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Can Sustainability Standards Build Stronger Businesses And Better Informed Investors?

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Late last year, I spoke with Andrew Winston about building more sustainable organizations to better serve investors, customers and the public interest. One of the organizations leading the charge in the U.S. is the Sustainability Accounting Standards Board (SASB), founded in 2011 to develop guidance to better inform investors on the value creation capacity and sustainability of the organization, based on disclosures that are clear, relevant, forward-looking, balanced and actionable. I recently spoke with Jean Rogers, co-founder and CEO of SASB about her vision and the influence sustainability standards could have in enabling stronger organizations and a better society.

This interview has been edited and condensed.

Jeff Thomson: What was your overarching mission and vision in founding SASB?

Jean Rogers: Nearly 10 years ago, I was working at Harvard’s Initiative for Responsible Investment (IRI) with Steve Lydenberg and Dave Wood. In our research, we noticed there was a proliferation of corporate social responsibility ( CSR ) and sustainability reporting, but we didn’t see an impact on investment. So, we looked at what it would take to close the gap between what companies were reporting and how investors could consume that information and eventually allocate capital accordingly.

Unsurprisingly, we found the information was not in a form that was easily consumable, it wasn’t able to be benchmarked and there were no complete data sets. As a result, investors had a hard time understanding what was and wasn’t relevant.

Based on that discovery, we set out to develop a method that could provide the information investors and analysts needed in a form they were used to consuming. The result was the paper, From Transparency to Performance, which set the foundation for how we approach our research and standard setting at SASB.

As we received feedback and interest in our research, we started looking for different methods to develop this market infrastructure across industries. That’s how SASB was born.

Thomson: Who are the primary stakeholders intended to benefit from sustainability standards in reporting?

Rogers: Since the beginning, we have envisioned our stakeholders and primary beneficiaries to be both corporations and investors. We’re providing corporations a cost-effective way to communicate their sustainable activities to investors, who are the primary consumers of the information. It’s now delivered in a useful format, which allows them to make decisions accordingly.

Thomson: Over the next year, SASB intends to develop sustainability accounting standards for more than 80 vertical industries in 10 sectors. How will these standards contribute to better businesses?

Rogers: As we did our early research at Harvard, we were shocked to discover the proliferation of reporting without a focus on performance, which made us question what it would take for businesses to make the connection between the two. Unsurprisingly, it comes down to key performance indicators and identifying what’s material, in the financial sense of the word. If you can manage performance on those material factors, you’ll drive value. In that way, these standards contribute to stronger businesses.

Focusing on industry verticals is at the heart of our approach because we want to preserve the concept of materiality. We’re not about disclosure for the sake of disclosure; we’re about disclosure on key performance indicators that will drive business value. We’ve already issued provisional standards for 45 industries in six sectors, so we’re well on our way.

Thomson: What is SASB’s view on mandating sustainability reporting for external disclosures?

Rogers: We’ve found companies are struggling with how to disclose their sustainable activities. In fact, approximately 70% of the topics that we’ve set standards for so far are already disclosed in the SEC’s Form 10-K, which is a mandatory filing. Thirty-seven percent of that, however, is boilerplate information. That tells us companies realize they need to report this information, but they don’t have a way of disclosing it in a form that is helpful to investors. That’s where standards help.

SASB’s standards are designed for the Management Discussion & Analysis (MD&A). We enable companies to provide a window into known trends and uncertainties that are likely to affect the financial condition of their companies. In the absence of a standard, these topics can be controversial and challenging to express. If you disclose too much, you put yourself at a competitive disadvantage. If you disclose too little, you risk omitting important facts.

Of course, the MD&A is a voluntary section within a mandatory filing. The intention of that section is not to merely have a checklist or a table of KPIs. Rather, it’s designed to be a combination of narrative and analysis. The narrative is management’s view on these known trends and uncertainties, and how well the company is positioned and performing. The analysis is the metrics that support the narrative. I don’t believe you should standardize management’s view in the MD&A, because you want it to unfold naturally. On the other hand, you do want to have reliable and comparable data that substantiates management’s view.

Thomson: What role does technology play in the disclosure process?

Rogers: Technology enablement is critically important in the preparer “ROI” associated with the end-to-end disclosures process for investors. For example, an Extensible Markup Language (XML) version of our provisional standards is available today. XBRL standards are not yet ready for the provisional standards, but will be available for the final standards by industry. And finally, SASB is working with PricewaterhouseCoopers (PWC) on integrating our standards into publicly-available frameworks, such as COSO’s Enterprise Risk Management (ERM) Framework.

Thomson: Let’s suppose it is 2020, nearly one decade after you founded the SASB. What outcomes would you envision for organizations and the public interest as it relates to sustainability reporting and standards?

Rogers: By 2020, our goal is that any investor or analyst can type in a ticker and pull up a company’s sustainability fundamentals right alongside its financial fundamentals. Of course, it’s not just about having the information, but also about understanding it. We hope this information affects investment decisions so capital is allocated to more sustainable outcomes and companies. Finally, we hope we will have created new language and new parameters so companies can benchmark themselves against their peers and against their own performance.

That’s our vision. By 2020, I hope that we’ll have the impact we intend to have.

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