At a proverbial snail’s pace, movement toward sustainability reporting is approaching a quiet but important milestone this summer.

The Sustainability Accounting Standards Board is about to codify an entire set of standards companies can follow to identify, manage, and disclose their performance on sustainability-related matters. After years of developing provisional, industry-specific standards using research, exposure drafts, public consultation, and revision, SASB has developed what it considers to be a complete set of standards to guide disclosures of sustainability metrics that carry financial consequences.

The board put the full book out for another round of public comment and review through late 2017 and early 2018, and now it is preparing to codify the standards, or declare them fully vetted and ready for corporate use. “I think we’re toward the end of the very beginning,” said Jeremy Hanson, managing partner at law firm Heidrick & Struggles, crediting a colleague with that specific poetic characterization. “That captures the feel of where we are.”

The standards themselves are not mandatory. No regulatory body is telling any public company they are required to adopt the standards. Instead, the standards are intended to help companies determine how to report issues that are subject to mandatory disclosure because they are financially material. SASB says they can be used by public companies in making disclosures in their 10-K filings.

The European Commission has even recognized SASB standards as providing a suitable framework for compliance with certain EU directives, but the standards have not gotten that same level of blessing at the Securities and Exchange Commission. In fact, a former member of the SEC openly criticized standard setting by bodies like SASB, believing their efforts to potentially confuse capital markets over what’s required and what’s not.

SASB persists because it believes the standards, if voluntarily followed by companies, will provide a common framework for capturing and reporting performance on environmental, social, and governance-related factors. And that logically might lead to greater visibility and accountability, producing a longer-range view of corporate performance that can be better understood by all capital market players.

SASB was founded in 2011 by an engineer with a passion for the corporate sustainability movement and a belief that something was missing for it to become a formidable market force. Jean Rogers was a principal for a global engineering consulting firm when she began noticing that companies starting to pay attention to sustainability issues were going about it in different ways.

“I observed that sustainability and the way the impacts were measured looked different from industry to industry,” she said. Manufacturers were not talking in the same terms as utilities or chemicals or infrastructure. “I suspected there was a gap between what companies measured and what investors wanted.”

A white paper making the case for sustainability standards to bridge the various measurement and expectation gaps became a blueprint for the founding of SASB, said Rogers. The securing of funding provided the needed momentum, and SASB was formed under a model very similar to that followed by the Financial Accounting Standards Board to write financial accounting rules.

Opening its doors in 2012, SASB would spend the next five years in a “waterfall process,” said Rogers, writing standards for 79 different industries across 10 major sectors following a due process much like that at the FASB. Now that the board is preparing to codify its first complete set of standards, the ongoing focus will be continued refinement and revision as markets and business change over time.

Although the board has written hundreds of standards, only a handful are likely to be applicable to any given company. The board says the focus on financial materiality by sector and by industry has led to the discovery that each industry is dealing with an average of five topics and 13 associated metrics. That naturally limits the number of standards that would apply to any one company.

Corporate reporting has long been dominated by a focus on financial measures, but investor interest in a broader base of information is slowly tugging companies toward more reporting of longer term sustainability factors. A recent study by communications firm Clermont Partners found nearly half of investors say they use ESG screens when evaluating potential stock investments, and three-quarters say ESG has become more important to the decision-making process in the past two years.

“There’s a lot of discussion around these issues that we think are important and material, but there’s still a lot of boilerplate. We’re trying to get companies to move from acknowledging the issues are material to moving toward more specific narratives with quantitative information.”
Jeffrey Hales, Chair, SASB

An open letter by Larry Fink, chairman and CEO of investment firm BlackRock, calls on corporate boards to exercise leadership on a broader range of issues than have traditionally dominated their agenda. In the current environment, stakeholders like investors, consumers, and local communities are demanding better management of environmental, social, and governance matters, he said. That means BlackRock is integrating them into its investment process, he said.

“The refrain we hear is that investors are not satisfied with the current state of disclosure,” said Kristen Sullivan, sustainability risk and assurance leader at Deloitte. “We’re starting to see credit raters and other rating organizations starting to integrate these measures into their valuations.” We’ve seen disclosure increase, but investor appetite has increased dramatically. There is still this information gap. How do you drive consistency and standardization of what companies are reporting?”

That’s the gap SASB aims to fill. “SASB is not trying to be a new regulator,” says Bob Hirth, a managing director at Protiviti who recently joined the SASB board. He’s also the former chairman of COSO, another body that puts out guidance required by no one, but COSO’s internal control framework has been almost universally adopted by public companies as a way to achieve compliance with internal control reporting requirements under Sarbanes-Oxley.

“There’s this anchor of materiality. If it has to be disclosed because it’s material and a lot of people seem to want this information, SASB is trying to put some order to that,” said Hirth.

Sustainability proponents might not mind if someone were to eventually deem SASB’s standards so important that they might be mandatory but even Rogers is not looking for that. Maybe a path like COSO’s that would lead to heavy acceptance and regulatory preference would be good enough, she said.

In the meantime, companies are starting to gravitate is slow numbers. JetBlue, for instance, is touted as a model in sustainability reporting. Although investors are calling for sustainability reporting, the cry hasn’t necessarily deafened corporate boards just yet, said Hanson. “There’s a conversation happening in the boardroom but most boards will tell you it has not risen to the high priority stake in board meetings,” he said.

Companies like ExxonMobil, for example, have faced heavy pressure, but largely because of the steep environmental consequences it deals, Hanson said. “For every ExxonMobil, there are thousands of companies that don’t face that kind of pressure,” he said.

Jeffrey Hales, SASB chair after Rogers recently passed the baton, says corporate uptake of a standard way to provide material sustainability information is in its early days. “There’s a lot of discussion around these issues that we think are important and material, but there’s still a lot of boilerplate,” he said. “We’re trying to get companies to move from acknowledging the issues are material to moving toward more specific narratives with quantitative information.”

Now that SASB will have a codified set of standards, Hales is hopeful companies will get even more engaged. “It’s going to be important for SASB post-codification to just listen,” he said. “What are the hurdles companies are facing? Where are the costs and frictions? What can we do to help make standards more useful to investors? We really want over the long term for the standards to be both as relevant and useful as possible, but also cost effective.”