The third morning workshop on Wednesday, day one of New Metrics ’14, at MIT Sloan School of Business, gave us a closer look at the Sustainability Accounting Standards Board (SASB), its process and its progress to date since its founding in 2012.
SASB’s Director of Stakeholder Engagement Katie Schmitz Eulitt and Deb Martin, Associate Director of Stakeholder Engagement, engaged with roughly 30 attendees with diverse backgrounds ranging from industry leaders and auditors, to consultants and professors from countries including the US, Chile, Morocco, France and UK. Schmitz Eulitt kicked off the workshop with an introductory video about SASB and how industry standards are set to give clear information to investors. Only 20 percent of market value is based on tangibles in financial reports, yet financial returns can’t be sustained if the underlying social and environmental assets are depleted. SASB's role is to present sustainability standards for over 80 industries to help them evolve and measure the intangibles that companies now need to manage.
Schmitz Eulitt and Martin highlighted the fact that corporate performance goals and quarterly financial results were traditionally prioritized, however going forward performance goals need to account for and align with drivers of long-term value, factors not previously included in financial models or reporting. The two also asserted that the current sustainability landscape can be confusing to investors due to the abundance of sustainability surveys, making it challenging for companies to efficiently communicate their ‘non-financial’ performance.
So one might ask, ‘why SASB and why now?’ The answer lies in the latest Sustainability Goes Mainstream Investor Survey from PwC: According to the survey, while investors expect to use more sustainability information in the future, they are dissatisfied with the current state of information and long for better disclosure from corporations. Institutional investors also believe that ESG (Environmental, Social, Governance) matters should be periodically assessed for materiality.
Another survey titled From Stockholder to Stakeholder, by the University of Oxford and Arabesque Partners, shows that investors are driving change as they recognize sustainability as one of the most significant trends in financial markets for decades. Investor interest does not stop there, with the CERES-led Investor Network on Climate Risk (INCR), NASDAQ, NYSE and other global exchanges proposing that the World Federation of Exchanges makes ESG reporting a listing requirement for all stock exchanges. This is where SASB comes into the picture — providing standards to cover the need for ESG data in 10-K filings, which currently only include financial accounting standards.
New Metrics '14!
During the group discussion, questions such as ‘Should there be two definitions of materiality, one for sustainability reporting and one for 10K reporting?’ and ‘What are your biggest barriers to align sustainability reporting process with 10K reporting?’ generated lively conversation.
As Schmitz Eulitt explained that SASB differentiates itself from other sustainability efforts by focusing on financial materiality, one attendee asked: ‘How can something be material risk sustainably and not financially?’ She explained that SASB uses the Supreme Court’s definition of ‘materiality,’ which is defined as ‘presenting a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the “total mix” of information made available.' At that point, the speakers and the audience agreed that there is a language problem when it comes to sustainability in the finance world, since investors are already seeking answers to questions that cannot be expressed in financial terms but that are still material to the decisions.
SASB is also different in that its primary deliverable is industry-specific standards, rather than a general framework. Martin explained the creation of sustainability accounting standards and added that SASB will create unique standards for 80+ industries. As of June, SASB has issued standards for 27 of those and completed 40 percent of the work to create a complete set of industry standards pertaining to material sustainability factors for use by capital markets. SASB's standards development process includes evidence-based research, multi-stakeholder iindustry working groups, a 90-day public comment period, and review by an independent Standards Council. The working groups for the Non-Renewable Resources sector — which included 221 registrants — represented publicly traded companies with more than $2 trillion in market capital and investment firms with more than $3.3 trillion in assets under management.
Schmitz Eulitt then explained the SASB materiality map, an interactive tool to help users identify SASB disclosure topics on an industry-by-industry basis and compare the potential materiality of various sustainability issues across different industries and sectors. The materiality map also highlights sustainability topics and metrics for each industry for more detailed analysis.
The speakers closed the workshop with advice on where to start and how to engage with SASB:
- Understand the “Why” behind SASB
- Become familiar with your standard and the application and become familiar with the Disclosure
- Get engaged in SASB’s standard-setting process by joining an Industrial Working Group or providing public comments
- Give an internal presentation on SASB with key stakeholders
- Form an Integrated Team to do a Gap Assessment to assess your situation for data completeness and data readiness for SASB
- Start to align your reporting by assess SASB standards for materiality in your financial reporting.