Navigating the Corporate Sustainability Disclosure Landscape
By Jeremy Capungcol, FSA
Assistant Project Manager, CodeGreen Solutions
Companies that are sustainability reporting veterans need only to dip their spoon into the familiar alphabet soup of three to four-letter acronym reporting programs. As the demand for further transparency increases, these reporting programs continue to proliferate, each with its own intended disclosures and target audience. A company wishing to disclose sustainability metrics for the first time may be met with “disclosure overload:” Given the wide breadth of required metrics, the company may lack the bandwidth to both disclose the information and apply it in a way that increases its Environmental, Social, and Governance (ESG) performance before the next reporting period.
In the wake of the recent growth spurt of corporate sustainability reporting, a new program has emerged that addresses this issue. Building upon the framework of traditional financial accounting, the SASB standard, or the Sustainability Accounting Standards Board standard, integrates ESG and sustainability disclosures back into core business practices by providing a method to account for a company’s intangible assets. With a strict desire to keep disclosures “decision useful,” SASB streamlined reporting in a way that is accessible and has the potential to add long-term value to a company.
The Difference
To understand how SASB can provide long-term value, it is important to differentiate SASB from other reporting programs. Focused on US markets and geared towards investors, SASB is a reporting standard. Consider CDP (formerly the Carbon Disclosure Project) and GRI (Global Reporting Initiative), two of the most well-known global reporting programs. The former is considered a reporting program, or a structure/model for reporting with best practices, while the latter is a framework, or a recommended practice that allows some leeway in its use or implementation. A standard however, consists of requirements and specifications that serve to ensure reports are issued with consistent content.
The approach in SASB’s reporting requirements should come as no surprise. Related to the FASB, or Fundamental Accounting Standards Board standard, SASB disclosures are imbedded within a company’s financial reports, such as the annual 10-K and the quarterly 10-Q. Given that these documents are heavily regulated by the Securities and Exchange Commission, both CEOs and CFOs for any public company are held legally responsible for any improper disclosures.
While this legal responsibility can be considered a potential liability, it helps ensure that disclosures are accurate and that multiple parties are engaged in the reporting process. Companies reporting for CDP and GRI, which do not face legal penalties for incorrect disclosure, may engage only analysts and sustainability professionals, whereas a company reporting for SASB needs the collaborative involvement of accountants, analysts, middle management, and the executive suite. With involvement required at all levels of an organization, a company is more likely to be aware of sustainability initiatives and potential for improvement throughout the organization.
Back to the Core
The value of the SASB standard can be seen in its accessibility and familiarity of existing metrics. Per SASB research, 74% of metrics required are already being disclosed by different companies within their respective industries. The notion of disclosing only “decision useful” information drives SASB’s desire to favor the quality of data over the quantity. Per further SASB research, of the companies that already collect data on required SASB metrics, only about 40% are using that information in a “decision useful” way.
To ensure added value to a company’s investors and management, SASB standards apply SICS, or Sustainable Industry Classification System models, for a predetermined subset of industries. SICS models indicate the required disclosures for a company given the industries it is primarily involved in. With such specific requirements, generic boiler plate language is avoided, and recipients of the company’s financial reports have all the information that would potentially influence their investment and management decisions. Additionally, by sticking only to the relevant metrics, both the reporting body and the report recipients will not be inundated by the collection and publication of irrelevant information.
With such targeted disclosures, reporting bodies are less likely to face legal liabilities per SEC rulings due to the omission of data. Internally, SASB disclosures may provide a company with insight on which resources are managed, what the company’s main cost drivers are, and areas in which operational efficiency can be improved.
Externally, however, SASB disclosures may also have the potential to bridge the gap between investors and customers/end-users. Take for example, the Real Estate Investment Trust (or REIT) industry:
Per a recent Bloomberg article, “Real estate investors might have more reason to care about the air conditioning in your office than you do. As energy-related emissions from buildings creep higher, property investors are starting to worry that regulators and politicians will come down hard on the sector for its contribution to climate change.”
In this case SASB standards can provide the concrete data investors need to pressure the landlords managing their assets to take a more involved approach. This is turn, may directly involve building tenants through the implementation of energy efficiency clauses in subsequent leases.
However, the REIT industry is just one of many that have begun to show a trend towards SASB’s approach to corporate disclosure. Companies such as Bloomberg LP, Appalachian Mountain Brewery, and Motorola Solutions have begun to incorporate SASB metrics into their non-SEC corporate reports. When considering the dissimilarity between these large companies’ industries and their position in their respective markets, it is apparent that the SASB standard continues to trend towards future growth and adoption.
