For nearly a century public companies have had in place requirements to disclose financial information so investors could accurately size up a company. More specifically, they were required to disclose material issues. But materiality is not a static state. It can widen and grow to include all sorts of risks that a company can encounter, some of which have yet to present themselves.
So it is with social and environmental risks, which if not acted on it, could sink the company. Just look at the state of the coal sector, which has seen several bankruptcies of as of late, and not just because commodity prices are slumping. Growing environmental awareness is wreaking havoc on this sector of the energy industry, mainly because it’s seen as dirty and old-fashioned, and careless when it comes to mining techniques.
Enter SASB or the Sustainability Accounting Standard Board. This newish accounting board recently completed provisional standards for 79 industries in the US economy and is seeking comments on them as well as a process to codify and maintain them, an effort dove-tailing with a regulatory initiative to modernize financial statement disclosures.
The SASB is an independent non-profit that aims to develop and disseminate sustainability accounting standards to help companies disclose material and informative social and environmental information to investors. It has worked closely with financial statement preparers and users for more than three years.
On April 13, the Securities and Exchange Commission (SEC) issued a concept release seeking views on how to modernize certain business and financial disclosures in Regulation S-K, which defines information that materially impacts a company. Those disclosures already include information related to sustainability, when relevant.
Himani Phadke, interim head of standard-setting at SASB, said SASB has met with the SEC to keep it abreast of its efforts. It will provide feedback on the regulator’s concept release, she said, but it is not lobbying for any particular outcome, since the SASB’s mission is essentially to facilitate companies’ sustainability reporting under current regulations.
Nevertheless, she added, “We’re seeing more demand from mainstream investors for this type of information, so if that voice is heard by the SEC, [the regulator] could determine that it would be beneficial to have more of that information in 10Ks and nudge financial statement preparers to do that.”
In fact, many institutional investors, especially in Europe but also large ones in the US such as CalPERS and CalSters, as well as large money managers, have formerly introduced sustainability into their investment analysis process. Many large companies have also started disclosing sustainability-related information in their annual reports, and discussing such disclosures with capital providers is anticipated to become increasingly necessary.
A week before the SEC published its concept release, the SASB issued three documents seeking comments by July 6 that will provide a foundation for the standard setter going forward. The first one sets up the practices and processes for its standard setting activities, including consultations with stakeholders, the codification of standards, and their ongoing maintenance. The second document will update the SASB’s conceptual framework that outlines the fundamental principles guiding its work. And the third one seeks to amend the Sustainable Industry Classification System, in which SASB groups related industries based on similarities in their sustainability profiles, risks and opportunities.
SASB anticipates reviewing the comments in short order and finalizing policies and procedures for how the SASB develops formal standards going forward. Phadke said each sector has an analyst that will reach out to stakeholders to consult with them more deeply on the standard to ensure they help disclose material information in a matter that is useful to investors and cost effective for corporate issuers. In addition, SASB anticipates sponsoring several meetings and group discussions.
“We’ll be seeking input from the industries and investors to comment on the provisional standards as we seek to finalize them,” she said.