Some revolutionary changes are happening in the world of sustainability reporting that—for better or worse—demand the attention of companies.
The Sustainability Accounting Standards Board, a non-profit standard-setting body established in 2011, has issued its first set in a planned series of industry-specific reporting standards, designed to bring uniformity to how companies account for the environmental, social, and corporate governance risks that matter most to their operational and financial performance. First industry up at bat: healthcare.The inspiration for SASB and its standards sprung from investor activists clamoring in recent years for greater disclosure of “ESG” performance. Companies responded by publishing annual reports of their corporate social responsibility efforts, but a lack of standard disclosure metrics left investors unhappy since they couldn't compare one company's CSR efforts against another's. Enter SASB.
Accredited by the American National Standards Institute to set standards for disclosure of sustainability issues by U.S. publicly listed companies, SASB set out to identify material ESG issues and develop standardized performance metrics for 88 specific industries across 10 sectors. By following the same definition of materiality as defined by the Securities and Exchange Commission, the hope is that companies will use the ESG standards in their annual Form 10-K reports.
Jean Rogers, founder and executive director of SASB, says the intent of the group is to become for ESG reporting what the Financial Accounting Standards Board has been for financial reporting. “Our goal is to standardize the disclosure of these material sustainability issues,” she says.
The SEC requires public companies to disclose material information in the Management Discussion and Analysis section of their annual reports—but how ESG risks fit into the mix of material data has always been an elusive practice at best. For that reason, some sustainability executives say the standards are a welcome development.
“Until SASB came along, it's been extremely difficult to compare apples-to-apples,” says Scott Tew, executive director for the Center for Energy Efficiency and Sustainability at Ingersoll-Rand. “The only way you can compare apples-to-apples is for everyone to agree on what is most material for a particular industry.”
SASB developed its standards by establishing working groups for each industry composed of stakeholders, including companies, investors, analysts, auditors, and consultants.
Ingersoll-Rand is one of several companies that sit on SASB's advisory council. Other companies include Hershey Co., McDonald's, JP Morgan, Johnson & Johnson, UPS, Con Edison, and several more.
Rogers says that SASB has had “no problem getting companies to participate”—because of, rather than in spite of, ESG reporting fatigue. “They're tired of spending a lot of time and money doing so many different initiatives that aren't necessarily looked at by investors,” she says.
“Until SASB came along, it's been extremely difficult to compare apples-to-apples. The only way you can compare apples-to-apples is for everyone to agree on what is most material for a particular industry.”
—Scott Tew,
Executive Director, Center for Energy Efficiency and Sustainability,
Ingersoll-Rand.
What's more, “investors tell us the same thing,” Rogers adds. “They're inundated with so much information that it makes it difficult for them to ascertain what's material. There is angst on both sides.”
Carrots and Sticks
For many other companies that may (quite understandably) groan over the idea of another ESG reporting initiative, be warned that investors and regulators alike are following these developments closely.
“It's surprising how quickly SASB has established a level of prominence and impact in this space,” says Kathy Nieland, U.S. sustainable business solutions leader at PwC. “Investors are absolutely taking note of what standards they're developing.”
Even though the use of SASB-developed metrics in SEC reports is voluntary, SASB is hoping to change that. “It's really up to the SEC to enforce the inclusion of this information in the Form 10-K,” Rogers says.
Anne Sheehan, director of corporate governance at pension giant CalSTRS, which has more than $170 billion under management, says the SEC likely will be a “very active observer” in SASB's efforts, given that the agency's role is to ensure investors have material information. “I don't know in terms of formal rulemaking that the SEC is there yet.”
SASB briefs the SEC on its progress with quarterly updates and the evidence it gathers through research. Whether the SEC will actually enforce the standards on public companies is still an open question. Commissioner Luis Aguilar, for example, has long supported the idea of more disclosure about risks around climate change. On the other hand, the agency has a full plate struggling to implement rules for the Dodd-Frank Act.
“Whether or not they're successful will be the proof as to whether they're legitimate or not,” says Cary Krosinsky, executive director for the Network for Sustainable Financial Markets.
The value proposition for companies is that the standards focus on issues that matter most to U.S. companies. In comparison, efforts such as the Global Reporting Initiative and the International Integrated Reporting Committee are guidelines focused on a global scale—and European views on CSR, for example, can be quite different from material disclosures under U.S. securities law.
At the very least, SASB's efforts have sparked some companies to think of sustainability practices in new and innovative ways. “Our strategy has been to integrate sustainability thinking into how the company operates its business,” Tew says. “We're really working on changing some of our already-existing processes.”
Sector
Stage
Key Dates
Healthcare
Complete
Provisional Standards
Release: July 31, 2013
Financials
Finalization
Provisional Standards
Release: Nov. 5, 2013
Technology & Communication
Refinement
Public Comment Period
Begins: Oct. 2, 2013
Non-Renewable Resources
Research
Industry Working Groups
Begin: Aug. 6, 2013
Transportation
Not Started
Industry Working Groups
Begin: Nov. 5, 2013
Services
Not Started
Industry Working Groups
Begin: Feb. 12, 2014
Resource Transformation
Not Started
Industry Working Groups
Begin: May 6, 2014
Consumption
Not Started
Industry Working Groups
Begin: Aug. 5, 2014
Renewable Resources &
Alternative Energy
Not Started
Industry Working Groups
Begin: Oct. 29, 2014
Infrastructure
Not Started
Industry Working Groups
Begin: Feb. 4, 2015
“Until recently we weren't formally asking our design engineers to think about the materials they choose for future products, or to evaluate what happens at the end of a product's lifecycle,” Tew says. “All that has changed now, because we've changed the process of how we develop products.”
What's Next
SASB issued its first set of standards on July 31, beginning with the healthcare sector and focusing on pharmaceuticals, biotechnology, medical equipment and supplies, healthcare delivery, healthcare distributors, and managed care.
For pharmaceutical companies, for example, SASB has developed standards on how to report on access to medicines, drug safety and side effects, safety of clinical trial participants, affordability and fair pricing, ethical marketing, counterfeit drugs, and efficiency in energy, water, and waste.
The standards were developed using a rigorous process that included industry working groups, a public comment period, and review by an independent standards council. The working groups for the healthcare sector, which included 127 survey responses, represented publicly traded companies with more than $800 billion in market capital and investment firms with more than $952 billion in assets under management.
SASB plans to release standards for the financial sector this fall, followed by technology and communications. Standards for the non-renewables sector are also in development.
As with any new undertaking, kinks will need to be kneaded out along the way, Sheehan says. “It's going to be an ongoing, iterative educational process to perfect this effort as they address various industry sectors.”
“The only burden is that it takes a long time to get it right,” Tew says. “It's time consuming. It's intense. It's detailed, but it's also being done right.”
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