SASB: A Pathway to Sustainability Reporting in the United States

In Brief

Sustainability reporting may be gaining in popularity around the world, but U.S. companies lag behind their peers in adoption. The Sustainability Accounting Standards Board's (SASB) new integrated standards may be just the ticket to getting U.S. companies on board. This article discusses the advantages of reporting under SASB standards and examines those standards in detail. It concludes with a comparison of the SASB standards to the Global Reporting Initiative (GRI) and the International Integrated Reporting Council (IIRC), the other leading worldwide frameworks for sustainability reporting.

Sustainability reporting is on the lise across the globe, but the United States lags belmid: Only 53% of S&P 500 companies published a sustainability report in 2012 (Ernst & Young, "Value of Sustainability Reporting, a Study by EY and Boston College Center for Corporate Citizenship," 2014). Benefits of sustainability reporting indude improved reputation, better risk management, and increased consumer and employee loyalty. While the number of laige U.S. companies providing sustainability reporting has been growing, much woik is still needed to get U.S. companies of any size on board. Why the reluctance to engage in sustainability reporting? Some companies see the process as too complex and costly, and survey responses by publicly traded corporations indicate that they do not have the resources to prepare a public report (Emst & Young 2014).

SASB has developed a new set of industry standards for sustainability reporting that allay some of the reasons that films do not engage in the practice. Importantly, it allows companies to begin their sustainability reporting efforts without having to gather information beyond that already reported to comply with SEC and other regulatoiy requirements.

Utilizing SASB reporting standards results in an integrated report, which some believe is the next advancement in sustainability reporting. An integrated report combining sustainability information with standard financial reporting may be more informative and less costly to produce than stand-alone sustainability reports.

What Is SASB?

SASB is a 501(c)3 nonprofit organization. Established in 2011, the SASB provides sustainability accounting standards that publicly fisted U.S. companies can use to disclose material nonfinandal sustainability issues (including chínate change) related to risk management and value creation. The standards ai e designed for disclosures in mandatoiy filings to file SEC, such as Form 10-K. In that way, SASB standards do not represent additional reporting, but rather put focus on material information that is already mandated. The metrics are industry focused and are intended to provide investors and analysts a more complete picture of a company's risks and opportunities. SASB plans to develop standards for more than 80 industries in 10 sectois by 2015. Thus far, it has released standards for industries in six sectors: Health Care (July 2013), Financial (February 2014), Technology & Communications (April 2014), Nonrenewable Resources (June 2014), Transportation (September 2014), and Services (December 2014). Sectors identified and remaining are Resource Transformation, Consumption I, Consumption II, Renewable Resources & Alternative Energy, and Infrastructure.

SASB's mission is to provide more useful mfoimation to investors and create value by improving coiporate performance on environmental, social, and governance (ESG) issues (access its full vision statement at http://www.sasb.org). SASB's governing board of directors, winch is responsible for communicating and supporting SASB's vision and mission, is led by Michael Bloombeig, founder of Bloomberg LP and former mayor of New York City, and is composed of many high-level executives, including CEOs and partners of accounting films and law firms. Of note are two formel- SEC chairwomen, Mary Schapiro and Elisse Walter, and Harvard Business School professor of management practice Bob Eccles. hi October 2014, former FASB Chairman Robert Herz was elected to SASB's board of directors.

The Time for Intecpated Reporting Has Arrived

Integrated reporting finks an organization's mission, coiporate governance, and financial, social, and environmental performance to both help managers make better internal decisions and provide greater transparency to external stakeholders so that they can more realistically gauge the trae economic performance of tlie company. According to the IIRC, an integrated report concisely communicates how a company's strategy, governance, performance, and prospects-in the context of its external environment-lead to Hie creation of value in title short, medium, and long term (http://www.theiirc.org/ intemational-ir-framework/).

PricewaterhouseCoopers's 17th Annual Global CEO Survey suggests company growth may depend upon integrated reporting (http://www.pwc.com/usceosuivey). A majority (74%) of global CEOs said that measuring and reporting total nonfinandal impacts contributes to long-term success, hi that survey, HSBC's group clnef accounting officer, Russell Picot, stated that integrated reporting "provides a unifying, integrating force within a company" between coiporate executives and busmess and department heads.

Nevertheless, 58% of the 100 largest companies that combined coiporate social responsibility (CSR) and finandal reporting set aside a special section of the annual report for CSR information, rather than integrating the nonfinandal CSR mfoimation with financial reporting information throughout the annual report (Nicholas C. Lynch, Michael F. Lynch David B. Casten, "The Expanding Use of Sustainability Reporting," The CPA Journal, March 2014, pp. 19-24). Tins suggests there is still much room for improvement in movement toward trae integrated reporting.

United Technologies Corporation (UTC) was the first Dow Jones Industrial Average member to produce an integrated report. A section of its 2013 annual report (found at http://www.utc.com) presents seven key performance indicators (KPIs) regarding sustainability issues such as greenhouse gas emissions, industrial process waste, worldwide The Standards Development Process

SASB employs working groups and provides for public comment where appropriate. It employs a three-phase model for due process. During Phase 1, the preparation phase of standards development, SASB's research team gathers evidence on potential matenal sustainability issues for an mdustry to determine whether they have both investor impact and economic impact. Matenality for Hie SASB standards is based upon principles of matenality enforced by the SEC; that is, matenality is detennined by Hie significance of an item to users of the reporter's financial statements. A matenality map is developed by SASB during Phase 1 of standards development for an mdustry. Issues are assigned a score based upon interest financial nnpact, and forward-looking adjustment (for emeiging issues). Those with scores above a particular threshold aie considered to be material for the mdusüy. The outcome of Phase 1 is an industry brief that contains the proposed disclosure items and accounting metrics.

Phase 2 is the development phase, where corporations, market participants, public interests, and intermediaries ar e represented in an industry working group. Their feedback informs an exposure draft standard containing accounting metrics and technical protocols for each matenal sustainability issue. Almost 2,000 participants from publicly traded companies with more than $9.5 trillion market capitalization and investment firms with $21 trillion assets under management have participated to date (SASB, "Newsletter, October 2014," http://www.sasb.org).

In Phase 3, the exposure draft is released for 90-day public comment, and feedback collected is incorporated into the standard. SASB's Standards Council reviews the draft for consistency, completeness and accuracy. Following the review, the provisional standard is made available to the public. Feedback is accepted for one year, at which time SASB releases an update and removes tire provisional label.

Several principles guide SASB's standardssetting process. Standards must be-

* applicable to all investors

* patinent and relevant across an industry

* foaised on driving value creation

* expected to bring benefits that exceed the perceived costs

* actionable by companies

* easily verified

* objective and supports decision making

* of the highest quality possible at any given tune

* reflective of the views of stakeholders

* detennined to support the shift to integrated reporting

* determined to support the convagaice to international accounting standards.

Standards Format

The guidelines within each industry sector follow the same basic presentation format composed of two pats: 1) an introduction that is similar across all sectors, aid 2) matenal sustainability topics aid accounting meines, winch ae sector specific. The introduction includes the following sections:

* Purpose and structure A high-level overview of the purpose of the SASB standards, which state that while guidaice identifies sustainability topics by mdustry, each company is responsible for determining which information is matoial to than specifically.

* Industry description. A short description of the industry in which the sector operates.

* Guidance for disclosure of material sustainability topics in SEC filings. Identifies the material topics for the mdustry, and discusses how a company cai determine which sustainability topics are matenal, which should be disclosed and where in the 10-K, and provides reminder's of other items such as risk factors that must be disclosed by law.

* Guidance on accounting of material sustainability topics. Recommends that companies address strategic approach, competitive positioning, degree of control and measures planned or undertaken over tiie last three fiscal years if relevant and not addressed by the accounting metrics.

* Users of die SASB standards Companes that issue securities aid must submit SEC filings.

* Scope of disclosure SASB recommaids that it include aitities in which a registrant lias controlling interest.

* Reporting format Provides guidance on activity metrics, units of measure, uncertain infonnation and basis for estimates used.

* Timing. Indicates that disclosure should be made for tiie fiscal year.

* Limitations. Here, SASB recognizes that its standards may not address all sustainability issues for each sector.

* Forward-looking statements. Since SASB allows for inclusion of future trends and uncertainties, it recommends here that registrants identify these statements as such, and that they become familiar with tiie safe-harbor provisions of section 27A of tiie Securities Act and section 2IE of the Exchange Act to understand how to protect themselves.

* Assurance The conclusion to tiie introduction, encouraging registrants to use mdependent assurance.

The standards developed for each industry thus far, and tiie sectors witlim them, are shown in tiie Exhibit.

Standards-Setter Comparison

This section compares SASB with tiie GRI and tiie IIRC, two other standard setters based upon their dommance or potential dominance in the sustainability reporting arena. The GRI guidelines that are shown at their website (http://www. globalrepoiting.org) aie the most widely accepted around tlie globe. Tlie GRI's roots stem from tlie U.S. nonprofit organization tlie Coalition for Environmentally Responsible Economics (CERES) and tlie Tellus Institute. Then' materiality focus is on tlie impact of a company's operations and value creation as an approach to determining tlie ESG issues to be reported. Although tlie GRI standards aie tlie most widely adopted and used, they aie interpreted more easily as a stand-alone, onesize-fits-all reporting standard, rather than an integrated approach. It is up to the reporting entity to sort through tlie voluminous standards to find (based upon a materiality threshold) those items of importance to their sustainable and transparent reporting. Tlie GRI intends for reporting to be integrated with annual report information, but tlie complex and in-depth nature of their standards would challenge most organizations to combine tlie two sets of standards (FASB and GRI) into one meaningful, integrated report.

The IIRC's goal is to promote tlie integration of financial reporting with sustainability reporting. Its International Integrated Reporting Framework, released in December 2013, focuses on integrating tlie most relevant ESG issues into annual corporate reports, but it admits to being less than wide-ranging and global. Similar to the GRI, however, the IIRC provides a one-size-fits-all, potentially stand-alone reporting format. Rather than a set of standards, tlie IIRC has published a framework and is conducting a pilot program with more than 100 reporting entities in over 25 countries. Its Integrated Reporting Database can be found at http://examples.tlienrc.org.

Tlie SASB standards are relatively new, so their adoption speed and breadth are yet to be determined. The SASB's plans include industry standards for Resource Transformation (February 2015), Consumption I (June 2015), Consumption II (August 2015), Renewable Resources & Alternative Energy (November 2015), and Infrastructure [April 2016, (http://www.sasb.org)]. The publication of an ambitious timeline is promising, although as of March 2015, Industry Working Groups have yet to be fonned for tlie last two projected industry standards.

Lynch et al. (2014) suggest that CPAs should aid in the development of these standards by either taking part in one of the SASB's industry working groups or joining the SASB Advisoiy Council. In addition, tlie market for CSR report attestation is in its infancy and growing quickly. There aie numerous opportunities for CPA expertise: strategy assistance, risk and opportunity analysis, information systems design and implementation support, and assurance services or review sei vices in supply chain, sustainability reporting, and tax incentive and credit areas.

How Wall Street Can Help

hi the August 27, 2014, New York Business Journal Bloombeig LP CEO Dan Doctoroff suggested that tlie SEC lias tlie power to make environmental sustainability Wall Sheet's top priority. Speaking to data scientists in New Yoik City, Doctoroff described a vision of markets moving based on a corporation's track record in environmentalism, documented through standardized, mandatory reporting. "If tlie SEC recognizes that sustainability information is material enough to include in public companies' 10-K annual reports," he stated, "then the entire reporting landscape and tlie whole woiid can change." He went on to say that "if all public companies begin to submit industry-specific (environmental, social, and governance) data using SASB's industry-specific metrics, we could see billions, if not trillions, of investment dollars move to companies that take sustainability seriously from those who don't." ?

SASB's mission is to provide more useful information to investors and create value by improving corporate performance on environmental, social, and governance (ESG) issues.

water consumption, and lost workday and total recordable incident rates alongside standard financial performance metrics. Energy efficiency, health and safety, and environmental performance are key themes integrated throughout Hie preface to the management discussion and analysis section, primarily presented as part of the business highlights section.

SASB employs working groups and provides for public comment where appropriate. It employs a three-phase model for due process.

The SASB standards are relatively new, so their adoption speed and breadth are yet to be determined.

Diane K. Schooley, PhD, CTP, is associate dean and professor of finance at Boise State University, Idaho. Her research interests include corporate governance, integrated sustainability and financial reporting, and consumer finance. Denise M. English, PhD, CPA, CIA, is professor of accountancy at Boise State University. Her research interests include corporate governance, integrated sustainability and financial reporting, and accounting education.