As Sustainability Reporting Matures, Focus Shifts to Materiality

Corporate America is on the verge of a major revolution in sustainability reporting. Everything—the what, how, and when—is about to change.

The way companies have traditionally approached sustainability reporting is to disclose in anecdotal terms their environmental, social, and corporate governance (ESG) efforts in their annual reports. A lack of standard disclosure metrics, however, continues to leave investors unsatisfied since they generally can’t compare one company’s ESG efforts to another’s. And many companies disclose only positive, sometimes vague reports that lack the rigor of financial reporting.

Such information is “not consistent, not comparable, and it’s not useful,” says Jean Rogers, founder and executive director of the Sustainability Accounting Standards Board, a non-profit standard-setting body established in 2011.

“One of the challenges in sustainability reporting has been how to determine what’s material—what matters most to stakeholders—and how granular to get in reporting,” says Frank O’Brien-Bernini, chief sustainability officer of building materials company Owens Corning. Companies were basically left to their own devices to overcome that elusive task on their own.

New standards are now starting to emerge that companies across all sectors can use to benchmark against industry peers, and take their sustainability reporting to the next level. “As sustainability reporting moves into the mainstream, the process is also maturing, with an increased focus on materiality,” says Louis Coppola, executive vice president of the Governance & Accountability Institute, a sustainability advisory firm.

At the forefront of this effort is the Sustainability Accounting Standards Board, whose unique mission is to develop industry-specific reporting standards, designed to bring uniformity to how companies account for ESG risks that matter most to their operational and financial performance. “This is a way for them to disclose material information in a way that is comparable and consistent from company to company,” Rogers says.

The Securities and Exchange Commission requires public companies to disclose material information in the Management Discussion & Analysis section of their annual reports. By following the same definition of materiality as defined by the SEC, SASB’s standards are specifically being designed for companies to use in their annual Form 10-K reports, Rogers says.

Materiality Defined

Because the materiality of ESG issues varies from one industry to another, SASB has set out to develop standardized performance metrics for 88 specific industries across 10 sectors through 2016. To date, SASB has issued final standards for four industries: non-renewable resources, healthcare, financial, and technology and communications.

With its latest standards, issued last week, SASB focused on the non-renewable resources sector across eight industries: oil and gas exploration and production, oil and gas midstream, oil and gas refining and marketing, oil and gas services, coal operations, iron and steel production, metals and mining, and construction materials.

“The non-renewable resources sector faces distinct risks, such as increased regulatory pressure due to carbon emissions and the need for a culture of safety and emergency preparedness,” Rogers says. Examples of standardized disclosures for this sector include greenhouse gas emissions; air quality; community relations; and health, safety, and emergency management, SASB stated.

In addition, SASB also developed standards for the healthcare industry. For pharmaceutical companies, for example, SASB has developed standardized disclosure metrics that focus on how to report on access to medicines, drug safety and side effects, safety of clinical trial participants, affordability and fair pricing, ethical marketing, and counterfeit drugs.

For commercial banks, in comparison, standardized disclosure metrics focus on the integration of ESG considerations in credit risk analysis, customer privacy and security, and systemic risk management. 

SASB developed each of these standards by establishing working groups for each industry composed of stakeholders, including companies, investors, analysts, auditors, and consultants. To date, 1,600 participants across five sectors have taken part in SASB’s standard-setting process, representing publicly traded companies with more than $8 trillion in market capital, and investment firms with more than $17 trillion in assets under management.

One of the challenges in sustainability reporting has been how to determine what’s material—what matters most to stakeholders—and how granular to get in reporting.
Frank O'Brien-Bernini, Chief Sustainability Officer, Owens Corning

“So we’ve had tremendous interest in involvement with our standards work to date,” Rogers says. “By the time we’re finished, we’ll have about double that participation.”

Sustainability executives say the standards are a welcome development.  “While it’s still up to companies to decide what is material, the more guidance that can be given, like the work SASB is doing, the better off we’ll all be at getting a common framework,” O’Brien-Bernini says.

For other companies that are just beginning their sustainability reporting efforts, the challenges are even more fundamental than that. One of the biggest challenges is “getting people more comfortable talking about sustainability issues,” says Linda Froelich, global product stewardship manager at specialty chemical company FMC. FMC has had a formal sustainability group in place for three years.

For other companies in a similar phase of development, Froelich says it may help to invite sustainability executives of other companies that are further along in the sustainability reporting process to come talk to your senior executives. “It helps to get people more comfortable with sustainability reporting,” she says.

Other Frameworks

SASB is not the only ESG reporting initiative. Others include the Dow Jones Sustainability Index, the Global Reporting Initiative (GRI), the International Integrated Reporting Committee (IIRC), and many more.

“We feel there is a lot to be learned from all these different standards,” Coppola says. “Every one of them brings something to the table.”

Sustainability executives agree. “We consider these standards and guidelines to be free consulting,” O’Brien-Bernini says. Deciding what issues are material to your company and to your stakeholders “takes a lot of time and company resources to come to that conclusion on your own, to do all that work,” O’Brien-Bernini adds. In that regard, these standards and guidelines are “massively valuable,” he says. 

Unlike the GRI and IIRC guidelines, however, SASB’s standards focus on issues that matter most to U.S. companies. In comparison, the GRI and the IIRC are guidelines focused on a global scale—and European views on ESG issues can be quite different from material disclosures under U.S. securities law.

FINANCIAL SERVICES

The graph below from the Governance and Accountability Institute reflects the results of a study undertaken of the financial services sector’s use of the Global Reporting Initiative (GRI) Framework and what GRI factors were most or least important to that sector.

Source: Governance and Accountability Institute.

Taken together, all these initiatives continue to encourage companies to think of their ESG efforts in new and innovative ways. “What we’re seeing now is a new era in sustainability reporting,” Rogers says.

Today, companies and investors are looking for more than just a reporting exercise, Rogers says. “They are grappling with these issues in real terms—not just how to report them, but how to incorporate them into business strategy, how to measure performance on them,” she says.

Owens Corning, for example, is looking to get more out of sustainability reporting than good public relations. From 2002 through 2012, when the company first began disclosing its ESG efforts, its main focus was getting its arms around measuring its energy consumption and greenhouse gas emissions from its facilities, and reporting progress against those efforts, explains O’Brien-Bernini. “That was a big step for us,” he says.

Since then, Owens Corning has made significant strides, and is now taking a “new forward-facing view,” O’Brien-Bernini says, by exploring what new opportunities can be gained through sustainability reporting. The overall goal is not only to understand the company’s global footprint, but also how to financially measure and report the positive aspects that are being gained through the sustainable use of Owens Corning’s products. “So that’s what we’re very much focused on right now,” O’Brien-Bernini says.

Owens Corning is not alone. The overall landscape of sustainability reporting is shifting from risk mitigation to long-term value opportunities, O’Brien-Bernini adds. “That’s where the standards will be heading.”

“Focusing on a much smaller number of disclosure metrics,” Rogers concludes, “and really highlighting how they’re connected to business strategy, and focusing on performance of those particular metrics, is really the way to improve the reporting and make it digestible.”