CSR Disclosure: Expanding the Conversation on Materiality and Sustainability

Submitted by Guest Contributor

By Katie Schmitz Eulitt and Marisa Mackey, SASB

Is the info in CSR reports truly not useful to investors or does it need to be put into a different language or source document?

This was one of the many questions that came up repeatedly during a recent webinar/tweetchat, titled Materiality Matters, co-hosted by CSRwire and the Sustainability Accounting Standards Board [SASB]. The session discussed how sustainability fits into the legal definition of materiality (under U.S. securities law) and provided an overview of SASB’s work to develop standards that help companies address, and investors analyze, the most material environmental, social and governance (ESG) issues in their industry.

Here were some key takeaways from the webinar that might surprise you:

1. Investors do care about sustainability—they just aren’t necessarily calling it that.

We must disabuse ourselves of the notion that investors aren’t interested in ESG — institutional investors, for example, have been concerned with the “G” for decades. A 2003 study by Harvard, Stanford and Yale professors showed that an investment strategy between1991-1999 that bought firms with the strongest corporate governance practices, and sold firms with the weakest practices, earned annual abnormal returns of 8.5 percent.

What investors need is useable and comparable ESG data that is presented in a format and medium they’re accustomed to, such as the Form 10-K, to bridge the obvious translation gap.

2. There’s too much noise. 

SASB’s preliminary research shows that 60 to 70 percent of data in CSR reports is immaterial (based on the Supreme Court definition of the term: information is material if “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 represents a major challenge for investors in the form of an overwhelming amount of immaterial sustainability data that is not comparable or benchmarkable from company to company.

SASB standards, which adhere to the Supreme Court definition of materiality, enable corporations and investors to drill down to the material ESG issues that drive long-term financial performance and value-creation. 

3. SASB, GRI and IIRC are complementary, not competing. 

The efforts of SASB, the International Integrated Reporting Commission [IIRC] and Global Reporting Initiative [GRI] contribute to a common end goal: the advancement of corporate sustainability reporting.

The products of all three organizations can be used in complementary ways — the SASB standards to guide the inclusion of sustainability in a 10-K form for investors, the GRI framework to guide the development of a sustainability report for all stakeholders, and the IIRC guidelines to inform the development of an integrated annual report. All companies—including those that are not yet using the GRI or IIRC frameworks, can use SASB standards.

One point of distinction to note is that SASB provides standards for mandatory filings, whereas GRI and IIRC provide frameworks for voluntary reporting.

4. SASB standards can benefit you—now.

While SASB’s full set of standards for 88 industries will not be completed until 2015, SASB tools are available now. SICS, our sustainable industry classification system, groups industries based on resource use and opportunity for innovation. Our materiality map presents the relative priority of sustainability issues within an industry. Consultants, corporations and investors are already using these tools to evaluate risks and opportunities for their industry or portfolio.

5. SASB standards will alleviate—not add to—reporting fatigue.

Sustainability executives may grumble at the idea of new required disclosure. Companies often cite being overwhelmed by the number and complexity of surveys and disclosure forms sent to them by customers, investor groups, activist groups, and others—it’s ‘death by a thousand cuts.’ However, SASB standards will alleviate reporting fatigue by providing clear guidance on what ESG issues are material for companies to report on within their specific industries.

In other words, companies can use SASB standards to identify which ESG issues to prioritize operationally—toward the goal of improving performance—as well as emphasize in their CSR or integrated reports. [SASB will offer a webinar series for preparers and users of the Form 10-K (as well as other stakeholders, such as sustainability consultants) that want to learn how to use SASB standards. Stay tuned.]

6. Mandatory sustainability reporting is in the future (and is already required).

As SASB develops standards for 88 industries, they will be available for companies to use in the Form 10-K. Regulation S-K already requires that all material issues must be reported in the Form 10-K. SASB’s vision is that every publicly-held corporation will disclose material ESG issues in the Form 10-K; enabling companies to manage the sustainability issues that are most germane to their industry and investors to drive capital to the most sustainable outcomes.

We promised during the webinar to keep the conversation going as we develop more sector standards and reach our goal of 88 industries by 2015. Stay tuned for more updates, questions and opportunities to get involved.

And join a SASB working group as we develop sustainability accounting standards for your industry.