The Sustainability Accounting Standards Board (SASB) started in 2011 to foster high-quality disclosure of material sustainability information to meet investor needs and make capital markets more efficient. The independent private-sector standards setting organization, which is based in San Francisco, spent the following years doing outreach and conducting research.
“Over time, accounting for environmental, social, governance-related impacts is really important,” says David Parham, deputy director of research at the Sustainability Accounting Standards Board. “These factors are tied to a company’s ability to create value over the long term.”
Later this year, the SASB team is planning to finalize their industry-specific disclosure framework. We recently caught up with Parham to find out what is happening with environmental, social, governance-related accounting and what this new wave means for corporate leaders.
How does sustainability accounting compare to traditional accounting?
A traditional accounting system is for recording and summarizing financial transactions in a consistent, comparable way. A sustainability accounting system accounts for a company’s environmental, social, governance-related (ESG) impacts in a comparable and consistent fashion.
There has been an increasing focus on significant externalities such as climate change that can be associated with business activities, and helping to connect sustainability-related impacts to companies’ business operations and value creation. That shift in focus by investors encourages businesses to think about these issues as value-creation issues.
SASB formed in 2011, recognizing the need for a comprehensive yet industry-specific framework to help companies disclose financial and material information related to sustainability factors.
A way we think about it is if you look at a company’s financial statements now, they may not give investors a complete understanding of the company’s performance. Traditional accounting is great at valuing and reporting traditional physical assets, but intangible assets like brand value or the value of R&D are inherently linked to a company’s business model and its sustainability, environmental, and social impact. There is a need to account for these performance factors since they are so important to a company’s ability to create value over the long term.
What is the status of SASB’s framework now?
The framework is technically still in development. Right now the standards are still in the provisional phase. We just finished a public comment period on what we put out as the final changes that would make it into the standard, based on years of outreach, stakeholder outreach, talking to companies, investors, and third party experts. We’re hoping to finalize the standards this year, and have them available for voluntary adoption by companies to start reporting to their investors.
There are several companies trying to get ahead of the game and they are already reporting. JetBlue, for example, produces a standalone report to our standards for their industry. NRG also has a reporting section where they use some of our indicators to report to their investors. Then there are companies in the hotel and real estate industries, Kilroy Realty and Host Hotels, which are using some of the SASB indicators in their reporting.
What are the biggest trends you’re seeing in this area?
We’re seeing is an increasing recognition from the investment community of the relationship between a company’s performance on material factors related to ESG and the need for disclosure of these factors. This year there was an open letter from BlackRock CEO Larry Fink. He wrote, “Without a sense of purpose, no company, either public or private, can achieve its full potential. It will ultimately lose the license to operate from key stakeholders. […] And ultimately, that company will provide subpar returns to the investors who depend on it to finance their retirement, home purchases, or higher education.”
Another example is from the Vanguard Group’s CEO William McNabb. In an open letter he sent last year to companies he cited why Vanguard sees importance in this issue, “We believe it is incumbent on all market participants — investors, boards, and management alike — to embrace the disclosure of sustainability risks that bear on a company’s long-term value creation prospects.”
What are the main pressure points for companies around sustainability accounting?
One of the pressure points that has received significant attention lately is that shareholder resolutions are being filed calling on companies to do a better job of disclosing. This past year there were notable shareholder resolutions that passed, calling on companies like ExxonMobil and Occidental Petroleum to increase disclosure around their management of climate-related risks, for example.
On the company side, there is the proliferation of requests for information. Investors often engage directly with companies through questionnaires. I would imagine that it becomes difficult for companies to manage all these different requests. We are hopeful that a market standard is an improvement both for companies so they can clearly communicate their value proposition, and for the investors seeking this information.
Are there other challenges?
When information needs are changing, it’s difficult for companies to build effective reporting systems. It’s like trying to study for a test and the professor keeps telling you the questions are going to change. It’s difficult to know what you will be graded on — and therefore what to study. If companies have a set of agreed-to factors they know are what the market is demanding, it will be more efficient to develop systems to collect, quality control, analyze, and record that data.
If a company isn’t looking at ESG factors, what are the main risks?
There is competitive motivation to ensure that you are communicating your full value proposition to investors. If the competition is able to paint a full picture of why they are a good investment based on ESG performance and your company isn’t, the investment community will consider that in its decision-making process. This is what we’re hearing from the investment community.
Companies are doing a lot to be responsible corporate citizens. They want to make sure they can communicate that full value proposition and be given fair value for all their efforts. We hope a framework that truly allows comparable performance reporting on these material factors can help companies explain to their investors why they are a better bet than their competition.
What does the future look like for sustainability accounting?
There are huge challenges, but also a huge reason for optimism. There is increasing recognition of — and demand for — standardized reporting on material factors related to company performance on ESG impacts. And that call for information has never been greater.
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