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By Alan Glazer
Alan Glazer has taught financial accounting at Franklin & Marshall College, Lancaster, PA, since 1975. He has served as chair of the Department of Business, Organizations, and Society and is presently Henry P. and Mary B. Stager Professor of Business. Glazer did his undergraduate work at Franklin & Marshall and completed his Master’s and Ph.D. at the University of Pennsylvania. He also is a CPA (inactive) in PA. Glazer’s recent research focuses on financial reporting of for-profit companies. He has published four research monographs for Bloomberg BNA and is currently studying how companies disclose information about sustainability issues. He is a reviewer for, and member of the editorial board of, the Journal of Accountancy. Glazer served as associate director of the Independence Standards Board’s conceptual framework project and as a consultant to the AICPA’s Not-for-Profit Committee. He has written articles on auditor independence, not-for-profit reporting, and accounting ethics.
Standalone sustainability reporting—communications prepared by managements of business organizations for investors, creditors, and other external stakeholders that discuss organizations’ environmental, social, and governance (ESG) activities and impacts—by large U.S. public companies has become the norm, with over 80 percent of S&P 500 companies issuing such reports in 2016, up from just 20 percent in 2011. Nevertheless, the lack of specific disclosure requirements and standardized metrics for communicating information about companies’ ESG activities often results in disclosures that are inconsistent from company to company and from year to year and, as a result, may not be useful to investors.
Several organizations have developed guidelines that companies employ to communicate ESG-related information, including the Global Reporting Initiative (GRI), the International Integrated Reporting Council (IIRC), the CDP (formerly the Carbon Disclosure Project), and the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD). This special report focuses on one organization, the Sustainability Accounting Standards Board (SASB), a U.S.-based group whose main goal is to improve ESG-related disclosures in U.S. Securities and Exchange Commission (SEC) filings.The Sustainability Accounting Standards Board (SASB) is funded in part by Bloomberg Philanthropies, and Michael Bloomberg, founder of the global business, financial information and news leader Bloomberg L.P., sits on its board. Bloomberg BNA is an affiliate of Bloomberg L.P. The special report begins with a brief introduction to sustainability reporting. Subsequent sections discuss the SASB’s mission and organizational structure, its approach to materiality, and its standard-setting process. The special report summarizes the status of the SASB’s provisional standards through Sept. 1, 2017, briefly discusses recent developments affecting the SASB, and concludes with some remarks about its future.
Many commentators believe that investors and other stakeholders need information about a company’s performance beyond that provided by traditional financial reporting. In their view, an organization’s long-term success depends on its ability to manage both financial and a wide variety of nonfinancial aspects of its activities, including those related to environmental ( e.g., energy and water usage and carbon emissions), social ( e.g., labor practices, health and safety, and workforce diversity), and governance ( e.g., ethics, board of directors’ structure and independence, and executive compensation) issues. Reporting “nonfinancial” information helps ensure that investors and others are aware of the wide range of complex issues organizations face and how those organizations are managing the related risks and opportunities. That information is particularly useful when it clearly links an organization’s performance on ESG issues with its business strategies and financial performance.The financial implications of managements’ failure to address sustainability-related issues can be significant. For example, the increased demand for, and reduced availability of, certain natural resources mean more global competition and pressure on companies to reduce waste. Increased concern about organizational lapses in environmentally risky situations—such as the Exxon Valdez and Deepwater Horizon oil spills and the Bhopal chemical accident—as well as the risks of corporate governance failures—including those that came to light in the aftermath of the 2008 global financial crises—has led many commentators to suggest that public companies’ sustainability-related risks should be more clearly reflected in their financial reporting. A recent survey (“Is Your Nonfinancial Performance Revealing the True Value of Your Business to Investors?”) of institutional investors, for example, reported that (a) 92 percent believe ESG issues have long-term “quantifiable” impacts; (b) 89 percent believe that “generating sustainable returns over time” requires a sharper focus, not only on governance, but also on environmental and social factors; and (c) 63 percent believe that a company’s annual report is the most useful source of ESG-information to support their investing decisions. Increased investor interest in ESG-related matters also is evident in the large number of recent shareholder resolutions dealing with those issues: more than two-thirds of the shareholder proposals filed in 2016 related to those areas, including many seeking expanded external reporting. For example, as reported by the New York Times, more than 60 percent of ExxonMobil shareholders approved a non-binding proposal in 2017 recommending that the company disclose how requirements to reduce greenhouse gas (GHG) emissions could impact the value of the company’s oil fields, pipelines, and refineries. Another indication of increased stakeholder concerns is proxy advisory firms’ implementation of specific voting policies on shareholder resolutions dealing with sustainability issues. For example, Institutional Shareholder Services (ISS) generally supports shareholder proposals to expand sustainability reporting unless the company has included similar information in other sustainability reports or has committed to implementing standards-based reporting ( e.g., one based on the GRI framework).In response to stakeholders’ concerns, many companies have expanded their ESG-related reporting by (a) including additional information in traditional external financial reports; (b) providing online and hard copy stand-alone reports, typically using one or more of the reporting frameworks mentioned below and often referred to by various names, including sustainability reports; environmental, social, and governance reports; corporate social responsibility reports; and nonfinancial reporting; (c) combining in a single report both traditional financial reporting and reporting on sustainability issues, a technique often called “triple bottom line” or “integrated reporting;” and (d) providing information to organizations such as the U.S. Environmental Protection Agency (EPA) and the CDP. The information may be quantitative or qualitative in nature, may be expressed in monetary or other terms, and may be subject to independent assurance. The American Institute of CPAs (AICPA) issued “Attestation Engagements on Sustainability Information (Including Greenhouse Gas Emissions Information, ” this year. That guide is intended to be used by accountants who provide attestation services on clients’ sustainability reporting. Despite the growing availability of ESG-related information, many investors and other stakeholders apparently are increasingly dissatisfied with the quality of the information currently provided by many companies. For example, over 40 percent of the investors responding to a 2016 survey indicated that ESG-related information is often “inconsistent, unavailable, or not verified” and is “seldom available for comparison with those [measurements] of other companies.” This was double the number reported in a similar survey in 2013.
The GRI, IIRC, and TCFD and other organizations have developed frameworks that many companies are using as guides to disclose sustainability information. Various regulatory and other initiatives, both in the U.S. and elsewhere (for example, the SEC’s interpretive release and the EU’s Directive have included guidance for disclosing ESG-related information). A standard framework—such as U.S. generally accepted accounting principles (GAAP) used in external financial reporting—would allow investors to assess more effectively a company’s (a) ESG-related activities, risks, and opportunities, (b) changes in a company’s sustainability performance over time, and (c) a company’s sustainability performance compared with that of other companies; however, no such framework currently exists.One significant issue facing companies trying to use existing sustainability reporting frameworks in their SEC filings is the difficulty in determining what ESG-related information is material to disclose under current SEC rules. The U.S. Supreme Court’s definition of materiality, which is used by the SEC, notes that information is material when there is “a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.” This definition of materiality differs from the one used in many of the existing sustainability reporting frameworks, and, as a result, those frameworks may not be suitable as guides for preparing ESG-related disclosures in SEC filings. The rest of this article focuses on one organization—the SASB—and its mission to develop industry-specific guidelines for disclosing ESG-related information in SEC filings.
The SASB is an independent private-sector group organized in July 2011. Its mission is
The SASB’s current two-tiered organizational structure is patterned after the one used by the Financial Accounting Foundation (FAF) and the Financial Accounting Standards Board (FASB). The SASB Foundation, an independent 501(c)3 organization, has overall fiduciary and oversight responsibility, but it delegates standard-setting authority to an independent body, the SASB Standards Board. The SASB Foundation’s board of directors is composed of a maximum of 21 members headed by a chair, currently Michael Bloomberg, and two vice chairs, currently Mary Schapiro and Robert Steel. It appoints SASB Standards Board members based on the recommendations of its governance and nominating committee. The Foundation Board’s standards oversight committee monitors the SASB Standards Board’s due process and standards-development activities.The SASB Standards Board, composed of between five and nine members with diverse backgrounds and experience who serve a maximum of two, three-year terms, is headed by a full-time chair, currently Jean Rogers, the SASB’s founder, and a vice chair, currently Jeffrey Hales. The Standards Board develops and maintains a technical agenda, ratifies SASB standards based on due process procedures, and updates those standards as needed. The chair of the SASB Standards Board calls and presides over its meetings and has other administrative functions, including supervising the SASB staff. A minimum of three board members (one of whom serves as chair) and an SASB analyst are assigned to each industry sector committee in which the SASB’s research and standard-setting work is typically done. The SASB Standards Board staff does research, consults on standards, proposes technical agenda items, and recommends Standards Updates to the Board. In addition to sector-specific analysts, the SASB staff includes a director of research, technical director, director of capital markets policy and outreach, and director of legal policy and outreach.The SASB’s “ Conceptual Framework,” revised in February 2017, discusses the “basic concepts, principles, definitions, and objectives” on which its standards are based (p. 1). Five sustainability dimensions are considered (pp. 2-4)—environment, social capital, human capital, business model and innovation, and leadership and governance—along with 30 broad sustainability issues (see Appendix A of this article) related to those dimensions. The Framework emphasizes that the SASB’s standard setting process helps to ensure that its standards provide information that is “reasonably likely to be material,” “decision-useful for companies and their investors,” and “cost-effective for corporate issuers” (pp. 9-11, emphasis in original).
The SASB’s goal is to develop standards for companies to use to report to investors about material ESG-related issues in mandatory SEC filings. Its industry-specific standards include metrics for each sustainability issue that is likely to impact the financial performance of companies in that industry. Those metrics, together with narrative descriptions, help investors better understand (a) companies’ sustainability activities, (b) their portfolios’ exposure to ESG risk, and (c) how to integrate sustainability assessments into their analyses of companies’ operating performance and financial condition. The SASB’s “ Engagement Guide for Asset Owners & Asset Managers” contains specific questions that help investors to assess companies’ approaches to sustainability issues and to benchmark companies’ sustainability performance. The SASB’s Investor Advisory Group (IAG) of investors and asset managers provides input to the Board and encourages companies to disclose sustainability-related information and to get involved in the SASB standard-setting process. The SASB Foundation also has partnered with various organizations—including B Analytics, Clean Capitalist, cr360, eFront, Green Diamond, and WeSustain—to provide tools that help (a) companies gather and communicate information about sustainability-related issues and (b) investors use that information to analyze companies’ performance. Data sets based on SASB’s provisional standards also are available from various sources, including Bloomberg’s Environmental, Social and Governance DataSnapshot template and Insight360 on the Thomson Reuters Eikon App Studio.
The SASB standards are intended to help registrants comply with existing U.S. securities laws and Regulation S-K requirements for disclosures in the Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) and other relevant sections of their annual filings on Forms 10-K and 20-F, as well as disclosures in other SEC filings. Item 303, Management Discussion and Analysis of Financial Condition and Results of Operations, of Regulation S-K, for example, requires companies to disclose in their MD&As the financial condition, results of operations, and management’s views on known trends and future uncertainties that are reasonably expected to have a material impact on companies’ sales, revenues, income, capital, or liquidity. Because of its scope, flexibility, and focus, the MD&A is the logical place for companies to report on their sustainability performance. The SASB expects companies to use the same processes and controls to produce sustainability-related information as they use for other information included in their MD&As. It also encourages companies to have their sustainability disclosures attested to in independent third party assurance engagements.The SASB recommends that companies include material sustainability-related disclosures in a separate section of their MD&As labeled “Sustainability Accounting Standards Disclosures.” Relevant information could also be included in other sections of Form 10-K and 20-F filings—for example, the “Description of Business,” “Legal Proceedings,” and “Risk Factors” sections—and in other filings as appropriate. Determining materiality is particularly complex for sustainability issues because of the large number of potential issues that could be included and the difficulty of measuring the impact on companies of those issues. Also, sustainability issues’ impacts often vary greatly from industry to industry—what might be a very significant issue for companies in one industry might be unimportant for companies in others.The SASB’s solution to the materiality problem has been to use an industry-specific standard-setting approach based on its proprietary Sustainability Industry Classification System (SICS™), in which industries are organized by their sustainability impacts. This seems logical because companies in an industry typically use similar resources to produce and sell similar goods and services and have similar business models, regulatory environments, and approaches to managing resources. As a result, those companies likely face similar sustainability issues—for example, product safety for pharmaceutical companies, fossil fuel-related stranded assets for oil and gas companies, and customer privacy for telecommunications companies. A broad sustainability standard applying to all companies in all industries could result in some companies being forced to disclose immaterial information or to use boilerplate language just to satisfy a standard’s requirements. The SASB’s initial materiality assessment process consisted of the following:
The SASB’s standard-setting process includes SASB staff recommendations to add items to its Standard Board’s technical agenda. Stakeholders also may submit proposals to add issues to the Board’s agenda, and Sector Advisory Groups and the IAG provide ongoing input on implementation and emerging issues. Proposed standards and updates are exposed for public comment, typically for 90 days. Final adoption of a new standard or update requires approval of at least a majority of the SASB Standards Board members.In March 2016, the SASB completed work on provisional standards covering 79 industries in 10 sectors—consumption, financials, health care, infrastructure, non-renewable resources, renewable resources and alternative energy, resource transformation, services, technology and communications, and transportation. Those provisional standards can be accessed on the SASB website, or by using the SASB Standards Navigator, a subscription-based research platform.Updates to SASB standards are to be made on three-year cycles unless developments occur requiring more frequent updating on a specific issue. The SASB also issues interpretations and technical and staff bulletins to help resolve questions and to provide implementation guidance.
The SASB recommends that companies use the provisional standards related to their primary industry, as listed in the SICS™. Companies operating in more than one industry should consider disclosing additional metrics and narrative information about the sustainability topics that the SASB considers material for each of those industries. “ SASB Industry Standards: A Field Guide,” summarizes the sustainability topics and metrics included in its 79 industry-specific provisional standards and discusses each industry’s risk exposures and opportunities. Each SASB provisional standard includes:
As part of a major initiative, the SEC is currently studying the overall effectiveness of its existing sustainability-related disclosure guidance. Its Concept Release, “ Business and Financial Disclosure Required by Regulation S-K,” issued in April 2016, solicits stakeholder comments about a wide variety of topics, including the need for improving its sustainability-related disclosure requirements as well as the costs and benefits of disclosing that information. Specific sustainability-related questions in the Concept Release (Section IV.F.3, “Disclosure of Information Relating to Public Policy and Sustainability Matters”) include:
Some commentators have suggested that the SASB’s mission to expand traditional financial reporting to include ESG-related disclosures about organizations’ sustainability activities should be done cautiously, if at all. Some of their concerns are based on companies’ existing disclosure practices: information about ESG activities and risks of many organizations, especially those of large publicly held companies in the U.S., is available from many print and online sources, including company websites, statutory and regulatory reports, equity research reports, and the financial press. In some commentators’ views, including sustainability information in SEC filings does not offer any comparative benefits over other sources of information. It can, however, result in higher external reporting costs because of additional staff time and the need for developing new information systems; it also may increase assurance-related costs.Despite the increasing availability of ESG-related information, some published surveys and other research suggest that mainstream investors and analysts may not be employing the information because it isn’t useful in assessing organizations’ overall sustainability performance or in linking that performance with organizations’ financial performance. Another frequent criticism of current reporting on ESG-related issues is that some managers engage in “greenwashing”—attempting to enhance an organization’s reputation and to protect its brand by accidentally or deliberately misleading stakeholders about its sustainability successes by showing the organization in a favorable light while ignoring negative aspects of the organization’s environmental and social impacts or without having any genuine interest in improving its sustainability performance. (See C. Marquis, M. Toffel, and Y. Zhou, “Scrutiny, Norms, and Selective Disclosure: A Global Study of Greenwashing,” Organization Science (2016), pp. 483-504.) A related problem is that some companies include too many, and often irrelevant, details about their ESG-related activities. This “information overload” or “carpet bombing” allows relevant information to be hidden among boilerplate information not important to investors’ decisions. (See C. Cho, G. Michelon, D. Patten, and R. Roberts, “CSR Disclosure: The More Things Change…?, Accounting, Auditing, & Accountability Journal (2015), pp. 14-35.)
This special report has described the SASB’s history, staff and organizational structure as well as its materiality assessment and standard setting processes. It also discussed the SASB’s provisional standards and recent developments and concerns that may affect the organization’s future.The SASB’s approach to developing sustainability standards has several specific advantages:
This exhaustive list of sustainability factors is filtered down through a series of steps, outlined in the Process section of this document, which are designed to identify only those issues reasonably likely to have material impacts on companies in an industry. Environment
An excerpt from the Provisional Standard shows sustainability disclosure topics, as well as accounting metrics.
As a result of heavy reliance on oil, the Airlines industry generates a significant amount of direct greenhouse gas (GHG) emissions and is subject to potential compliance costs and risks associated with climate change mitigation policies. Over 99 percent of airline emissions are in the form of carbon dioxide. The main sources of GHG emissions for airlines companies are aircraft fuel use and emissions, ground equipment, and facility electricity. Aircraft emissions are the largest contributor to total emissions from the industry, and fuel management is a critical part of reducing emissions. The management of the environmental impacts of fuel usage includes both fuel efficiency and the use of alternative fuels, which are effective ways for airlines to increase profits through reduced fuel costs while also limiting exposure to volatile fuel pricing, future regulatory costs, and other consequences of GHG emissions.
1. The registrant shall disclose gross global Scope 1 greenhouse gas (GHG) emissions to the atmosphere of the six GHGs covered under the Kyoto Protocol (carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride).
6. In the case that current reporting of GHG emissions to the CDP or other entity ( e.g., a national regulatory disclosure program) differs in terms of the scope and consolidation approach used, the registrant may disclose those emissions. However, primary disclosure shall be according to the guidelines described above.
7. The registrant should discuss the calculation methodology for its emission disclosure, such as noting if data are from continuous emissions-monitoring systems (CEMS), engineering calculations, mass balance calculations, etc.
8. The registrant shall discuss the following, where relevant:
11. Disclosure corresponds with:
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