Last month, Michael Bloomberg and Mary Schapiro sent a letter to the CEO and CFO of every Fortune 500 company. The letter had one request: take a seat at the table as sustainability accounting standards are refined for your industry.
“Companies increasingly acknowledge that factors such as climate change and cybersecurity impact their financial success – and investor decisions to buy, sell, or hold a security,” the letter says. “But until now, companies and investors have lacked standardized, comparable information about how these factors affect corporate performance.”
Mr. Bloomberg, as founder of Bloomberg LP, and Ms. Schapiro, as former chair of the U.S. Securities and Exchange Commission (SEC), know a thing or two about what’s good for the markets. In the words of Mr. Bloomberg, “disclosures are a cost-effective and compelling way for businesses to understand the material risks that climate change and other sustainability factors pose to their operations.” It’s as simple as this: what can’t be measured can’t be managed.
To help public companies measure and manage critical sustainability issues, SASB has issued provisional sustainability standards for 79 industries. The standards are designed to help public companies disclose material information to investors in SEC filings. SASB is now in a period of deep consultation to gather additional input before the standards are codified. And we don’t want companies to miss the chance to have a seat at the table.
Corporate disclosure fatigue is a problem. Companies are annually subject to environmental, social and governance (ESG) evaluations by 150 ratings systems on approximately 10,000 performance metrics, leading to “survey fatigue.” Similarly, responding to shareholder proposals is time-consuming and costly—and sustainability-related resolutions, which accounted for 40 percent of all shareholder proposals in 2011, today account for 67 percent of them..
Despite the abundance of disclosure, investors remain dissatisfied with the information received. Existing disclosure is largely not material (as defined under U.S. securities laws), comparable, complete, or reliable. A 2015 PwC study found that 82 percent of investors said they are dissatisfied with how risks and opportunities are quantified; 79 percent of the investors polled said they are dissatisfied with the comparability of sustainability reporting between companies in the same industry.
SASB exists to alleviate disclosure fatigue for companies. By improving the effectiveness of sustainability disclosure, standards reduce the cost burden borne by companies. SASB standards are cost-effective, identifying the minimum set of disclosure topics likely to constitute material information for companies in an industry. On average, each industry standard has just five disclosure topics. Whenever possible, SASB references metrics already in use by industry, such as those developed by CDP, EPA, OSHA, GRI, and industry organizations such as IPIECA, EPRI and GRESB.
Perhaps most importantly, the standards are designed to support effective disclosure under existing U.S. securities law. Item 303 of Regulation S-K requires that companies describe known trends, events, and uncertainties that are reasonably likely to have material impacts on their financial condition or operating performance in the MD&A section of Form 10-K or 20-F. Because of these requirements, companies often address sustainability matters in SEC filings—three-quarters of the disclosure topics in SASB standards are already addressed. However, more than 40 percent of this disclosure consists of boilerplate language, which is insufficient for investor decision-making. SASB standards will help improve the usefulness of sustainability disclosure to investors.
Companies are beginning to acknowledge the benefits of improved sustainability disclosure. GE, for example, has focused on making its Form 10-K more forward-looking and less of a compliance document. The company also combined its annual and sustainability reports into an integrated report. According to Senior Vice President and CFO Jeffrey Bornstein, “based on the various inquiries we’ve gotten over the course of this year, I think you can see a lot more companies doing some form of an integrated report…If there’s real value, investors will start asking for it. If the investors see value in it, they’ll start pushing the other companies that they’re invested in for something similar.”
Investor demand is mounting. In April, the SEC issued a concept release on disclosure reform, which invited feedback on a broad range of issues including sustainability disclosure. Though just 4% of the release addressed sustainability disclosures in SEC filings, 66% of responses discussed sustainability disclosures. More than half of these responses were from investors with an aggregate AUM of over $168T. 85% of sustainability-related letters called for improved disclosure of sustainability factors in SEC filings. Learn more about the SEC’s disclosure effectiveness initiative at the SASB Symposium.
Market forces are aligning. Sustainability disclosure is inevitable. In the face of the inevitable, where do you want to be? Companies, it’s time to shape sustainability accounting standards for your industry, so the standards are as useful and cost-effective as possible. Make sure your voice is heard—contact an analyst to learn more about the standards and schedule a consultation meeting.
In the words of Michael Bloomberg and Mary Schapiro, “we’re helping companies comply with existing requirements in ways that are useful to them and to investors, to save both time and money. Thank you for your partnership as we work to together with your industry to help shape disclosure standards – and create stronger, more transparent markets.”