The Magazine of Corporate Responsibility

Sustainability Reporting Group Issues First Standards for SEC Filings

by Michael Connor

A new initiative to develop standards for reporting on environmental, social and governance (ESG) issues by publicly-held U.S. companies has launched its first set of standards - for the health care sector - with ambitious plans to develop similar standards for more than 80 industries in 10 sectors over the next two years.

The Sustainability Accounting Standards Board (SASB), which began its work in October 2012, aims to introduce standards for additional business sectors every three months, according to Dr. Jean Rogers, the organization’s founder and executive director. Next up: the financial sector, followed soon by technology and communications, and non-renewable resources.

The goal, Rogers said in an interview, is “to create a race to the top” for accounting of “material, non-financial risks and opportunities” through traditional reporting channels, notably the annual Form 10-K filed by public companies with the U.S. Securities and Exchange Commission.

The SASB standards will be a “a very cost-effective way” to disclose information on ESG issues, according to Rogers, and are designed in part to help address the “questionnaire fatigue” confronted by companies with demands from multiple sources for ESG reporting.  By providing a “level playing field” for sustainability reporting, she said, the SASB standards will “truly enable comparison of peer performance and benchmarking within an industry.”

The SASB reporting standards differ from those of the Global Reporting Initiative (GRI) and the International Integrated Reporting Committee (IIRC), according to Rogers, in their focus on U.S. companies and SEC filing requirements.  The GRI and IIRC “are global, with a much broader set of stakeholders,” Rogers said.

What’s Material?

SASB’s health care sector standards cover six industries: biotechnology, pharmaceuticals, medical supplies & equipment, health care delivery, health care distributors and managed care. Issues addressed include resource management, pharmaceutical water contamination, drug safety and side effects, ethical marketing, affordability and fair pricing, managed care price performance and safety of clinical trial participants.

The working groups for the health care sector— which included 127 survey responses— represented publicly traded companies with more than $800 billion market capital and investment firms with more than $952 billion in assets under management, according to SASB. Working group members include representatives from Baxter,Cleveland ClinicJ&JKaiser PermanentePfizerMerckNovo NordiskAllianceBernsteinBreckinridge Capital AdvisorsCalvert Investment and UBS Securities.

SASB’s Rogers said working group members are set to begin “piloting” the standards by beginning to incorporate them into their 10-K filings with the SEC.  The sustainability disclosure process will be “no different than what they (companies) go through every year” in preparing their financial reporting, she said.

In an analysis of the quality of corporate disclosure practices on specific issues, SASB provides examples of “No Disclosure,” “Boilerplate Statements,” ”Industry Specific,” and “Metrics” – in ascending order, with “Metrics” providing the most data on issues.

Defining what is “material” to a company’s operations and financial performance is at the heart of the process. “It’s not an easy question” to answer, Rogers said, though there is a substantial base of U.S. securities case law to rely on.  A “material” ESG issue is one that a “reasonable investor” would want to be aware of, according to Rogers.  For example, has interest in an issue been expressed through shareholder resolutions, or in media reports?  Is there evidence the issue will have an economic impact on the company?  And, ultimately, Rogers said, “would long-term value creation be affected by management or mismanagement of the issue…Is it likely to affect share price?”

Apples to Apples

For an increasing number of institutional investors, like the California State Teachers’ Retirement System (CalSTRS), which manages some $170 billion, including holdings in about 7,000 publicly-held companies, disclosure on environmental, social and governance issues allows portfolio managers  “to hear how they (companies) are accounting for their risks,” said Anne Sheehan, CalSTRS director of corporate governance.

“It’s a question of risk management,” Sheehan said in an interview. “Will (a company’s) handling of a particular issue result in a loss of economic value that, in turn, affects the value of our portfolio?”

Many companies now provide varying levels and types of disclosure on ESG issues through multiple channels – including the GRI, IIRC, corporate sustainability reports, corporate social responsibility (CSR) reports, and data provided in response to a variety of independent surveys.  The emerging SASB standards, Sheehan said, will provide “uniformity and structure in reporting” and “allow investors like us to compare apples to apples.”

Sheehan, who is a member of SASB’s board (but resigning soon for personal reasons, she said), praised SASB’s “bottoms up, grass roots” development process which involves multi-stakeholder working groups, public comment, and review by independent experts in standards development, securities law, investment, environmental law, metrics and accounting.  Her hope, she said, is that SASB’s emerging body of work will be “accepted as a de facto standard.”

Out on a Limb

SASB has a staff of 15, most headquartered in San Francisco, according to executive director Rogers. As new standards are introduced for additional industry sectors over the next two years, more staff will be added. The organization is currently supported by foundations – including Bloomberg Philanthropies and the Rockefeller Foundation – but Rogers said the plan is to eventually derive earned income from educational programs, publications and conferences.

“We’re going after a broad, broad swath of public companies,” said Rogers, emphasizing that the SASB standards are intended to be not “just a reporting exercise” but also a way for companies to “manage” sustainability issues.

Common reporting standards, said Rogers, should provide competitive benchmarks for sustainability managers and CSR officers at publicly-held companies.  For those executives, Rogers said, a common standard “takes away the fear that ‘I’m sticking my neck out, or going out on a limb,’” by advocating that senior management and boards of directors devote more attention and resources to sustainability initiatives.

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