If you go these days to sustainable business conferences and events you will find out pretty quickly that this field is mainly occupied with two main themes it struggles with: storytelling and metrics. Last week, for example, it was all about metrics in an event organized by the Sustainability Accounting Standards Board (SASB).
SASB is a non-profit organization engaged in “establishing an understanding of material sustainability issues facing industries and creating sustainability accounting standards suitable for disclosure in standard filings such as the Form 10-K and 20-F.” Its goal is to set standards for 10 sectors and 88 until the second quarter of 2015, starting with the Healthcare sector and moving on to the Financial sector, which was at the center of the NY event.
After last week’s event I can add another title to SASB: a potential game changer.
I’m not sure if all the 300 participants at the event hosted by Bloomberg in New York shared this sentiment. Yet, I’m quite positive they recognized the importance of SASB’s efforts to create a standardized framework that will help companies and investors identify and evaluate material ESG issues. After all, as Jean Rogers, SASB Executive Director commented, the world needs better performance and to get better performance we need better measurement. And this is where SASB enters the picture.
Actually, if we want to be accurate (after all, we’re talking about accounting here) SASB enters one or two steps before the measurements, as it helps companies and investors to understand what should be measured and where would be the most effective place to present this information.
And it all begins with materiality. No matter what industry or sector we talk about, the starting point of the standardization process is a preparation of a materiality map in order to understand the relative materiality of issues in the industry. Each map, Harvard Business School Professors Bob Eccles and George Serafeim explain in their article “The Performance Frontier” prioritizes 43 ESG issues, ranking their materiality for a given industry from a scale from 0.5 to 5, with 5 being most material.
But while it is no brainer that materiality is a fundamental concept in sustainability reporting, it is still a somewhat elusive concept that can be interpreted in different ways. The first panel in the event was looking into this issue trying to better understand what do we talk about when we talk about materiality in the sustainability universe.
The main reference presented in this debate was the Supreme Court definition of materiality, which was presented in 1976 in the case of TSC Industries v. Northway, Inc. Back then, the court defined materiality as “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 the information made available.”
This definition is used for example by the SEC in its rules on climate change disclosure, but not everyone in the panel agreed with it. Bob Herz, former Chairman of FASB for example said “could” would be a better fit than “would” and very quickly the whole panel was involved in a lively discussion on how broad the definition should be – whether sustainability information “would,” “could,” or “should” have been viewed by the reasonable investor as having significantly altered the total mix of information made available.
The discussion wasn’t only focusing on linguistics. Other issues such as the characteristics of the reasonable investor and fiduciary duty were brought up as well. In addition Prof. Serafeim, who participated in the panel mentioned that we need to think about the SASB disclosure framework also as a managerial tool, reflecting the notion in his and Eccle’s article that in order to create sustainable strategies that simultaneously boost both financial and ESG performance companies need first and foremost to focus strategically on the most material ESG issues.
The second panel was focusing on another important issue – where should a company disclose the material data? SASB’s standards are designed for integrated reporting and are appropriate for disclosure in the SEC form 10-K and 20-F, in the MD&A section, and SASB hopes that the SEC will adopt eventually this approach and require companies to do it.
But is Form 10-K really the best place to disclose this sort of information from stakeholders’ point of view in general and investors in particular? The panel seemed to think that it is, or at least that it’s better than a regular CSR report. Dan Hanson, Managing Director, Portfolio Manager at Jarislowsky Fraser said it is important to have this information on Form 10-K or the annual report because from an investor’s point of view if this data not on Form 10-K or the annual report it indicates that these issues are not vital for the management.
It makes a lot of sense but this would be quite a challenge considering the starting point, at least in the Financial sector. Half of the 63 companies surveyed by SASB in this sector said they currently don’t provide any disclosure on ESG issues in their 10-K filings, with another 14 percent offering only boilerplate statements and 30 percent reporting on industry-specific issues. Only 6 percent said they disclose ESG metrics.
While it remains to be seen if SASB’s standards will be widely accepted in the sustainable business universe, right now it looks like the best chance we have to move ahead with sustainability metrics. Now we need to see how we reform storytelling.
Raz Godelnik is the co-founder of Eco-Libris and an adjunct faculty at the University of Delaware’s Business School, CUNY SPS and Parsons the New School for Design, teaching courses in green business, sustainable design and new product development. You can follow Raz on Twitter.