Sustainability Accounting – Materiality Driving Investor Sentiment in Sustainable Reporting


“Investors recognize that sustainability issues can be very material from a valuation standpoint” said Robert Herz, in response to a question on what is driving investor interest in sustainability reporting. Mr. Herz spoke with Bloomberg Tax at the AICPA’s conference on SEC and PCAOB developments in Washington, DC, where he provided insight into some of the goals of the SASB, and what guidance companies can look for when considering sustainability reporting issues. The edited transcript is below.

Bloomberg Tax

What is driving investor interest in sustainability reporting?

Robert Herz

Investors recognize that sustainability issues can be very material from a valuation standpoint, and therefore from an investment point of view. They [sustainability issues] can affect the financial performance, or a company's financial condition, particularly over a longer term horizon. So from an investment perspective it becomes very important to understand what key issues are affecting a company, which could impact the success of your investment choices.

Bloomberg Tax

What are some of the bigger sustainability issues?

Robert Herz

It varies. First of all, there are both risks and downsides, but also opportunity for upside. These vary by industry, and to a certain extent by the company's business model. SASB standards are industry based because the material issues are very specific in an industry context. Safety issues, for example food safety supply chains, are very important to food companies and restaurant chains. [Whereas] drug safety issues would be important to drug manufacturers.

Climate change is something that affects many industries, and companies in many industries, but how it impacts them can be very different. How it would impact a real estate developer, versus an automobile company, versus an apparel company - that sources cotton from different parts of the world - versus an insurance company, all of these have different impacts. You have to develop your thinking about what kind of impact could sustainability issues have, how do we address those, and how do we measure our performance as we take actions.

Bloomberg Tax

Given that the sustainability requirements are quite broad, and impacts vary from the industry to industry, company to company. What are some of the goals, or ways that SASB can help companies?

Robert Herz

Although there is a whole panoply of [Environmental, Social, and Governance] ESG and other sustainability issues - you can probably think of 100 of them - in any one industry there is probably only a dozen issues [you can narrow down to].

The SASB has undertaken a very rigorous, very thorough process over the last five years, industry by industry, identifying which issues can be material from a financial and valuation investment point of view. Then we look at what kind of measures matter in that context. The panoply of potential sustainability issues which are essentially environmental, social, human capital, licenses to operate type issues, for any particular industry, on average only five broader issues may be particularly relevant. Within those relevant issues then are how you measure the impacts and what disclosures make a difference.

Bloomberg Tax

What guidance should a company use to make sure that they're complying?

Robert Herz

I think the SASB standards, which are industry by industry across about 80 industries, say which issues are likely to be material based on the research, and a lot of input from a broad range of stakeholders. Then for each of those issues what kind of disclosures and measures are the ones to think about that would give comparable information to investors. The SASB standards themselves provide very good guidance in that area.

Bloomberg Tax

What do you see being the most disclosed topic from your experience in sustainability reporting?

Robert Herz

Companies have, for a number of years now, issued standalone sustainability or corporate social responsibility reports, but they often cover a gamut of issues, some of which may not be material in the financial and investment sense, but they may be good corporate citizenry type issues.  For example what they're doing in the local community, what they're doing to reduce their carbon footprint, even though they might be a service company that does not have a major carbon footprint.

But you really have to think about it from the viewpoint of the main street investors. Which of those issues are really going to matter to their performance and their value growth, or value destruction over time? Therefore, look at things like the SASB standards to help identify those issues, and then to see whether the disclosures there, which are basically KPI’s [key performance indicators], are things you should start to measure.

Bloomberg Tax

There are some major accounting changes going on with revenue recognition, leasing, credit losses... What is your advice to companies to tackle these new accounting changes.

Robert Herz

I would say with any new standard, once it gets issued, get ahead of the game, don't wait. FASB has been giving companies fairly ample time to implement, but human nature being what it is, you can have some people put it off until after.

The better approach is to attack it in a systematic, organized way. Create disciplinary teams because it is not just “capture the data, put in new controls.” You have [also] got to think about how it impacts things like employee benefit plans, investor relations, debt covenants, all those kinds of things.

Therefore you have got to have a systematic way, and an implementation plan. It is going to take - in the cases of major standards – a few years to pilot test all that work with your auditors. Whenever you make major changes in accounting there is all these knock on effects, and therefore there needs to be a lot of care and effort. 

I happen to think that the new standards are better than the old ones. The initial pain will fade over time, because once you get past that effort in the first few years it becomes much more routine and embedded in “business as usual.”

I think that the best advice is get ahead of it, make sure you have the resources, and help that you need.      

Disclaimer: The Sustainability Accounting Standards Board (SASB) is funded in part by Bloomberg Philanthropies, the charitable organization founded by Michael Bloomberg, the ultimate owner of Bloomberg Tax.

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