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Meet the New Standard Setter for Sustainability

Robert Herz | April 30, 2013

Most people involved in the reporting
process are probably familiar
with the Financial Accounting
Standards Board, the International Accounting
Standards Board, and, perhaps, the Governmental
Accounting Standards Board. But
do you know about the Sustainability Accounting
Standards Board (SASB)? If not,
you'll probably be hearing more about this
organization and its work
in the near future.

SASB, based in San
Francisco, is an independent,
not-for-profit standard-
setting body that
was established in 2011 to
develop industry-specific
standards for use by companies
to report on material
environmental, social, and
governance (ESG) issues in
standard filings such as the Form 10-K.

Many investors and other stakeholders
have become increasingly interested in
the effect of ESG issues on the sustainability
of companies' business models and their
ability to generate value over the long term.
The growth in “sustainable and responsible
investing” by investment managers, studies
showing a correlation between long-term
performance and an ESG focus, and the numerous,
well-documented examples of value
destruction by specific companies stemming
from their mis-management of such issues, as
well as value creation from the proper management
of ESG, attest to the growing importance
of sustainability reporting.

Many companies have responded to the
call for greater transparency in this area by
publishing annual sustainability or corporate
social responsibility (CSR) reports. The information in these documents, however, does not provide standardized metrics that enable investors and others to properly assess trends, benchmark peers, and compare the performance of companies on ESG issues over time and across industries and sectors of the economy. Accordingly, SASB plans to develop reporting standards that identify the material ESG issues and standardized performance metrics, including key performance indicators (KPIs), for 88 specific industries across 10 sectors.

How does SASB go about developing
these standards? While the process
is somewhat different than that followed
by FASB, IASB, and other bodies that
set financial accounting standards, it is
nevertheless systematic and robust. Like
FASB and IASB, SASB includes significant
stakeholder engagement and consultation,
and publishes proposed standards
for public comment. SASB is accredited
by the American National Standards Institute
(ANSI) to set standards for disclosure
of sustainability issues by publicly
listed companies, and follows best practices
in standards setting, including transparency
and maintaining a balance of participation
in the standards setting process
between affected interest groups (corporations,
investors, and intermediaries).

During the first step, SASB's research
staff develops a “SASB Materiality Map”
which enables them to identify the relative
materiality of specific ESG issues in
each industry. The map provides a unique
sustainability profile for each industry,
illuminating the high-priority ESG issues.
Creating the map for each industry
involves extensive review of relevant data,
including evidence of stakeholder interest
and of the financial impact of particular
ESG issues. Source documents that are
reviewed include Form 10-Ks, SEC comment
letters, CSR reports, and media reports.
The issues are then ranked according
to their relative significance in order
to determine those issues that are likely to
be material within a particular industry.
Issues identified as material in the process
often sit at intersection of business
models and sustainability factors. The
broader societal impacts arising from the
use of particular resources by companies
in an industry, for example, are often on
the list.

Developing Performance Indicators

In the next phase, the SASB staff develops
a set of “straw man” performance
indicators for a particular industry and
convenes an industry working group
composed of a cross-section of stakeholders
for that industry. The working groups
generally include investors and financial
analysts, corporate representatives, accountants,
consultants, academics, and
public interest officials with specific industry
expertise to review and help refine
the straw man indicators. Industry working
group participants debate the materiality
of the issues and evaluate the relevance,
usefulness, and cost-effectiveness
of the performance indicators. SASB then
publishes the performance indicators on
its Website, and solicits public comment
on them over a 30-day period. Comments
are then reviewed and, as appropriate, revisions
are made to the proposed performance

The use of SASB metrics can enhance the specificity, consistency, and comparability of information contained in CSR reports.

The draft standards are then reviewed
by the SASB Standards Council to ensure
consistency, completeness, and accuracy.
The council is comprised of 17 individuals
with extensive backgrounds in standards
setting, investing, financial analysis, and
sustainability issues across various industries.
For example, two of my former FASB
colleagues, Katherine Schipper and Jeffrey
Hales, are members of the SASB Standards
Council, which also includes several experts
from major investment management
firms. Once the industry standard has
been approved by the Standards Council it
is published by SASB. A 12-member board
of directors is responsible for overseeing,
articulating, and upholding the vision, values,
and mission of SASB.

The SASB consensus-driven process
is designed to identify and develop standardized
KPIs for material ESG issues.
SASB follows the concepts and definitions
of materiality found in the U.S. federal
securities laws and related court decisions.
For example, SEC Regulation S-X
states material information as that “about
which an average prudent investor ought
to be reasonably informed.” Similarly, the
U.S. Supreme Court has defined material
information in terms of there being a
substantial likelihood that the disclosure
of such information would be viewed by
the “reasonable investor” as having significantly
altered the “total mix” of information
made available. Thus, while use of
SASB-developed metrics in SEC reports
is voluntary, because they provide information
on material issues, they will presumably
assist companies to better fulfill
their disclosure obligations under the federal
securities laws.

In recent years the SEC has expanded
the realm of information required to be
provided on specific ESG issues, such as
climate change, use of conflict minerals
and on certain payments by oil, gas, and
mining companies to foreign and U.S.

The use of SASB metrics can enhance
the specificity, consistency, and comparability
of information contained in
CSR reports. SASB is also designing its
standards to be compatible with the integrated
reporting framework being developed
by the International Integrated
Reporting Council (IIRC). The goal of
integrated reporting is to bring together,
in a cohesive and concise way, material
information on an organization's strategy,
risks and opportunities, governance, and
performance in terms of financial results
and key non-financial areas, including
ESG matters. The IIRC is currently conducting
a major pilot program with over
80 companies from around the world,
including Microsoft, Coca Cola, HSBC,
and Unilever. The IIRC has just issued for
public comment a proposed framework
for integrated reporting. The use of SASB
metrics can help improve the comparability
and overall usefulness of the information
in integrated reports.

While SASB is a very new organization,
it has already attracted significant
interest and support from a diverse and
broad range of stakeholders. More than
170 people participated in the SASB
healthcare working groups, for example,
and the financial services working groups
counted nearly 300 members. (Healthcare
and financial services are the first two sectors
SASB has addressed.) For both sectors
combined, participants represented
companies with approximately $2.1 trillion
in total market capitalization and
almost $6 trillion in assets under management
by investor participants.

Participation in SASB industry groups
provides interested and knowledgeable
stakeholders the opportunity to share
their expertise, learn from industry peers,
and help shape the SASB standard for
their industry. SASB has also established
an advisory council comprised of more
than 100 individuals from the investor,
finance, corporate, accounting, academic,
and NGO communities.

Additional information regarding
SASB, its ongoing program to develop
industry-specific standards for reporting
on material ESG issues, and how to
participate in SASB industry working
groups can be found at