fundamentals of sustainability accounting (fsa) …
TRANSCRIPT
Part I The Need for Sustainability Accounting Standards
Part II Understanding SASB Standards
Part III Using SASB Standards
LEVEL I STUDY GUIDE
FUNDAMENTALS OF SUSTAINABILITY ACCOUNTING (FSA) CREDENTIAL™
Learning Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Part I: The Need for Sustainability Accounting Standards
1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2. A Growing Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2 .1 . Changing Valuations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2 .2 . Sustainability Issues Are Business Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2 .3 . Existing, Evolving, and Emerging Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2 .4 . Increasing Investor Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3. Historical and Legal Basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
3 .1 . The Aftermath of the Stock Market Crash of 1929 . . . . . . . . . . . . . . . . . . . . . . . 21
3 .2 . Disclosure as the Basis of the Securities Acts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
3 .3 . The SEC and Its Work . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
4. The Role of Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
4 .1 . Early Statements on Generally Accepted Accounting Principles . . . . . . . . . . . . . . 27
4 .2 . Historical Cost Accounting and the Rise of the APB . . . . . . . . . . . . . . . . . . . . . . . 28
4 .3 . Decision-Usefulness Enters the Lexicon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
4 .4 . The Founding of the FASB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
4 .5 . The FASB’s Conceptual Framework Project . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
5. Materiality: The Guiding Principle of Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
5 .1 . Foundational Cases: TSC v. Northway and Basic v. Levinson . . . . . . . . . . . . . . . . . 33
5 .2 . The SEC’s and FASB’s Views of Materiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
5 .3 . The NRDC’s Rule-Making Petition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
6. SEC Disclosure Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
6 .1 . Periodic Filing Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
6 .2 . Regulation S-K Requirements for Form 10-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
6 .3 . MD&A Section Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
6 .4 . The SEC’s Climate Change Guidance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
6 .5 . Consequences of Inadequate Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
6 .6 . The Sarbanes-Oxley Act and Controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
6 .7 . The SEC’s Disclosure Effectiveness Initiative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
7. Sustainability Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
7 .1 . Pointing the Way Forward: the AICPA, the FASB, and the CFA Institute . . . . . . . . 52
7 .2 . Sustainability Accounting and the Accounting Profession . . . . . . . . . . . . . . . . . . 53
7 .3 . External Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
7 .4 . Internal Decision-Making . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
7 .5 . Current Initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
8. The State of Sustainability Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
8 .1 . Voluntary Sustainability Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
8 .2 . Disclosure Overload . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
8 .3 . Securities Law, Not Semantics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
8 .4 . Sustainability Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
8 .5 . Benefits of Improved Sustainability Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
CONTENTS
Last Updated: March 2020
Part II: Understanding SASB Standards
9. The Importance of Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
9 .1 . Financial and Non-Financial Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
9 .2 . State of Sustainability Disclosure in SEC Filings . . . . . . . . . . . . . . . . . . . . . . . . . . 68
10. Introduction to SASB Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
10 .1 . U .S . Capital Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
10 .2 . Likely to Be Material . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
10 .3 . Decision-Useful . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
10 .4 . Cost-Effective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
10 .5 . Industry-Specific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
11. Identifying Industry-level Disclosure Topics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
11 .1 . The Reasonable Investor Revisited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
11 .2 . Evidence-Based Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
11 .3 . Stakeholder Consensus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
11 .4 . Evolving with the Marketplace . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
12. Components of a Standard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
12 .1 . Disclosure Guidance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
12 .2 . Disclosure Topics and Accounting Metrics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
12 .3 . Technical Bulletins and Interpretations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
13. Cross-Sector Themes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
13 .1 . Climate Change: Ubiquitous but Differentiated . . . . . . . . . . . . . . . . . . . . . . . . . 102
13 .2 . Other Sustainability Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
13 .3 . Unique Sector Sustainability Profiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
Part III: Using SASB Standards
14. Corporate Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
14 .1 . Considerations for Corporate Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
14 .2 . Collecting Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
14 .3 . Managing Sustainability Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121
14 .4 . Reporting Material Sustainability Information . . . . . . . . . . . . . . . . . . . . . . . . . . 126
15. Investor Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139
15 .1 . Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139
15 .2 . Portfolio Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141
15 .3 . Industry Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143
15 .4 . Company-Level Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144
15 .5 . Active Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150
Preparing for the Exam . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151
Sample Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153
Appendix I – SASB Provisional Disclosure Topics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165
Appendix II – Resources for Enhanced Understanding . . . . . . . . . . . . . . . . . . . . . . . . . . . 178
CONTENTS CONTINUED
A GROWING DEMAND
Describe the trends driving demand for the disclosure of sustainability information .
Explain why sustainability information is increasingly important to investors for investment decisions (e .g ., reduced ratio of net assets to enterprise value, increased risks and opportunities) .
HISTORICAL AND LEGAL BASIS
Explain the purpose and role of requiring public companies to disclose material information in SEC filings .
THE ROLE OF ACCOUNTING STANDARDS
Explain the current state of financial accounting (codified, standardized, decision-useful) given the history and efforts of the FASB .
MATERIALITY: THE GUIDING PRINCIPLE OF DISCLOSURE
Discuss the Supreme Court definition of “materiality” and the implications of this definition .
Discuss the implications of making statements about materiality outside of SEC filings .
SEC DISCLOSURE REQUIREMENTS
Recognize key elements of Regulation S-K and other prominent legislation and what is required for disclosure (i .e ., financial and nonfinancial information that alters the total mix of information) .
Explain why MD&A section was added to the 10-K and why it is an appropriate place for the disclosure of sustainability information .
Describe the trends driving demand for the disclosure of sustainability information .
SUSTAINABILITY ACCOUNTING
Describe the trends driving demand for the disclosure of sustainability information .
Explain why sustainability information is increasingly important to investors for investment decisions (e .g ., reduced ratio of net assets to enterprise value, increased risks and opportunities) .
Discuss the challenges that investors face in integrating sustainability information into investment decisions (e .g ., information is available, but often its quality varies, it is not comparable, and/or it lacks obvious financial implications) .
Distinguish SASB’s approach (sustainability accounting) from other approaches to sustainability tracking and reporting .
Discuss the role of SASB standards in helping companies develop strategies for long-term value creation, and benchmark and improve operational performance .
LEARNING OBJECTIVES
THE STATE OF SUSTAINABILITY DISCLOSURE
Discuss the challenges that investors face in integrating sustainability information into investment decisions (e .g ., information is available, but often its quality varies, it is not comparable, and/or it lacks obvious financial implications) .
Distinguish SASB’s approach (sustainability accounting) from other approaches to sustainability tracking and reporting .
Discuss the implications of making statements about “materiality” outside of SEC filings .
Describe the trends driving demand for the disclosure of sustainability information .
THE IMPORTANCE OF STANDARDS
Discuss the challenges that investors face in integrating sustainability information into investment decisions (e .g ., information is available, but often its quality varies, it is not comparable, and/or it lacks obvious financial implications) .
Distinguish SASB’s approach (sustainability accounting) from other approaches to sustainability tracking and reporting .
Describe the current state of disclosure of sustainability topics in the 10-K .
INTRODUCTION TO SASB STANDARDS
Distinguish SASB’s approach (sustainability accounting) from other approaches to sustainability tracking and reporting .
Explain the organization of SICSTM and the implications of a sustainability-based industry classification .
IDENTIFYING INDUSTRY-LEVEL DISCLOSURE TOPICS
Explain the evidence basis that supports the identification of SASB disclosure topics .
Explain the stakeholder consensus that supports the identification of SASB disclosure topics .
Distinguish SASB’s approach (sustainability accounting) from other approaches to sustainability tracking and reporting .
Discuss the Supreme Court definition of materiality and the implications of this definition .
COMPONENTS OF A SASB STANDARD
Describe the principles that guide the selection of SASB’s industry-specific topics for disclosure .
Describe the criteria that guide the selection of SASB’s accounting metrics .
Describe the components of a sustainability accounting standard and their purpose for supporting disclosure .
Distinguish SASB’s approach (sustainability accounting) from other approaches to sustainability tracking and reporting .
LEARNING OBJECTIVES CONTINUED
CROSS-SECTOR THEMES
Distinguish SICSTM sectors based on their distinct sustainability profiles .
Explain the organization of SICSTM and the implications of a sustainability-based industry classification .
CORPORATE USE
Explain the cross-functional nature of preparing sustainability disclosures in the 10-K .
Explain the timeline and process for 10-K disclosure .
Discuss the stages of 10-K preparation where sustainability information could be incorporated .
Discuss the role of SASB standards in helping companies develop strategies for long-term value creation, and benchmark and improve operational performance .
Explain the influences of internal controls and third-party assurance on the data quality of sustainability information and disclosures .
Explain why MD&A section was added to the 10-K and why it is an appropriate place for the disclosure of sustainability information .
Describe the special disclosure considerations for multinational and diversified companies .
Recognize key elements of Regulation S-K and other prominent legislation and what is required for disclosure (i .e ., financial and nonfinancial information that alters the total mix of information) .
Discuss the challenges that investors face in integrating sustainability information into investment decisions (e .g ., information is available, but often its quality varies, it is not comparable, and/or it lacks obvious financial implications) .
INVESTOR USE
Discuss the utility of SASB standards in investment decisions (e .g ., portfolio allocation, risk/return profile) .
Explain the organization of SICSTM and the implications of a sustainability-based industry classification .
Explain why sustainability information is increasingly important to investors for investment decisions (e .g ., reduced ratio of net assets to enterprise value, increased risks and opportunities) .
LEARNING OBJECTIVES CONTINUED
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EXECUTIVE SUMMARY
In 2015, nearly 11,000 companies around the world filed annual reports with
the U .S . Securities and Exchange Commission (SEC) . Each of those filings was the
product of a complex system of workflows, involving dozens or even hundreds of
professionals with specific corporate, legal, accounting, or other expertise—people
like you . For a group so large and varied to communicate effectively—not just with
one another but also with the investors and creditors whose capital helps fund their
business—a common language is required .
For centuries, accounting has served as “the language of business,” and like
any language it has evolved—along with the world around it—to meet the needs
of its users . In English, new words, inflections, and even grammatical constructions
emerge while others fall into disuse . Likewise, concepts new and old have regularly
entered into and disappeared from the accounting lexicon—from the rise of
double-entry bookkeeping in medieval Europe to the establishment of decision-
useful financial accounting standards in the 1970s .
In today’s rapidly changing world, businesses face a unique set of challenges
that call for a new type of non-financial accounting and for a new set of standards
to ensure that it is useful . Large-scale issues such as population growth, resource
constraints, urbanization, technological innovation, and climate change can
and do have profound effects on business outcomes . As a result, managers are
incorporating non-financial performance measures into their decision-making
processes and investors are looking beyond traditional financial statements for a
more complete picture of how companies create value over the long-term . The
language of business is evolving yet again to meet this growing demand .
However, as non-financial value drivers have grown in significance, sustainability
accounting initiatives have struggled to effectively sharpen their focus on the
factors most relevant to internal and external decision-makers . Consequently, the
market is faced with an avalanche of information that is costly for companies to
produce; lacks comparability, reliability, and timeliness for investors; and is often
useless to both .
EXECUTIVE SUMMARYSASB® FSA™ LEVEL I STUDY GUIDE
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Increasingly, a wide range of market participants—including companies,
investors, accountants, and lawyers—recognizes the need for a shared
understanding of how these non-financial value drivers impact corporate
performance and for a common language to communicate those impacts .
Founded in 2011, the Sustainability Accounting Standards Board (SASB)
addresses this need by developing industry-specific standards that help public
corporations disclose material, decision-useful sustainability information to investors .
SASB standards are developed—and designed to be considered—using the
U .S . Supreme Court definition of materiality . Alignment with the SEC’s existing
legal framework helps to bring companies and their investors together around the
factors that have, or are anticipated to have, a material effect on the business . By
facilitating the collection, management, and reporting of sustainability information
that is relevant, reliable, and comparable, SASB empowers both corporate and
investor decision-making, risk management, and strategy-setting .
Against the backdrop of this changing business landscape, practitioners in
sustainability, finance, accounting, securities law, and investing must understand
how to identify, quantify, and communicate the sustainability factors that are
material to a company’s financial condition and operating performance . In the
content that follows:
• Part I sets the context for sustainability accounting, describing the current
market landscape and explaining the relevant legal considerations .
• Part II outlines how SASB standards are designed to fit within that context .
• Part III covers the implications of sustainability accounting for both
companies and investors .
This content is intended to help readers gain insight into how sustainability
accounting can inform their own work for the benefit of their organization, its
shareholders, the capital markets, and the economy at large .
EXECUTIVE SUMMARY
THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS
PART I
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INTRODUCTION
Like the world around it, today’s business climate is increasingly complex .
Companies face an ever-expanding laundry list of risks and opportunities, many
of which are not captured by traditional financial statements . Macroeconomic
trends such as population growth, climate change, globalization, technological
innovation, and resource constraints can (and do) have profound effects on
business outcomes .
Daily news reports offer a litany of examples: Insurance companies must identify
the vulnerability of their insured assets to rising sea levels, increasing drought,
and more severe winters; hardware companies must consider how to source
minerals from unstable regions where
mining can fuel conflict; credit card
companies must consider how to
protect against data breaches .
These are just a few cases that
illustrate how such emerging trends
are already affecting business
performance, and consequently, must
be appropriately reflected in business
reporting . This development is the
continuation of a natural evolution of corporate disclosure—the history of which
is rooted in the U .S . Securities Acts of the 1930s, and traces its lineage from the
establishment of the SEC in 1934 to the formation of the Financial Accounting
Standards Board (FASB) in 1973 and beyond .
Sustainability accounting represents the next step in the progression of
corporate disclosure for the benefit of the capital markets .
1DEFINITION : BUSINESS REPORTING
The information that a company provides to help investors with capital allocation decisions about the company
Source: FASB. Improving Business Reporting
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2A GROWING DEMAND
Learning Objectives Covered in This Section
Describe the trends driving demand for the disclosure of sustainability
information .
Explain why sustainability information is increasingly important to investors
for investment decisions (e .g ., reduced ratio of net assets to enterprise value,
increased risks and opportunities) .
Investors and business professionals alike recognize the need for business
reporting to evolve . They see it in their declining ratio of net assets to enterprise
value, in their frequently short-sighted earnings guidance, and in a changing
regulatory landscape . Investors are increasingly requesting information about how
companies are prepared to navigate and adapt to this changing modern landscape .
And companies, for their part, are recognizing the value in addressing these issues
head-on .
Members of both groups have come to a shared realization that financial returns
and value creation can only be sustained if companies are well governed and the
social and environmental assets underlying those returns are not depleted .
2 .1 . Changing Valuations
The dynamic of a changing world and changing investor focus is perhaps most
readily apparent in our financial markets, where the difference between the book
values listed on balance sheets and the market values reflected in stock prices grows
wider each year .
In 1975, only 17 percent of the assets in the S&P 500 were intangible; in 2015,
the number was 84 percent .1 When market valuations are increasingly based on
intangibles, such as intellectual capital, customer relationships, brand value, and
other “soft” assets that create shareholder value in a knowledge-driven economy,
1 Ocean Tomo “Annual Study of Intangible Asset Market Value from Ocean Tomo, LLC” (2015) . Accessed July 22, 2015 .
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traditional financial statements tell an
increasingly smaller part of the story —by
some estimates, as little as five percent .2
Conventional accounting does not treat
nonfinancial resources—things like human,
social, and natural capital—as assets, even
though they undeniably represent sources
of future value . This point has long been
acknowledged by the FASB3 and helps
explain why investors are now looking
beyond financial statements: because
sustainability issues are business issues .
Of course, it’s not simply that these
intangible assets represent nonfinancial
capitals that are unaccounted for by
traditional methods . What further complicates this shift is the fact that, in the
absence of applicable accounting metrics to aid efficient pricing, the market value of
these intangibles is particularly sensitive to impairment by mismanagement .
2 Lev, Baruch, The End of Accounting and the Path Forward for Investors and Managers, Wiley Finance (June 27, 2016) .
3 FASB Business Reporting Research Project, Improving Business Reporting: Insights into Enhancing Voluntary Disclosures, January 29, 2001 .
DEFINITION : SUSTAINABILITY
The concept of sustainability, or sustainable development, was defined in the Brundtland Report (Our Common Future) as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs .”
As it relates to corporate activities, and for the purpose of the SASB standards, “sustainability” refers to environmental, social, and governance (ESG) dimensions of a company’s operation and performance .
Components of S&P 500 Market Value
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1975 1985 1995 2005 2015
Components of S&P 500 Market Value
Intangible Assets Tangible Assets
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The increasing dependence of market capitalization on value that is not captured
by financial statements (and the precariousness of that value in a highly liquid
marketplace)—particularly in human capital-intensive, high-technology, innovative
industries—contributes to an increasing interest among investors, who are looking
to nonfinancial reporting to close the information gap .4
2 .2 . Sustainability Issues Are Business Issues
Another factor driving the disclosure of nonfinancial information, particularly
sustainability information, is a growing acknowledgement among academics
and corporate executives that an important link exists between sustainability
performance and financial performance . For example, according to research from
Harvard Business School, companies with a high commitment to sustainability in
their organizational processes, structures, and disclosures not only enjoy increased
market returns over firms that lack a similar commitment, but also achieve better
performance on accounting returns .5 This finding mirrors much research on the
subject—in fact, a 2015 review of more than 2,000 empirical studies found that
approximately 90 percent showed a non-negative relation between sustainability
criteria and corporate financial performance .6
Although research tends to
support the idea that sustainability
management and business outcomes
are linked, the evidence suggests only
correlation, not necessarily causation,
and in many cases the connection has
been somewhat weak . Most studies,
however, have considered a broad
set of sustainability issues or broadly
defined individual issues . Very little
research has focused on material
sustainability issues—those that would
be of interest to a reasonable investor .
This distinction is extremely
important, and the remainder of
this document will cover the reasons
why in more detail . Seminal research
in this area, also from Harvard Business School, has found that firms focusing
their sustainability investments on material factors enjoyed significantly higher
4 OECD, Corporate Reporting of Intangible Assets: A Progress Report, April, 2012 .
5 Eccles, Robert, Ioannis Ioannou, and George Serafeim . “The Impact of a Culture of Sustainability on Corporate Behavior and Performance .” Harvard Business School Working Paper, May 2012 .
6 Gunnar Friede, Timo Busch, and Alexander Bassen, “ESG and Financial Performance: Aggregated Evidence from More than 2000 Empirical Studies,” Journal of Sustainable Finance & Investment, Volume 5, Issue 4, p . 210-233 (December 2015) .
Stock returns (in annualized alpha) by type of sustainability performance
Performance on MATERIAL factors
Performance on IMMATERIAL factors
LOW
HIG
H
LOW HIGH
4.8% 1.5%
-2.2% -0.4%
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accounting and risk-adjusted market returns (see table on the previous page) than
those focused on immaterial sustainability factors .7
Meanwhile, corporate executives have reached their own consensus on the
matter . According to a 2011 McKinsey survey (The Business of Sustainability), 76
percent of global CEOs consider strong sustainability performance to contribute
positively to their businesses in the long term . Increasingly, firms are addressing
sustainability not as a set of piecemeal initiatives, but rather as a core component
to integrate it into their strategy . Indeed, according to a 2013 Accenture report
(CEO Study on Sustainability), 80 percent of CEOs believe that their company is
approaching sustainability as a route to competitive advantage .
Nevertheless, just 14 percent of investors believe the companies they invest in are
doing so, according to a related Accenture report from 2014 (The Investor Study: Insights from PRI Signatories) . This apparent disconnect between executives and
investors illustrates the fact that firms, even those with strong performance, are
struggling to effectively tell their sustainability story .
2 .3 . Existing, Evolving, and Emerging Regulation
These changes—the transformation of market value and an evolving view of
the role of sustainability in business—continue to unfold against a backdrop of
regulatory uncertainty . A growing list of countries has passed legislation or issued
directives to increase reporting of sustainability information, including China,
the European Union (“E .U .”), Denmark, Germany, Japan, Norway, Sweden, and
Malaysia . These countries recognize that it is a subject of increasing public interest
and integral to long-term economic growth .
Perhaps most notably, in September 2014, the E .U . adopted an amendment
to its general accounting directives . The amendment requires large, publicly listed
companies to disclose in their management report relevant and material information
on environmental and social matters, as well as those related to employees, human
rights, anticorruption, bribery, and diversity .
Although the reporting regime in the U .S . already requires the disclosure of
material information (financial and otherwise) to investors as appropriate, the SEC
has issued specific guidance on a handful of sustainability issues—most notably
climate change in 2010 .8 The SEC also launched a Disclosure Effectiveness Initiative
in 2013 with the goal of improving the quality of disclosures and issued a related
Concept Release in April 2016, which indicated that sustainability information may
be within the scope of its reform .
At the same time, a growing number of stock exchanges are pushing for
standards related to responsible investment and sustainability issues . Many
7 Khan, Mozaffar, George Serafeim, and Aaron Yoon . “Corporate Sustainability: First Evidence on Materiality .” The Accounting Review 2016 91:6, 1697-1724 .
8 SEC, “Commission Guidance Regarding Disclosure Related to Climate Change,” Release Nos . 33-9106; 34-61469; FR-82, February 2, 2010 (hereafter cited as “2010 Release”) .
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exchanges, particularly in emerging markets, already require listed companies to
make sustainability disclosures . Meanwhile, the World Federation of Exchanges
(WFE) and its 60 member exchanges (including New York Stock Exchange – NYSE –
and NASDAQ in the U .S .) have engaged the investment and regulatory community
on the efficacy of sustainability disclosures as part of a broader commitment to
creating transparency and fairness in the capital markets . In addition, the United
Nations Sustainable Stock Exchanges initiative connects exchanges, investors,
regulators, and companies in a collaborative endeavor to improve transparency and
disclosure of sustainability performance, and to encourage long-term approaches
to investment . In 2017, the London Stock Exchange Group released “Your Guide to
ESG Reporting,” guidance aimed at supporting high quality reporting and effective
communication around sustainability factors between issuers and investors .
2 .4 . Increasing Investor Interest
As a result of these and other factors, demand for the disclosure of sustainability
information is on the rise . Indeed, 82 percent of global institutional investors
surveyed by PwC in 2014 (Sustainability Goes Mainstream) had considered
sustainability information in their investment decisions in the last 12 months .
Meanwhile, a 2014 global survey by EY (Tomorrow’s Investment Rules) of a broad
range of investors—from banks and insurance companies to third-party investment
managers and pension funds—found that 65 percent incorporate sustainability
information to some extent during investment reviews . Meanwhile, 84 percent of
North American respondents indicated that sustainability performance played a
pivotal role in their investment decision-making process at least once in the last 12
months .
In fact, approximately half of global institutional assets—about $60 trillion, as
of 2017—are managed by signatories to the Principles for Responsible Investment
(PRI), which promotes the incorporation of ESG factors into investment decisions .
Assets Under Management (AUM in US$ trillion)
Source: UN PRI
Number of signatories
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That figure has grown steadily every year
since the PRI’s inception in 2006 .
In addition to the increased use of
sustainability information by mainstream
investors, the “sustainable, responsible,
and impact investing” field has grown
dramatically in the U .S . According to U .S .
Forum for Sustainable and Responsible
Investment (U .S . SIF) (Report on Sustainable, Responsible and Impact Investing Trends, 2016), such investments represent $8 .72
trillion—more than 20 percent of the total
assets under professional management in the
U .S .—an increase of 33 percent in just two years .
These developments make sense in the context of the trends outlined above .
As the value of equities becomes less tangible, it also becomes more sensitive to
sustainability risks, the management of those risks, and any regulatory attempts to
address them . Investors factor the price of risk into the returns they require, raising a
firm’s cost of capital . In other words, as risk increases, value decreases—and vice versa .
In one high-profile example of increasing investor interest, a group of 62
institutional investors representing nearly $2 trillion in assets under management
sent a letter to the SEC in April 2015 calling for improved disclosure by oil and gas
companies of “critical climate change-related business risks that will ‘profoundly
affect the economics of the industry .’” These investors cited growing concerns about
strategic planning and risk management in the industry .9 Other prominent examples
abound . For instance, in a separate letter in July 2016, a group of 45 investors
representing $1 .1 trillion in assets under management called on the SEC to improve
sustainability disclosure, arguing that such information needs to be material,
comparable, and useful .10 Similarly, in July 2017, the Human Capital Management
Coalition—a group of institutional investors collectively managing $2 .8 trillion in
assets—petitioned the SEC to require corporate issuers to disclose information
regarding their management of human capital .11
Investors have begun making their case not only to regulators, but directly to
companies . In a June 2016 letter to S&P 500 CEOs, the chief executive of BlackRock,
the world’s largest asset manager, urged them to focus on long-term sustainability,
saying, “Over the long-term, environmental, social and governance issues—ranging
from climate change to diversity to board effectiveness—have real and quantifiable
financial impacts .” More recently, in August 2017, Vanguard, one of the world’s
9 Ceres, “Investors Push SEC to Require Stronger Climate Risk Disclosure by Fossil Fuel Companies,” April 17, 2015 .
10 Ceres, “Re: File Number S7-06-16: Business and Financial Disclosure Required by Regulation S-K” (letter to SEC dated July 20, 2016) .
11 Human Capital Management Coalition, letter to the SEC dated July 6, 2017, available at https://www .sec .gov/rules/petitions/2017/petn4-711 .pdf .
“ While many US CEOs are worried about the next three months, our global competitors are making long-term investments in their companies and in their economies . . . .We’ve created an environment where a company’s long-term value and health are all too easily sacrificed at the altar of meaningless short-term performance .”
– Thomas Donohue, President and CEO of the US
Chamber of Commerce
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largest investment management companies, penned an open letter calling on
public companies to “embrace the disclosure of sustainability risks that bear on a
company’s long-term value creation prospects” using a suitable framework like the
SASB standards .
2 .4 .1 . Response to Short-Termism
To some extent, the increased focus of investors on sustainability information may
be viewed as a market correction . In recent years, investors and business leaders
alike have bemoaned the deleterious effects of extreme “short-termism”: a growing
pressure put on corporate executives to meet near-term earnings projections at
the expense of long-term value creation . Although short-term investors increase
market liquidity, critics argue that persistent, extreme short-termism will result in
diminished public confidence, depressed economic growth, and reduced investment
returns . At its worst, short-termism may undermine the efficiency of capital markets
by contributing to the mispricing and misallocating of assets because of a lack of
reliable information about long-term prospects .
Evidence shows that earnings myopia is both real and pervasive . Surveys indicate
that the overwhelming majority of CFOs would destroy economic value to meet
short-term earnings targets . For example, 80 percent have said they would decrease
discretionary spending (such as R&D or advertising), while 39 percent have said they
would incentivize customers (i .e . offer them discounts) to make early purchases .12
Warren Buffett, the billionaire chairman of Berkshire Hathaway, says the
practice of telling Wall Street what to expect from quarterly earnings can distort
management’s priorities . “Guidance can lead to a lot of malpractice,” he told CNBC
in July 2016 . “It doesn’t have to, but I think if the CEO goes out and says, ‘We’re
going to earn $1 .06 next quarter,’ I think that if they’re going to come in at $1 .04,
there’s a lot of attempts to find a couple extra pennies someplace .”
Officers explain that a fickle market forces them to play this “earnings game .”
To put the trend in context, the average holding period for stocks in 1960 was 100
months . That holding period dropped every decade until it was just six months in
2010 . At the same time, the first decade of the 2000s was by far the most volatile in
recorded history for the S&P 500, according to a September 2011 New York Times analysis .
Despite these pressures, according to a 2013 McKinsey Quarterly survey of global
board members and C-suite executives, 86 percent believed that “using a longer time
horizon to make business decisions would positively affect corporate performance
in a number of ways, including strengthening financial returns and increasing
innovation .” Research supports this position . For example, a 2017 study found that
12 Graham, John R ., Campbell R . Harvey, and Shiva Rajgopal, “Value Destruction and Financial Reporting Decisions,” Financial Analysts Journal, 2006, Vol . 62, No . 6, p . 31 .
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firms taking a long-term mindset consistently outperform industry peers on nearly
“every financial measure that matters .”13
In recent years, more and more companies have ended their practice of providing
earnings guidance . In fact, in November 2015, seven of the world’s 10 most
valuable companies had moved away from quarterly guidance . Overwhelmingly,
these companies believe that such guidance detracts from their focus on long-term
performance . Further, many see value in attracting more “patient” capital, so ceasing
guidance is an affirmative strategy to attract investors interested in prioritizing
long-term value . In 2016, prominent corporate CEOs such as Mary Barra of GM,
Jamie Dimon of JPMorgan Chase, and Jeff Immelt of GE and heads of institutional
investment firms such as Larry Fink of Blackrock, Bill McNabb of Vanguard, and
Ronald O’Hanley of State Street Global Advisors published an open letter which
said, “Our financial markets have become too obsessed with quarterly earnings
forecasts . Companies should not feel obligated to provide earnings guidance —
and should do so only if they believe that providing such guidance is beneficial to
shareholders .”14 Research shows that ending guidance may significantly reduce
information asymmetry, result in increased long-term investor holdings, and have
no significant impact on analyst following or return volatility .15 Nevertheless, there
remains significant demand for quarterly earnings guidance from Wall Street .
Guidance or no, a 2015 UBS report (The Investment Drought) points out that
companies’ capital (CAPEX) and research and development (R&D) expenditures
have decreased significantly in recent years as an increasing portion of corporate
earnings is being distributed to shareholders as dividends or share repurchases . In
other words, investors are getting returns today, but they may be coming at a long-
term cost . Overcoming the effects of extreme short-termism is likely to require a
commitment by all key participants in the investment value chain: not just companies,
but asset owners and asset managers, as well .16
2 .4 .2 . Fiduciary Duty
The debate over short-termism is related to, and partly rooted in, a similar
dispute over the fiduciary duty of asset managers and other trustees . Fiduciary
obligations exist to ensure that trustees who manage other people’s money act
in the best interests of their clients or beneficiaries, rather than serving their own
interests . Although different definitions and legal interpretations of fiduciary duty
exist, a common misconception is that it legally compels asset managers to solely
maximize financial returns .
13 Dominic Barton, James Manyika, and Sarah Keohane Williamson, “Finally, Evidence that Managing for the Long Term Pays Off,” Harvard Business Review (Feb . 7, 2017) .
14 Commonsense Corporate Governance Principles website . “Commonsense Corporate Governance Principles .” Accessed September 20, 2017 .
15 KKS Advisors and Generation Foundation, Implementing Integrated Guidance (November 2015) .
16 Kelly Tang and Christopher Greenwald, “Long-Termism vs . Short-Termism: Time for the Pendulum to Shift?” S&P Dow Jones Indices Research (April 2016) .
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However, this view is changing as the material impacts of sustainability issues
on financial performance become more clearly defined . In fact, a 2005 U .N .
report stated: “In our opinion, it may be a breach of fiduciary duties to fail to take
account of [environmental, social, and governance (ESG)] considerations that are
relevant and to give them appropriate weight, bearing in mind that some important
economic analysts and leading financial institutions are satisfied that a strong
link between good ESG performance and good financial performance exists .” A
follow-up report (Fiduciary Duty in the 21st Century), published in 2015, stated
unequivocally, “Failing to consider long-term investment value drivers, which include
environmental, social and governance issues, in investment practice is a failure of
fiduciary duty .”
This evolving perspective has also extended to regulatory oversight . For example,
the U .S . Department of Labor, which administers the Employee Retirement Income
Security Act (ERISA), clarified its stance on the issue in 2015, stating explicitly,
“Fiduciaries need not treat commercially reasonable investments as inherently
suspect or in need of special scrutiny merely because they take into consideration
environmental, social or other factors .”
The largest institutional investors own such significant amounts of assets that
many have adopted a “universal owner” approach: They consider not only portfolio-
level returns, but also the opportunity to stimulate wider economic growth, which
is also in the best interests of their beneficiaries . The fiduciary’s duty of loyalty
calls for impartial treatment of different types of beneficiaries, including different
generations . Because sustainability impacts can shift wealth between generations,
the “failure of fiduciaries to adopt a sustainable development investment approach
has fiduciary duty implications and raises questions about the ability of fiduciaries
to efficiently allocate investment capital to growth opportunities and manage risks
to economic growth and future portfolio returns .”17 Other strategies for integrating
sustainability into fund management also exist, and are legally viable when they are
assessed within prudent investment rules . These rules are outlined in the Uniform
Prudent Investor Act (UPIA) of 1992 and other legislation outlining the modern
prudent investor rule . In fact, fiduciaries, who have a duty of prudence, benefit from
considering material sustainability information as sustainability becomes increasingly
relevant to a company’s performance, for both risk management and growth
opportunities .
2 .4 .3 . Time-consuming Alternatives
Even so, these investors have few options for obtaining material sustainability
information, or for compelling companies to address sustainability performance .
According to PwC, 89 percent of surveyed investors, representing more than
50 percent of total U .S . institutional assets, say they are “very likely” to request
17 Johnson, Keith, “Introduction to Institutional Investor Fiduciary Duties,” International Institute for Sustainable Development, February 2014, p . 8 .
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this information directly from the company, and 50 percent are similarly likely to
sponsor or cosponsor a shareholder proposal . Indeed, 67 percent of the shareholder
resolutions filed during 2016’s proxy season were related to sustainability, up from
45 percent in 2013 . The SEC has also refined its view on shareholder proposals
to make it increasingly difficult for companies to exclude proposals that deal
with climate change or sustainability . Although studies show that firms improve
sustainability performance when they have been targeted by a related shareholder
proposal,18 it is nevertheless an expensive and time-consuming means for getting
investors the information they need .
Lacking that information, long-term investors at times opt for divestment .
According to Fossil Free, more than 700 organizations with $5 .45 trillion in assets
under management have committed to cutting their exposure to fossil fuels in
recent years . For example, the $860 million Rockefeller Brothers Fund joined the
Global Divest-Invest initiative, which is part of a movement by philanthropists to
divest from fossil fuel assets .
SECTION REVIEW
In this section, the following Learning Objectives were covered:
• Describe the trends driving demand for the disclosure of sustainability
information .
• Explain why sustainability information is increasingly important to investors
for investment decisions (e .g ., reduced ratio of net assets to enterprise value,
increased risks and opportunities) .
? Questions to consider
√ Why does the increasing influence of intangible assets on market valuation
matter to sustainability?
√ Why is sustainability information relevant to the fiduciary duty of asset man-
agers and other trustees?
18 Grewal, Jody, George Serafeim, and Aaron Yoon . “Shareholder Activism on Sustainability Issues .” Harvard Business School Working Paper, No . 17-003, July 2016 .
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21
HISTORICAL AND LEGAL BASIS
Clearly the demand for information on corporate sustainability performance
is growing rapidly . However, few “best practices” for the disclosure of material
sustainability information to investors have been well established among publicly
listed firms in the U .S .
Nevertheless, the mechanism for delivering this data to the capital markets
already exists; no new regulation is required . To fully understand and appreciate the
key features of our disclosure regime, it’s necessary to examine its origins .
3 .1 . The Aftermath of the Stock Market Crash of 1929
Starting in September 1929, the frantic selling of securities on the New York Stock
Exchange (NYSE) led the market to lose about 80 percent of its value by the end of
June 1932 . The stock market crash of 1929 accelerated the Great Depression, which
was marked by a wave of bank failures, a record unemployment rate, and declining
income . The U .S . economy did not recover until the 1940s .
On the political front, the public reacted angrily to the economic collapse, with
most of the ire aimed at Wall Street . Reform and regulation of the capital markets
became an effective rallying cry for politicians . The Senate Committee on Banking
and Currency commenced hearings on securities transactions and stock exchanges,
which uncovered evidence of many unethical and risky financial practices . These
included bankers and companies failing to fully disclose information about the
companies whose securities were being offered for sale . The Committee’s Report
(the “Fletcher Report”) describes many examples of securities being sold using false
or misleading information .19
19 11 Senate Banking and Currency Committee, Stock Exchange Practices (“Fletcher Report”), S . Rep . No . 73-1455, (1934) .
3Learning Objectives Covered in This Section
Explain the purpose and role of requiring public companies to disclose material
information in SEC filings .
PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS
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As a result of the drive for reform and regulation, Congress passed the Securities
Act of 1933 (“Securities Act”) and the Securities Exchange of 1934 (“Exchange
Act”) . The Securities Act regulates the sale of securities to the investing public .
Before a company can offer securities under federal jurisdictional means, Section
5(c) of the Securities Act requires companies to fully and truthfully disclose
information about the company in a registration statement filed with the SEC .
The Exchange Act regulates the stock exchanges and provides ongoing reporting
requirements of companies that register securities with the SEC . The Exchange Act
also established the SEC, which will be discussed later in Part I .
3 .2 . Disclosure as the Basis of the Securities Acts
Disclosure was the concept that drove reform and securities regulation . In 1914,
Supreme Court Justice Louis Brandeis articulated the benefit of disclosure:
Publicity is justly commended as a remedy for social and industrial diseases . Sunlight is said to be the best of disinfectants; electric light the most efficient policeman .20
Brandeis influenced President Franklin Delano Roosevelt’s views about disclosure
as the appropriate method of securities regulation . Brandeis also greatly influenced
the thinking of Felix Frankfurter, a future associate justice of the Supreme Court, on
the benefits of disclosure . Frankfurter played a leading role in writing the Securities
Act and guiding it through Congress .
In addition to Brandeis and Frankfurter, lawyer Adolf Berle and economist
Gardiner Means had a large intellectual influence on the Securities Acts, although
they were not directly involved in writing the laws . As coauthors of a seminal work
on corporate governance, Berle and Means saw mandatory disclosure as a method
to hold managers accountable to their shareholders and to promote the public
interest .21 They also believed that disclosure would advance the ability of the capital
markets to efficiently price securities .22
Frankfurter’s thinking about disclosure echoed the sentiments of Brandeis, Berle,
and Means . Not surprisingly, Frankfurter emphasized that disclosure was about
investors making informed decisions: “[T]he information which must be furnished
in the registration statement is intended to reveal facts essential to a fair judgment
upon the security offered .”23 At the same time, Frankfurter stated the Securities
Act’s disclosure requirements were designed to establish new standards of behavior
for managers, banks, and accountants .
20 Brandeis, Louis D . Other People’s Money and How the Bankers Use It, 1967 edition . Harper Torchbooks, 1914, p . 62 .
21 Berle, Adolf A ., and Gardiner C . Means . The Modern Corporation and Private Property . Harcourt, Brace & World, 1967 (1932), p . 310; Cynthia A . Williams, “The Securities and Exchange Commission and Corporate Social Transparency .“ 112 1197, (1999), p . 1217 .
22 Williams, p . 1216 .
23 Frankfurter, Felix, “The Federal Securities Act: II,” Fortune, Vol . 7, No . 2 (August 1933): 53 .
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The Securities Act is strong insofar as it is potent; it is weak insofar as publicity is not enough . … Many practices safely pursued in private lose their justification in public . Thus social standards newly defined gradually establish themselves as new business habits .24
Representative Sam Rayburn chaired the House Committee on Interstate and
Foreign Commerce to which Frankfurter reported . Rayburn sponsored the Securities
Act and argued that the separation of ownership and control made managers
trustees, and therefore managers had a duty to provide reliable information to
owners of the corporation:
Today the owner of shares in a corporation possesses a mere symbol of ownership, while the power, the responsibility, and the substance which have characterized ownership in the past have been transferred to separate group which holds control . … These managers are truly trustees . One of their duties as trustees is to furnish security owners, in being and in prospect, with reliable information .25
The Securities Act’s objective was “full publicity and information, and that
essentially no important element attending the issue shall be concealed from the
buying public .”26 The Supreme Court affirmed this objective 20 years later, saying
the Securities Act was designed “to protect investors by promoting full disclosure
of information thought necessary to informed investment decisions .”27 Roosevelt
argued that the law “adds to the ancient rule of caveat emptor, the further rule
‘let the buyer beware .’”28 The Securities Act did not supplant caveat emptor; it
supplemented the principle with the obligation to disclose to the investing public .
Investors were still free to make poor investment decisions .
The legislative history of the Securities Act demonstrates that the law had
two equally important purposes: to protect investors and to influence corporate
behavior . Professor Cynthia Williams explains:
Yet, following Brandeis, disclosure was not an end in itself nor meant solely to protect investors, although investor protection was clearly a major goal . … In the spirit of Brandeis—who was specifically invoked—Congress hoped that disclosure of this information would change the way business was conducted .29
Professor Marc Steinberg concludes that Congress’s intent regarding corporate
conduct has come to fruition: “[T]here is little question that disclosure has had
a substantial impact on the normative conduct of corporations .”30 In proposing
24 Id . at 55 .
25 77 Cong . Rec, p . 2918 (1933) .
26 Address to Congress by Franklin D . Roosevelt, reprinted in Michael F . Parrino, Truth in Securities, p . 23 . Queensland Publishing Company (1968) .
27 SEC v . Ralston Purina Co ., 3467 US 119, 124 (1953) .
28 Ibid .
29 Williams, pp . 1233-34 .
30 Steinberg, Marc I . Corporate Internal Affairs: A Corporate and Securities Law Perspective, p . 29 . Praeger (1983) .
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corporate governance regulations in 1978, the SEC acknowledged the positive
effects of disclosure on corporate behavior .31
Because of the limited scope of the Securities Act, which focused on the
disclosure requirements for the initial offering of securities to the public, in 1934
President Roosevelt pushed for a second bill that would fill in the gaps left by
the 1933 Act, especially gaps concerning the regulation of stock exchanges . The
Exchange Act gives the SEC the power to establish rules to regulate speculation
and market manipulation on the stock markets . Speculation was addressed through
prohibitions on short sales, limits on margin trading, and capital requirements for
trading . Market manipulation was addressed through prohibitions on manipulative
and fraudulent devices to purchase or sell securities, prohibitions on manipulative
pricing, and the regulation of brokers and dealers . Rule 10b-5, a broad anti-fraud
prohibition established by the SEC in 1942, prohibits the making of misleading,
untrue statements or engaging in fraud or deceit in the purchase or sale of any
security . The rule has served as the primary basis for securities fraud lawsuits .
The Exchange Act, like the Securities Act, has the disclosure of information as its
underlying principle . Section 12 of the Exchange Act prohibits trading of securities
on a U .S . stock exchange unless they are first registered, and the information
requirements are similar to the Securities Act’s disclosure requirements for new
securities issues . In describing the rationale for the registration of all securities
traded on a national exchange, the Senate Committee Report stated that disclosure
was about the “furnishing of complete information relative to the financial
condition of the issuer, which information shall be kept up to date by adequate
public reports .”32
Section 13 of the Exchange Act contains the periodic reporting requirements to
keep the information filed under Section 12 current . The periodic reports include
annual reports on Forms 10-K, 20-F, or 40-F, quarterly reports on Form 10-Q, and
current reports on Form 8-K . The periodic reporting requirements are intended to
promote “‘honest publicity’ so that the markets could operate properly to value
securities,”33 where “publicity” means the disclosure of accurate, complete financial
information on an ongoing basis .34
3 .3 . The SEC and Its Work
The Exchange Act also established the Securities and Exchange Commission .
The mission of the SEC is to protect investors; maintain fair, orderly, and efficient
markets; and facilitate capital formation .
31 Sec . Ex . Act Rel . 15,384, 16 SEC Dock . 348, 350 (1978) .
32 S . Rep . No . 73-793, p . 10 .
33 House of Representatives Report No . 73-1383, p . 11 .
34 Williams, p . 1244 .
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The SEC is governed by five commissioners and is organized into divisions and
offices, which cover substantive areas of rulemaking, analysis, and enforcement .
For the purposes of this discussion, the most relevant division is the Division
of Corporation Finance (“Corp Fin”) . Corp Fin has responsibility for corporate
disclosure of information to the investing public . The division reviews corporate
disclosure filings with the SEC, advises companies on interpreting disclosure rules
and regulations, and makes recommendations to the Commission concerning new
rules or modifications to existing rules .
Corporate disclosure filings are reviewed for whether they meet the requirements
for disclosure . Specific disclosure requirements will be discussed in more detail later
in Part I, however the SEC broadly describes the requirements as follows:
To meet the SEC’s requirements for disclosure, a company issuing securities or whose securities are publicly traded must make available all information, whether it is positive or negative, that might be relevant to an investor’s decision to buy, sell, or hold the security .35
The Exchange Act gives the SEC authority to establish accounting principles
for the companies that register securities (the “registrants”) . In 1938, the SEC
commissioners voted to allow the private sector to establish generally accepted
accounting principles (“GAAP”) to guide the preparation of financial statements .
The SEC cannot delegate authority to establish GAAP, and it has carefully overseen
the private sector’s efforts to create accounting standards . This includes overseeing
the activities of the American Institute of Accountants in the 1930s through the
current activities of the FASB . FASB has no enforcement powers; only the SEC does .
The evolution of GAAP and its implications for corporate reporting and the capital
markets will be discussed later in Part I .
Consistent with the SEC’s authority over accounting principles, the Sarbanes-
Oxley Act (SOX) of 2002 gave the SEC oversight power over the newly formed
Public Company Accounting Oversight Board (“PCAOB”) . The PCAOB protects
investors and the public interest by working toward useful independent audit
reports and by establishing standards for audits and auditors . The PCAOB has
oversight over the external audit profession . The SEC regularly communicates with
and provides feedback to the PCAOB, the FASB, the International Accounting
Standards Board (“IASB”), and the American Institute of Certified Public
Accountants (“AICPA”) regarding accounting standards .
35 This language is a user-friendly version of the language in the Acts and their rules, SEC guidance statements, and court opinions . It is therefore not controlling . Securities and Exchange Commission “The Investor’s Advocate: How the SEC Protects Investors, Maintains Market Integrity, and Facilitates Capital Formation .” Accessed July 20, 2014 .
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SECTION REVIEW
In this section, the following Learning Objectives were covered:
• Explain the purpose and role of requiring public companies to disclose
material information in SEC filings .
? Questions to consider
√ How can disclosure improve the ability of the market to efficiently price
securities?
√ What effects might disclosure have on the conduct of managers, banks, and
accountants?
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The SEC’s oversight relationship with the FASB and PCAOB demonstrates the
importance of understanding how accounting principles shape the context in
which corporate disclosures are made . Therefore, it is important to consider how
developments in accounting have influenced disclosure .
4 .1 . Early Statements on Generally Accepted Accounting Principles
As Congress was drafting the Securities Act, the accounting profession took
measures following the stock market crash of 1929 to buttress its legitimacy . In
1932, the American Institute of Accountants (“AIA”) recommended five generally
accepted principles of accounting to the NYSE .
After the SEC voted to delegate the creation of financial accounting standards to
the private sector in 1938, the AIA’s Committee on Accounting Procedure (“CAP”)
began to publish Accounting Research Bulletins (“ARB”) . The ARB were designed
to give the SEC authoritative support for the GAAP .36 In 1939, an AIA committee
recommended that the auditor’s report contain the language “present [financial
information] fairly … in conformity with generally accepted accounting principles .”37
Through these statements about generally accepted accounting principles, the
profession attempted to demonstrate a commitment to consistency in financial
reporting procedures . The CAP became the accounting standard setter in the U .S .
36 Zeff, Stephen A ., “The Evolution of US GAAP: The Political Forces Behind Professional Standards: Part 1, 1930–1973,”The CPA Journal .” (January 2005): 20 (hereafter “Zeff 2005”) .
37 Zeff 2005, p . 20
4Learning Objectives Covered in This Section
Explain the current state of financial accounting (codified, standardized,
decision-useful) given the history and efforts of the FASB .
THE ROLE OF ACCOUNTING STANDARDS
PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS
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4 .2 . Historical Cost Accounting and the Rise of the APB
In 1935, the SEC stated that historical cost accounting must be used to create
financial statements to avoid “misleading disclosures .” Historical cost accounting
is a measure of an asset’s value that is the actual cost paid for the asset . Under this
approach, the original cost is reported on the balance sheet even if the value of the
asset changes over time .
The Commission’s insistence on historical cost accounting, together with the
1940 publication of An Introduction to Corporate Accounting Standards, by
Professors William Paton and A .C . Littleton, two members of the AIA executive
committee, established historical cost accounting as the dominant accounting
method, and an embedded element of GAAP, for nearly 40 years .
Despite the SEC’s commitment to historical cost accounting, some quarters
of the accounting profession started calling in the 1940s for departures from
and/or exceptions to historical cost accounting . As the accounting standard
setter, the CAP and the AIA (known as the American Institute of Certified Public
Accountants, or AICPA, since 1957), became the focal point for philosophical and
political disagreements regarding historical cost accounting and broader notions of
uniformity and flexibility in general . During the 1940s, the CAP allowed for multiple
accounting methods when several accepted practices existed for the same issue . The
large accounting firms on the CAP could not agree on one best practice . As a result,
more than one accepted practice arose . Therefore, the question became whether
“generally accepted” necessarily meant a uniform set of methods or allowed for a
diversity of practice .
The tension between uniformity and diversity, as well as questions surrounding
the basis for accounting methods, created momentum for changes in standards-
setting . In response to the pressure for clear accounting principles, in 1959, the
AICPA established the Accounting Principles Board (“APB”) to reduce variation in
accounting practice . The APB consisted of members from all Big Eight accounting
firms and, for the first time, company financial executives, because of their growing
influence on the CAP .
Early in the APB’s history, the SEC objected to a 1962 proposal promoting the use
of current replacement costs for inventories and fixed assets . The APB subsequently
rejected it . This not only confirmed the Commission’s power to set the direction of
accounting standards-setting, but it also indicated differences between the SEC and
some members of the accounting profession .
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4 .3 . Decision-Usefulness Enters the Lexicon
When the SEC rebuffed the APB’s attempts to establish accounting principles
that deviated from historical cost accounting, the American Accounting Association
(“AAA”), a group of accounting academics, decided that a more normative
approach to accounting was needed . In 1966, the AAA published A Statement of Basic Accounting Theory (“ASOBAT”) that deemphasized the asset valuation
purpose of financial statements and instead focused on their decision-usefulness .
The document defined accounting as “the process of identifying, measuring, and
communicating economic information to permit informed judgments and decisions
by users of the information .”38
The emphasis on users of information was new and normative . In addition,
ASOBAT proposed that users of financial information cared primarily about that
information’s ability to predict future earnings . Robert Sterling, a prominent
accounting academic, called the report revolutionary because it recast accounting
measurements as related to a specific purpose, and not primarily to the accuracy of
the measurements .39
Therefore, “the purpose of accounting is to provide information which will be
of assistance in making economic decisions .”40 This new theory of accounting,
explains Professor Stephen Zeff, “was a coherent theory which effectively linked
decision-usefulness to the information required to make investment decisions:
using discounted future cash flows as the most relevant attribute of assets and
liabilities .”41
4 .4 . The Founding of FASB
During the late 1960s and early 1970s, dissatisfaction grew over the APB’s inabil-
ity to propose and garner widespread support for accounting principles . Several of
the Big Eight accounting firms became increasingly worried about the influence of
corporations on the APB .42 In 1970, the APB affirmed the decision-usefulness objec-
tive in the fourth statement of its basic concepts and accounting principles, which
stated:
The basic purpose of financial accounting and financial statements is to provide quantitative financial information about a business enterprise that is useful to statement users, particularly owners and creditors, in making economic decisions . This purpose includes providing information that can be used in evaluating management’s
38 American Accounting Association . A Statement of Basic Accounting Theory, Evanston, IL: AAA, 1996: p . 1 .
39 Robert Sterling . “A Statement of Basic Accounting Theory: A Review Article,” Journal of Accounting Research, Vol . 5, No . 1, pp . 95-112 .
40 Staubus, George J . The Decision Usefulness Theory of Accounting: A Limited History, 1961, p . 11 .
41 Zeff, Stephen A ., “The Objectives of Financial Reporting: A Historical Survey and Analysis,” January 1, 2013, Accounting and Business Research . Accessed August 17, 2014 .
42 Zeff, Stephen A . “The Evolution of the Conceptual Framework for Business Enterprises in the United States,” Accounting Historians Journal, Vol . 26, No . 2, December 1999: 99 (hereafter, “Zeff 1999”)
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effectiveness in fulfilling its stewardship and other managerial responsibilities .43
However, the APB’s statement could not be considered a strong endorsement
of decision-usefulness, as a statement is not authoritative, while an opinion is
authoritative . Further, the statement spent most of its time explaining GAAP rather
than proposing a normative objective of financial statements . As a result, the AICPA
came under greater pressure to produce a normative statement once and for all .
In 1971, the AICPA formed two special committees to address consternation over
the APB’s inability to propose standards: the Trueblood Committee and the Wheat
Committee . The Trueblood Committee’s purpose was to propose the objectives of
financial reporting, based on the underlying belief that identifying objectives would
help improve financial reporting . The Trueblood Committee’s report seconded the
decision-usefulness objective that ASOBAT had articulated, with a strong emphasis
on future cash flows to investors .
The Trueblood Committee stated that the economic and social goals of business
are equally important .44 The committee pointed to pollution as an example of
“enterprise activities which require sacrifices from those who do not benefit .”45 In
other words, some corporate activities impose externalities on the rest of society .
Therefore, one objective of financial statements is “to report on those activities of
the report affecting society which can be determined and described and measured
and which are important to the role of the enterprise in its social environment .”46
The Wheat Committee was charged with identifying ways to improve the
establishment of accounting standards . In 1972, it proposed the formation of the
Financial Accounting Standards Board (“FASB”) . The FASB was to be an independent
organization dedicated to the development of financial accounting standards, unlike
the APB, which was made up of individuals serving part-time . The AICPA adopted
the Wheat Committee’s recommendation, and in July 1973, the FASB began
operations and replaced the APB with the SEC’s approval .
In 1973, in Accounting Series Release No . 150, the SEC recognized the FASB as
the authoritative source of GAAP shortly after the FASB’s formation . By endorsing
the pronouncements of its predecessors, the FASB began to codify GAAP . The
FASB’s own statements further developed GAAP .
4 .5 . The FASB’s Conceptual Framework Project
The FASB decided to embark on a Conceptual Framework project that would
provide principles for financial accounting . Statements of Financial Accounting
43 Accounting Principles Board . Basic Concepts and Accounting Principles Underlying Financial Statements of Business Enterprises, 1970, Chapter 4 .
44 Zeff 1999, p . 101 .
45 American Institute of Certified Public Accountants, “Objectives of Financial Statements” (Trueblood Committee report), 1973, p . 54 .
46 Ibid ., p . 55 .
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Concepts (“SFAC”) focused on discrete topics within financial accounting .
Understanding the early SFAC provides insight into how financial accounting
standards evolved in the United States .
SFAC No . 1, issued in 1978, addressed the objectives of financial reporting by
business enterprises . In it, the FASB identified the primary purpose of financial re-
porting as “provid[ing] information to help present and potential investors and credi-
tors and other users in making rational investment, credit, and similar decisions .”47
SFAC No . 2 concerned the qualitative aspects of accounting information, and
was published in 1980 . The goal was to define the characteristics of decision-useful
information for users of financial reporting in making decisions .
• The two most important characteristics were identified as “relevance”
and “reliability .” “Relevance” means the ability of information to make a
difference in a decision, including its timeliness, predictive value, and feedback
value . “Reliability” means reasonably free from error and bias and faithful
representation of what the information purports to represent .
• Information produced from standards should be neutral: that is, not favoring
a purpose other than better decisions by investors and creditors, or favoring
one economic interest over another .
• A secondary quality of useful information is comparability, or enabling users to
identify similarities and differences between two sets of economic outcomes .
• The statement also noted that useful information must be material, or of a
large enough magnitude to affect decisions
• Finally, information must possess benefits that exceed the costs of producing
it in order to be useful .48
SFAC No . 2 is often cited as the most respected and copied of the FASB’s concept
statements because of its clear definitions, logic, and organization .49
In 2010, the FASB issued SFAC No . 8, which replaced SFAC No . 1 and No . 2 .
SFAC No . 8 reinforces the value of financial reporting—to provide investors, lenders,
and other creditors information to help them assess the prospects for future net cash
inflows . But it also recognized that financial reporting does not, and cannot, provide
all the information those users need . The FASB also reinforced the importance of the
decision-usefulness of information . In doing so, it adjusted some of the characteris-
tics of useful financial information . The new characteristics are:
• Relevance, which explicitly recognizes the importance of materiality; and
47 FASB, Statement of Financial Accounting Concepts No . 1, 1978, paragraph 34 .
48 FASB, Statement of Financial Accounting Concepts No . 2, 1980; Miller, Paul B .W ., Rodney J . Redding, and Paul R . Bahnson . The FASB: The People, the Process, and the Politics, Third Edition, 1994 ., pp . 105-107 .
49 Donald J . Kirk . “Looking Back on Fourteen Years at the FASB: The Education of a Standard Setter,” Accounting Horizons, Vol . 2, No . 1, 1988, p . 13; Zeff 1999, p . 110 .
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• Faithful representation, which more specifically means that the information is
complete, neutral, and free from error .
To enhance the relevance and faithful representation of the information, it should
also be:
• Comparable;
• Verifiable;
• Timely;
• Understandable .50
SECTION REVIEW
In this section, the following Learning Objectives were covered:
• Explain the current state of financial accounting (codified, standardized,
decision-useful) given the history and efforts of the FASB .
? Questions to consider
√ Given the value of decision-usefulness for financial accounting, what lesson
can be applied to sustainability accounting?
√ Why did the establishment of the FASB help resolve the challenges that faced
the CAP and the APB?
50 FASB, Statement of Financial Accounting Concepts No . 8, 2010, pp . 16-18 .
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Materiality is a fundamental principle of financial reporting in the United States .
It lies at the intersection of the regulatory and accounting issues already discussed
in Part I . Federal regulation prescribed under the Securities Act requires U .S . public-
ly listed companies to provide investors and other users with material information
that is necessary to form an understanding of the company’s financial condition and
operating performance, as well as its prospects for the future . To fully understand
this legal concept and its role in corporate disclosures, it is important to explore how
materiality and its components have been viewed by the courts and the SEC .
5 .1 . Foundational Cases: TSC v. Northway and Basic v. Levinson
Transparent disclosure is the philosophical underpinning of the federal securities
law regime . Yet, a company is not required to disclose all relevant or interesting
information about itself to the capital markets, which would place undue burden on
the company . The limitation on disclosure is materiality .
Two Supreme Court cases, TSC v. Northway, 426 U .S . 439 (1976) and Basic v. Levinson, 485 U .S . 224 (1988), articulated the principle of materiality in the securities
law context . A more recent federal district case, Reese v. Malone, No . 12-35260 (U .S .
Court of Appeals for the Ninth Circuit, February 13, 2014), provides one example
of how materiality can be demonstrated . Along with SEC rules and regulations, the
cases provide the legal standard for the disclosure of material information in SEC
filings and other forms of corporate reporting .
In TSC, National purchased 34 percent of TSC’s voting securities from TSC’s
founder and principal shareholder and his family . Soon thereafter, the founder and
5MATERIALITY: THE GUIDING PRINCIPLE OF DISCLOSURE
Learning Objectives Covered in this Section
Discuss the Supreme Court definition of materiality and the implications of this definition .
Discuss the implications of making statements about “materiality” outside of
SEC filings .
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his son resigned from TSC’s board of directors, and five National nominees were
placed on the board, including National’s president and executive vice president,
who subsequently became chairman of the board and chairman of TSC’s executive
committee . The TSC board approved a proposal to liquidate and sell all of TSC’s
assets to National by exchanging TSC stock for National stock . TSC and National
then issued a joint proxy statement to their shareholders recommending approval of
the proposal . The proxy solicitation was successful, TSC was placed in liquidation and
dissolution, and the exchange of shares was completed . A TSC shareholder brought
an action for damages against TSC and National, claiming that their joint proxy
statement was incomplete and materially misleading, in violation of Exchange Act
14(a) and Rule 14a-9 in that it omitted material facts relating to the following:
• the degree of National’s control over TSC (i .e ., it failed to disclose the positions
National’s president and executive vice president held within TSC, as well as
reports filed with the SEC by National and TSC indicating that National “may
be deemed a ‘parent’ of TSC”), and
• the favorability of the proposed acquisition to TSC shareholders (i .e ., it failed
to disclose certain unfavorable information about the proposal contained in
a letter from an investment banking firm whose earlier favorable opinion of
the proposal was reported in the proxy statement, and also recent substantial
purchases of National’s common stock, suggestive of manipulation, by
National and a mutual fund) .
The shareholder alleged that the omission materially affected the decision of how
to vote on the change-of-control transaction .51
The issue was what standard should guide the determination of material
information . After examining existing case law, the Court announced the following
standard of materiality:
There must be 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 information made available .52
The Court elaborated:
It does not require proof of a substantial likelihood that disclosure of the omitted fact would have caused the reasonable investor to change his vote . What the standard does contemplate is a showing of a substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder.53 (emphasis added)
51 TSC v . Northway, 426 US 439 (1976)
52 TSC, 426 US 449 .
53 TSC, 426 US at 449 .
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Therefore, information does not have to have changed the shareholder’s decision
to be material . The information needs only to be likely to be considered by the
reasonable shareholder . That is a higher standard than saying the information
“might” be considered, which was the appeals court’s standard that the Supreme
Court rejected on the ground that the standard was not stringent enough .54 The
Supreme Court emphasized that materiality is a question of law applied to the
specific facts of a case .55
The Supreme Court addressed materiality again in Basic . Combustion Engineering
Inc . and Basic Inc . agreed to merge . For two years leading up to the agreement, the
companies had meetings and conversations about the possibility of a merger . During
that time, Basic made three public statements denying that any merger negotiations
were taking place . It also denied that it knew of any corporate developments that
would account for heavy trading activity in its stock . Former Basic shareholders,
who sold their stock between Basic’s first public denial of merger activity and the
suspension of trading in Basic stock just prior to the merger announcement, filed a
class action suit against the company and some of its directors . The suit alleged that
Basic’s statements had been false or misleading - in violation of Section 10(b) of the
Exchange Act and Rule 10b-5 - and that shareholders were injured by selling their
shares at prices artificially depressed by those statements .56
Section 10(b) and Rule 10b-5 prohibit: (1) the use of deceptive devices or
schemes, (2) the making of a material misstatement or omitting information such
that the statements made are not misleading, and (3) committing a fraud or deceit,
in the sale or purchase of securities .57 Shareholders can bring Rule 10b-5 suits
alleging materially false or misleading statements against the company, its executives,
and/or its board members .
After reviewing several standards of materiality, the Supreme Court held that the
TSC standard for materiality applied . Further, upon analyzing conflicting standards
for the materiality of merger discussions from two federal circuit courts, the Court
held that preliminary merger discussions are material . Their materiality, the Court
said, depends on a balancing of the probability the transaction will be completed
and its significance to the issuer of the securities .58 Probability turns on evidence
of interest in the transaction at the highest levels of the companies . A relatively
small transaction for the issuer of the securities, or one that involves a small price
premium, probably will not meet the standard of materiality . Thus, the Basic test for
materiality is called the probability/magnitude test . The materiality inquiry depends
on the facts of the merger negotiations, and this fact-specific approach is consistent
with the TSC approach .
54 TSC, 438 US at 448-449 .
55 TSC, 438 US at 450 .
56 Basic v . Levinson, 485 US 224 (1988) .
57 15 U .S .C . § 78j; 17 C .F .R . 240 .10b-5 .
58 Basic, 485 US at 238-241 .
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Materiality of information can be demonstrated in numerous ways . In Reese, the
plaintiffs brought a Rule 10b-5 suit, alleging that British Petroleum (“BP”) and certain
executives made materially false and misleading statements about their knowledge
of corrosion in an oil pipeline, which later experienced a large spill . Plaintiffs focused
on three statements that they alleged to be materially false or misleading: (1) press
statements by BP’s senior executive in charge of the pipeline project, one of which
was general in nature and two of which related specifically to a large oil spill; (2)
a general statement by BP’s CEO to the press that the large oil spill had occurred
notwithstanding “BP’s world class corrosion monitoring and leak detection systems”;
and (3) statements in BP’s annual reports, one about management’s belief that BP
materially complied with applicable environmental laws and regulations and one
about BP’s “environmental best practices .”
The Ninth Circuit concluded that the statements, except for the CEO’s general
statement, taken together sufficiently pled material falsity under federal securities
laws . The senior executive’s statement (that the pipeline corrosion that ultimately
caused the spill had been detected earlier at a “low manageable rate”) was false
because it contradicted BP internal documents . Further, the court found that the
senior executive’s statements were material, because BP’s knowledge of pipeline
problems prior to the spill were central questions raised by the media and in
government investigations . The court concluded that “facts demonstrating public
interest in the withheld information demonstrate its materiality .” Although the public
may have doubted the effectiveness of BP’s pipeline maintenance practices after the
spill, the disclosure that BP may have ignored significant warning signs would have
altered the total mix of information made available to investors .59
5 .2 . The SEC’s and FASB’s Views of Materiality
Although materiality is a nuanced legal concept that cannot be reduced to a
bright-line test, the views of the SEC and the FASB provide useful insights into its
application . In Staff Accounting Bulletin No. 99—Materiality, the SEC states that
companies should not use financial thresholds or rules of thumb to make ultimate
materiality determinations . For example, the bulletin rejects the rule of thumb that
a misstatement or omission of less than five percent is not material .60 Similarly,
the FASB has stated that materiality cannot be captured by a formula61 and that
quantitative thresholds should not be used to make materiality determinations .62
Financial rules of thumb and formulas cannot, by definition, capture material
information that investors are interested in . The bulletin states that companies should
59 Basic, 485 US at 231-232 .
60 17 C .F .R . Part 11, SEC Staff Accounting Bulletin No . 99—Materiality (August 11, 1999)
61 FASB, Statement of Financial Accounting Concepts No . 2, Qualitative Characteristics of Accounting Information, 131 (1980) .
62 FASB, Statement of Financial Accounting Concepts No . 8, Qualitative Characteristics of Useful Accounting Information, 17 (2010) .
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perform “a full analysis of all relevant considerations,” including both quantitative
and qualitative factors, when deciding whether information is material .
In November 2014, the FASB announced a tentative decision to revise the
description of materiality in SFAC No . 8 to state that materiality is a legal concept .
The statement will incorporate the U .S . Supreme Court’s description of materiality,
which is an entity-specific determination .63 Once this decision becomes final, the
FASB’s standard of materiality will presumably align with the Supreme Court’s
standard .
5 .3 . The NRDC’s Rule-Making Petition
Materiality is intrinsically tied to the reasonable investor . After all, what is material
depends on what the reasonable investor would find important in her investment
decisions . Yet, courts have not explicitly or clearly defined the reasonable investor
as they have materiality itself . Instead, the reasonable investor has been ascribed a
number of traits across many cases .64 As a result, the definition of the reasonable
investor is not settled, though the definition is intended to be objective .65
During the 1970s, through a series of cases brought by the National Resources
Defense Council (“NRDC”) against the SEC, the SEC indirectly addressed
how it thinks about the reasonable investor . The late 1960s and early 1970s
saw shareholders and organizations ask companies to disclose more social,
environmental, and civil rights information . For example, Campaign GM was a proxy
proposal that involved General Motors shareholders asking the company to provide
more information on its environmental and civil rights performance, as well as on
safety and design issues . In 1971, the NRDC brought a rule-making petition before
the SEC, asking the Commission to expand civil rights and environmental disclosure
under the federal securities laws .66 After a number of investigations and public
hearings spanning almost a decade, the SEC decided in administrative proceedings
that the requested disclosures were not needed . Two federal courts ultimately
upheld the SEC’s rule-making authority and actions . What happened during those
administrative and court proceedings provides insight into the relationship between
materiality and the reasonable investor .
The federal district court ordered the SEC to work on two critical factual issues
regarding materiality . First, the prevalence of what they called “ethical investor”
interest in greater environmental and civil rights disclosure . Second, what other
avenues ethical investors can use to combat corporate actions that negatively
affect the environment or the practice of equal employment . Regarding expanded
63 The Board may alter tentative decisions at future Board meetings, and decisions become final only after the Board votes on a written ballot to issue a standard . Details available at FASB .org, accessed February 20, 2015 .
64 Lin, Tom C .W ., “The New Investor,” 60 UCLA L . Rev . 678, 694-695 (2013); Padfield, Stephen . “Is Puffery Material to Investors? Maybe We Should Ask Them,” 10 U . Ap . J . Bus . & Emp . L . 339, 344-348 (2008) .
65 Padfield, 2008, pp . 346, 365 .
66 See NRDC v . SEC, 389 F .Supp . 689, 693-694 (D .D .C . 1974) .
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disclosure on environmental and social topics, the SEC found that less than one
percent of the total value of stocks and bonds in the United States in 1974 was
invested using ethical investing principles . Likewise, shareholder proposals on
environmental and social issues received, on average, between two and three
percent support from voting stockholders during the 1970s . These findings led
the SEC to conclude ethical investing was not an important or significant type of
investing .67
The SEC’s decision turned on a level of interest insufficient to conclude that the
reasonable investor was interested in social and environmental information . The
Commission’s analysis of what is material to the reasonable investor depended
on the portion of investors and/or assets under management . That reasoning
suggests that when a sufficiently large percentage of investors and/or assets under
management consider sustainability information to be material, sustainability
disclosure would be justified because the reasonable investor views that information
as decision-useful .
Because investors presumably invest primarily for economic gain, the Commission
decided to adhere to an economic understanding of materiality . Further, the SEC
stated that it could not require disclosure solely for the purposes of changing
corporate behavior, although it recognized the disclosure might have an indirect
effect on such behavior .68 To require disclosure solely for the goal of changing
corporate behavior, it stated, would go beyond the Commission’s authority to require
disclosure that is: “necessary or appropriate for the protection of investors or the
furtherance of a fair, orderly and efficient market or for fair opportunity of corporate
suffrage .” This reasoning contrasts with the legislative intent of the Securities Acts .
Moreover, expanded social disclosure can provide useful information to investors that
directly relates to the goals of investor protection and informed voting .69
Indeed, on a couple of occasions the SEC has expanded corporate governance
disclosure to protect investors and/or inform their voting without the disclosures
constituting material information in the economic sense . In 1978, it issued new
requirements for disclosing attendance statistics, as well as the committee structure
of the board of directors to increase the corporation’s accountability to society .70 In
1992, it expanded disclosure of executive compensation in response to public outcry
over compensation levels .71
Finally, the SEC reasoned that if social disclosures were economically important,
then the information was material, and current regulations required that the
information be disclosed .72 This last point is debatable because, according to the
67 Commission Conclusions and Rule Making Proposals, Securities Act Release No . 5627, Exchange Act Release No . 11773, [1965–1976 Transfer Binder] Fed . Sec . L . Rep (CCH) ¶ 80, 820 at 85,719-720 (October 14, 1975) .
68 Commission Conclusions, Securities Act Release No . 5627, at 85, 713 .
69 Williams, 1999, pp . 1272-1273 .
70 Ibid ., p . 1265 .
71 Ibid ., p . 1266 .
72 Commission Conclusions, Securities Act Release No . 5627, at 85,723-24 .
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traditional view, material information does not have to be disclosed unless there
is a duty to disclose it (e .g ., line item disclosure requirement; omission of material
information makes a statement misleading) .73
SECTION REVIEW
In this section, the following Learning Objectives were covered:
• Discuss the Supreme Court definition of materiality and the implications of
this definition .
• Discuss the implications of making statements about “materiality” outside of
SEC filings .
? Questions to consider
√ How does the concept of materiality improve the usefulness of corporate
disclosures?
√ Given that the “reasonable investor” has not been explicitly defined by the
Supreme Court, what implications does this have for the definition of materi-
ality?
73 Monsma, David, and Timothy Olson, “Muddling Through Counterfactual Materiality and Divergent Disclosure: The Necessary Search for a Duty to Disclose Material Non-Financial Information,” 26 Stanford Envtl .L . J . 137, 1988, pp . 168-172 .
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40
Such debate has created a lack of clarity for issuers and investors alike . As a
result, despite the regulatory obligation to disclose material information, corporate
reporting today still fails to systematically account for non-financial value drivers
in a way that helps investors make informed decisions . To understand what can
be done, it’s helpful to ask some fundamental questions: What are the disclosure
requirements? Do they apply to sustainability information? If so, how?
6 .1 . Periodic Filing Requirements
Companies that issue a class of securities registered under the federal securities
laws (also called issuers or registrants) are subject to periodic and current reporting
requirements:
• Form 10-K annual report: Form 10-K provides a comprehensive overview
of the company’s business and financial condition, including audited financial
statements . Regulation S-X governs the format and presentation of financial
reports,74 while Regulation S-K governs a wide range of information, including
nonfinancial information, in Forms S-1, 10-K, 20-F, 10-Q, and 8-K .75
• Form 10-Q quarterly reports: Form 10-Q includes unaudited financial
statements and gives a continuing view of the company’s financial condition
74 17 C .F .R . Part 210 .
75 17 C .F .R . Part 229 .
6SEC DISCLOSURE REQUIREMENTS
Learning Objectives Covered in This Section
Recognize key elements of Regulation S-K and other prominent legislation and
what is required for disclosure (e .g ., financial and nonfinancial information that
alters the total mix of information) .
Explain why MD&A section was added to the 10-K and why it is an appropriate
place for the disclosure of sustainability information .
Describe the trends driving demand for the disclosure of sustainability
information .
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during the year . The issuer files Form 10-Q for the first three quarters of its
fiscal year .
• Form 8-K current reports: The Form 8-K provides current information about
major events that shareholders should be aware of .
6 .2 . Regulation S-K Requirements for Form 10-K
Regulation S-K, which lays out the reporting requirements for U .S . publicly listed
companies, contains several requirements relevant to the disclosure of sustainability
information . In addition to the Management’s Discussion & Analysis section of Form
10-K (discussed in detail below), other sections of Form 10-K may be relevant to
sustainability information, including the following:
• Description of business: Item 101 of Regulation S-K requires issuers to
provide a description of the issuer’s business and its subsidiaries . Specifically,
Item 101(c)(1)(xii) expressly requires disclosure regarding certain costs of
complying with environmental laws . Appropriate disclosure shall also be
made regarding the material effects that compliance with federal, state, and
local provisions that have been enacted or adopted regulating the discharge
of materials into the environment, or otherwise relating to the protection
of the environment, may have upon the capital expenditures, earnings, and
competitive position of the registrant and its subsidiaries .
• Legal proceedings: Item 103 of Regulation S-K requires companies to briefly
describe any material pending or contemplated legal proceedings . Instructions
to Item 103 provide specific disclosure requirements for administrative or
judicial proceedings arising from laws and regulation targeting discharge of
materials into the environment or primary atmosphere for the purpose of
protecting the environment .
• Risk factors: Item 503(c) of Regulation S-K requires filing companies to
provide a discussion of the most significant factors that make an investment
in the security speculative or risky . Companies must clearly state the risk and
specify how a particular risk affects the particular filing company .
6 .3 . MD&A Section Disclosure
One appropriate place in Form 10-K to disclose sustainability information is
Item 303 of Regulation S-K, also known as Management’s Discussion & Analysis
of Financial Condition and Results of Operations (“MD&A”) . Introduced in 1968,
MD&A took its current form in 1980 . A company is expected to discuss its overall
financial condition, results of operations, and management’s view of known trends
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and uncertainties that are reasonably likely to have a material effect on results
of operations and financial condition .76 This last requirement provides the nexus
between material sustainability information and MD&A .
The SEC’s Interpretive Releases on MD&A provide useful guidance to registrants
on what information to disclose and how to disclose it . Of particular relevance
to sustainability information, issuers are required to disclose “known trends or
uncertainties that the registrant reasonably expects will have a material impact
on net sales, revenues, or income from continuing operations .” Registrants “shall
focus specifically on material events and uncertainties known to management that
would cause reported financial information not to be necessarily indicative of future
operating results or of future financial condition .”77
The 1989 Interpretive Release explains the important distinction between required
disclosure and voluntary forward-looking information to be included in MD&A .
Both required disclosure regarding the future impact of presently known trends, events or uncertainties and optional forward-looking information may involve some prediction or projection . The distinction between the two rests with the nature of the prediction required . Required disclosure is based on currently known trends, events, and uncertainties that are reasonably expected to have material effects, such as: a reduction in the registrant’s product prices; erosion in the registrant’s market share; changes in insurance coverage; or the likely non-renewal of a material contract . In contrast, optional forward-looking disclosure involves anticipating a future trend or event or anticipating a less predictable impact of a known event, trend or uncertainty.78 (emphasis added)
Therefore, the issuer has a duty to disclose the known trends and uncertainties
that are reasonably likely to have a material effect on results of operations and
financial condition .
In determining whether a known trend or uncertainty is reasonably likely to have
a material effect, the Commission advises management to ask two questions:
(1) Is the known trend, demand, commitment, event, or uncertainty likely to
come to fruition? If management determines that it is not reasonably likely to
occur, no disclosure is required .
(2) If management cannot make that determination, it must evaluate
objectively the consequences of the known trend, demand, commitment,
event, or uncertainty, on the assumption that it will come to fruition . Disclosure
is then required unless management determines that a material effect on the
76 The “reasonably likely” test is a lower standard of disclosure than “more likely than not,” meaning that the likelihood need not reach 50 percent . See Commission Guidance Regarding Disclosure Related to Climate Change, p . 17 (“2010 Release”) .
77 Regulation S-K, 17 C .F .R . 229 .303 .
78 SEC, “Interpretation: Commission Guidance Regarding Management’s Discussion and Analysis of Financial Condition and Results of Operations; Certain Investment Company Disclosures, Securities and Exchange Commission,” Release Nos .33-6835; 34-26831; IC-16961; FR-36, May 18, 1989 (hereafter “1989 Release”) .
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registrant’s financial condition or results of operations is not reasonably likely
to occur .79
Forward-looking statements are often identified by words including “believe,”
“expect,” “anticipate,” “will,” “should,” “optimistic,” and “intend .” Corporations
may be wary of making forward-looking statements because of concerns about
potential legal liability—for example, if a shareholder made decisions based on the
statements and the company’s outcomes turned out to differ materially from those
suggested by the statement . However, these concerns can be addressed through
safe harbors . The Securities Act and the Exchange Act contain safe harbors for
“forward-looking statements” that predate the Private Securities Litigation Reform
Act of 1995 (PSLRA) .80 These safe harbors apply both to the required disclosures on
known trends and uncertainties, as well as to voluntary forward-looking disclosures
in MD&A .81 Protection under the PSLRA requires the company to accompany
forward-looking statements with “meaningful cautionary statements identifying
important factors that could cause actual results to differ meaningfully from those in
the forward-looking statement .82 The cautionary statements should be specific to the
company and not boilerplate .83
The Commission’s 2003 interpretive release reminds issuers of three main goals of
MD&A disclosure:84
• To provide a narrative explanation of a company’s financial statements that
enables investors to see the company through the eyes of management;
• To enhance the overall financial disclosure and provide the context within
which financial information should be analyzed; and
• To provide information about the quality of, and potential variability of,
a company’s earnings and cash flow, so that investors can ascertain the
likelihood that past performance is indicative of future performance .
The Commission also emphasizes four points regarding the focus and content of
MD&A:85
• Focus on material information: Companies should focus on material
79 Footnote 27 of the 1989 Release states that the probability/magnitude test for materiality of Basic v . Levinson does not apply to MD&A disclosure: “MD&A mandates disclosure of specified forward-looking information, and specifies its own standard for disclosure—i .e ., reasonably likely to have a material effect . This specific standard governs the circumstances in which Item 303 requires disclosure . The probability/magnitude test for materiality approved by the Supreme Court in Basic, Inc ., v . Levinson, 108 S .Ct . 978 (1988), is inapposite to Item 303 disclosure .”
80 Exchange Act, § 21E; Securities Act, § 27A .
81 Rule 175(c) under the Securities Act, 17 CFR 230 .175(c), and Rule 3b-6(c) under the Exchange Act, 17 CFR 240 .3b-6 .
82 15 U .S .C . § 78u-5(c)(1)(A)(i) .
83 See Slayton v . Am . Express Co ., 604 F .3d 758, 2010 WL 1960019 (2d Cir . May 18, 2010) .
84 SEC, “Interpretation: Commission Guidance Regarding Management’s Discussion and Analysis of Financial Condition and Results of Operations; Certain Investment Company Disclosures, Securities and Exchange Commission,” Release Nos .33-8350; 34-48960; FR-72, December 29, 2003 (hereafter “2003 Release”) .
85 2003 Release .
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information and eliminate immaterial information that does not promote
understanding of companies’ financial condition, liquidity, and capital
resources, changes in financial condition and results of operations (both in the
context of profit and loss and cash flows) . Moreover, Exchange Act Rule 12b-
20 requires issuers to provide other material information that is necessary to
make the required statements, in light of the circumstances in which they are
made, not misleading .86
• Include key performance indicators: Companies should identify and
discuss the key performance indicators—including non-financial performance
indicators—that management uses to manage the business and that would
be material to investors . The Commission encourages the use of non-financial
metrics that promote comparability across companies within an industry .
• Disclose known trends and uncertainties that are reasonably likely: Companies must identify and disclose known trends, events, demands,
commitments, and uncertainties that are reasonably likely to have a material
effect on financial condition or operating performance, including forward-
looking information, as discussed previously . The Commission has specified
that the “reasonably likely” threshold for disclosure “is lower than ‘more likely
than not .’”87
• Analyze the information that is disclosed: Companies should provide
not only disclosure of information responsive to MD&A’s requirements,
but also an analysis that is responsive to those requirements . The analysis
must explain management’s view of the implications and the significance
of that information and satisfy the objectives of MD&A . The analysis should
explain the underlying reasons or implications of the trends or uncertainties,
interrelationships between their parts, or their relative significance . Further,
the analysis should describe the causes of the trends and uncertainties .
6 .4 . The SEC’s Climate Change Guidance
In its interpretive guidance, the SEC has explicitly acknowledged that certain
Regulation S-K requirements, including those outlined above, may create
sustainability-related disclosure obligations for companies . For example, in response
to investor petitions and regulatory, legislative, business, and market developments,
the SEC released guidance in 2010 (“2010 guidance”) regarding disclosure related
to climate change . The purpose of the release was to give the Commission’s views
regarding existing disclosure obligations as they apply to climate change issues . The
86 See Securities Act Rule 408 [17 CFR 230 .408], Securities Act of 1933 Section 10(b) [15 U .S .C . §78j(b)], Exchange Act Rule 10b-5 [17 CFR 240 .10b-5], and Exchange Act Rule 12b-20 [17 CFR 240 .12b-20] .
87 Securities and Exchange Commission, “Commission Statement about Management’s Discussion and Analysis of Financial Condition and Results of Operations,” Release Nos . 33-8056; 34-45321; FR-61, January 22, 2002 .
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release elaborates four climate change issues that registrants should consider for
disclosure:
1. The impact of legislation and regulation: Changes in federal and state
legislation on climate change may trigger disclosure obligations in different Items
of Regulation S-K, as discussed below . Examples of potential effects of pending
legislation and regulation related to climate change include:
• Costs to purchase and/or profits from sales of, allowances or credits under a
“cap and trade” system;
• Costs required to improve facilities and equipment to reduce emissions
in order to comply with regulatory limits or to mitigate the financial
consequences of a “cap and trade” regime; and
• Changes to profit or loss arising from increased or decreased demand for
goods and services produced by the registrant, which result directly from
legislation or regulation, and/or indirectly from changes in costs of goods sold .
2. International accords: Issuers should disclose material impacts of international
agreements and protocols regarding climate change mitigation .
3. Indirect consequences of regulation or business trends: Risks, as well
as opportunities, arising from developments in climate change law, politics, and
technology should be considered for disclosure if they are determined to be material .
Examples of such consequences include: increased or decreased demand for goods
depending on the amount of greenhouse gas emissions they produce; greater
competition to develop innovative, sustainable products; and greater demand for
energy from alternative and renewable sources . Another indirect impact from climate
change that should be considered for disclosure is a reputational impact’s effect on
business operations and financial condition, depending on the registrant’s business,
competitive conditions, and public opinion . Some companies may experience bigger
reputational damage than others because of their inaction or nondisclosure of their
climate change response .
4. Physical impacts of climate change: Severe weather events, changes in sea
level, decreases in arable farmland, and changes in water quality and supply can
affect a company’s operations and financial results . Examples of possible physical
impacts of climate change and severe weather events include:
• Property damage and disruptions to operations, including manufacturing
operations or the transport of manufactured products, for registrants with
operations concentrated on coastlines;
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• Indirect financial and operational impacts from disruptions to the operations
of major customers or suppliers from severe weather, such as hurricanes or
floods;
• Increased insurance claims and liabilities for insurance and reinsurance
companies;
• Decreased agricultural production capacity in areas affected by drought or
other weather-related changes; and
• Increased insurance premiums and deductibles, or a decrease in the availability
of coverage, for registrants with plants or operations in areas subject to severe
weather .
All four climate change issues could potentially need to be disclosed in MD&A .
A company should apply the same “reasonable likelihood” test to the four climate
changes issues that it does to the rest of MD&A .
In the 2010 guidance, the Commission reiterated that “unless management
determines that a material effect is not reasonably likely, MD&A disclosure is
required .”88 When doubts about materiality arise, the company should lean toward
disclosure: “In view of the prophylactic purpose of the securities laws and the fact
that disclosure is within management’s control, ‘it is appropriate that these doubts
be resolved in favor of those the statute is designed to protect .’”89
In identifying and disclosing known material trends and uncertainties, the SEC
reminds registrants that they “are expected to consider all relevant information
even if that information is not required to be disclosed, and, as with any other
disclosure judgments, they should consider whether they have sufficient controls
and procedures to process this information .”90 Thus, registrants must have disclosure
controls and procedures that can effectively allow them to identify, collect, and
consider non-financial information that they may need to disclose . The controls are
discussed in more detail in Part III: Using SASB Standards .
Although this guidance specifically addresses climate change, its reasoning may
be readily applied to other material sustainability factors . As the guidance makes
clear, climate change is not a special case requiring unique treatment or additional
line-item disclosures; rather, the reporting of material information related to climate
risk is rooted in existing, long-established requirements and the core principles that
guide all disclosure .
88 2010 Release, p . 23 .
89 2010 Release, p . 11 (internal citation omitted) .
90 2010 Release, pp . 17-18 (internal citation omitted) .
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6 .5 . Consequences of Inadequate Disclosure
Under the Exchange Act, the officers and directors who cause statements to
be made in SEC filings may be liable for materially false or misleading statements
contained in Commission filings .91 Shareholders can bring civil actions for
damages for violations of Exchange Act Section 10(b) and Rule 10b-5 against
the company’s executives and board members for alleged material omissions and
misrepresentations .92 In one Rule 10b-5 case concerning non-financial information,
the Ninth Circuit reversed the district court’s dismissal of the complaint, concluding
that the plaintiffs had sufficiently pled materiality because a reasonable investor
would have found information concerning maintenance costs and operations and
a Federal Aviation Administration (“FAA”) investigation of an airline to significantly
alter the total mix of information .93 In a Rule 10b-5 suit alleging that certain
boilerplate disclosures about environmental compliance were materially misleading,
the Central District of California denied defendants’ motion to dismiss .94 This ruling
suggests that boilerplate disclosures about sustainability topics carry legal risks .
Boilerplate disclosures are discussed in more detail in Part II: Understanding SASB
Standards .
The Exchange Act grants authority to the SEC to bring civil actions for aiding or
abetting antifraud violations of the securities laws . In addition to civil liability for
individuals, the SEC can provide comments to a company regarding the adequacy of
its disclosures . The company must respond to the SEC’s comments and might have
to submit a revised filing . In extreme cases, the companies can face sanctions and
delisting from a stock exchange .
6 .6 . The Sarbanes-Oxley Act and Controls
Other existing regulation that is relevant to the disclosure of material sustainability
information is included in the Sarbanes-Oxley Act of 2002 . This legislation was
enacted in the wake of several highly publicized corporate and accounting scandals,
including Enron and WorldCom . In addition to establishing the PCAOB, which was
discussed previously, the act covers a variety of aspects of how public corporations
91 Exchange Act, §§ 18 .
92 Exchange Act, § 10(b) (15 U .S .C . § 78j) and Exchange Act Rule 10b-5 (17 CFR 240 .10b-5) . See, for example, Howard v . Everex Systems, Inc ., 228 F .3d 1057 (Ninth Cir . 2000) (a corporate officer who signs aN SEC filing containing representations “makes” the statement in the filing and can be liable as a primary violator of Section 10(b) of the Exchange Act) .
93 No . 84 Employer-Teamster Joint Council Pension Trust Fund v . Am . W . Holding Corp ., 320 F .3d 920 (Ninth Cir . 2003) . The plaintiffs brought suit against America West and its officers and directors, alleging that America West made false and misleading statements and omissions concerning the company’s maintenance operations and continuing safety investigations by the FAA . As a result of the FAA’s investigation, the FAA and America West reached a settlement agreement under which the company agreed to pay $5 million for violating the FAA’s aircraft inspection and maintenance rules . The Ninth Circuit pointed out that the price of America West’s stock dropped 31 percent after the full economic effect of the settlement agreement with the FAA became known . (The number of governmental enforcement actions of aviation safety regulations is a metric for the Airline industry in the SASB Transportation sector standards .)
94 David M . Loritz et al . v . Exide Technologies et al ., No . 2:13-cv-2607-SVW-Ex, General Minutes—Civil (C .D . Cal . August 7, 2014) . The court concluded that whether the reasonable investor would consider boilerplate disclosure sufficient such that disclosure about the full extent of environmental issues would not have significantly altered the total mix of information is a question of fact .
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and their boards of directors are expected to comply with the law, including the use
of disclosure and internal controls .
Sarbanes-Oxley requires that the CEO and CFO certify the content of the issuer’s
periodic reports as well as the procedures used to prepare financial statements and
its other disclosures . Corporate officers who sign the Sarbanes-Oxley certifications
regarding the accuracy of the company’s disclosures can face civil and criminal
penalties for signing false certifications .95
The corporate officers are required to certify: (1) the material accuracy and fair
presentation of the disclosures in the report, (2) that the issuer has established
and maintained effective disclosure controls and procedures, and (3) inadequacies
in, or material changes to, internal controls over financial reporting .96 “Disclosure
controls and procedures” are designed to ensure that the information disclosed
under the Exchange Act is appropriately accumulated and communicated to the
issuer’s management, including its CEO and CFO . Effective disclosure controls and
procedures allow for timely decisions regarding required disclosure and give the CEO
and CFO comfort so that they can provide the required certifications .
“Internal controls over financial reporting,” which are also included in the
Sarbanes-Oxley certifications, refer to a process designed by, or under the
supervision of, the issuer’s CEO and CFO, and effected by the issuer’s board of
directors, management, and other personnel, to provide reasonable assurance of
financial reporting reliability . The controls over financial reporting also assist in the
preparation of financial statements for external purposes in accordance with GAAP .
As described in the 2010 Release, issuers should consider whether they have
sufficient disclosure controls and procedures to process all relevant information for
potential disclosure, even if the information is not required to be disclosed . The SEC
has reminded issuers that the scope of disclosure controls and procedures is not
limited to the specifically required disclosures:
As we have stated before, a company’s disclosure controls and procedures should not be limited to disclosure specifically required, but should also ensure timely collection and evaluation of “information potentially subject to [required] disclosure,” “information that is relevant to an assessment of the need to disclose developments and risks that pertain to the [company’s] businesses,” and “information that must be evaluated in the context of the disclosure requirement of Exchange Act Rule 12b-20 .”97
Therefore, an issuer should evaluate whether, and to what extent, its disclosure
controls and procedures are being maintained and are effective with respect to
financial and non-financial information that may be incorporated into materiality
determinations .
95 Sarbanes-Oxley Act, §§ 302 and 906 .
96 Sarbanes-Oxley Act, § 302; Exchange Act, Rules 13-14(a) and 15d-14(a) .
97 2010 Release, p . 19, n . 62 .
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6 .7 . The SEC’s Disclosure Effectiveness Initiative
In December 2013, the SEC published a report reviewing the disclosure
requirements of Regulation S-K and announced its Disclosure Effectiveness Initiative .
The report noted that MD&A disclosure is more about principles-based requirements
than about line-item, rules-based requirements . The intent of MD&A, it said, is to
elicit meaningful, company-specific disclosure .98
The initiative is an opportunity for the SEC to undertake a large-scale evaluation
of Regulation S-K’s disclosure requirements in light of the many economic and
technological changes since 1996, when the requirements were last reviewed .
Although much information gathering and discussion will occur before any revisions
are implemented, the director of the Division of Corporation Finance observed that
the initiative may result in new disclosure requirements:
While always mindful of the costs and burdens of our regulation, we will ask whether there is information that is not part of our current requirements but that ought to be . While looking for ways that we can streamline our disclosure requirements is an important element of our review, reducing the volume of disclosures is not the sole end game . You may be surprised to learn that there are many investors who have expressed an appetite for more information, not less . If we identify potential gaps in disclosure or opportunities to increase the transparency of information, we may very well recommend new disclosure requirements .99
As part of this initiative, the SEC issued a Concept Release in April 2016 seeking
public feedback on how it might modernize disclosures to make them more useful
for today’s investors . Two-thirds of the non-form comment letters it received in
response addressed sustainability matters, and 80 percent of those called for
improved disclosure of this type of information .100
The initiative is about making disclosure more effective, not only about reducing
the amount of disclosure . However, the initiative aims to meet the dual goals of
streamlining requirements for companies, including emerging growth companies,
and focusing on useful, material information for investors .101
98 SEC, “Report on Review of Disclosure Requirements in Regulation S-K,” December, 2013, pp . 41-42 (hereafter “Disclosure Effectiveness Report”) .
99 Higgins, Keith, “Disclosure Effectiveness: Remarks Before the American Bar Association Business Law Section Spring Meeting,” SEC .gov, April 11, 2014 .
100 Sustainability Accounting Standards Board, “Business and Financial Disclosure Required by Regulation S-K – the SEC’s Concept Release and Its Implications” (Sept . 14, 2016) .
101 Disclosure Effectiveness Report, p . 96 .
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SECTION REVIEW
In this section, the following Learning Objectives were covered:
• Recognize key elements of Regulation S-K and other prominent legislation
and what is required for disclosure (e .g ., financial and nonfinancial information
that alters the total mix of information) .
• Explain why MD&A section was added to the 10-K and why it is an
appropriate place for the disclosure of sustainability information .
• Describe the trends driving demand for the disclosure of sustainability
information .
? Questions to consider
√ Given requirements to disclose known trends, events, and uncertainties in
MD&A section of Form 10-K, what are the implications for sustainability dis-
closures?
√ What did the SEC’s 2010 Release on climate change suggest about the
Commission’s views regarding existing disclosure obligations as they apply to
sustainability information?
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51
As non-financial value drivers continue to grow in significance, accountants have
grappled with questions of how to identify what data to collect, how to measure that
information, which controls and monitoring process are appropriate, how to analyze
the information to inform management decisions, and what to disclose externally .
These questions can be more complex when the information is difficult to quantify .
Undaunted, a number of initiatives have pressed forward with the conviction that all
participants in the capital markets will benefit from an improved ability to account
for all of the capitals—financial, natural, social, human, and others—that enable and
impact corporate performance . As the AICPA has pointed out, “accountants’ widely
acknowledged expertise and skills in measurement, control, reporting, and assurance
place them in an excellent position to help an organization link sustainability activities
to strategies using accounting measures, tools, theories, and techniques .”102
102 AICPA, “Accounting for the Sustainability Cycle: How the Accounting Profession Can Add Value to Sustainability-Oriented Activities,” October 2013 .
7SUSTAINABILITY ACCOUNTING
Learning Objectives Covered in This Section
Describe the trends driving demand for the disclosure of sustainability
information .
Explain why sustainability information is increasingly important to investors
for investment decisions (e .g ., reduced ratio of net assets to enterprise value,
increased risks and opportunities) .
Discuss the challenges that investors face in integrating sustainability
information into investment decisions (e .g ., information is available, but
often its quality varies, it is not comparable, and/or it lacks obvious financial
implications) .
Distinguish SASB’s approach (sustainability accounting) from other approaches
to sustainability tracking and reporting .
Discuss the role of SASB standards in helping companies develop strategies
for long-term value creation, and benchmark and improve operational
performance .
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7 .1 . Pointing the Way Forward: the AICPA, the FASB, and the CFA Institute
Sustainability accounting aims to meet a need that was identified by two of the
major financial accounting organizations in the 1990s and 2000s . Motivated by
a variety of factors, including the declining ratio of net assets to enterprise value
among publicly traded firms, the AICPA and FASB each commissioned a report to
review the state of business reporting . Both organizations saw signs that business
reporting, which includes financial and non-financial reporting, could be improved to
better serve investors and other users that depend on relevant and useful disclosures .
Despite the fact that both organizations focus on financial accounting and reporting,
both reports identified a need for non-financial information to make business
reporting more meaningful .
In 1991, the AICPA formed the Special Committee on Financial Reporting
(also known as the Jenkins Committee) because of concerns about the relevance
and usefulness of business reporting . The committee’s key conclusions and
recommendations called for improved business reporting that, in addition to financial
statements, would include valuable non-financial information . Specifically, the report
identified the value of “material trends, demands, commitments, concentrations,
or events … known to management that would cause reported information not
to be indicative of future core earnings, net income, cash flows, or future financial
condition .”103 This includes forward-looking information, such as management’s
plans and the company’s opportunities and risks, and non-financial information that
captures drivers of long-term value creation .104
Shortly after the AICPA’s report, the Association for Investment Management
and Research (“AIMR”), now called the CFA Institute, released a report in 1993 that
reached similar conclusions . Titled Financial Reporting in the 1990s and Beyond, the
report concluded that financial statements are one component of a comprehensive
business reporting model that serves users, and the report encouraged management
to “disclose and discuss their strategies, proposed tactics and plans, and expected
outcomes .”
Following these findings, the FASB formed the Business Reporting Research
Project to review how companies could improve their reporting to be more relevant
and useful . In 2001, the FASB issued Improving Business Reporting: Insights into Enhancing Voluntary Disclosures . The FASB found that leading companies in select
industries voluntarily included some non-financial information that was useful to
investors . It also found that the importance of this information was likely to increase .
The FASB noted that the most useful and relevant disclosures included the factors
103 AICPA, Jenkins Committee Report, 1994, p . 54 .
104 Ibid ., p . 4 .
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that influence a company’s success, its strategy for managing those factors, and the
metrics for measuring management of those success factors .
As prominent organizations in the financial accounting, financial reporting,
and financial analysis professions, the AICPA, the FASB, and the CFA Institute
helped validate the claims made by sustainability professionals about the need
for sustainability accounting . Although the approaches of the three organizations
differed in scope, they identified similar purposes for complementary financial and
non-financial information .
7 .2 . Sustainability Accounting and the Accounting Profession
Compared with financial accounting, sustainability accounting is a nascent
practice with no universally agreed-upon definition . However, a consensus is
beginning to emerge .
The AICPA explains that “accounting for sustainability involves linking
sustainability initiatives to company strategy, evaluating risks and opportunities, and
providing measurement, accounting and performance management skills to ensure
that sustainability is embedded into the day-to-day operations of the company .”105
Without explicitly offering a definition for sustainability accounting, the
Institute of Management Accountants (“IMA”) describes the relationship between
sustainability and accounting as identifying “where connections can be made
between non-financial reporting, financial value, and the sustainable worth of the
entity .”106
SASB’s Conceptual Framework defines sustainability accounting as the
measurement, management, and reporting of corporate activities that maintain
or enhance the ability of the company to create value over the long term .107 This
includes activities that involve human, social, and environmental capital, but also
the impacts of governance, leadership, and innovation on value creation . Although
sustainability accounting metrics may not be expressed in monetary units, the
performance they measure can have a financial impact .
Although not identical, these three notions of sustainability accounting share
a common theme: They all identify a connection between sustainability and a
company’s overall performance—traditionally defined as financial performance .
As such, sustainability accounting is relevant to both financial and managerial
accountants for the purposes of external reporting and internal decision-making .
105 AICPA .org, accessed November 24, 2014 .
106 Institute of Management Accountants, “The Evolution of Accountability,” 2008 .
107 SASB, Conceptual Framework, February 2017 .
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7 .3 . External Reporting
Financial accountants have traditionally explained how a company creates value
and answered investors’ questions with four financial statements: the balance
sheet, the income statement, the statement of cash flows, and the statement of
stockholders’ equity . As those questions evolve, accountants will need additional
tools to answer them .
Although many companies now issue annual sustainability reports, the
information contained in them is aimed at a broad set of stakeholders and is
often immaterial to the reasonable investor .108 Financial accounting, on the other
hand, focuses primarily on the needs of investors and other providers of capital . It
encompasses information about a company’s resources, claims against the company,
and how efficiently and effectively the company’s management and board have used
the company’s resources .109 When reported to the public, that information serves
investors, lenders, and other creditors as they make decisions to provide resources to
the company .
For those groups to make informed decisions, they require more information
than what is captured by financial accounting alone .110 111 A decision to invest in
or provide debt or credit to a corporation reflects an assessment of the likelihood
of the corporation improving the investment, repaying the debt, or remaining
creditworthy—which is to say an assessment of future performance . Financial reports
account for the financial performance in the past or at a certain point in time . They
can include indicators of future performance, but critics of financial reporting often
argue that the financial reports do not generally offer enough information on their
own to make adequate projections of a company’s future performance .112 Financial
analysts and other users of business reporting use financial analysis models to project
future performance . As material sustainability data becomes more readily available,
those financial models are beginning to incorporate the data to help improve
investment decisions and provide a more accurate picture of a company’s current
and future performance .113
Accounting for the sustainability information that influences a company’s ability
to create value in the future is therefore valuable for the same users of financial
accounting data . There is ample research to suggest that select non-financial
information, which may include sustainability information, can serve as a leading
indicator for future financial performance .114 Sustainability factors, particularly a
108 PricewaterhouseCoopers, “Sustainability Goes Mainstream,” May 2014 .
109 FASB, Statement of Financial Accounting Concepts No . 8, 2010, p . 2 .
110 Ibid .
111 Jenkins, Edmund, “The FASB’s Role in Serving the Public: A Response to the Enron Collapse,” p . 2 .
112 American Accounting Association, “Recommendations on Disclosure of Nonfinancial Performance Measures,” 2002 (hereafter “Recommendations on Disclosure”) .
113 UN PRI, “Integrated Analysis: How Investors are Addressing Environmental, Social and Governance Factors in Fundamental Equity Valuation .” February 2013 .
114 American Accounting Association’s Financial Accounting Standards Committee “Comments to the FASB on Nonfinancial Performance Measures,” April 2002, pp . 1-6 .
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company’s future plans, opportunities, risks, and uncertainties, can add context
and perspective to financial reports .115 Investors and other users of financial reports
can therefore make more informed decisions about the company’s ability to create
value in the long-term .116 Moreover, since financial accounting has not developed
techniques and standards to fully capture the difference between market value and
book value,117 sustainability accounting can help account for that uncaptured value .
7 .4 . Internal Decision-Making
A fundamental question facing executives is how to best allocate corporate
resources . Such decisions are typically made on the basis of a formal or informal cost-
benefit analysis . However, when dealing with non-financial resources—things like
human, social, and natural capital—the costs and benefits are difficult to quantify .
Traditional accounting does not treat these things as assets, even though they
undeniably represent sources of future benefits .
“You can’t manage what you can’t measure” is a timeworn business axiom—
largely because it contains at least a kernel of truth . However, measurements don’t
necessarily need to be expressed in fungible units of financial currency .
Managerial accounting helps companies measure both financial and non-
financial resources in order to manage those resources and deploy them to
maximize performance and/or minimize risk . Sustainability accounting metrics can
enhance or be incorporated into managerial accountants’ performance evaluation
systems to promote goal congruence and coordination, communicate expectations,
motivate unit managers, provide feedback to top-level decision-makers, and inform
benchmarking efforts . They can help managers to identify those areas of their
operation that are falling short of expectations, and to focus their attention on what
needs improvement .
Sustainability accounting can provide insight on where resources are being wasted
and how a company can further improve its operational efficiency . Also, it may
help managerial accountants develop further insight into cost drivers and create
more robust activity-based costing analyses . And because they’re tied to specific
value impacts, they fit neatly into a balanced scorecard approach to performance
evaluation .
In addition to offering insight on day-to-day operational performance, non-
financial measures can also help managerial accountants align a company’s activities
with its key strategic objectives and provide support for the identification or
exploration of growth opportunities .
Managerial accountants’ focus on performance management and corporate
strategy parallels sustainability accounting’s objective to draw the link between
115 “Recommendations on Disclosure,” p . 360 .
116 AICPA Special Committee on Financial Reporting, “Meeting the Information Needs of Investors and Creditors,” 1991 .
117 Institute of Management Accountants, “The Evolution of Accountability,” 2008, p . 11 .
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today’s performance and tomorrow’s ability to create value . A 2008 IMA report
(The Evolution of Accountability: Sustainability Reporting for Accountants) explains:
“The management accountant who fails to identify the factors contributing to the
sustainability of the organization is not providing management with a full picture
of the organization’s value or of the breadth of risks that need to be addressed
in maintaining and enhancing the organization’s value .” The role of sustainability
accounting in value creation will be discussed in Part III: Using SASB Standards .
7 .5 . Current Initiatives
One of the more prominent organizations for sustainability reporting is the
Global Reporting Initiative (“GRI”) . Since 2000, GRI has offered a framework for
organizations to engage in a multi-stakeholder process to identify, and then report
on, the company’s significant economic, environmental, social, and governance
aspects as well as the aspects that substantively influence the assessment and
decisions of stakeholders .118 The organization—which could be a company,
a governmental institution, or an NGO, among others—determines who its
stakeholders are, which could include those who have invested in the organization
or those who have other relationships to the organization, such as employees,
customers, or civil society .119 The GRI introduced a set of standards in 2017, including
three universal standards applicable to all organizations and a series of topic-specific
standards to report information on economic, environmental, and social impacts .
The standards are not specific to a given country, industry, or sector, but the GRI has
provided supplemental guidance for a limited number of sectors .
Another prominent organization is the International Integrated Reporting Council
(“IIRC”), which provides a principles-based framework for companies to create an
integrated report . It defines this framework as a “concise communication about how
an organization’s strategy, governance, performance and prospects, in the context
of its external environment, lead to the creation of value over the short, medium
and long term .”120 Integrated Reporting <IR>, from the perspective of the IIRC,
is primarily conducted by private-sector, for-profit companies by adhering to the
Guiding Principles and Content Elements of the International <IR> Framework . The
<IR> Framework is not specific to a given country, industry, or sector . It does not
specify key performance indicators (“KPIs”) or measurement methods . It is up to the
company to determine what to disclose and how .
The CDP (formerly Carbon Disclosure Project) is a global system for companies
and cities to measure and disclose carbon emissions, water use, deforestation, and
supply chain data . The data are then published to help investors better understand and
118 GRI, “G4 Sustainability Reporting Guidelines” .
119 Ibid .
120 IIRC website . Accessed February 20, 2015 .
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mitigate risks in their investment portfolios based on those topics .121 One special project
of CDP—the Climate Disclosure Standards Board (CDSB)—has developed the Climate
Change Reporting Framework . The framework helps companies report greenhouse gas
emissions and, according to the company’s management, the extent to which climate
change will affect the company’s strategy and operational performance .122
The UN Global Compact is a participant-based policy initiative, including
businesses and other participants, such as academics, public sector organizations,
and cities .123 Business participants in the UN Global Compact commit to
incorporating the Global Compact Ten Principles into their strategies and day-
to-day operations . In addition, they issue an annual Communication on Progress
highlighting their progress in incorporating the Ten Principles, which relate to human
rights, labor issues, the environment, and anticorruption . Business participants
receive a variety of resources to support their work and advance sustainable business
models and markets .
The Financial Stability Board, an international body established by the G20,
formed the Task Force on Climate-Related Financial Disclosures (TCFD) in 2015
to develop recommendations for climate-related disclosures . With a range of
stakeholders and a global remit, the TCFD recommendations, which were released
in December 2016, reach beyond current disclosure requirements and emphasize
forward-looking scenario analysis—for example describing the potential impact of
an international effort to limit the global increase in temperature to 2°C above pre-
industrial levels .
Finally, SASB is an independent nonprofit organization that develops sustainability
accounting standards to help U .S . publicly listed companies disclose material
121 CDP website, “About Us .” Accessed November 2, 2014 .
122 CDSB, “Climate Change Reporting Framework—Edition 1 .1,” October 2012 .
123 United Nations website, “Overview of the UN Global Compact .” Accessed November 2, 2014 .
SASB GRI IIRC CDSBUN Global Compact
TCFD
Subject Sustainability Sustainability Non-financial & financial
Climate change Non-financial Climate change
Type of guidance Standards Standards Framework Framework Principles Framework
Scope Industry-specific General General General General General and sector-specific
Target Audience Investors All stakeholders Investors Investors All stakeholders Investors, lenders, and insurance underwriters
Initiatives Related to Sustainability Reporting
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information in SEC filings in a way that is decision-useful for investors . The SASB
standards address sustainability issues with industry-specific disclosure topics, and
include both accounting metrics and disclosure guidance . SASB’s standards and its
standard-setting process will be covered in more detail in Part II: Understanding
SASB Standards .
Although many initiatives exist, SASB was established to fill a void in the
sustainability reporting landscape: To provide investors with accessible, decision-
useful information regarding a company’s performance on the small handful of
industry-specific sustainability topics that are reasonably likely to have material
impacts on its financial condition or operating performance . Some of the challenges
investors have faced will be discussed in the following sections .
SECTION REVIEW
In this section, the following Learning Objectives were covered:
• Describe the trends driving demand for the disclosure of sustainability
information .
• Explain why sustainability information is increasingly important to investors
for investment decisions (e .g ., reduced ratio of net assets to enterprise value,
increased risks and opportunities) .
• Discuss the challenges that investors face in integrating sustainability
information into investment decisions (e .g ., information is available, but
often its quality varies, it is not comparable, and/or it lacks obvious financial
implications) .
• Distinguish SASB’s approach (sustainability accounting) from other approaches
to sustainability tracking and reporting .
• Discuss the role of SASB standards in helping companies develop strategies for
long-term value creation, and benchmark and improve operational
performance .
? Questions to consider
√ In what ways did prominent financial accounting organizations suggest that
non-financial information could make business reporting more meaningful?
√ In what ways can sustainability information be useful to decision-makers
inside and outside of an organization?
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59
Although sustainability disclosure has proliferated with the rise of voluntary
corporate social responsibility (CSR) and sustainability reports, creating a greater
level of transparency on a broad set of sustainability issues, investors and companies
continue to face challenges . In particular, investors have been faced with disclosure
overload—a preponderance of sustainability data that is generally neither material
nor decision-useful . Meanwhile, these reports present potential legal pitfalls
for issuers . As a result, many initiatives have begun to move toward integrating
sustainability reporting with existing financial reporting processes (and standardizing
material disclosures with comparable metrics) to better serve the needs of investors .
8 .1 . Voluntary Sustainability Reporting
Despite the lack of mandated disclosure requirements in most countries, an
increasing number of companies have begun reporting on sustainability issues
in voluntary, stand-alone reports on corporate social responsibility (CSR) or
sustainability . Indeed, as of 2014, 71 percent of the top 100 companies in 41
countries reported on sustainability factors and 124 95 percent of the largest 250
124 UN PRI website . Accessed August 14, 2014 .
8 THE STATE OF SUSTAINABILITY DISCLOSURE
Learning Objectives Covered in This Section
Discuss the challenges that investors face in integrating sustainability
information into investment decisions (e .g ., information is available, but
often its quality varies, it is not comparable, and/or it lacks obvious financial
implications) .
Distinguish SASB’s approach (sustainability accounting) from other approaches
to sustainability tracking and reporting .
Discuss the implications of making statements about materiality outside of SEC
filings .
Describe the trends driving demand for the disclosure of sustainability
information .
PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS
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companies in the world produced a sustainability report .125 According to the
Corporate Register, the largest repository for CSR/sustainability reports, more than
85,000 reports have been issued by nearly 14,000 companies .
It is not enough to simply report sustainability information . The information needs
to be in a place that is convenient to investors, in a format that is useful for them,
and relevant for investment decision-making . The timing of the reporting is also
important because the CSR report and Form 10-K tend to be issued months apart
and therefore impact investors’ ability to incorporate the information . These and
other reasons help explain why, in a 2015 survey of investment professionals, 61
percent of respondents thought that public companies should be required to report
annually “on a cohesive set of sustainability indicators in accordance with the most
up-to-date reporting framework .”126
8 .2 . Disclosure Overload
One of the major issues with current sustainability/non-financial disclosures is
the sheer volume of reported information . Comprehensive CSR and sustainability
reports can exceed 200 pages . Due to the lack of clear, uniform disclosure standards,
companies have been disclosing enormous amounts of information that may be
immaterial to and lacks decision-usefulness for the reasonable investor . Indeed, much
of the information contained in these reports lacks clear financial implications .
This has led to the increasing use of the phrase “information overload” in regard
to companies’ disclosure of sustainability data and the disclosure of information in
general . “Information overload” is described by the U .S . Chamber of Commerce as
“a phenomenon in which ever-increasing amounts of disclosure make it difficult for
an investor to wade through the volume of information she receives to ferret out
the information that is most relevant .”127 The Chamber of Commerce states that the
issue of information overload must be addressed to promote transparency and the
interests of all investors and American business .
This view aligns with the sentiments of the authors of Disclosure Overload and
the UK’s Financial Reporting Council’s report on Cutting Clutter: Combating Clutter in Annual Reports, both of which state the need for decreasing redundancies
and immaterial issues in reports . The sentiment is echoed by the IASB’s broad-
based disclosure initiative, which reiterates the need for addressing materiality in
reporting . The lack of focus on material issues is evident in the fact that “more
than 500 sustainability issues are currently tracked by dozens of entities, relying on
2,000 indicators,” which “leads to confusion in the marketplace about quality and
credibility .”128
125 EY, “Tomorrow’s Investment Rules,” 2014 .
126 CFA Institute, ESG Survey (June 2015) .
127 US Chamber of Commerce, Center for Capital Market Competitiveness, “Corporate Disclosure Effectiveness: Ensuring a Balanced System that Informs and Protects Investors and Facilitates Capital Formation,” 2014 .
128 AccountAbility, “Redefining Materiality II: Why it Matters, Who’s Involved, and What It Means for Corporate Leaders and Boards,” 2013 .
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Perhaps even more concerning for
investors is the positive bias of these
reports . A 2013 study of highly rated
sustainability reports revealed that 90
percent of known negative events were
not reported by the company .129 This
phenomenon is sometimes referred to as
“greenwashing .”
Meanwhile, corporations have their
own concerns about the proliferation of
sustainability information . In addition to
sustainability reports, which are costly
to produce, companies frequently field
requests for sustainability information
in the form of broadly focused surveys
and questionnaires from investors,
data aggregators, indices, and ratings
agencies, creating a significant burden
on the preparer with limited benefit to
its shareholders . At GE, responding to over 650 ESG questionnaires involved more
than 75 employees and took several months .130 In a 2016 IMA webinar survey of
100 members, 7 .5 percent of respondents reported completing more than 250 ESG
surveys per year . This practice can also contribute to information asymmetry in the
market, potentially raising red flags with regulators in the context of Regulation FD,
which , which prohibits companies from selectively disclosing material nonpublic
information to analysts, institutional investors, and others without concurrently
making widespread public disclosure .131
As the SEC has stated, “as a practical matter, it is impossible to provide every
item of information that might be of interest to some investor in making investment
and voting decisions .”132 Indeed, a fine line separates appropriate transparency from
disclosure overload, and the concept of materiality defines that line .
8 .3 . Securities Law, Not Semantics
To complicate matters, many companies are using different definitions of
“materiality” in their sustainability reports and SEC filings . In fact, on average, just 29
percent of the issues deemed “material” in a company’s sustainability report are also
129 Olivier Boiral, Sustainability Reports as Simulacra? A Counter-Account of A and A+ GRI Reports, ACCOUNTING, AUDITING & ACCOUNTABILITY JOURNAL, Vol . 26, No . 7, p . 1036–71 (2013), http://www .emeraldinsight .com/doi/pdfplus/10 .1108/AAAJ-04-2012-00998 .
130 Klee, Ann, “Ratings Good for the Environment?” Environmental Forum (May/June 2015) .
131 17 C .F .R . 243 .100 -243 .103 .
132 Securities and Exchange Commission, Securities Act Release No . 5627 (October 14, 1975) .
PROPRIETARY DEFINITIONS OF MATERIALITY
Proprietary definitions of materiality, such as that used by GRI, broaden the concept to capture information that is not as relevant to investors . GRI’s definition, for example, is as follows:
The Materiality Principle states that the report should cover Aspects that: reflect the organization’s significant economic, environmental and social impacts; or substantively influence the assessments and decisions of stakeholders .
Source: G4 Sustainability Reporting Guidelines: Frequently Asked Questions. p.11. Last updated October 27, 2014.
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disclosed in its mandatory filings .133 This discrepancy is more than semantics—it’s
risky business for companies .
SEC registrants who publish a sustainability report using a proprietary definition
of “materiality”—such as the definitions offered by GRI, IIRC, and others—may be
exposed to legal liability . Consider the definition the U .S . Supreme Court adopted in
TSC v. Northway (discussed in greater detail earlier): Information is material “if there
is a substantial likelihood that the omitted fact would have significantly altered the
total mix of information available to the reasonable investor .”
The differences in the Supreme Court definition and proprietary definitions fall
into three categories: whose perspective is considered, what kinds of decisions
are affected, and the threshold for disclosure . The securities law definition takes
the perspective of the reasonable investor . Information is material if it is important
to investors in their decisions to buy, hold, or sell a security, or how to vote on a
corporate matter . The threshold for disclosure is whether the information would have
assumed significance in the deliberations of the reasonable investor .
By contrast, proprietary definitions of materiality often consider what matters to
a broad range of stakeholders, including local communities, customers, employees,
and interest groups . While the decisions and assessments affected are not specifically
identified, they might include the company’s attractiveness as an employer, or how
prospective customers view the company .
For SEC registrants, their use of a definition of materiality that deviates from the
securities law definition entails risks, because this definition is among the elements
that can trigger legal liability in Rule 10b-5 lawsuits .134
This risk of using more than one more definition of materiality in the U .S . can be
seen in the following situation . A company publishes a sustainability report following
a proprietary definition of materiality . To do so, it completes an extensive stakeholder
engagement process, asking stakeholders what is relevant or important to them . The
company compiles the results, creates the report, and publishes it . At the same time,
the company discloses some information on sustainability in its Form 10-K filing .
However, that information is not the same as, is described in a different way from,
or conflicts with, what it reported in its sustainability report . Shareholders could
begin to wonder whether the statements made in the sustainability report, on issues
that they think are important to them, are materially false and misleading . Since the
company has called the contents of the sustainability report material, shareholders
may ask why there are discrepancies between Form 10-K and the sustainability
report .
Companies can ensure compliance with SEC disclosure obligations, and reduce
potential legal risks, by taking the time to distinguish between material and
immaterial sustainability information and ensuring the description of that information
133 WBCSD, Sustainability and Enterprise Risk Management: The First Step Towards Integration (January 2017) .
134 Basic v . Levinson, 485 U .S . 224 (1988) .
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is appropriate and consistent across all corporate reporting channels . Writing in
the American Bar Association’s Business Law Today, Nancy Cleveland, David Lynn,
and Stephen Pike explained that information that is relevant to stakeholders other
than investors should be labeled as “significant,” “important,” or “key,” and not
“material,” if the information does not satisfy the definition outlined in U .S . federal
securities laws .
8 .4 . Sustainability Ratings
As a result of the increase in sustainability data, there has been a similar increase
in the number of sustainability ratings . According to a 2012 International Finance
Corporation report (Redefining Value: The Future of Corporate Sustainability Ratings), there are currently more than 100 organizations—a mix of independent
ratings agencies and media enterprises such as Newsweek and CRO Magazine—
that provide sustainability ratings . Some of these organizations (such as MSCI,
Sustainalytics, GIIRS, FTSE4Good, and Vigeo Eiris) rate companies across a full range
of sustainability issues . Others (including CDP and GMI), meanwhile, focus on specific
issues such as governance, climate, and other environmental issues .
Ideally, ratings give companies incentives to compete on the performance of one
or more aspects of sustainability . When ratings are transparent and comparable for
companies across industries, investors can apply ratings to portfolio management,
which further incentivizes companies to outperform their peers .
However, the fragmented and diverse group of sustainability ratings makes it
difficult for investors to rely on them . There is a lack of uniformity and consistency
among the ratings . But more importantly, the information they rely on may or
may not be material . As a result, a single company can be (and often is) scored at
opposite ends of the spectrum, depending on the ratings system .135 This only adds to
the confusion and lack of clarity about the potential value of material sustainability
information .
135 Ibid .
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8 .5 . Benefits of Improved Sustainability Disclosure
Despite the absence of decision-useful
standards, some companies and investors
have already been able to take advantage
of some of the benefits .
For companies:136 137 138
• Opportunity for competitive
advantage
• Improved access to capital
• Enhanced reputation
• Increased efficiency and waste
reduction
• Improved employee loyalty
• Lower cost of capital
• Expanded revenue growth
• Improved risk management
For investors:139 140
• Increased transparency
• More effective allocation of capital
• Improved market stability
• Greater market liquidity
However, the benefits of sustainability reporting cannot be fully realized without
standardized, comparable sustainability metrics that allow corporations, investors,
and others to better manage performance and make resource allocation decisions
based on material, non-financial information . Part II will explore how SASB standards
are designed to help achieve this goal .
136 COSO, “Demystifying Sustainability Risk,” May 2013 .
137 EY and Boston College Center for Corporate Citizenship, “Value of Sustainability Reporting,” 2013 .
138 UNEP Finance Initiative, “Sustainability Management and Reporting,” December 2006 .
139 Chatham House, “The Future of Sustainability Reporting,” January 2012 .
140 Climate Disclosure Standards Board, “Benefits of CDSB’s Work,” 2013 .
“You have to compare among peers and among the industry segment itself to make it meaningful . We’re all releasing numbers and we’re all talking more and more about sustainability, but very often it is hard to get that tangible comparison and know what the benchmark is, or even how that relates to somebody else’s benchmark .”
— Hyatt Hotels Corp. Chief Financial Officer Gebhard Rainer
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SECTION REVIEW
In this section, the following Learning Objectives were covered:
• Discuss the challenges that investors face in integrating sustainability
information into investment decisions (e .g ., information is available, but
often its quality varies, it is not comparable, and/or it lacks obvious financial
implications) .
• Distinguish SASB’s approach (sustainability accounting) from other approaches
to sustainability tracking and reporting .
• Discuss the implications of making statements about “materiality” outside of
SEC filings .
• Describe the trends driving demand for the disclosure of sustainability
information .
? Questions to consider
√ Why does the “disclosure overload” of immaterial sustainability information
actually make it more difficult to incorporate sustainability information into
investment analysis?
√ Why is it important for companies to consistently label material and
immaterial information across all reporting channels?
UNDERSTANDING SASB STANDARDS
PART II
© SUSTAINABILITY ACCOUNTING STANDARDS BOARD 67
Globally, and throughout history,
standards have contributed to improved
economic function . Going as far back
as some of the first standards (standard
measurements for weight and volume
in the barter economy of ancient Egypt)
accepted standards have improved trade
and valuation . Standards contribute to
improved economic efficiency by reducing
variety and improving compatibility, which fosters markets for materials, products,
and information . Standards also reduce information asymmetry between buyers
and producers—a pound is a pound is a pound—which helps limit market failures .
Furthermore, standards tend to promote trade by reducing barriers to access new
markets . A gram in France is the same as a gram in Germany, so you don’t have to
reconfigure your supply chain or pricing structure .
9THE IMPORTANCE OF STANDARDS
Learning Objectives Covered in This Section
Discuss the challenges that investors face in integrating sustainability
information into investment decisions (e .g ., information is available, but
often its quality varies, it is not comparable, and/or it lacks obvious financial
implications) .
Distinguish SASB’s approach (sustainability accounting) from other approaches
to sustainability tracking and reporting .
Describe the current state of disclosure of sustainability topics in the 10-K .
“[Without standards] there would be no consistency, no comparability, little transparency and a lack of trust in the information, which would lead to higher costs of capital and increased risks for investors .”
— Edmund L. Jenkins, FASB Chairman
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9 .1 . Financial and Non-financial Accounting
Accounting standards are no exception . They exist to ensure that the decisions
facing accountants, managers, investors, regulators, taxpayers, reporters, and other
users of financial information can be made in an informed, reasonable way . They
create comparability, enforce transparency, and emphasize relevance .
However, although the FASB has been establishing and improving U .S . GAAP
since 1973 to create officially recognized standards for financial accounting, no
such standards had been developed for non-financial accounting until recently . That
includes reporting of sustainability information .
9 .2 . State of Sustainability Disclosure in SEC Filings
SASB’s research shows that, in their SEC filings, 69 percent of companies are
already addressing at least three-quarters of the sustainability topics included in their
industry’s SASB standard, and 38 percent are already providing disclosure on every
SASB topic . However, this information is rarely disclosed in a decision-useful way .
The actionable value of a statement tends to increase as it becomes more specific .
However, more than half of these disclosures contain boilerplate language: broad,
nonspecific wording that does not describe the realities of the registrant’s particular
operating context . Rather, it could apply to multiple companies and/or a variety of
industries . Meanwhile, less than 24 percent of these sustainability disclosures use
metrics .
Even when companies disclose specific sustainability information, it may not be
useful to investors if it is not comparable to information from other companies,
especially industry peers . Indeed, in the absence of standardized data about material
sustainability factors, all stakeholders—including businesses, investors, and others—
are challenged to make informed decisions in a changing world . Research shows
that when a topic is not effectively disclosed using metrics that can establish a level
of performance with respect to peers, but instead is buried underneath boilerplate
language that is not decision-useful, analysts have less certainty about its impact on
valuation and therefore its risk to shareholders .141
141 Ole-Kristian Hope, Danqi Hu, and Hai Lu, The Benefits of Specific Risk- Factor Disclosures (working paper, University of Toronto, Feb . 26, 2016) .
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9/18/19 © SASB1
Current State of Disclosure on SASB Topics
Source: SASB analysis performed for FY 2016 using the latest annual SEC Filings (i.e. Form 10-Ks and 20-Fs) for the top companies, by revenue, per SICS industry (maximum of 10 companies).
Health Care
Financials
Technology & Communications
Extractives & Minerals Processing
Transportation
Services
Resource Transformation
Food & Beverage
Consumer Goods
Renewable Resources & Alternative Energy
Infrastructure
Current State of Sustainability Disclosure
Source : SASB
Sector Resource Transformation
Industry Chemicals
Topic Product Design for Use-phase Efficiency
BoilerplateCompany-Tailored
Narrative Metrics
“ New Business Opportunities . We seek to pursue new business opportunities by developing new and specialized products and technologies … We are seeking a strong position in the technological development of chemicals from renewable resources and/or using production processes that generate fewer emissions by investing in research, development and technological innovation .”
“ On April 15, 2015, the Company announced its 2025 Sustainability Goals, the third set of sustainability-related goals since 1995 . The 2025 Sustainability Goals include aggressive sustainability targets designed to develop breakthrough product innovations, positively impacts the lives of one billion people and deliver $1 billion in cost savings or new cash flow for the Company by valuing nature in business decisions .”
“ Sustainable Solutions net sales accounted for about 2 percent of the company’s total consolidated net sales for the years ended December 31, 2105, 2014 and 2013, respectively .”
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SECTION REVIEW
In this section, the following Learning Objectives were covered:
• Discuss the challenges that investors face in integrating sustainability
information into investment decisions (e .g ., information is available, but
often its quality varies, it is not comparable, and/or it lacks obvious financial
implications) .
• Distinguish SASB’s approach (sustainability accounting) from other approaches
to sustainability tracking and reporting .
• Describe the current state of disclosure of sustainability topics in the 10-K .
? Questions to consider
√ How do standards benefit companies, investors, and other users of disclosed
information?
√ How does the percentage of boilerplate disclosures compare between the
Technology & Communications sector and the Extractives & Minerals Process-
ing sector? The percentage of metrics-based disclosures?
© SUSTAINABILITY ACCOUNTING STANDARDS BOARD 71
To address the market need for standardized disclosure of material sustainability
information, SASB began developing sustainability accounting standards in 2012 and
has since issued standards for 79 industries in 11 sectors .
A unique set of characteristics make SASB standards stand apart from other
sustainability reporting initiatives . SASB standards are designed to:
1 . Focus on the U .S . capital markets;
2 . Surface sustainability information likely to be material;
3 . Yield decision-useful data;
4 . Be cost-effective for corporate issuers;
5 . Identify industry-specific disclosure topics .
By emphasizing these characteristics, SASB standards are intended for easy
integration into companies’ existing processes for identifying, managing, and
reporting on the sustainability factors that impact their performance .
10 .1 . U .S . Capital Markets
SASB standards are uniquely focused on U .S . capital markets . They are compatible
with U .S . securities laws, and help companies comply with existing regulation
(Regulation S-K) to make complete, useful disclosures of material information in
MD&A section of Form 10-K (or 20-F or 40-F) . SASB standards follow the U .S .
Supreme Court’s definition of material information, which has a singular and
10 INTRODUCTION TO SASB STANDARDS
Learning Objectives Covered in This Section
Distinguish SASB’s approach (sustainability accounting) from other approaches
to sustainability tracking and reporting .
Explain the organization of SICSTM and the implications of a sustainability-based
industry classification .
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unwavering focus on the reasonable investor’s decision to buy, sell, or hold a
security .
Although the Standards are intended for use in filings made with the SEC, it
is important to note that companies from all over the world are subject to U .S .
disclosure requirements . For example, foreign-domiciled companies represent nearly
one-third—32 .4 percent—of the aggregate market capitalization of companies listed
on the NYSE, along with 8 .9 percent on NASDAQ .142
10 .2 . Likely to Be Material
In order to standardize disclosure on the most crucial sustainability issues, SASB
surfaces those environmental, social, and governance topics that are reasonably likely
to have material impacts on the financial condition or operating performance of
companies in a given industry . SASB has designed a standards-development process
to achieve this objective by focusing on evidence-based research, market-informed
vetting, quantitative back-testing, and independent oversight—all guided by the legal
concept of materiality, a high threshold .
This helps to address the problem of “disclosure overload” (covered in Part I),
raising the signal-to-noise ratio for investors . It also helps to surface information that
is useful for management, while satisfying the disclosure requirements of Regulation
S-K and improving cost-effectiveness for issuers .
Although SASB standards identify the sustainability-related disclosure topics
most likely to constitute material information for companies within a given industry,
the final determination of materiality is the responsibility of the corporation . Each
company is ultimately responsible for determining which information it will include in
its Form 10-K or 20-F and other periodic SEC filings .
10 .3 . Decision-Useful
For sustainability disclosures to be decision-useful to the reasonable investor,
they need to be representationally fair, useful, applicable, comparable, complete,
verifiable, aligned, neutral, and distributive .
SASB standards are designed to meet all of these criteria by helping issuers
to regularly report accurate, objective information that allows investors to better
understand how today’s management decisions affect tomorrow’s performance and
provide them with the ability to make apples-to-apples comparisons among peer
companies .
142 Data from Bloomberg Professional Service, accessed May 5, 2017 .
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10 .4 . Cost-Effective
By incorporating the U .S . Supreme Court’s high bar for separating material from
immaterial information, SASB’s standards development process is designed to surface
the minimum set of disclosure topics that are likely to constitute material information
for companies in a given industry . (The standards have a median of five topics and
13 metrics per industry, 78 percent of which are quantitative .) Furthermore, when
selecting or developing related metrics for each disclosure topic, SASB considers
whether the data are already being collected by most companies or could be
collected in a timely manner and at a reasonable cost .
This approach helps make SASB standards less costly to implement than the more
comprehensive frameworks that may be used in sustainability reports aimed at a
broader set of stakeholders (i .e . other than the reasonable investor) .
10 .5 . Industry-Specific
Different sustainability topics affect different industries in different ways . Even
those issues that affect all industries have varying impacts . Although climate
change touches nearly every industry in some way, a single metric applied across all
industries can’t capture meaningful information about event readiness or disease
migration in Health Care Delivery, stranded assets in fossil fuel-based industries, or
the energy intensity of data centers in Software & IT Services .
Because SASB standards are industry-specific, investors can use them to inform
the sector-allocation strategies they use for portfolio construction . Meanwhile,
companies can use them to benchmark performance against peers .
10 .5 .1 SICS™
The most commonly used industry classification systems, such as GICS® and
ICB, use financial concepts, such as sources of revenue, to assign companies
to a given industry or sector . These systems often result in categorizations that
are either too granular or not granular enough for understanding their shared
sustainability challenges and opportunities . In order to group industries based on
their sustainability impacts, SASB developed the Sustainable Industry Classification
System™ (SICS™) .
Where other traditional classification systems take either a supply-side,
production-oriented approach or a demand-side, market-oriented approach to
classifying companies, SICS use a methodology focused on impacts, which can
have implications for either side . Thus, it builds on and complements traditional
classification systems by grouping issuers into sectors and industries in accordance
with a fundamental view of their business model, their resource intensity and
sustainability impacts, and their sustainability innovation potential .
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Using a sustainability-based industry classification helps SASB to surface the
disclosure topics that are likely to impact all or most companies in an industry . For
example, GICS® identifies five industries related to electronics hardware, including
communications equipment, computers and peripherals, and office electronics .
Although these industries may differ in financial characteristics, they produce similar
products and face similar regulatory environments from a sustainability perspective .
Separating them would therefore create overlap and repetition between the industry
sustainability accounting standards . With SICS™, these types of companies all
belong to one industry—Hardware . Conversely, GICS® identifies the Oil, Gas and
Consumable Fuels industry, which includes oil and gas exploration companies,
as well as oil and gas refining and marketing companies . In sustainability terms,
however, these industries are different, so investors are likely to benefit from
different disclosures .
Within a SICS™ industry, companies
tend to have similar business models, face
similar growth and innovation opportunities,
operate in the same legal environment,
rely on similar resources, and produce
comparable products and services, as well
as comparable impacts on society and the
environment .143 Just as the price-to-earnings
ratio is assessed in the industry context (since
different industries have different norms for
this ratio), sustainability data, such as carbon
emissions or employee safety, are best considered in an industry context . Industry-
level disclosure topics offer a balance between comparability and materiality .
143 Eccles, Robert G ., Michael P . Krzus, Jean Rogers, and George Serafeim, “The Need for Sector-Specific Materiality and Sustainability Reporting Standards,” JACF 2012 (24:2) p . 71 .
SICS LOOK-UP TOOL
Companies looking to benchmark performance and investors seeking to integrate sustainability considerations into their investment decisions can find the primary SICS™ industry of almost any U .S .-listed company by entering its ticker symbol into the SICS™ look-up tool on the SASB website .
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SECTION REVIEW
In this section, the following Learning Objectives were covered:
• Distinguish SASB’s approach (sustainability accounting) from other approaches
to sustainability tracking and reporting .
• Explain the organization of SICSTM and the implications of a sustainability-
based industry classification .
? Questions to consider
√ What five characteristics help distinguish SASB’s standards from other
sustainability reporting initiatives?
√ What are the commonalities that unite companies within a SICS™ industry?
© SUSTAINABILITY ACCOUNTING STANDARDS BOARD 76
To identify its disclosure topics—those sustainability factors that are likely to
have material impacts for companies in a given industry—SASB has designed
a rigorous, evidence-based, multi-stakeholder process, with the U .S . Supreme
Court’s definition of materiality as its focus . In addition to helping produce quality
outcomes—disclosure topics and metrics that yield material, decision-useful
information in a cost-effective way—this particular emphasis also makes SASB’s
process an appropriate one for companies to adapt and use when making their
own materiality assessments .
11IDENTIFYING INDUSTRY- LEVEL DISCLOSURE TOPICS
Learning Objectives Covered in This Section
Explain the evidence basis that supports the identification of SASB disclosure
topics .
Explain the stakeholder consensus that supports the identification of SASB
disclosure topics .
Distinguish SASB’s approach (sustainability accounting) from other approaches
to sustainability tracking and reporting .
Discuss the Supreme Court definition of materiality and the implications of this
definition .
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SASB Research Methodology
Assessing materiality Testing the reasonableness of the materiality assessment
Surfacing Issues
SASB identifies topics in each industry that would be of interest to a reasonable investor and:
› Pose direct financial risks
› Are or may be regulated in the near future
› Are becoming industry norms and drive competitive best practices
› Are raised by investors and other stakeholders and threaten brands or license to operate
› Represent opportunities for innovation and growth
Analysts conduct in-depth research to gather evidence on whether the topic affects the company’s financial condition or operating performance. Analysts then map the sustainability topic to a specific impact on financial fundamentals:
› Revenue Impacts
› Operating Costs
› Asset Value
› Impact on Liabilities and/or
› Financing Costs
Analysts conduct valuation analysis, such as Discounted Cash Flow (DCF)modeling across a five-year time horizon, to assess the probability and magnitude of a potential financial impact for the top and bottom deciles of performance on sustainability factors.
SASB hosts industry working groups with issuers, corporate experts, investors, and market intermediaries to vet the evidence and assess consensus regarding the materiality of the topic, with generally a 75% approval benchmark for inclusion in the standards.
SASB evaluates the current state of disclosure in mandatory filings (Forms 10-K and 20-F) for the topics in SASB standards to verify that companies are already making disclosures and to assess the quality of disclosure on material topics.
Analysts perform quantitative analysis to assess the effect on price values. With better data, back-testing can be conducted in the future.
Materiality Assessment
Vetting Verification ValidationCharacterizing Nature of
Financial Impact
1 2 3 4 5 6
Although SASB does not prescribe what constitutes a material disclosure for
any company or industry, its process serves to establish a basis for standard-setting
that is aligned with existing U .S . securities law . This rigorous, dynamic approach is
rooted in evidence, shaped by the market, and subject to quantitative testing and
qualitative vetting . Key steps in this process are discussed below .
11 .1 . The Reasonable Investor Revisited
As the SEC has pointed out, “the federal securities laws are dynamic and respond
to changing circumstances .”144 Therefore, as changes occur in the broader economy,
the information markets need to efficiently allocate capital may also change in ways
that may require, public companies to adjust their disclosures . As mentioned in
Part I, the Court’s definition of materiality is fundamentally linked to the reasonable
investor, the notion of which evolves over time, based on the “ordinary experience
and understanding” of society’s citizens . Therefore, the concept of materiality
evolves along with the “reasonable investor,” and in so doing “provides a framework
for addressing new issues and shedding issues whose importance has waned .”145
144 Statement of the Commission Regarding Disclosure of the Year 2000 Issues, Securities and Exchange Commission (August 4, 1998) .
145 The Materiality Standard for Public Company Disclosure: Maintain What Works, Business Roundtable (October 2015) .
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As the trends outlined in Part I reveal, the reasonable investor is increasingly
interested in more than just a company’s financial information, to the extent that
non-financial information can impact the total mix of information . Non-financial
information can cover topics including brand loyalty or intellectual property as well
as sustainability topics . SASB assesses evidence of investor interest and financial
impact to gauge whether a reasonable investor might consider information about
how the company manages a particular sustainability topic as part of the total mix of
information .
It is important to note that the total mix of information is not equivalent to a
comprehensive set of information . The Supreme Court-defined “total mix” concept
is intended to assist in determining the materiality of individual disclosures within the
context of all company information that is available to the capital markets . “Total
mix” does not imply that investors are entitled to the totality of information that
could be made available, but rather asks what impact a given piece of information
has on the bigger picture from the reasonable investor’s point of view . Simply adding
content—of any amount—to the “total mix” does not necessarily “significantly
alter” it . At the same time, even a seemingly small or statistically insignificant fact is
considered material when it is decision-useful to the reasonable investor .
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11 .2 . Evidence-Based Research
SASB’s process begins with a universe of sustainability issues . The initial set of
issues is comprehensive, including factors related to each of SASB’s five sustainability
dimensions: Environment, Social Capital, Human Capital, Business Model &
Innovation, and Leadership & Governance .
This comprehensive list (next page) is filtered down through a series of steps
designed to identify those issues likely to have material impacts on companies in an
industry . In the earliest of those steps, SASB’s research team examines two types of
evidence: evidence of interest and evidence of financial impact . This is to determine
a minimum set of disclosure topics for each industry .
UNIVERSE OF ESG ISSUES
SUSTAINABILITY ISSUES
Industry Research
Market Input
Evidence VettingStandards Board Review
Public Comment
Revisions & the SASB Approval
SASB StandardAverage of
6 topics and 13 metrics
Standards maintenance
Ongoing
Rigorous Process Drives SASB StandardsStandards for each industry are rooted in evidence and shaped by market input
Industry Working Groups and Issuer, Investor Consultation
Evidence of Financial Impacts
(Exposure Drafts)90 days
11/13/17 © SASB1
When determining the sustainability information that is material to their business,
companies can benefit from using the industry-specific SASB standards as a starting
point, and then consider evidence of interest and evidence of financial impact .
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DIMENSIONS GENERAL TOPIC
EnvironmentGreenhous Gas Emissions
Air Quality
Energy Management
Water & Wastewater Management
Waste & Hazardous Materials Management
Ecological Impacts
Social CapitalHuman Rights & Community Relations
Customer Privacy
Data Security
Access & Affordability
Product Quality & Safety
Customer Welfare
Selling Practices & Product Labeling
Human CapitalLabor Practices
Employee Health & Safety
Employee Engagement, Diversity & Inclusion
Business Model & Innovation
Product Design & Lifecycle Management
Business Model Resilience
Supply Chain Management
Materials Sourcing & Efficiency
Physical Impacts of Climate Change
Leadership & Governance
Business Ethics
Competitive Behavior
Management of the Legal & Regulatory Environment
Critical Incident Risk Management
Systemic Risk Management
SASB’s Five Sustainability Dimensions
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11 .2 .1 . Sources of Evidence
In its standards-setting, SASB relies heavily on evidence to ensure that the process
is robust and the outcomes are reliable . The evidence SASB considers is extensive and
screened to ensure it comes from credible sources . It primarily serves to uncover the
disclosure topics that are likely to constitute material information for companies in an
industry .
Typical sources of evidence for SASB’s initial research include, in no particular
order: Forms 10-K, 20-F, 40-F, and other SEC filings; legal news and litigation
reports; shareholder resolutions; corporate sustainability/CSR reports; industry and
academic research reports; sell-side research; investor call transcripts; third-party case
studies; SEC comment letters; media reports; and innovation-related news . Other
sources include: ESG data (such as CDP data and ESG research reports), industry
association websites, government statistics and reports (such as the Department of
Energy, the Occupational Safety and Health Administration, and the Census Bureau),
as well as reports from the prominent accounting, consulting, and research firms .
When assessing the quality of information and sources, SASB considers, as
objectively as possible, the known or perceived level of rigor used by the publication
to check facts and references . It excludes irrelevant or low-quality pieces of evidence
from the standards-development process . SASB publishes the key external evidence
sources for each industry in an industry research brief, which can be accessed with
the SASB Standards Navigator .
11 .2 .2 . Evidence of Interest
SASB’s process for identifying evidence of interest begins with a data-driven,
five-factor test, which represents a reliable and consistent methodology from topic to
topic and industry to industry . The five-factor test aims to objectively and impartially
strike a balance between considering a wide range of potential sustainability topics
with the need to assign relative importance to some topics over others .146 Based
on research from AccountAbility (Redefining Materiality) and from the Initiative
for Responsible Investment at Harvard University, the five-factor test addresses the
following:
1 . Financial impacts and risk
2 . Legal, regulatory, and policy drivers
3 . Industry norms and competitive drivers
4 . Investor/Stakeholder concerns and social trends
5 . Opportunities for innovation
146 Lydenberg, Steve, Jean Rogers, David Wood, “From Transparency to Performance,” Harvard University, Initiative for Responsible Investment, 2010, p . 22 .
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Each factor draws from different
source documents and encompasses
different perspectives that are relevant
to a reasonable investor . The factors
are not equivalent to the total mix
of information, either individually or
collectively, but they objectively point to
elements of the total mix of information .
Each factor involves an algorithm that
searches source documents for keywords
associated with the comprehensive set of
sustainability issues . Although investors
don’t always consult all of the sources,
topics that appear in multiple source
documents are likely to overlap with the topics the reasonable investor is already
considering, or to represent leading topics that are of interest to the reasonable
investor . The aggregate frequency of a keyword, across tens of thousands of source
documents in the five domains, helps indicate the extent to which a reasonable
investor is likely to be interested in that keyword’s parent topic . This is not to say that
the frequency is equivalent to the materiality of the topic .
• Factor 1: Financial impacts and risk. This factor relates to the likelihood
that the issue may have an impact on near-, medium-, or long-term financial
performance of companies in the industry . Sustainability issues can impact
financial performance in very specific ways, and SASB ties each of its
disclosure topics to specific types of financial impact . These are grouped into
three broad categories: revenues and costs, assets and liabilities, and cost
of capital . SASB applies the first factor by searching documents that provide
the perspective of companies’ management teams, such as 10-K and 20-F
forms . These forms include information that companies have determined to
be material .
• Factor 2: Legal, regulatory, and policy drivers. This factor relates to
existing, emerging, or evolving regulatory considerations, including the
likelihood that legislation or policy will be enacted by government that will
require companies in the industry to take action to address the issue . For
this factor, SASB searches documents that provide the perspective of the
government and the courts, such as legal news and litigation reports . These
documents identify topics that are being shaped by emerging or evolving
government policy and litigation or regulation regarding sustainability topics .
New policy or regulation may translate to costs or opportunities that affect
the entire industry . The greater the intensity of the discussion around these
To consider
The five-factor test suggests questions that can also help corporations make materiality assessments . • If performance were improved would
it add value to the bottom line?
• Is there possible regulation pending?
• Is it in the news as an industry issue?
• Are peers disclosing this information?
• Are shareholders raising the topic?
• Is there opportunity to innovate?
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topics, the greater the relevance of the legal and regulatory environment for
the industry . Recent discussion about regulation or legislation around topics—
such as consumer fraud, hydraulic fracturing, and carbon taxes—highlights
the increased potential that a topic may be likely to yield material information .
Finally, SASB considers Item 103 disclosures in the industry . As discussed
above, Item 103 of Regulation S-K compels companies to disclose material
legal proceedings . The SEC has indicated that Item 103 should also include
potential environmental proceedings .147
• Factor 3: Industry norms and competitive drivers. This factor evaluates
the current and best practices by industry firms in addressing or disclosing
information on the topic . To apply this factor, SASB searches documents
that provide the perspective of industry peers, such as corporate social
responsibility (CSR) reports . These documents present topics on which
companies in the industry already manage and measure their performance,
often because it drives business value in some way . Peer companies within
an industry tend to face similar issues because of the manner in which they
use resources to produce the goods and services they bring to market, and
therefore the manner in which they impact society and the environment .
They are also often subject to the same regulations, tax structures, incentives,
societal concerns and pricing pressure that shape the evolution of industries .
Identifying industry issues that are being addressed by peers can provide
insight into topics that are material for a particular company .
• Factor 4: Investor/Stakeholder concerns and social trends. This factor
evaluates the importance of the issue to a broad range of stakeholders,
including shareholders, communities, NGOs, and the general public, that
might indicate whether the issue reflects social and consumer trends that
are likely to rise to the level of investor interest when they result in economic
implications . In this part of the test, SASB searches documents that provide
the perspective of shareholders and the general public, such as shareholder
resolutions and general media documents . These documents serve as proxies
for what is, or should be, of interest to investors and other stakeholders . They
can include the cultural (e .g ., the role of diversity in the workforce) as well
as the highly technical (e .g ., the safety of nanotechnology), and they often
have economic implications .148 Stakeholder concerns can be material for
investors when they affect revenue (boycotts), operations (labor strikes), brand
reputation (intangible value), license to operate (future cash flows, assets and
liabilities), and/or may result in legal challenges .
147 Monsma, Olson, p . 149 .
148 Lydenberg, Steve . “On Materiality and Sustainability: The Value of Disclosure in the Capital Markets .” Harvard University, Initiative for Responsible Investment, 2012, p . 60
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• Factor 5: Opportunities for innovation. This factor evaluates the potential
for competitive advantage from innovation of new products and services,
or from the ability to serve new markets in order to address a particular
sustainability issue . To perform this part of the test, SASB searches innovation-
related news that provides the perspective of corporate leaders in the industry .
These documents identify innovative solutions that benefit the environment,
customers, and/or society . By implementing these solutions, the company can
demonstrate industry leadership and create competitive advantage . These
documents help distinguish innovations that add incremental value from those
that can help solve pressing societal needs or serve untapped customers (e .g .,
financial services to unbanked or underbanked customers) . The latter is an
innovation opportunity likely to be material to a reasonable investor .149
149 On Sustainability and Materiality, p . 60 .
DIMENSIONS GENERAL TOPIC
Environment
Greenhouse Gas Emissions
Air Quality
Energy Management
Water & Wastewater Management
Waste & Hazardous Materials Management
Ecological Impacts
Every general sustainability topic for each dimension
Five-factor Data-driven Test
Factor 1 Factor 2 Factor 3 Factor 4 Factor 5
Keywords Keywords Keywords Keywords
Objective, quantitative data that contributes to the overall evidence of interest for the general sustainability topic
Five Dimensions
Keywords
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This data-driven test, which is more
objective than stakeholder surveys, helps
to identify the issues likely to have material
impacts . Collectively, these five factors
and the perspectives they represent—
management, government, industry peers,
stakeholders, and industry leaders—capture
elements of the total mix of information
that are relevant to a reasonable investor . To
rise to the level of a SASB disclosure topic,
however, there must also be additional
evidence of interest (as well as evidence of
financial impact, which is discussed in the
next section) .
The results of the five-factor test represent
just one data point among many that SASB
uses to determine evidence of interest .
The results are a valuable and objective
representation of potential materiality,
but the test is not a complete assessment .
Therefore, the outcomes are complemented by additional quantitative and qualitative
research and vetting to assess the economic implications of a specific topic on
companies’ financial condition or operating performance .
11 .2 .3 . Evidence of Financial Impact
Material information is linked with the relevance of that information to a
company’s financial condition and the potential for financial impacts .150 Without
evidence of financial impact, a sustainability factor is not included as a SASB
disclosure topic . When it comes to sustainability information, financial impacts can
extend beyond simple cost savings . Sustainability initiatives, provided they address
issues with material impacts, can be in a corporation’s best interest and can improve
financial performance in a variety of ways .151
150 Monsma, Olson, p . 182 .
151 Meese, Alan J ., “The Team Production Theory of Corporate Law: A Critical Assessment,” William and Mary Law Review Vol . 43, No . 4 (2002): 1693 .
FOR CONTEXT: PRIOR WORK ON FINANCIAL IMPACTS
Others have demonstrated the connection between financial factors and sustainability topics . John Elkington outlined five financial categories that might identify indicators of sustainable, long-term performance: costs, demand for products or services, pricing and profit margins, innovation programs, and the business ecosystem . Andrew Winston tied material sustainability strategies to four financial factors: brand value, revenue growth, eco-efficiencies, and risk exposure . Sheila Bonini, et . al . not only identified groups of financial value that can be impacted by CSR initiatives–growth, returns on capital, risk management, and management quality–but they also segmented the data into categories that investors commonly consider, such as new markets or operational efficiency .
Revenue
• Market size/share
• Pricing power
Recurring costs
• Cost of goods sold (COGS)
• Research and development (R&D)
Extraordinary expenses
Capital expenditures (CAPEX)
Assets & Liabilities
• Tangible assets
• Intangible assets
• Contingent liabilities and provisions
• Pension and other liabilities
Cost of capital
• Risk premium
• Industry divestment risk
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Sustainability issues can impact financial performance in very specific ways that
vary by topic and industry . One issue might affect revenues, another might be tied
to costs, and a third might have multiple types of impacts . Therefore, SASB has
identified three drivers of financial impact: revenues and costs, assets and liabilities,
and cost of capital .
SASB further segments the three financial drivers into more specific types of
financial impacts that mirror the way mainstream analysts and investors value
corporations, and which therefore may be easily plugged into a range of financial
analysis tools and calculations . See preceding page .
For example, the sustainability performance of competing products and services
can impact revenues through market share and pricing power . Sustainability issues
can change availability and pricing of raw materials and inputs, impacting expenses
through the supply chain via cost of goods sold . Tangible and intangible assets—
such as plant, property, and equipment (PP&E) or brand value, respectively—can
be impaired by the impacts of sustainability issues such as climate change . Realized
or contingent liabilities can arise from sustainability issues such as severe weather-
related events or regulatory action related to climate change . Finally, sustainability
issues can affect a firm’s cost of capital by raising its risk profile or limiting its access
to capital .
Each of SASB’s disclosure topics is tied to specific types of financial impact . For
example, water management is a disclosure topic in the Oil & Gas - Exploration
& Production industry . Based on SASB’s research, five types of financial impact
were identified for this topic: market size, cost of goods sold, capital expenditures,
tangible assets, and cost of capital . The evidence for these impacts is summarized in
the SASB industry brief .
Sustainability issues can have positive and negative financial impacts . SASB also
makes a distinction between acute and chronic financial impacts . Acute impacts
11/5/17 © SASB1
FinancialImpact
Types of Financial Drivers
COST OF CAPITALREVENUE COST ASSETS &
LIABILITIES
Demand for Core Products and Services
Intangible Assets and Long-Term
Growth
Operational Efficiency/Cost
Structure
Valuation of Core Assets
and Liabilities
Governance, License to
Operate and Risk
Drug safety Diverse
workforce in technology
Energy-efficient
chemicals production
Stranded coal assets
Operational safety of gas
pipelines
Disclosure Topics Examples
Expected Value DriversSASB’s process identifies disclosure topics with evidence of impact on financial condition, operating performance or risk
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correspond to events that may be rare or unlikely but can have a significant impact,
such as extreme weather, unanticipated spills or accidents, or financial collapse from
systemic risk . Chronic financial impact presents less extreme impacts in any given
year, but they are persistent and erode a company’s value over time .
Financial impacts can also be either actual or potential . Actual impacts, for
example, might materialize in the form of existing regulation and known changes
in consumer demand . Potential impacts, on the other hand, are latent . This is due
to pending regulation on sustainability issues, threats of competition from products
or services that embed sustainability factors, or increased interest in sustainability
performance .
SASB relies on the SEC’s recommended “reasonable likelihood” test to assess
potential impacts:
• A reasonable likelihood that the known trend, demand, commitment, event,
or uncertainty will occur; and
• A reasonable likelihood that the occurrence will have a material effect on the
registrant’s financial condition or results of operations
11 .3 . Stakeholder Consensus
A key challenge for SASB is ensuring that its standards are developed in a way
that is equitable, accessible, and responsive to the needs of a variety of stakeholders .
Investors want decision-useful information, issuers have cost-benefit questions, and
other market participants—from asset managers and analysts to accountants and
attorneys—want a seat at the table to voice their own needs .
To meet this challenge, SASB uses a transparent, multi-stakeholder approach that
is open to public comment and subject to independent oversight .
11 .3 .1 . Industry Expertise
Stakeholder consultation is an integral part of SASB’s operation, and the
organization has established communication channels to encourage market and
public input into every phase of its standards-setting process .
For example, for each of the 79 SICS™ industries, SASB convened an Industry
Working Group to provide feedback on the disclosure topics and accounting metrics
identified in the initial research phase of the provisional standards-development
process . Each Industry Working Group was composed of balanced representation
from corporate professionals, investors, and intermediaries (such as accountants,
lawyers, consultants, and NGO representatives) . These individuals participated in a
specific industry based on their background and expertise .152
152 Each group (investors, corporations, and intermediaries) consists of professionals who provide feedback in their individual capacity, not on the behalf of the organization that employs them .
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A balance among these three
perspectives offers valuable insight into
the views of the reasonable investor .
Professionals with corporate backgrounds
in the industry understand what is likely
to affect the financial condition and/
or operating context for companies
in the industry . Investors and analysts
understand what information helps them
evaluate companies in the industry . Other
intermediaries provide insights into other
relevant aspects of materiality, such as
how to account for a disclosure topic in a
verifiable or decision-useful way, or how it
conforms to securities law .
This stakeholder input helped translate
the topics and metrics that SASB proposed
into more refined versions that enable the
measurement of sustainability performance
as well as the disclosure of related information for the benefit of the reasonable
investor . Industry Working Group feedback not only provided additional evidence,
but also clarified whether, and how, SASB’s proposed disclosure topics could best be
captured in a sustainability accounting standard .
The participants were surveyed to offer feedback on the likely materiality of
proposed disclosure topics for the industry . This feedback was then incorporated into
an Exposure Draft of the standard . The SASB Standards Council (described below)
then reviewed the standard, disclosure items, accounting metrics, and the outcome
of Industry Working Groups to ensure consistency, completeness, and accuracy .
In addition to performing evidence-based research, SASB vets each of its
disclosure topics with a group of industry experts—including balanced representation
of corporate, investor, and other perspectives—to assess the likelihood that they will
have material impacts on companies in an industry . During the provisional phase of
standard-setting, over 85 percent of investors and issuers (on average) agreed on the
likely materiality of SASB’s sustainability disclosure topics .153 When a topic failed to
reach at least 75 percent consensus, it was either flagged for further review (if close
to 75 percent) or not carried forward .
Going forward, as SASB codifies and maintains the standards, industry expertise
is incorporated into the process via ongoing, targeted stakeholder consultation
and through Advisory Committees and ad hoc Advisory Groups, which may be
153 The chart reflects only those sustainability topics proposed to SASB’s Industry Working Groups that were also eventually included in the provisional sustainability accounting standard . On average, 78 .2 percent of corporate professionals and 88 .7 percent of investors agreed the topics were likely to constitute material information for companies in the industry .
FOR CONTEXT: ASSESSING METRICS
The Committee on Metrics Quality ensures that SASB metrics meet the two following characteristics:
1 . Does the metric capture company performance on the relevant sustainability topic, either directly or by proxy? Can it be used to define an industry benchmark, with sufficient range of performance and ability to track performance over time?
2 . Does the metric support financial analysis of performance? Does it enable analysts to translate company performance into effects on traditional financial analysis of performance, on a fundamental or comparative basis?
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established to provide market input on thematic or technical matters related to
specific sustainability issues, industry topics, or other factors .
11 .3 .2 . Independent Oversight
During provisional standards-setting, the SASB Standards Council served as
an independent oversight body composed of volunteer experts in standards
development, securities law, environmental law, metrics, and accounting . The
Standards Council reviewed SASB’s provisional process for each sector to ensure
that it was transparent, based on evidence and multi-stakeholder feedback, and
consistent from sector to sector .
The Standards Council strove to represent the various investor types within the
U .S . capital market system, and the independent perspectives of its members served
to strengthen the standards development process .
Additionally, to help with the evaluation of the metrics for the provisional
standards, SASB consulted with the Committee on Metrics Quality, a subcommittee
of the Standards Council . The committee’s purpose was to help ensure that SASB
fulfilled its goal of producing decision-useful and cost-beneficial metrics to measure
corporate performance on sustainability topics . To reflect the views of investors, the
committee was composed of sell-side analysts and asset managers .
During SASB’s post-provisional phase, codification and maintenance of the
standards is subject to similar due process oversight and technical feedback by an
expert-led board .
Health Care
Financials
Technology & Communications
Extractives & Minerals Processing
Transportation
Services
Resource Transformation
Food & Beverage
Consumer Goods
Renewable Resources & Alt. Energy
Infrastructure
0
All % Corporations %
Stakeholder-specific feedback on likely materiality of all proposed disclosure topics
(% of respondents, by interest group, who think suggested topics are likely to constitute material information)
Investors/Analysts %
10 20 30 40 50 60 70 80 90 100
Health Care
Financials
Technology & Communications
Extractives & Minerals Processing
Transportation
Services
Resource Transformation
Food & Beverage
Consumer Goods
Renewable Resources & Alt. Energy
Infrastructure
1
2
3
4
5
6
7
8
9
10
11
0
All % Corporations %
Stakeholder-specific feedback on likely materiality of all proposed disclosure topics
(% of respondents, by interest group, who think suggested topics are likely to constitute material information)
Investors/Analysts %
10 20 30 40 50 60 70 80 90 100
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11 .3 .3 . Public Comment Period
SASB conducts periods for public comment for all proposed standards and
updates to the standards . For example, after SASB revised its initial disclosure topics
and related metrics based on Industry Working Group feedback, and its process and
outcomes had been reviewed by the Standards Council, SASB made an Exposure
Draft of each industry standard available for public comment .
The 90-day public comment period is a critical step for a standards-setting
organization, allowing for a range of perspectives on each topic . During this phase,
any member of the public can download the Exposure Draft Standard from SASB’s
website and provide feedback .
Specifically, SASB seeks feedback addressing the following:
• Identification of disclosure topics that may not be material to a reasonable
investor
• Suggestions for disclosure topics not included in the standards that may be
material to a reasonable investor, including supporting evidence
• Comments that correct, improve, or add to accounting metrics in the
standards
• Additional or alternate accounting metrics to measure performance with
respect to a disclosure topic
• Assessments of how costly it would be for companies to collect, analyze, and
report information required for the proposed accounting metrics
SASB publishes all the comments that are received during the public comment
period, as well as SASB’s response to each comment .
11 .4 . Evolving with the Marketplace
The sustainability issues that businesses face evolve quickly . Therefore, SASB
standards are not set in stone once they have been released . SASB has developed a
long-term plan to assess and maintain the standards, a virtuous cycle of feedback-
informed updates that will capture evolving market dynamics . This process involves
ongoing research, expert outreach and consultation, multiple rounds of public
comment and exposure, and due process oversight .
11 .4 .1 . Provisional Standards Release
Each provisional standard, which has been vetted by an IWG and exposed
for public comment, serves as a starting point for the SASB’s ongoing standards
maintenance . SASB incorporated feedback into the standard at the conclusion of the
public comment period for each of the 79 SICS industries, after which the Provisional
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Sustainability Accounting Standard was published and became available to the
public .
SASB standards are considered provisional for at least one year after their initial
release . During this time, SASB continues to welcome feedback from the public
and engages in direct consultation with issuers and investors to interrogate the
materiality, decision-usefulness and cost-effectiveness of the standards .
In the meantime, investors and companies can use the provisional standards;
being provisional does not impair their usability .
11 .4 .2 . Reviewing Provisional Standards
For every sector, SASB reviews each provisional standard following its release . The
Rules of Procedure for this review process were published in 2016, exposed for public
comment, and finalized in 2017, prior to the review of any provisional standards .
Each provisional standard is reviewed and subsequently refined as necessary
based on additional research and market-based input for the disclosure topics and
accounting metrics . This process involves multiple rounds of public comment and
exposure .
The review process involves research, consultation, agenda setting, updates and
public comment, and, finally, ratification of updates . A robust governance structure
will oversee all reviews, proposals, and updates, ensuring due process, transparency,
the inclusion of stakeholder views, and technical rigor .
11 .4 .3 . Updating the Standards
As businesses and industries grow and change, the sustainability topics that
are likely to constitute material information will adjust over time . Therefore, over
time, some topics will need to be removed from the standards and others added .
However, such changes are subject to the same level of rigor as the development
of the provisional standards . The process for updating the standards involves
a systematic, independent evaluation of evidence-based research, stakeholder
consultation, technical agenda-setting, proposals, public comment, and ratification—
all of which are subject to public transparency .
Before updating standards, SASB also considers each potential modification in
the context of the essential concepts of sustainability accounting outlined in its
Conceptual Framework . For example, any proposed change is judged against the
impact it will have on reporting organizations and their ability to provide year-to-year
comparisons .
SASB’s process endeavors to balance the need for timely outcomes with the need
for comprehensive research and broad stakeholder participation . It carries out its
process for maintenance and improvement of the standards on a recurring three-year
cycle . However, SASB may address more urgent issues outside this regular schedule,
as it deems necessary or useful .
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SECTION REVIEW
In this section, the following Learning Objectives were covered:
• Explain the evidence basis that supports the identification of SASB disclosure
topics .
• Explain the stakeholder consensus that supports the identification of SASB
disclosure topics .
• Distinguish SASB’s approach (sustainability accounting) from other approaches
to sustainability tracking and reporting .
• Discuss the Supreme Court definition of materiality and the implications of
this definition .
? Questions to consider
√ What are the five factors in SASB’s data-driven test that contribute to
identifying topics likely to have material impacts on companies in an industry?
√ How does evidence of a topic’s financial impact influence the development of
a SASB standard?
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93
12 COMPONENTS OF A SASB STANDARD
SASB builds rigor into its standards development process to ensure quality
outcomes . The final product, a SASB sustainability accounting standard, must help
registrants disclose material, decision-useful sustainability information to investors in
a way that is cost-effective for the preparer .
A Provisional SASB standard has two main parts . First, SASB provides disclosure
guidance, which includes a brief overview of the types of companies in the industry
and an overview of how to include information about those topics in SEC filings .
(This is done when the topic is determined to be likely to constitute material
information .) Then, the standard presents the list of the disclosure topics, along with
associated accounting metrics, including technical protocols for each metric . The
technical protocols describe how to properly capture and disclose the data from the
metric .
12 .1 . Disclosure Guidance
Each SASB standard offers specific guidance for the corporations that use it to
disclose material sustainability information in SEC filings . The guidance is intended
to help companies in performing their own materiality assessments, determining
the scope of disclosure and the format of reporting, reporting activity metrics for
Learning Objectives Covered in this Section
Describe the principles that guide the selection of SASB’s industry-specific topics
for disclosure .
Describe the criteria that guide the selection of SASB’s accounting metrics .
Describe the components of a sustainability accounting standard and their
purpose for supporting disclosure .
Distinguish SASB’s approach (sustainability accounting) from other approaches
to sustainability tracking and reporting .
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normalization (see sidebar), and making
other important considerations related to the
disclosure of sustainability information with
SASB standards .
SASB recommends that registrants use
SASB standards specific to their primary
industry as identified in the SICS™ . If a
registrant generates significant revenue from
multiple industries, SASB recommends that it
consider the materiality of the sustainability
topics that SASB has identified for those
industries and disclose the associated SASB
accounting metrics . Consolidated entities
are recommended to calculate metrics for
the whole entity, regardless of the size
of the minority interest, but data from
unconsolidated entities does not need to be included .
NORMALIZATION OF METRICS
In addition to the accounting metrics in the standards, SASB identifies activity metrics that help financial analysis calculations . Activity metrics capture basic industry-specific data about a company that may assist in the accurate evaluation and comparability of disclosures . These may include operational data, such as the total number of employees or quantity of products produced or services provided . It also may include industry-specific data, such as plant capacity utilization and hospital-bed days . SASB does not include metrics for information that is already disclosed in Form 10-K (e .g ., revenue, EBITDA, etc .) .
Disclosure Topics Accounting Metrics
Technical Protocols
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12 .2 . Disclosure Topics and Accounting Metrics
In addition to Disclosure Guidance, SASB standards also include one or more
accounting metrics associated with each industry-specific disclosure topic, along with
technical protocols for using the metrics .
12 .2 .1 . Disclosure Topics
Disclosure topics represent the industry-specific impacts of broader sustainability
issues . For example, Health & Nutrition is a disclosure topic in a number of Food
& Beverage industries, representing one aspect of the broader issue of Customer
Welfare . This same issue, however, manifests itself in terms of Counterfeit Drugs
in the Biotechnology & Pharmaceuticals industry, Quality of Education & Gainful
Employment in the Education industry, and so on . (See table .)
Sustainability Dimension
Environment
Sustainability Issue Environmental Impacts on Assets & Operations
Disclosure Topic Climate Change Adaptation
Accounting Metric
Number of lots located in 100-year flood zones
Technical Protocol
The entity shall disclose the number of controlled lots that are located in 100-year flood zones .1 .1 100-year flood zones are defined as land areas subject to a one-percent or greater chance of flooding in any given year . Such areas may also be referred to as being subject to the one-percent annual chance flood, the one-percent annual exceedance probability flood, or the 100-year flood .1 .1 .1 Examples of 100-year flood zones may include, but are not limited to, coastal flood plains, flood plains along major rivers, and areas subject to flooding from ponding in low-lying areas .1 .2 For controlled lots located in the U .S ., 100-year flood zones shall include those land areas designated by the U .S . Federal Emergency Management Agency (FEMA) as special flood hazard areas (SFHA) .1 .2 .1 SFHAs are defined as land area in the flood plain subject to a one-percent or greater chance of flooding in any given year . The area may be designated in the applicable flood insurance rate map, as per the U .S . National Flood Insurance Program, as Zones A, AO, AH, A1-30, AE, A99, AR, AR/A1-30, AR/AE, AR/AO, AR/AH, AR/A, VO, V1-30, VE, and V . This definition is derived from U .S . 44 CFR 59 .1 .1 .3 The scope of controlled lots includes all lots owned or contractually available for ownership through option contracts or other equivalent types of contracts .2 The scope of disclosure shall include all of the entity’s controlled lots that are located in 100-year flood zones, regardless of the country of their location .3 The entity may disclose its risks, opportunities, and potential impacts resulting from reclassifications of 100-year flood zones, including the risk of expansion of such areas into lots controlled by the entity or its active selling communities .
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Five fundamental principles help guide SASB’s determination of topics for
disclosure, aimed at balancing the needs of the various user groups:154
• Of interest to investors: SASB addresses issues likely to be of interest
to investors by assessing whether a topic emerges from the “total mix” of
information available through the existence of, or potential for, impacts on
five factors: (1) direct financial impacts and risk; (2) legal, regulatory, and
policy drivers; (3) industry norms, best practices, and competitive drivers;
(4) stakeholder concerns that could lead to financial impacts; and (5)
opportunities for innovation .
• Relevant across an industry: SASB addresses topics that are systemic to an
industry and/or represent risks and opportunities unique to the industry and
which, therefore, are likely to apply to many companies within the industry .
Disclosure topics that are not relevant across an industry are not included
in the SASB standard . For example, 70 percent of all rubber is used by the
tire industry, so sustainably sourced rubber attracts attention among auto
tire manufacturers . However, the Auto Parts industry manufactures more
than tires—including catalytic converters, engine exhaust, wheel rims, and
electronic equipment—so sustainably sourced rubber is not included as a
topic for disclosure .
• Potential to affect corporate value: Through research and stakeholder
input, SASB identifies topics that can or do affect operational and financial
performance through three channels of impact: (1) revenues and costs, (2)
assets and liabilities, and (3) cost of capital or risk profile . This principle often
results in topics being excluded if they attract substantial interest but have
only minimal evidence of financial impact . For example, SASB research found
evidence to indicate investor interest in Waste Management as a topic in the
Oil & Gas - Exploration & Production industry . However, the topic did not
demonstrate the potential to significantly affect corporate value, and was
therefore not included in the standard .
• Actionable by companies: SASB assesses whether broad sustainability
trends can be translated into industry-specific topics that are within the
control or influence of individual companies . For example, the disclosure topic
Climate Change Adaptation assesses the risks that increased weather events
or a rise in sea levels pose to infrastructure . Road networks, both in the U .S .
and around the world, constitute some of the most extensive infrastructure
networks in existence . However, because government agencies build and
maintain these roads, the topic was not included in the Road Transportation
industry’s provisional standard . Rail companies do build and maintain rail
154 The following principles are drawn from SASB’s 2017 Conceptual Framework .
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tracks, however, so the topic was included as a Watch List topic in the Rail
Transportation industry .
• Reflective of stakeholder (investor and issuer) consensus: SASB considers
whether there is consensus among issuers and investors that each disclosure
topic is reasonably likely to constitute material information for most companies
in the industry . SASB recognizes that industry experts are able to provide
significant and valuable insight on the topics that are likely to be material in
their industry . SASB actively solicited input during its provisional standards-
setting process, specifically from Industry Working Groups, one-on-one expert
interviews, the Committee on Metrics Quality, and the public at large during
public comment periods . Stakeholders lend insightful perspective and point
to valuable evidence . When needed, SASB acts as the final determinant of
standards . It bases such determination on research, industry consultation,
public input, SASB’s judgment, and careful deliberation about the usefulness,
materiality, and cohesiveness of resulting information . For example, there
was significant agreement among Industry Working Group participants (93
percent) that Product Safety was a topic likely to constitute material information
for companies in the Automobiles industry . The topic was included in the
provisional standard . However, although SASB’s initial research surfaced Local
Community Engagement as a proposed disclosure topic, only 37 percent of
Industry Working Group participants agreed that it was likely to constitute
material information . That topic was excluded from the provisional standard .
It is important to note, however, that while a topic may be excluded from an
industry standard based on the preceding principles, information about that topic
may nevertheless be material to a specific company’s circumstances and may warrant
disclosure . Likewise, a topic that has been included in an industry standard based
on these principles may be unlikely to materially impact a specific company given its
circumstances and may not warrant disclosure . The determination of materiality and
duty to disclose lies with corporations, which are subject to federal securities laws .
12 .2 .2 . Accounting Metrics
The most effective metrics yield data that can be analyzed and acted upon by a
variety of parties . An ideal metric allows corporate management to benchmark and
measure sustainability performance, while also allowing investors and analysts to
evaluate companies’ performance and incorporate their conclusions into investment
decisions .
Just as the SASB Disclosure Topics are guided by a set of fundamental principles,
the accounting metrics are determined based on the following criteria .155
155 The following criteria are drawn from SASB’s 2017 Conceptual Framework .
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• Fair Representation: A metric adequately
and accurately describes performance
related to the aspect of the disclosure topic
it is intended to address, or is a proxy for
performance on that aspect of the disclosure
topic .
• Useful: A metric will provide useful
information to companies in managing
operational performance on the associated
topic and to investors in performing financial
analysis .
• Applicable: Metrics are based on definitions,
principles, and methodologies that are
applicable to most companies in the industry
based on their typical operating context .
• Aligned: Metrics are based on those already
in use by issuers or are derived from standards,
definitions, and concepts already in use by
issuers, governments, industry associations, and others .
• Comparable: Metrics will yield primarily (a) quantitative data that allow
for peer-to-peer benchmarking within the industry and year-on-year
benchmarking for an issuer, but also (b) qualitative information that facilitates
comparison of disclosure .
• Complete: Individually, or as a set, the metrics provide enough data and
information to understand and interpret performance associated with all
aspects of the sustainability topic .
• Distributive: Metrics are designed to yield a discernable range of data
for companies within an industry or across industries allowing users to
differentiate performance on the topic or an aspect of the topic . Not every
topic will need metrics that are directional . For instance, a topic such as
“employee diversity” does not need to, and cannot, always be increasing .
• Neutral: Metrics are free from bias and value judgment on behalf of SASB, so
that they yield an objective disclosure of performance that investors can use
regardless of their worldview or outlook . (see sidebar .)
• Verifiable: Metrics are capable of supporting effective internal controls for
the purposes of data verification and assurance .
FOR CONTEXT: NEUTRALITY OF SASB METRICS
SASB metrics are designed to be neutral and apolitical to the extent that it is possible . SASB avoids standardizing metrics that imply that companies with certain inherent data profiles (e .g . because of their size, scope of operations, or degree of integration) are “better” or “more sustainable .” Although some of SASB’s disclosure topics relate to politicized issues, it attempts to develop metrics that do not advance a political agenda . A disclosure topic on Employee Relations with a metric on the percentage of unionized employees does not offer a judgment on whether or not it is positive or negative to have a high or low percentage . Those judgments are for the market to make .
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Each SASB metric is developed differently,
depending on the type of financial impact with
which it is linked, whether or not performance
can be easily measured either directly or via proxy .
It also depends whether or not existing metrics
are able to capture decision-useful information .
Wherever possible, SASB harmonizes its metrics
with those already in use . Elsewhere, it makes
every effort to develop new metrics that reference
existing benchmarks or standards . For instance,
the SASB standard for the Household & Personal
Products industry includes a metric encompassing
the percentage of palm oil consumption certified
to the Roundtable on Sustainable Palm Oil
standard . Here, SASB references an agreed-upon
benchmark rather than creating a proprietary
definition or description .
Each disclosure topic is associated with between
one and six accounting metrics . SASB uses one metric if that metric captures the
information necessary for financial analysis of a company’s performance on the topic .
For example, “product design for use-phase efficiency” is a disclosure topic in the
SASB standard for the Chemicals industry, and it is associated with only one metric .
That metric is revenue from products designed for use-phase resource efficiency .
Where one metric does not allow for complete analysis, additional metrics are included
as needed to capture performance in different ways so that all the metrics, as a
complete whole, present a full picture .
For example, when considering employee health and safety, SASB might
determine that two metrics are needed: the number of near misses and the number
of injuries and deaths . If a company has zero near misses but 100 fatalities, the
metric for near misses would not present the full picture . The opposite is true in a
situation where a company has zero fatalities but 1,000 near misses—the metric for
fatalities would not give a reasonable investor all the information she needs .
As SASB develops its metrics, it pays close attention to the ability of the metrics
to fit into standard investment analysis methods . Thus, approximately 80 percent
of SASB metrics are quantitative in nature, and because they are tied to specific
value impacts, they can be incorporated into conventional analytical tools, such as
discounted cash flow analyses .
12 .2 .2 .1 . Quantitative vs . Qualitative
While quantitative data are extremely useful for fundamental and comparative
analysis, investors and other users of sustainability information also benefit from
FOR CONTEXT: TECHNICAL PROTOCOLS
In the SASB standard for the Oil & Gas - Exploration & Production industry, one of the accounting metrics is “Gross global Scope 1 emissions, percentage methane, percentage covered under emissions-limiting regulations” One of the technical protocol instructions indicates which greenhouse gases should be measured for emissions quantity: carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, sulfur hexafluoride, and nitrogen triflouride . Another technical protocol clarifies that disclosure shall exclude emissions covered under voluntary trading systems and disclosure-based regulations (e .g ., the US Environmental Protection Agency EPA mandatory reporting rule) .
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a contextual understanding of a firm’s operations and future initiatives . SASB
standards facilitate sustainability disclosure that delivers both quantitative information
on performance and qualitative context underlying that performance . This approach
is in keeping with SEC guidance on MD&A, which explains that the section is
intended to provide a “narrative from management’s perspective” that “identif[ies]
and discuss[es] key performance indicators, including non-financial performance
indicators, that their management uses to manage the business and that would be
material to investors .”
In some cases, qualitative metrics are the best way to provide decision-useful
sustainability information to the reasonable investor . For example, in the Software &
IT Services industry, a reasonable investor would gain substantially from a qualitative
discussion of management’s approach to identifying and addressing data security
risks, which represent a material trend or uncertainty . This information may be
particularly useful when evaluating companies with no previous data breaches or
related corrective actions—events that are easier to quantify .
12 .2 .3 . Technical Protocols
For each metric, the SASB standard clarifies which data are encompassed by
the scope of the metric and which data are not . These technical protocols provide
multiple clarification points for each metric . By providing definitions, scope,
accounting guidance, compilation instructions, and presentation guidance, the
technical protocols ensure that disclosures from companies in the same industry are
comparable and verifiable .
Objectives
Standardized
Criteria forTopic Selection
Principles for Metric Selection
• Fair Representation• Useful• Applicable• Comparable
• Complete• Verifiable• Aligned• Neutral• Distributive
METRICS
Fundamental Tenets of SASB’s Approach
Evidence-Based Industry-Specific Market-Informed
TOPICS
PRESENTATION
INFORMATION
APPROACH
• Relevant across an industry
• Actionable by companies
• Reflective of stakeholder concensus
• Potential to affect value creation
• Of interest to investors
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12 .3 . Technical Bulletins and Interpretations
SASB issues technical bulletins as needed to address questions or current subjects
that fall outside the standards-setting process . For example, technical bulletins may
be issued in response to issues or questions raised by stakeholders with regard to
adoption or use of the standards that do not warrant an update or interpretation .
While intended to provide additional guidance or clarification, or to enhance
the standards’ utility, they do not impact the fundamental substance of SASB’s
sustainability accounting standards, nor do they provide interpretations of the
standards .
Periodically, SASB issues documents called “interpretations” to address clarifying
questions related to sustainability standards that have been ratified . Interpretations
do not change the content of the standards, but rather attempt to resolve questions
regarding aspects of the standards that are unclear . SASB considers issuing an
interpretation when there is sufficient interest from stakeholders to clarify aspects of
the standards that may be ambiguous or lead to different interpretations .
SECTION REVIEW
In this section, the following Learning Objectives were covered:
• Describe the principles that guide the selection of SASB’s industry-specific
topics for disclosure .
• Describe the criteria that guide the selection of SASB’s accounting metrics .
• Describe the components of a sustainability accounting standard and their
purpose for supporting disclosure .
• Distinguish SASB’s approach (sustainability accounting) from other approaches
to sustainability tracking and reporting .
? Questions to consider
√ How do each of the six principles for disclosure topics influence whether or
not a topic is included or excluded from a SASB standard?
√ What is the purpose for each of the criteria that guide SASB’s accounting
metrics?
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13 CROSS-SECTORTHEMES
Because each industry has a unique profile with respect to the resources it
uses to create goods and services to meet societal needs, the key dimensions of
sustainability—and what needs to be managed to create value—change from
industry to industry . Sustainability has no one-size-fits-all definition . Through its
research and standards development process, SASB reveals the unique sustainability
profile of each business sector and industry, which helps make otherwise intractable
macroeconomic trends actionable for companies and investors alike .
13 .1 . Climate Change: Ubiquitous but Differentiated
For example, issues related to climate change are likely to have material impacts
in 72 out of 79 SICS industries, representing $27 .5 trillion, or 93 percent of the U .S .
equity market . Although it’s tempting, as a result, to consider climate change as
ubiquitous, it’s important to note that climate change manifests differently in nearly
every industry .
For companies in the Health Care Delivery industry, for instance, one of the
more important issues related to climate change is event readiness . Extreme
weather events can significantly impact the core assets and operations of these
firms . According to Kaiser Health News, Hurricane Sandy cost NYU Langone
Medical Center in New York City $1 .2 billion in damages and lost revenue in 2012 .
Meanwhile, a 2011 study estimated that the health care costs associated with six
climate-related events between 2000 and 2009 were $740 million, reflecting more
than 760,000 encounters with the health care system .156
156 Knowlton, Kim, “Six Climate Change–Related Events in the United States Accounted for About $14 Billion in Lost Lives and Health Costs,” Health Affairs, November 2011 .
Learning Objectives Covered in This Section
Distinguish SICSTM sectors based on their distinct sustainability profiles .
Explain the organization of SICSTM and the implications of a sustainability-based
industry classification .
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However, in the Financials sector, climate change becomes a very different beast .
Although the competitive landscape in the Commercial Banking industry is not
directly impacted by environmental concerns in any significant way, banks must
respond to mounting investor and regulatory pressure to monitor and manage
their financed emissions . Nevertheless, a recent study found that in the six-year
period following the implementation of the Kyoto Protocol, the top 10 banks nearly
doubled their financial support of the coal industry, financing more than $150
billion worth of coal operations .157 When a bank invests in, or provides lending
to, firms that produce significant greenhouse gas emissions, the bank indirectly
exposes itself to climate-related risks that could diminish returns and reduce value for
shareholders . For example, if governments pass legislation aimed at avoiding a rise in
global average temperature of more than 2°C above preindustrial levels, HSBC bank
analysts suggest that equity valuations could be reduced by 40 to 60 percent . This
would result in higher costs of capital, ratings downgrades to existing bonds, and
difficulties repaying or refinancing existing debt .158
As climate change impacts industries in unique ways, simply reporting GHG
emissions across the board doesn’t tell investors anything about event readiness or
disease migration in health care . It doesn’t tell them anything about the potential for
stranded assets in fossil fuel-based industries . It doesn’t even tell them much about
the energy intensity of data centers in technology and communications . In fact,
GHG emissions is likely to be a material disclosure in only 23 of 79 industries and,
indeed, data from CDP indicates that only seven industries account for 85 percent of
reported Scope 1 GHG emissions .
SASB’s industry-specific approach provides key insights on the ultimate source
of GHG emissions . It focuses on pressure points and signals for market-based
approaches to mitigation and innovation . For example:
• Energy management and Scope 2 emissions: By providing for disclosure
on energy management rather than Scope 2 GHG emissions, SASB standards
focus on the role that big electricity consumers can play, through energy
efficiency and choice of energy mix . For industries that indirectly contribute
to greenhouse gas emissions through their use of purchased electricity,
SASB recommends metrics related to understanding the amount, type
(i .e ., conventional or renewable), and source (i .e ., if it is self-generated or
purchased) of energy . SASB research and engagement has concluded that
these measures provide a better understanding of potential material risks
related to indirect emissions than a Scope 2 emissions figure does .
• 80/20 rule: The most cost-effective climate change data addresses the largest
sources of emissions (i .e ., 80 percent of the effects come from 20 percent
157 Urgewald, GroundWork, Earthlife Africa Johannesburg and BankTrack, “Bankrolling Climate Change: A Look into the Portfolios of the World’s Largest Banks,” December 2011 .
158 Carbon Tracker Initiative, “Unburnable Carbon 2013: Wasted Capital and Stranded Assets,” 2013 .
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of the sources) . For example, in the Automobiles industry, SASB focuses
on use-phase emissions rather than those generated during production, as
life-cycle analyses have found that 80-90 percent of vehicle-related GHGs
are emitted during use . In banking, SASB focuses on financed emissions
rather than emissions from branches, which are comparatively negligible . In
manufacturing, it focuses on the link in the value chain where the impact
is most significant—for example, auto parts and its supply chain for auto
manufacturing .
• Financed emissions: As mentioned above, carbon imbedded in a bank’s
loan portfolio, an insurer’s investment portfolio, or an oil and gas company’s
reserves can lead to significant loss in value . Disclosing this risk and integrating
it into the risk-adjusted value of those assets would likely result in scarcer and
more expensive capital to finance carbon-intensive industries .
13 .2 . Other Sustainability Issues
Although climate change may have the most extensive reach, other important
sustainability trends have emerged from SASB’s standards development process .
Many other issues cut across disparate sectors—again with industry-specific
impacts—including Product Alignment and Safety, Resource Intensity and Efficiency,
Labor Practices and Skill Development, Closed-Loop Economies, Supply Chain
Management, Materials Sourcing & Efficiency, Ecological Impacts and Biodiversity,
and Operational Safety . Other issues create systemic impacts across the industries
within a sector, such as Financing and Responsible Lending in the financials sector . A
few of these issues are discussed in more detail below:
• Product Alignment and Safety: Responsible product stewardship
means strategically addressing a $431 billion counterfeit drug market in
the Biotechnology & Pharmaceuticals industry . Mitigation strategies in an
increasingly complex, global supply chain could stem or reverse the loss of
consumer confidence and company revenues . More importantly, they can
prevent up to 100,000 deaths each year .159 160 Meanwhile, issues of product
safety can have similar impacts on revenues, reputation, and people’s lives .
Electrical fires in residential U .S . buildings cause more than 360 deaths, 1,000
injuries, and $995 million in damages each year .161 Eighty-nine percent of these
fires are caused by electrical failures, including malfunctioning equipment,
short-circuited arcs, and defective wire insulation . Companies in the Electrical
& Electronic Equipment industry that fail to proactively manage these risks can
lose market share while facing increases in legal costs and cost of capital .
159 Anis, Khurrum, “Stopping Fake Drugs from Pakistan Is Too Late for Victims,” Bloomberg, May 17, 2012 .
160 Miller, Henry, “Fake and Flawed Medicines Threaten Us All,” Forbes, July 25, 2012 .
161 United States Fire Administration, Residential Building Electric Fires, March 2008, p . 1 .
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• Resource Intensity and Efficiency: Population growth and industrial
activity are increasing demands on a decreasing supply of natural resources .
From production to pricing, this imbalance affects a variety of industries in
nearly every sector, with impacts at all stages of operations . For example,
an estimated 2,200 gallons of water are used for creating an integrated
circuit (IC) on a 300 mm wafer, placing significant constraints on the water
supplies of local communities where semiconductors are manufactured . For
companies in this industry, large water withdrawals in water-scarce regions
create operational risks related to price and availability, as well as possible
tensions with local communities . Meanwhile, in the Automobiles industry, the
price of aluminum—a key input—is projected to rise 29 percent through 2018
as demand outstrips supply .162 Therefore, manufacturers able to maximize
efficiency and minimize dependency will better insulate themselves from price
volatility and supply disruptions .
• Financing and Responsible Lending: The financial crisis highlighted the
importance of financial transparency and responsible lending . Between 2003
and 2006, the percentage of mortgage originations that were subprime
increased from eight to 20, driven by strategic decisions to steer borrowers
into more risky products, as well as to offer loans to those who were
previously unable to qualify .163 These practices increased the risk of default
and led to an estimated four million foreclosures between 2007 and 2012 .164
Meanwhile, increasing tuition is pushing more students to take on federal
and private loans . By the second quarter of 2014, total student debt in the
U .S . reached $1 .2 trillion, the second largest category of household debt after
mortgage loans .165 To remain competitive, for-profit colleges need to provide
high-quality education in order to increase the likelihood that graduates will
obtain employment and pay off loans .
These issues do not represent radical departures from what companies currently
address in their SEC filings . In fact, SASB’s research shows that 69 percent of
companies already report on at least three-quarters of the disclosure topics included
in their SASB industry standard, and 38 percent provide disclosure on every SASB
topic . However, these disclosures are rarely presented in a decision-useful way .
SASB research indicates that more than half of these disclosures contain boilerplate
language, while less than 24 percent use metrics .
Meaningful—not boilerplate—disclosures on sustainability topics enable investors
to more efficiently allocate capital . For example, by breaking down climate change
162 Fedorinova, Yuliya, and Marina Sysoyeva, “Carmakers Use Aluminum Over Steel in Boost for Rio: Commodities,” Bloomberg News, February 6, 2013 .
163 Joint Center for Housing Studies of Harvard University, “The State of the Nation’s Housing,” 2008
164 Brennan, Morgan, “The Foreclosure Crisis Isn’t Over Just Yet,” Forbes, December 1, 2012 .
165 Hsiao, Justin, “U .S . For-Profit Schools Need to Be Bigger and Better in Order to Survive,” National University of Singapore’s Credit Research Initiative, Weekly Credit Brief, September 30–October 6, 2014 .
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into its specific impacts, SASB helps investors
understand which industries will be facing
headwinds as a result of global sustainability
challenges and to diversify their portfolios
through sector allocation . Meanwhile,
comparable data allows investors to perform
more robust benchmarking and valuation,
helping to identify leaders and laggards on
specific sustainability issues and determine
which companies are well positioned to address
these material factors .
EXAMPLES OF QUESTIONS FOR THE EXAM
• How does the Health Care sector
differ from Extractives & Minerals
Processing?
• What do Health Care and Services
share in common?
• In which sectors are Environmental
impacts most prominent? What
about Human Capital? Business
Model & Innovation?
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13 .3 . Unique Sector Sustainability Profiles
As reliable data begins to emerge, the unique sustainability profiles of the
SICS™ sectors will become more clearly defined . In the meantime, however,
investors can develop a fuller understanding of industry- and sector-specific
sustainability impacts by surveying the outcomes of SASB’s standard-setting
process, which are outlined in the table below and the tables in Appendix I .
The table shows an aggregate view of SASB’s research findings at the top level,
according to sector and sustainability topic .
How to read the table:
The table below depicts the 30 general sustainability issue categories separated into the five dimensions of sustainability—Environment; Social Capital; Human Capital; Business Model & Innovation; and Leadership & Governance . A red dot (•) indicates that 50 percent or more of the industries in that sector have a disclosure topic linked to the general sustainability topic . A grey dot (•) indicates that fewer than 50 percent of the industries in that sector have a disclosure topic linked to the general sustainability topic . For example, half of the industries in the Health Care sector have a disclosure topic linked to “Supply chain management,” but less than half of the industries in the Transportation sector have a disclosure topic linked to “Supply chain management .” A box without a dot indicates that none of the industries in that sector have a disclosure topic linked to the general sustainability topic .In addition, each sustainability dimension is assigned a high, medium, or low prevalence for disclosure topics in that sector . A dark red rectangle (n) indicates that there is a high prevalence of disclosure topics for that sustainability dimension in the identified sector . A dark grey rectangle (n) indicates that there is a medium prevalence of disclosure topics for that sustainability dimension in the identified sector . A white rectangle indicates a low prevalence but not necessarily no prevalence . For example, there is a high prevalence of disclosure topics for the Human Capital dimension in the Technology & Communications sector, a medium prevalence in the Extractives & Minerals Processing sector, and a low prevalence in the Financials sector .As the table reveals, many sectors have a dominant sustainability dimension . For example, Environment is the defining dimension in Extractives & Minerals Processing, where management of resources, emissions, and ecological impacts are crucial . Human Capital stands out in Technology & Communications, where skilled workers drive R&D and create valuable intellectual property . Meanwhile, Social Capital is key in the Health Care sector, where managing patient relationships is a critical success factor . Although the red areas of the table represent those with the highest prevalence of material sustainability factors, it’s important to note that even the white, low-prevalence areas may contain some SASB disclosure topics . This table represents only one view of SASB’s research findings, and the sector-specific differences it reveals are only the tip of the iceberg . Each sector contains a variety of industries, in which sustainability topics can manifest themselves in unique ways . Therefore, these broader issues warrant context-specific disclosure topics . For example, a Social Capital issue, such as Customer Welfare, will mean different things in different industries . In the Biotechnology & Pharmaceuticals industry (Health Care), it will be related to drug safety, so an appropriate disclosure would include a list of products flagged by the FDA and related fatalities . Meanwhile, in the Education industry (Services), the issue manifests itself in terms of quality of education and gainful employment, so graduation and job placement rates are more appropriate for disclosure .For a more in-depth and multi-tiered understanding of this information and the patterns that have emerged from it, consult the Materiality Map™, an interactive and multi-tiered version of the information contained these tables, which is available on SASB’s website . SASB’s industry-specific disclosure topics are listed in the tables in Appendix I .
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HC FN TC EM TR SV RT FB CG RR INF
GHG Emissions • • • • • • • •Air Quality • • • • •Energy Management • • • • • • • • • •Water & Wastewater Management • • • • • • • •Waste & Hazardous Materials Management • • • • • • • •Ecologial Impacts • • • • • •
Environment
HC FN TC EM TR SV RT FB CG RR IF
Human Rights & Community Relations • • • •Customer Privacy • • • •Data Security • • • • • • •Access & Affordability • • •Product Quality & Safety • • • • • • •Customer Welfare • • •Selling Practices & Product Labeling • • • •
Social Capital
HC FN TC EM TR SV RT FB CG RR IF
Labor Practices • • • • • • •Employee Health & Safety • • • • • • • • •Employee Engagement, Diversity & Inclusion • • • • •
Human Capital
High Prevalence Medium Prevalence Low Prevalence
HC: Health Care FN: Financials TC: Technology & Communications EM: Extractives & Minerals Processing TR: Transportation SV: Services
RT: Resource Transformation FB: Food & Beverage CG: Consumer Goods RR: Renewable Resources & Alternative Energy IF: Infrastructure
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HC FN TC EM TR SV RT FB CG RR IF
Product Design & Lifecycle Management • • • • • • • • • •Business Model Resilience • •Supply Chain Management • • • • • • • •Materials Sourcing & Efficiency • • • • • • •Physical Impacts of Climate Change • • • • •
Business Model & Innovation
High Prevalence Medium Prevalence Low Prevalence
HC: Health Care FN: Financials TC: Technology & Communications EM: Extractives & Minerals Processing TR: Transportation SV Services
RT: Resource Transformation FB: Food & Beverage CG: Consumer Goods RR: Renewable Resources & Alternative Energy IF: Infrastructure
HC FN TC EM TR SV RT FB CG RR IF
Business Ethics • • • • • • •Competitive Behavior • • • •Management of the Legal & Regulatory Environment • • •Critical Incident Risk Management • • • • •Systemic Risk Management • • •
Leadership & Governance
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SECTION REVIEW
In this section, the following Learning Objectives were covered:
• Distinguish SICSTM sectors based on their distinct sustainability profiles .
• Explain the organization of SICSTM and the implications of a sustainability-
based industry classification .
? Questions to consider
√ What are some of the prominent sustainability issues that have emerged in
multiple, disparate industries?
√ Why do industry-specific standards help make broad macro-trends more
actionable for companies and investors?
USING SASB STANDARDS
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14 CORPORATE USE
Learning Objectives Covered in This Section
Explain the cross-functional nature of preparing sustainability disclosures in the
10-K .
Explain the timeline and process for 10-K disclosure .
Discuss the stages of 10-K preparation where sustainability information could
be incorporated .
Discuss the role of SASB standards in helping companies develop strategies
for long-term value creation, and benchmark and improve operational
performance .
Explain the influences of internal controls and third-party assurance on the data
quality of sustainability information and disclosures .
Explain why MD&A section was added to the 10-K and why it is an appropriate
place for the disclosure of sustainability information .
Describe the special disclosure considerations for multinational and diversified
companies .
Recognize key elements of Regulation S-K and other prominent legislation and
what is required for disclosure (i .e ., financial and nonfinancial information that
alters the total mix of information) .
Discuss the challenges that investors face in integrating sustainability
information into investment decisions (e .g ., information is available, but
often its quality varies, it is not comparable, and/or it lacks obvious financial
implications) .
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Using SASB Standards
SASB standards are designed to be useful to both corporate issuers and the
investing community . They’re intended to meet the needs of the reasonable investor
without creating an undue burden on issuers .
For companies, they offer:
• A minimum set of cost-effective disclosure topics that are likely to constitute
material information for companies in an industry;
• A standard for disclosing those factors in a decision-useful way for investors;
• A method for understanding and improving performance on sustainability-
related value drivers; and
• A way to comply with Regulation S-K .
For investors, they offer:
• Comparable data for benchmarking and evaluating company performance;
• Standardized, decision-useful information in a trusted, convenient channel
(e .g ., Form 10-K); and
• Data to inform analysis and understanding of sustainability risk at the portfolio
level .
Part III provides a general overview of how both companies and investors
incorporate SASB standards—and the data they yield—into their existing strategic
planning and tactical processes .
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SASB standards serve the dual purpose of helping companies:
• Prepare disclosure for external financial reporting, like Form 10-K (or 20-F);
and
• Establish and/or improve their approach to managing the sustainability topics
most likely to impact long-term value creation .
In addition to satisfying external reporting requirements, SASB standards provide
an opportunity to create a foundation for evaluating performance and supporting
business decisions .
14 .1 . Considerations for Corporate Use
Business organizations are increasingly complex, involving a large number
of interconnected and interdependent roles, departments, business units, and
subsidiaries . Although each business operates in its own unique fashion, the
following considerations are likely to be applicable to most companies .
14 .1 .1 . Cross-functional Nature
For companies to disclose financial statements in SEC filings, cross-functional
groups must effectively cooperate to accomplish a wide range of tasks . These
include:
• Collecting data about a company’s finances;
• Engaging an independent auditor to review the data;
• Assessing legal requirements and implications concerning disclosure;
• Presenting the statements to the board and management for approval;
• Communicating the results to investors, creditors, and other users .
Disclosing material sustainability information will similarly depend on effective
cross-functional collaboration . Companies can rely on the same or similar
collaborative policies and procedures they’ve established for accomplishing the
tasks necessary for disclosing financial statements and related material information .
However, these practices may need to be expanded to include sustainability data .
Companies will likely also need to include new individuals—such as sustainability
staff—in the disclosure process . Improved collaboration can in turn enhance a
company’s understanding of the ways sustainability affects operational and financial
performance .166 Collaborative companies can adapt faster, innovate more, and
166 Craig, Pamela J ., Bruno Berthon, Steven Culp, and Donniel Schulman, “The Chief Executive Officer’s Perspective,” Accenture, p . 8 .
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engage more completely with the marketplace to understand and respond to
customer needs and competitive pressures .167
14 .1 .1 .1 . Business Roles Applicable to Sustainability Disclosures
To determine what information to disclose in SEC filings, many public companies
establish a disclosure committee, which often includes the following positions
(or their equivalents): CEO, CFO, legal counsel, controller, chief audit executive
and internal audit team, risk management team members, investor relations
professionals, and managers of business units and information technology . With the
addition of the chief sustainability officer, the same employees can be involved in the
disclosure of material sustainability information .
However, the activities and responsibilities involved in preparing external
disclosures are not limited to these roles . Others that may participate are discussed
in the table below, although it is important to note that this is not meant to
represent a comprehensive or universal list . In many cases, the roles identified may
not be involved to a significant degree, while others that are not identified—such
as Risk Management, Compliance, or Environmental, Health, & Safety—may be
integral to the process . Although not comprehensive, the table details how certain
business roles could be involved in the collection, management, and/or disclosure of
sustainability information .
167 Chang, Beiting, Robert G . Eccles, Daniela Saltzman, eds ., “Integrated Reporting and the Collaborative Community: Creating Trust through the Collective Conversation,” The President and Fellows of Harvard College, 2010, p . 186 .
CEO and CFO
• Sign SEC filings and certifications about the accuracy and completeness of
the information disclosed as well as the effectiveness of internal controls and
disclosure controls
• Participate in annual assessments of sustainability information for materiality
(this includes but is not limited to previous disclosures)
• Develop and communicate a business-specific strategy for incorporating
sustainability into core activities, decision-making, and performance evaluation
Legal Counsel
• Fully understand sustainability disclosure requirements and provide relevant
information and analysis when companies are determining what information to
disclose
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• Help manage legal risks related to the omission of material information,
informed risk management, and informed decision-making to fulfill duties of
care, as subpar performance on material sustainability factors can pose a risk to
a company’s financial condition or operating performance
• Review all of the company’s communications on sustainability, such as corporate
social responsibility and sustainability reports, to ensure consistency and the
appropriate use of “materiality” to describe sustainability information
Chief Sustainability Officer
• Participates in both new and established processes for collecting and reporting
sustainability data for sustainability reports and 10-K disclosures
• Establishes collaborative relationships with the internal audit and/or finance
teams
• Contributes to assessing the materiality of sustainability information by helping
to identify how sustainability impacts the company’s business performance
Chief Audit Executive and Internal Audit
• Systematically evaluate the organization’s risk management, control, and
governance processes
• Work closely with the independent assurance provider
• Work with the audit committee of the board of directors to keep the board
informed about the policies and procedures surrounding the controls
• Provide data control and risk management oversight to inform management
about the company’s sustainability performance
Independent Assurance Provider
• Assesses the data quality of sustainability disclosures, including the design
and operation of the internal controls, for purposes of getting comfort over
management’s assertion
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Board of Directors
• Accepts or assigns to the audit committee responsibility for overseeing the
preparation of certain aspects of SEC filings and reviews and approves filings
before they are submitted
• Oversees the internal audit team to ensure appropriate controls are in place, that
the team is objective and competent, and that it has the necessary training and
support
• Oversees the external assurance provider, assesses its independence, and
reviews its activities and the final report
• Engages in other relevant activities, including discussion of financial statements,
the contents of MD&A, the company’s risk assessment, and sustainability’s role
in business strategy
• Establishes sustainability committee to oversee relevant disclosures
Investor Relations
• Crafts and presents the company’s message to the investment community
• Communicates investors’ opinions to management
• Communicates with a range of roles, including finance, communication,
marketing, and securities law/compliance
• Places earnings in the context of near- and long-term goals and/or strategies,
which may be informed by the consideration of material sustainability information
• Provides perspective on the company’s sustainability performance, effectively
and convincingly communicating the value of initiatives to shareholders
Managers of Business Units
• Use unit-specific knowledge and understanding to inform measurement,
management, and reporting of sustainability data
Information Technology
• Helps decision-makers consider the architecture (technology, platform, software,
etc .) that will support reliable, accurate, and complete reporting that meets
management’s expectations for disclosure in a statutory filing and/or allows for
effective measurement and management of performance
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14 .1 .2 . Special Disclosure Situations
The structural complexities that require companies to use cross-functional teams
when preparing external disclosures may also present challenges related to the
scale and scope of a company’s operations . When a firm is vertically or horizontally
integrated, or when it operates in a multinational context, special disclosure
situations may arise .
14 .1 .2 .1 . Operational Considerations
SASB recommends that registrants use SASB standards specific to their primary
industry as identified by SICSTM . If a registrant generates significant revenue from
multiple industries, SASB recommends that it consider sustainability topics that
SASB has identified for those industries and disclose the associated SASB accounting
metrics where relevant .
SASB recommends that consolidated entities calculate metrics for the whole
entity, regardless of the size of the minority interest, but data from unconsolidated
entities does not need to be included . A registrant should disclose, however,
information about unconsolidated entities when it is deemed necessary for investors
to understand the effect of sustainability topics on the company’s financial condition
or operating performance (typically, this disclosure would be limited to risks and
opportunities associated with these entities) .
14 .1 .2 .2 . Regional Considerations
Multinational or non-U .S . domiciled SEC registrants may have special
considerations around certain SASB disclosure topics and/or accounting metrics . In
some cases, those registrants may conclude that a given SASB accounting metric
does not constitute material information and therefore does not warrant disclosure in
SEC filings .
For example, SASB recommends Responsible Lending & Debt Prevention as a
disclosure topic for companies in the Mortgage Finance industry . The related metrics
are likely to yield material information for companies domiciled in the U .S ., where a
robust secondary market for securitized mortgages facilitates capital efficiency but
may increase the risk of default and present systemic risk management challenges .
However, the metrics are less likely to constitute material information for companies
issuing mortgages in the U .K ., where these loans typically remain on the balance
sheets of originating banks and capital adequacy is more heavily regulated .
In some cases, the information captured by SASB metrics may be incomplete
or otherwise materially misleading without accounting for differences associated
with multinational or non-U .S .-domiciled registrants . Consequently, SASB aims to
incorporate the consideration of international factors into its metrics, disclosure
guidance, and/or normalization .
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Nevertheless, in some cases, a company may need to provide contextual
information to make its disclosures decision-useful for investors . For instance,
Recruiting & Managing a Global, Diverse & Skilled Workforce is a recommended
disclosure topic for companies in the Software & IT Services industry . However, when
reporting gender and racial/ethnic group representation, where those percentages
are significantly influenced by the country or region where the workforce is
located, the registrant should provide contextual disclosure to ensure the proper
interpretation of the results .
14 .1 .3 . Alignment with Sustainability Reporting
Although sustainability reports and SEC filings serve different stakeholder
groups, most companies will find some overlap in the information they contain . A
company can ensure its compliance with SEC disclosure obligations by taking care to
distinguish between material and immaterial sustainability information and ensuring
the description of that information is consistent and appropriate across all reporting
channels .
To reduce the risk of shareholder scrutiny and lawsuits, the company can take
several steps .
1. Use “material” to describe only sustainability information inside SEC filings. Once shareholders begin to examine statements outside of SEC filings,
the risk of litigation regarding those statements increases . One solution is for a
company to explicitly state that information contained in its sustainability report is
relevant or interesting, but not material .
2. Have legal counsel review sustainability reports. A review by legal
counsel can help ensure that any inconsistencies or conflicts between the
contents of a company’s sustainability report and its SEC filings are identified and
addressed . The review can help a company understand the risks involved, decide
what information to disclose for what purpose, and determine how to describe
the information .
3. Include material sustainability information in SEC filings. The inclusion of
sustainability information in SEC filings as appropriate can help a company fulfill
its SEC disclosure obligations .
14 .2 . Collecting Data
Data quality is a critical aspect of reliable disclosures . Corporations and investors
cannot fully benefit from sustainability information if the information is not reliable .
For example:
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• Corporate management will not be as comfortable making decisions based on
the information; and
• Investors and analysts will be less likely to include sustainability information in
their financial analysis models .
Many of the questions that arise around the reliability of sustainability disclosures
are the very same ones that made financial auditing an obligatory practice in the
wake of the stock market crash of 1929: Is the underlying data accurate? Is the
underlying data complete? Are there controls in place to mitigate risks and improve
reliability in the data collection processes?
This section addresses the topic of internal controls, which are intended to
ensure data accuracy . The issue of assurance, a process intended to strengthen user
confidence, is addressed later in the section on reporting .
14 .2 .1 . Internal controls
Internal controls are activities that help companies achieve their objectives by
mitigating risks of incorrect data and disclosures . When effectively implemented
and maintained, they provide assurance to management that the organization has
achieved its operations, reporting, and compliance objectives .168
Some examples of internal control activities include:
• Calibration testing of measurement equipment (e .g ., electricity meters)
• Establishing automated tolerance limits that trigger warnings when anomalies
occur;
• Protecting data access (i .e . minimizing possible data corruption);
• Reconciling invoices to the general ledger;
• Performing analytical reviews to follow up on unusual fluctuations,
adjustments, etc .; and
• Establishing independent reviews during the data entry process .
Before a public corporation prepares its financial statements for disclosure in an
SEC filing, it is expected to establish internal controls, which help mitigate the risk
of misstating information . The internal controls for financial reporting (ICFR) are
the responsibility of the CEO and CFO .169 The Sarbanes-Oxley Act (SOX) stipulates
that the CEO and CFO sign certifications regarding the review and effectiveness of
internal controls (Sections 302 and 906 of SOX) .
168 Committee of Sponsoring Organizations of the Treadway Commission, “Internal Control—Integrated Framework,” Executive Summary, May 2013 .
169 Sarbanes-Oxley 404 .
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Sustainability disclosures typically rely on information systems and processes
outside the financial reporting domain and its established controls environment .
Information is often prepared in spreadsheets aggregating data points from global
facilities with few formal controls . Due to these and other factors, 71 percent
of investors have expressed dissatisfaction with the quality of currently available
sustainability data .170
Sustainability disclosures in SEC filings are subject to the same SOX certifications
regarding disclosure controls and procedures and the accuracy and completeness of
the information that apply to financial reporting .171 Although the SOX certification
does not explicitly cover internal controls over non-financial information, the
certification requirements place a higher standard of accountability on sustainability
disclosures in SEC filings than may exist in other communication channels, such as a
sustainability or CSR report .
Therefore, SASB recommends registrants integrate sustainability disclosures with
existing financial reporting processes, including the internal control framework . The
COSO Internal Control Integrated Framework specifically references non-financial
reporting objectives, which allows companies to integrate sustainability reporting
objectives into their existing internal control framework .172 Two non-financial
reporting objectives relevant to SASB are the inclusion of SASB information in SEC
filings and the assurance of SASB information . By applying the COSO framework
to SASB information, a company can implement internal controls that mirror the
rigor and robustness of ICFR . Establishing internal controls over SASB information
can support the SOX certification requirement regarding sustainability information
included in SEC filings, and also support an external party’s assurance of SASB
information .
14 .3 . Managing Sustainability Performance
As understanding of the link between sustainability and performance becomes
more sophisticated, companies can progress from short-term risk avoidance
and regulatory compliance to long-term value creation and the development of
competitive advantage . Many businesses have begun to realize this . An Accenture
survey of senior executives (Long-Term Growth, Short-Term Differentiation and Profits from Sustainable Products and Services, 2012) shows that 77 percent of U .S .
respondents believe that sustainability is “vital to future growth .” This is a shift from
prior surveys that indicated sustainability was primarily a factor in compliance or cost
considerations . Indeed, 88 percent of U .S . respondents indicated that sustainability
expenditures are an investment, not a cost . The Accenture results coincide with data
170 PwC, Investors, corporates, and ESG: bridging the gap (October 2016) .
171 SEC, “Commission Guidance Regarding Disclosure Related to Climate Change; Final Rule,” February 2010 .
172 McNally, J . Stephen, “The 2013 COSO Framework & SOX Compliance–One Approach to an Effective Transition,” Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), p . 4 .
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from McKinsey (Valuing Social Responsibility Programs, 2009) which shows that the
companies creating financial value from their sustainability initiatives are doing so by
targeting common financial drivers, such as revenue growth and return on capital .
Although sustainability efforts often make good business sense, companies that
want to maximize their ability to create value will need to develop a sustainable
business strategy as opposed to a sustainability strategy . Sustainability strategies
represent tactical, focused responses to a specific performance area . Sustainable
business strategies, on the other hand, represent a more proactive, forward-thinking
approach to creating shareholder value over the long run .
14 .3 .1 . Creating a Sustainable Business Strategy
A sustainability strategy is a company’s standalone strategy for improving
its performance on one or more sustainability topics . Sustainability strategies
often address managing risk, such as exposure to climate change or potential
liabilities in the supply chain . A sustainability strategy—and any goals that may be
communicated to the public—often reflects popular topics in the media or society
at large (e .g ., reducing building energy use by 20 percent by 2020, serving 80
percent locally sourced food in staff cafeterias by 2025, or auditing an entire supply
chain for adherence to a “no child labor” policy within three years) . Consequently,
sustainability strategies can be one way a company responds to requests from
stakeholders or generates positive media attention . However, by virtue of its focus on
a specific element of the business, a sustainability strategy tends to be independent
of the company’s business strategy and does not necessarily translate into sustained
long-term success .
A sustainable business strategy, on the other hand, is a company’s plan to
improve its performance managing the financial and non-financial capitals that
impact its ability to create value over the long-term . Just as investors need both
financial and non-financial information to make informed decisions, managers must
consider both types of information to create a sustainable business strategy . In
both cases, it’s necessary to have useful information about the sustainability issues
that can have material impacts on a company’s financial condition or operating
performance .
The first step on the pathway to a sustainable business strategy is identifying the
proper metrics .
Identify metricsDevelop
knowledge from data
Craft strategy based on findings
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This process mirrors many other frameworks for translating business information
into business strategy for value creation . For example, Deloitte outlines a Business
Intelligence framework that identifies a linear, iterative value-creation pathway that
starts with metrics, which yield data, that become knowledge when supplemented
with additional context and understanding . When that knowledge guides
appropriate action, it yields innovation that impacts the entire business, which
subsequently can create value for the company .173
The most relevant sustainability metrics for strategists are those most closely
linked to the company’s ability to create value . That link is incorporated into SASB
metrics by the process through which they are developed . (See Part II .)
14 .3 .2 . Connecting SASB Metrics to Strategy
Companies regularly analyze their ability to create and sustain competitive
advantage within their industries . These analyses consider industry context, the
competitive landscape, and the capabilities and resources of the firm and their
supply chains . Through this process, companies develop and assess potential options
to create value and test or implement those deemed likely to succeed . They then
monitor results and refine their practices as needed . Incorporating SASB metrics into
this process and other existing strategy frameworks can help leaders in two ways .
First, their analyses will be more complete, which can prevent unwelcome surprises
for the company and its shareholders . Second, they can more effectively differentiate
themselves from their peers, helping to attract customers and investors .
Harvard Business School research indicates that firms can achieve superior
accounting and market returns by efficiently focusing their efforts on material
sustainability factors .174 These represent the issues most likely to be incorporated into
a company’s core strategy as well as those identified in SASB disclosure topics .
SASB began publishing its provisional standards in 2013 and they were first used
in SEC filings for fiscal year 2016 . However, most corporations that want to report
with SASB standards are still implementing the data collection, management, and
reporting processes necessary to embed the standards into the company’s financial
reporting cycle . Nonetheless, because the metrics are developed based on evidence
of financial impact, there are many examples of public corporations that have
generated significant value from strong performance on metrics included in SASB
standards .
For example, tire manufacturer Pirelli capitalized on an opportunity to create value
related to one of SASB’s metrics for the Materials Efficiency topic—the percentage
of input materials consisting of recycled or remanufactured content . Such initiatives
not only lower the environmental lifecycle impact of vehicles, they also help auto
parts companies more effectively manage risks related to the pricing volatility and
173 Pant, Prashant, “Business Intelligence (BI): How to Build Successful BI Strategy,” Deloitte, 2009 .
174 Khan, et al .
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availability of key inputs, improve operational efficiency, and potentially reduce
the cost of revenue, thereby enhancing margins . In 2009, Pirelli launched a Green
Performance Strategy to produce tires that combine performance and environmental
sustainability . As part of the strategy, the company identified an opportunity to
minimize its costs and attract new customers by developing high-performance
silica—which improves the safety and durability of tires—from food waste such as
rice husks .
The Green Performance tires now account for 49 .8 percent of Pirelli’s sales,175
with their growth rate more than doubling the company’s overall sales growth .176
Using this approach, Pirelli’s input costs are reduced,177 its manufacturing
process consumes less energy, and its products reduce fuel consumption by 5-7
percent—with a corresponding impact on CO2 emissions—due to their low rolling
resistance .178 The initiative’s success is due in part to its alignment with Pirelli’s
business strategy, which deeply embeds sustainability considerations into the culture
of the firm . An unexpected benefit of the strategy led to a doubling in the number
of analysts covering the Pirelli stock, from 12 to 25 . Although the SASB metric didn’t
exist when Pirelli launched its Green Performance Strategy, this case serves as an
example of how SASB metrics’ inherent connection to industry-specific value drivers
makes them useful starting points for identifying opportunities for value creation .
14 .3 .3 . Performance Management
When a company pursues its sustainable business strategy, its performance goals
should be chosen based on their financial impact or operating results .179 180 Because
they are directly linked to specific value drivers, SASB metrics can be incorporated
into existing performance evaluation systems to set targets and measure progress .
In the Pirelli example above, SASB’s Materials Efficiency disclosure topic is correlated
with multiple value drivers—Market Share, New Markets, Cost of Revenue, Research
& Development, and Contingent Liabilities & Provisions .
This approach contrasts with a common strategy for establishing corporate
sustainability targets . Companies that identify sustainability goals in their CSR reports
tend to include an extensive list of initiatives and targets . However, firms are likely to
gain more economic value from their performance evaluation systems by focusing on
a limited set of key performance indicators (KPIs) .181 182
175 Pirelli, Annual Report 2018 (May 17, 2019) .
176 UN PRI and Global Compact LEAD, The Value Driver Model: A Tool for Communicating the Business Value of Sustainability (December 2013) .
177 Jose M Asumendi, .Pirelli & C. SpA, J .P . Morgan-Cazenove Europe Equity Research (July 18, 2013) .
178 Shared Value Initiative, “Pirelli Uses Rice Husks in Tires to Reduce Waste and Save Fuel”; available at https://www .sharedvalue .org/examples/silica-tires-made-part-rice-husks-reduce-waste-and-save-fuel (accessed July 26, 2019) .
179 Chartered Institute of Management Accountants, “Accounting for Climate Change: How Management Accountants Can Help Organisations Mitigate and Adapt to Climate Change,” February 2010 .
180 Casazza, Carol, “Oversight of Corporate Sustainability Activities,” NACD, 2014 .
181 Bonini, Sheila, and Steven Swartz, “McKinsey Profits with Purpose: How Organizing for Sustainability Can Benefit the Bottom Line,” 2014 .
182 Casazza
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It’s common practice for a specific role or team to assume responsibility for
financial performance management, and the same approach is likely to be beneficial
for sustainability data .183 By having a dedicated individual or group focused on
sustainability KPIs linked to financial performance, a company is more likely to identify
and take advantage of increasingly significant opportunities for value creation .
Successfully capitalizing on those opportunities tends to follow certain stages of
value creation . These stages, which move along a continuum from “doing things
differently to doing different things,”184 have been identified in research and analysis
by thought leaders such as the Harvard Business Review, MIT Sloan Management Review, Accenture, and Deloitte .
In the initial stage, value emerges from cost and risk management initiatives—
the low-hanging fruit . As that type of value is captured, the organization tends to
move on to the second stage: optimizing efficiencies and redesigning products and
processes in order to further enhance value .185
Those first two stages—minimizing costs and optimizing efficiencies—yield
incremental value . The next two stages begin to deliver much more . In the third
stage, when key sustainability KPIs are integrated into performance evaluation
systems, savvy companies will see opportunities for new products and technologies,
which foster new business models and sources of value . As those mature and
become more embedded in the organization, the most successful companies will
enter the fourth stage, having differentiated themselves and their value proposition
from competitors . The corporate culture and brand leadership that emerge as a
result help to secure the company’s competitive advantage .186 187 188 189 Below is a
chart that summarizes the four stages and provides an example initiative for each
stage .190 The examples represent the Environment dimension of sustainability, but the
four stages can also be applied to the other dimensions .
Not all corporations that implement sustainability performance evaluations
will reach the final stage of value creation, but those that are most effective at
recognizing the opportunity for value creation stemming from sustainability will be
best positioned to do so .
183 Bonini and Swartz .
184 Goh, Eugene, Knut Haanaes, David Kiron, Nina Kruschwitz, Martin Reeves, “The Innovation Bottom Line,” MIT Sloan Management Review, Winter 2013 .
185 Esty, Daniel C ., and David A . Lubin, “The Sustainability Imperative,” Harvard Business Review, May 2010 .
186 Kiron, et al, “The Innovation Bottom Line .”
187 Esty, Daniel C . and David A . Lubin, “Bridging the Sustainability Gap,” 2014 .
188 Accenture and CECP, “Business at Its Best: Driving Sustainable Value Creation—Five Imperatives for Corporate CEOs,” 2011 .
189 Grocery Manufacturers Association/Food Products Association and Deloitte, “Sustainability: Balancing Opportunity and Risk in the Consumer Products Industry,” 2007 .
190 Esty and Lubin, “Sustainability Imperative .”
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14 .4 . Reporting Material Sustainability Information
14 .4 .1 . 10-K Preparation Process
The preparation of an SEC filing, such as Form 10-K, is a complex, detailed, and
time-consuming process that involves a long list of sensitive regulatory requirements,
a great deal of procedural discipline, and important contributions from a variety of
sources .
14 .4 .1 .1 . The Disclosure Committee
In 2002, the SEC recommended that public companies establish a non-board
disclosure committee . Although it is a recommendation and not a legal requirement,
most public companies have created the committee to develop and evaluate their
disclosure controls and procedures, according to the National Investor Relations
Institute . Many companies use the committee to help review disclosure controls,
internal controls, and the accuracy and completeness of the disclosure statements
that are subject to the CEO and CFO certification requirements under SOX .
The committee’s function and scope are usually outlined in a formal governance
charter, which clarifies the roles and responsibilities . The committee often meets
at least once each quarter, usually as the quarterly/annual financial statement
are nearing finalization . The committee tends to review internal procedures for
data collection and disclosure controls, and analyzes the materiality of collected
information in order to make recommendations for inclusion in SEC filings . The
recommendations are made far enough in advance of filing deadlines so the CEO,
CFO, and audit committee can decide and act upon the recommendations .
Four Stages of Value Creation Examples
1 . Minimizing costs Since 1975, 3M has saved $1 .7 billion by changing products or processes and recycling or reusing materials (e .g ., replacing a solvent-based paper treatment process with a water-based process) .
2 . Optimizing efficiencies Through its “zero waste” initiative, DuPont weighed future earnings against business and environmental risks, eliminating divisions with significant waste products (e .g ., carpets and nylons) .
3 . New products and/or technologies
Dow’s focus on sustainability innovation led to new products and breakthroughs such as solar roof shingles and hybrid batteries, which helped shift Dow’s core business from commodity chemicals to advanced materials and high-tech energy .
4 . New business models and differentiated value proposition
GE’s ecomagination initiative generated $160 billion in revenue between 2005 and 2014 based on $12 billion in R&D . Consequently, GE has emerged as a differentiated energy and environmental solutions provider .
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For those companies whose fiscal year ends on December 31, the following
timeline represents a common 10-K preparation process . Frequently, the CSR report
preparation timeline occurs several months later and is not as thorough and robust .
When making sustainability disclosures in Form 10-K, companies should consider
how to adjust their disclosure controls and procedures to cover sustainability
information that may need to be disclosed under the securities laws .
14 .4 .1 .2 . Common Form 10-K Preparation Timeline
December
• Hold planning meeting and update controller’s questionnaire
• Review prior year Form 10-K
• Review new regulatory developments/rules and peer practices and industry
trends
- Consider changes to known trends, uncertainties for MD&A
- Determine information necessary to ensure disclosures are complete and
accurate
January
• Draft the following sections:
- Business section
- Risk factors
- Compensation discussion and analysis
- Exhibits
• Executive officers review business section
• Request compensation data
February (and potentially March for filers with later deadlines)
• Disclosure committee meets to review Form 10-K drafts and to evaluate
disclosure and internal controls
• Submit for audit committee and compensation committee reviews
• Gather board signatures
• File with SEC via EDGAR
The formal structure of the disclosure committee, the inclusion of high-ranking
officers, and the tight preparation timeline reinforce the fact that the preparation
of Form 10-K is a highly sensitive corporate activity . Not only are the CEO and CFO
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subject to potential liability, but there are also significant costs associated with
correcting a misstatement . Misstatements subject the company to potential liabilities .
14 .4 .1 .3 . Disclosure Process
Sustainability disclosures based on SASB standards should focus on enhancing the
quality and context of factors that impact value creation—not simply add volume
to current disclosures . To that end, SASB standards are designed to help companies
focus on the disclosure topics most likely to be material in their industry .
Companies consider and
re-consider the materiality of
information throughout the
financial reporting process,
typically on a quarterly basis . The
consideration of the sustainability
topics included in the standards
should be integrated within the
financial reporting disclosure
processes that occur on a regular
basis, rather than being reviewed
in a “one-off” ad-hoc process . For
example:
• The controller’s
questionnaire can be
instrumental in gathering
additional information
needed to assess the
magnitude and probability
of the topic in future
periods .
• In addition, the cross-
functional team may also
identify specific research
and/or analysis that will
better inform future
evaluation of the materiality
of sustainability events,
trends, demands, and uncertainties .
• Lastly, the company may wish to engage directly with investors and/or
shareholders to seek their input on sustainability disclosures .
THE FIVE-FACTOR TEST
When determining which of the SASB topics might be material, based on the legal and regulatory interpretations of that term, companies can use the following five-factor test . (See “Part II: Understanding SASB Standards” for more detail .)
• Financial impacts and risks: Consider the likelihood that the topic may have a material impact on the entity’s ability to create value in the short-, medium-, and long term through other factors .
• Legal, regulatory, and policy drivers: Consider the current and future regulatory environment surrounding the topic .
• Industry norms and competitive drivers: Consider the completeness of current disclosures by evaluating the practices of industry peers .
• Investor/Stakeholder concerns and social trends: Consider whether the topic has been raised by investors and other stakeholders in the form of questionnaires or shareholder resolutions .
• Opportunities for innovation: Consider the organization’s business model and the potential to capitalize on opportunities relevant to the sustainability topic .
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Specific parts of the disclosure process will be more relevant to sustainability
reporting than others, as identified in the chart on the next page .
14 .4 .2 . Sustainability in Form 10-K (or 20-F)
SASB standards are most useful in helping management comply with disclosure
obligations under Management’s Discussion and Analysis of Financial Condition
and Results of Operations (MD&A) of Regulation S-K . The purpose of MD&A is to
give investors a meaningful, candid assessment of a company’s performance and
prospects through the eyes of management .
In addition to being included in MD&A, SASB disclosures may also be warranted
within a company’s description of business,191 legal proceedings192 and risk factors .193
These four locations are consistent with those highlighted in the SEC’s interpretive
guidance on disclosure requirements related to climate change and cybersecurity .
14 .4 .2 .1 . MD&A Disclosures
Item 303 of Regulation S-K requires a company to provide a discussion and
analysis of management’s view of the business . MD&A requirements call for
registrants to provide investors and other users with material information that
is necessary to form an understanding of the company’s financial condition and
operating performance, as well as its prospects for the future .194 Such requirements
are intended to satisfy three principal objectives (see the “For Context: Purpose of
MD&A” sidebar following) .
While sustainability matters may be implicated by any of the requirements of Item
303, the most prominent is the requirement to disclose material events, trends, and
uncertainties . Registrants are required to disclose “any known trends or uncertainties
that have had or that the registrant reasonably expects will have a material
favorable or unfavorable impact on net sales or revenues or income from continuing
operations . If the registrant knows of events that will cause a material change in the
relationship between costs and revenues (such as known future increases in costs
of labor or materials or price increases or inventory adjustments), the change in the
relationship shall be disclosed .”195 Item 303 states that MD&A “shall focus specifically
on material events and uncertainties known to management that would cause
reported financial information not to be necessarily indicative of future operating results or of future financial condition .”196 (emphasis added)
The SEC provides a likelihood test for assessing the materiality of events, trends or uncertainties, and compels MD&A disclosure if the Company cannot conclude:
191 Ibid . (§ 229 .101) .
192 Ibid . (§ 229 .103) .
193 Ibid . (§229 .503(c)) .
194 SEC FR-72, Commission Guidance Regarding Management’s Discussion and Analysis of Financial Condition and Results of Operations (December 2003) .
195 C .F .R . § 229 .303 (Item 303)(a)(3)(ii) .
196 Ibid .
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Management Reporting Close the Books
Understand markets and trends
Establish data needs, determine who needs access, and build supporting IT
Determine reporting needs, create standard chart of accounts, manage account definitions, and standardize
accounting processes
Create management reports and confirm that results support strategy
Create master general ledger and supporting general ledgers
• Chart of accounts
• General ledger(s)
• Management reports
• Income statement
• Balance sheet
• Cash flow statement
Process Steps
Outputs
Consolidate reports and reconcile accounts
Journalize transactions, post to ledger accounts, and run trial balance
Search for errors and modify trial balance
Prepare financial statements
Distribute to business units and external analysts
Post prepayments and accruals, close revenue and expense accounts,
prepare income summary, post closing entries
External Reporting
Create team for external reporting, identify and source reporting
Write supporting narrative
Assemble information
Secure board committee approval
Release/Publish
• External reports (e .g ., 10-K)
• Analyst briefing materials
Relevant for Sustainability Accounting
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1 . that the event, trend or
uncertainty is not reasonably likely to
occur or 2 . assuming the occurrence of
the known uncertainty, that it is not
reasonably likely to have a material
impact on the company’s financial
condition or results of operations197
SASB anticipates the disclosure of
sustainability matters to focus on the
following content elements:
• Executive overview: Although not required, the
SEC expects an informative
executive-level overview to
provide insight into material
opportunities, challenges, and
risks on which the company’s
executives are most focused for
both the short- and long-term,
as well as the actions they are taking to address them .
• Results of operations: The SEC requires disclosure of a known trend
or uncertainty that is reasonably likely to have a material effect on the
registrant’s financial condition or results of operations .
• Environmental and product liabilities: The SEC requires disclosure of
environmental liabilities for which the company has information that creates
a reasonable likelihood of a material effect on its financial condition or results
of operations . MD&A should discuss, to the extent material, historical and
anticipated environmental expenditures, including recurring costs associated
with managing hazardous substances and pollution in ongoing operations,
capital expenditures, mandated expenditures to remediate previously
contaminated sites, and other non-recurring expenses .
Many of the sustainability topics identified by SASB address trends that are
expected to occur over the medium- and long-term . Companies should consider the
trajectory of a relevant sustainability trend and the potential speed of those changes
relative to their own preparedness . The SEC also provides specific guidance for
considering the disclosure implications of forward-looking information .
197 The SEC has stated that the disclosure threshold of “reasonably likely” is lower than “more likely than not .” Commission Statement about Management’s Discussion and Analysis of Financial Condition and Results of Operations, Securities Act Release No . 33-8056, 2002 SEC LEXIS 148, January 22, 2002 (hereafter “2002 MD&A Statement”) .
FOR CONTEXT: PURPOSE OF MD&A
Provide insight into the organization’s financial condition, changes in financial condition, and results of operations . Specifically, satisfy three objectives to provide:• Narrative explanation of the financial statements that enables investors to see the company through the eyes of management; • Context within which financial information should be analyzed;• Quality of, and potential variability of, a company’s earnings and cash flow, so that investors can ascertain the likelihood that past performance is indicative of future performance.
PART 229 Regulation S-K; 2003 Interpretive Guidance 33-8350 MD&A; 17 CFR Parts 211, 231 and 241 – Commission Guidance Regarding Disclosures Related to Climate Change
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In addressing prospective financial
condition and operating performance, the
SEC requires companies to disclose material,
forward-looking information regarding
known trends and uncertainties . The SEC
also encourages discussion of prospective
matters and forward-looking information in
circumstances where that information may
not be required—though not all forward-
looking information falls within the realm of
optional disclosure .198
The Private Securities Litigation Reform
Act (PSLRA), which was covered in Part I: The
Need for Sustainability Accounting, provides
the company with a safe harbor from liability for forward-looking statements that
are:199
(1) accompanied by meaningful cautionary statements, or
(2) immaterial, or
(3) unsupported by allegations that the statement was made with actual
knowledge that the statement was false or misleading .
The company therefore can enjoy the safe harbor’s protection through three
distinct paths .
14 .4 .2 .2 . Description of Business
Item 101 of Regulation S-K requires a company to provide a description of
its business and its subsidiaries . Item 101(c)(1)(xii) expressly requires disclosure
regarding certain costs of complying with
environmental laws .
If the risks or opportunities related
to a SASB topic materially affect “the
registrant’s products, services, relationships
with customers or suppliers, or competitive
conditions, the registrant should provide
disclosure in the registrant’s ‘Description
of Business .’”200 In determining whether to
include disclosure, registrants should consider
the impact on each of their reportable
segments .
198 SEC FR-72, Commission Guidance Regarding Management’s Discussion and Analysis of Financial Condition and Results of Operations, December 2003 .
199 Section 21E of the Securities Exchange Act of 1934, 15 U .S .C . § 78u-5 .
200 See Item 101 of Regulation S-K; and Form 20-F, Item 4 .B .
PURPOSE OF DESCRIPTION OF BUSINESS
Provide an overview of form of organization, principal products/services, major customers, and competitive conditions for reportable segments and key geographic areas . Describe any material effects that compliance with environmental laws may have on capital expenditures, earnings and competitive position .
PART 229 Regulation S-K; 2003 Interpretive Guidance 33-8350 MD&A; 17 CFR Parts 211, 231 and 241 – Commission Guidance Regarding Disclosures Related to Climate Change
FOR CONTEXT: ALSO IN ITEM 101
“Appropriate disclosure also shall be made as to the material effects that compliance with Federal, State and local provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, may have upon the capital expenditures, earnings and competitive position of the registrant and its subsidiaries .”
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14 .4 .2 .3 . Legal Proceedings
Item 103 of Regulation S-K requires companies to describe briefly any material
pending or contemplated legal proceedings . It includes specific disclosure
requirements for administrative or judicial proceedings arising from laws and
regulations that target discharge of materials into the environment or that are
primarily for the purpose of protecting the environment . However, legal proceedings
involving other sustainability issues or
SASB topics may also be material .
If a registrant (or any of its subsidiaries)
is a party to a pending legal proceeding
that is material, the registrant may need
to disclose information regarding this
litigation in its “Legal Proceedings”
disclosure . Using cybersecurity as an
example, if a significant amount of
customer information is stolen, resulting
in material litigation, the registrant should disclose the name of the court in which
the proceedings are pending, the date instituted, the principal parties thereto,
a description of the factual basis alleged to underlie the litigation, and the relief
sought .201
14 .4 .2 .4 . Risk Factors
Item 503(c) of Regulation S-K requires filing companies to provide a discussion
of the most significant factors that make an investment in the registrant speculative
or risky, clearly stating the risk and specifying how a particular risk affects the
particular filing company . Registrants should disclose risks related to SASB topics if
they are among the most significant factors that make an investment in the company
speculative or risky .202
In determining whether risk factor disclosure is required, registrants are expected
to evaluate risks related to the SASB topic and take into account all available relevant
information, including prior events and their associated severity and frequency .
As part of this evaluation, registrants should consider the probability that events
will occur and the quantitative and qualitative magnitude of those risks, including
potential costs and other consequences . Registrants should also consider the
adequacy of preventative actions taken to reduce risks in the context of the industry
in which they operate .
Consistent with Regulation S-K Item 503(c) requirements for risk factor
disclosures, sustainability risk disclosure provided must adequately describe the
nature of the material risks and specify how each risk affects the registrant .
201 SEC, CF Disclosure Guidance: Topic No . 2, Division of Corporation Finance guidance regarding disclosure obligations relating to cybersecurity risks and cyber incidents, October 2011 (hereafter “Cyber Disclosure”) .
202 See Item 503(c) of Regulation S-K; and Form 20-F, Item 3 .D .
FOR CONTEXT: PURPOSE OF LEGAL PROCEEDINGS
Summarize any material pending legal actions to which the company is a party .
PART 229 Regulation S-K; 2003 Interpretive Guidance 33-8350 MD&A; 17 CFR Parts 211, 231 and 241 – Commission Guidance Regarding Disclosures Related to Climate Change
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Registrants should not present risks
that could apply to any issuer or any
offering and should avoid generic
risk factor disclosure .203 Depending
on the registrant’s particular facts
and circumstances, and to the extent
material, appropriate disclosures may
include:
• Discussion of aspects of the registrant’s business or operations that give rise to
material sustainability risks and the potential costs and consequences;
• Description of related incidents experienced by the registrant that are
individually, or in the aggregate, material, including a description of the costs
and other consequences;
• Description of relevant insurance coverage;
• Description of occurrence (e .g ., specific cyberattack, extreme weather event)
and its known and potential costs and other consequences .
The disclosure should enable investors to appreciate the nature of the risks faced
by the particular registrant in a manner that would not compromise the registrant’s
security or competitiveness .204
14 .4 .2 .5 . Assurance
SASB standards are designed for the disclosure of material sustainability
information in MD&A section
of Form 10-K, but MD&A is not
required to be audited . Nevertheless,
some companies may elect to
seek external assurance of their
sustainability disclosures . “Assurance”
is defined as a review by external,
independent professional(s) to opine
on the credibility of the data . The
independent third-party assurance
provider applies established assurance
procedures in order to report an
opinion on its findings . The opinion
helps the user of the information
203 Item 503(c) of Regulation S-K instructs registrants to “not present risks that could apply to any issuer or any offering” and further, to “explain how the risk affects the issuer or the securities being offered .” Item 503(c) of Regulation S-K .
204 “Cyber Disclosure .”
PERSPECTIVE
Risk reporting is an opportunity to instill confidence in shareholders that the registrant and its board have insight into key threats to the achievement of strategic objectives and continued business operations .
DEFINITION: ASSURANCE VS. ATTESTATION
“Attestations” are defined by the PCAOB and can cover a range of non-financial subjects, including but not limited to sustainability . When sustainability assurance is conducted in accordance with a PCAOB attestation standard, the assurance engagement is the same as an attest engagement . However, sustainability assurance is sometimes provided by professionals who are not certified public accountants and/or by professionals who do not follow a PCAOB standard . In those instances, a sustainability assurance engagement is not an attest engagement .
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make a decision about its
reliability .
Audits are likely the most
well-known assurance services
among public corporations and
the investment community . They
involve the examination of both
financial statements and internal
controls by independent certified
public accountants .205 When
a publicly listed corporation
presents its Form 10-K, it must
include the audit report of its
public accounting firm . If the
audit finds no evidence that the
financial statements and controls
are inaccurate, then there is a
high degree of confidence in the
reliability of the information due
to the rigor of the audit .
Attestations are another
type of assurance service . In
attestations, certified public
accountants provide an
examination or review over
the agreed-upon subject matter, which may include financial information or non-
financial information .206 They then may issue an opinion on the conclusion of the
assurance procedures .207
An attest engagement can be conducted at a comparable level of rigor as an
audit or at a less rigorous level, with a less detailed review . These differences result
in different assurance testing procedures and opinions . The most rigorous attestation
services, on par with audits, review the reported information, the source data, and
the organization’s internal controls for protecting the integrity of the source data .
The internal controls are reviewed to gauge how effectively they mitigate the risk
of misstated data . This level of rigor is called reasonable assurance . A less rigorous
attestation engagement—limited assurance, or a review—will be more limited in
scope, which can be associated with a lower degree of confidence that the reported
information is reliable .
205 PCAOB Rules Section 1.
206 PCAOB Rules Section 1 .
207 AT-C 105 .
FOR CLARITY: INDEPENDENCE
The AICPA and PCAOB Code of Professional Conduct (ET section 101 .01) requires that third-party assurance providers must not only act independently, but also appear independent . If the provider is in fact independent, but one or more factors suggest otherwise, the public may conclude that the assurance report is not credible, reliable, or trustworthy . The International Federation of Accountants (IFAC) explains that independence requires:
• Independence of Mind: The state of mind that permits the expression of a conclusion without being affected by influences that compromise professional judgment, allowing an individual to act with integrity, and to exercise objectivity and professional skepticism
• Independence in Appearance: The avoidance of facts and circumstances that are so significant that a reasonable and informed third party, having knowledge of all relevant information, including safeguards applied, would reasonably conclude a firm’s, or a member of the assurance team’s, integrity, objectivity or professional skepticism had been compromised .
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The quality and trustworthiness
of the attestation depends on
the professional expertise of the
person or people performing the
service, their independence from
the reviewed organization, and their
adherence to professional standards .
The independent firm providing
the attestation services should also
establish policies and procedures
that safeguard the quality of the
attestation engagement, in order to
offer assurance that the attestation
provider’s personnel comply with the
attestation standard .208
In the U .S ., the Public Company Accounting Oversight Board (PCAOB) sets the
attestation and auditing standards for public companies . Although PCAOB audit
standards are limited to financial statements, the attestation standards can be
applied to a variety of subject matters, including sustainability data .
The rise in sustainability accounting and reporting, along with investors’ increased
consideration of sustainability data have prompted a corresponding focus on
assurance or attestation of sustainability information . In fact, in a 2015 survey by
the CFA Institute (ESG Survey), 69 percent of respondents thought sustainability
disclosures should be subject to independent, third party verification, such as by
a professional services firm . Nevertheless, it is not yet a common practice in the
U .S . Among S&P 500 companies, just 12 percent of sustainability reports included
third-party verification and assurance in 2014 .209 The scope of assurance can vary
considerably, covering only specific sections (e .g ., GHG emissions) or extending to
the content of the entire report . Research has indicated that only 30 percent of U .S .
assurance engagements covered the full sustainability report in 2013 .210
Although not all providers of external assurance have adopted a common
assurance standard for sustainability data, in July 2017, the AICPA issued
sustainability attestation guidance to assist CPAs with interpreting and applying its
attestation standards when performing examination (AT-C Section 205) or review
(AT-C Section 210) engagements on sustainability information .
The AICPA’s AT Section 101 standard, which was recently superseded by AT-C
105, was frequently used for attest engagements over sustainability information . It
applied to attestation engagements executed by a certified public accountant over
a determined subject matter . While this standard served a broad range of subject
208 AT-C 105 .06
209 The Conference Board, Sustainability Practices 2015, 2015 .
210 Global Reporting Initiative, Trends in External Assurance of Sustainability Reports, July 2014 .
DEFINITION: SUITABLE CRITERIA
Criteria are the benchmarks against which the practitioner evaluates the subject matter . For the purposes of an attestation engagement, suitable criteria are those criteria that meet certain characteristics (such as relevance, objectivity, measurability, and completeness), as defined by the standard . Suitable criteria are required for reasonably consistent measurement or evaluation of subject matter within the context of professional judgment .
Source: AT –C Section 105
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matters, it could be applied to the review of disclosed sustainability information, in
MD&A or elsewhere .
The same is true of AT-C Section 105, which outlines the attributes required of
suitable criteria . The accounting metrics and related disclosure guidance in the SASB
sustainability accounting standards are intended to form the basis for suitable criteria,
as identified by many existing assurance standards, including AT-C 105 .
The International Federation of Accountants (IFAC) has also issued a standard for
assurance engagements—the International Standard on Assurance Engagements
(ISAE) 3000—but that standard is more commonly used outside the U .S .; the AICPA
standards are more commonly used within the U .S .
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SECTION REVIEW
In this section, the following Learning Objectives were covered:
• Explain the cross-functional nature of preparing sustainability disclosures in
the 10-K .
• Explain the timeline and process for 10-K disclosure .
• Discuss the stages of 10-K preparation where sustainability information could
be incorporated .
• Discuss the role of SASB standards in helping companies develop strategies
for long-term value creation, and benchmark and improve operational
performance .
• Explain the influences of internal controls and third-party assurance on the
data quality of sustainability information and disclosures .
• Explain why MD&A section was added to the 10-K and why it is an
appropriate place for the disclosure of sustainability information .
• Describe the special disclosure considerations for multinational and diversified
companies .
• Recognize key elements of Regulation S-K and other prominent legislation
and what is required for disclosure (e .g ., financial and nonfinancial information
that alters the total mix of information) .
• Discuss the challenges that investors face in integrating sustainability
information into investment decisions (e .g ., information is available, but
often its quality varies, it is not comparable, and/or it lacks obvious financial
implications) .
? Questions to consider
√ When it comes to collecting, managing, and reporting material sustainability
information, why do companies need to involve more than just the sustain-
ability team?
√ What should companies begin doing in order to better understand their per-
formance on the sustainability topics likely to be material in their industry?
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139
15 .1 . Overview
A wide variety of individuals and organizations invest in securities, each with
their own unique strategies, risk tolerance, investment objectives, time horizon,
and available capital . All investors, however, share one characteristic: They value
information . The more opaque a company is about its operations and outcomes,
the more difficult it is for investors to evaluate the company’s stock . As a result,
these firms are usually seen as riskier investments .
Although traditional financial information remains valuable, investors and
analysts are increasingly looking beyond financial statements and seeking
out sustainability data to enhance their understanding of related risks and
opportunities .
For example:
• Many pension funds and institutional investors are interested in sustainable
investing from an alpha-generating and risk-reduction approach . Because
appropriate consideration of sustainability issues can help deliver superior
risk-adjusted returns to long-term investors, fiduciary duty requires asset
managers to consider relevant sustainability issues, related material
information, and their portfolio-level impacts .
15 INVESTOR USE
Learning Objectives Covered in This Section
Discuss the utility of SASB standards in investment decisions (e .g ., portfolio
allocation, risk/return profile) .
Explain the organization of SICSTM and the implications of a sustainability-based
industry classification .
Explain why sustainability information is increasingly important to investors
for investment decisions (e .g ., reduced ratio of net assets to enterprise value,
increased risks and opportunities) .
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• Many large, full-service brokerages have strategic, values-based investing
programs that are open-architecture and have clear goals for assets under
management, allowing investors to “do well while doing good .”
• Many high-net-worth individuals, endowments, and foundations are
interested in sustainable investing from a philosophical and mission-alignment
approach . A recent U .S . Trust study found that one-half (50 percent) of high-
net-worth investors, including 75 percent of Millennials and 63 percent of
wealthy women, say they consider the social and environmental impact of
the companies they invest in to be an important part of investment decision-
making .211
• Many types of investors want both alpha-generating/risk-reduction benefits
and mission alignment . A growing body of research has shown that investors
don’t need to choose between “value” and “values .”
By facilitating the disclosure of decision-useful information, SASB provides all
investor types with the ability to assess the long-term value-creation potential of a
company or industry based on how well it manages all forms of capital . The use of
accounting standards for sustainability data helps all types of investors achieve their
individual goals while improving overall market efficiency .
Furthermore, by standardizing sustainability disclosures, SASB raises the signal-
to-noise ratio, minimizing excessive or
boilerplate disclosures and enabling
apples-to-apples comparisons among firms
within an industry—the number-one need
identified by institutional investors in a recent
survey .212 Meanwhile, SASB standards allow
analysts to shift from time-intensive data
gathering to what they do best: rigorous
data analysis .
Indeed, a diverse range of investors has
already begun to use SASB standards to inform decision making . For example, UBS
Asset Management, which handles $670 billion in assets, uses SASB’s Materiality
Map as a guide for information gathering to augment traditional fundamental
analysis—such as a discounted cash flow model—which allows it to identify
equities that are both priced attractively today and poised to deliver returns over
the long-term . Breckenridge Capital Advisors, managing $25 billion in assets, takes
a similar approach, adding an extra layer of rigor to its fundamental analysis of
fixed-income securities, where investments have longer time horizons and investors
211 U .S . Trust, “Insights on Wealth and Worth,” June 20, 2014 .
212 EY, “Tomorrow’s Investment Rules,” 2014 .
DEFINITION: ALPHA
Alpha measures an investment’s performance compared to a benchmark, such as the S&P 500 . A high-alpha investment outperforms the benchmark .
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have less appetite for risk .213 In addition to
these asset managers, many asset owners
are incorporating SASB resources into the
evaluation and monitoring of their external
managers, and private equity firms are
performing SASB-powered ESG analysis as
part of their due diligence .
The various uses of SASB standards—and
the data they yield—reflect the full spectrum
of investment activities, from top-down
allocation of assets in a portfolio to the
individual selection of securities . Specifically,
SASB standards can help investors and
analysts investigate such questions as:
• How do differentiated, industry-
specific sustainability impacts affect
a portfolio across all sectors? Which
sectors or industries are facing
sustainability headwinds?
• How do sustainability issues impact
the core value drivers in an industry-
level analysis?
• How do companies leverage
opportunities or mitigate impacts
related to material sustainability
issues? How can these issues and their
corresponding metrics be integrated
into firm-level analysis, either on
a comparative basis or in terms of
fundamental valuation?
15 .2 Portfolio Construction
Traditional methods of managing risk
in a portfolio based on diversifying assets
rely on assumptions of the risks, returns,
and correlations between asset classes .
Sustainability information provides a new
213 Sustainability Accounting Standards Board, ESG Integration Insights (Q4 2016) .
SASB INVESTOR ADVISORY GROUP
The SASB Investor Advisory Group (IAG) comprises leading asset owners and asset managers who recognize the need for consistent, comparable and reliable disclosure of material and decision-useful ESG information . Members include:
› APG (All Pensions Group)
› ATP › AXA Investment
Management › Bank of America Merrill
Lynch › BCI (British Columbia
Investment Management Corporation)
› BlackRock › Boston Trust Walden › Breckinridge Capital
Advisors › Brunel Pension
Partnership › Caisse de dépôt et
placement du Québec (CDPQ)
› CalPERS › CalSTRS › Calvert Research and
Management › Capital Group › CPP Investments › Domini Impact
Investments › Fidelity Investments › Franklin Templeton
Investments › Goldman Sachs Asset
Management › Harvard Management
Company › Hermes Investment
Management › Ivy Investment
Management Company
› LACERA › Legal & General
Investment Management America
› Morgan Stanley Investment Management
› Neuberger Berman › New York City
Retirement Systems › Nissay Asset
Management › Nordea Asset
Management › Norges Bank Investment
Management › Northern Trust Asset
Management › Ontario Teachers’
Pension Plan › Oregon State Treasury,
Investment Division › PGGM Investments › PIMCO › Putnam Investments › QMA (a PGIM company) › RBC › Schroders › State Street Global
Advisors › Sustainable Insight
Capital Management › UAW Retiree Medical
Benefits Trust › UBS Asset Management › ValueAct Capital › Vanguard › Walden Asset
Management › Wells Fargo Asset
Management › Wespath Investment
Management
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perspective on sector allocation, where sectors could become more or less correlated
depending on sustainability risks and opportunities . Calculating a portfolio’s
diversification, overall expected return rate, and risk exposure, based on sector
exposure to material sustainability topics, is a potentially superior alternative to
meeting risk/return targets through diversification without compromising fiduciary
duty .
Furthermore, it has been argued that a sector-based diversification strategy for
risk management can still yield high portfolio returns . There is some initial evidence
corroborating this argument . State Street Global Advisors (The Rising Tide of Sector and Industry Investing, 2016) has suggested that “the use of sector and industry
strategies is clearly on the rise” due to four distinct advantages the approach has
over style-based (i .e ., value, blend, growth) investing:
1. Sectors are a key driver of risk: Beyond company-specific factors, industry
exposure has been the most influential driver of equity market returns,
accounting for 22 percent of gains for U .S . stocks over the past 20 years .214
2. Sectors exhibit differentiated correlations to the broader market: Average sector correlations to the S&P 500 Index range from 0 .60 (Utilities)
to 0 .92 (Industrials), whereas style correlations are 0 .98 (growth) and 0 .97
(value) . This diversity allows investors to manage risk and potentially improve
diversification through more precise and agile allocations .
3. Sectors produce a wider dispersion of returns: Between 2000 and
2015, the average yearly difference between large-cap growth and value
returns was 7 .8 percent versus 36 .1 percent between the best- and worst-
performing sectors . Thus, over- or underweighting certain sectors may offer
greater alpha-generating opportunities than style-based strategies .
4. Sectors are dependent on economic cycles: Sector performance varies
from year to year based on cyclical macroeconomic factors, which allows
investors to add the potential for alpha by harnessing these trends through
over- or underweighting .
The State Street survey found that 85 percent of investors have some exposure to
sector/industry-based investing, with more than a quarter indicating it was a major
part of their U .S . equity strategy . Whether they use the approach as part of their
core strategy or more tactically on the margins (i .e ., to enhance a portfolio selected
on other premises, such as growth rate or cap size), investors can benefit from better
understanding sustainability-related risks and opportunities at the industry or sector
level . By adapting traditional industry classification systems to reflect the unique
sustainability profiles of sectors and industries, SASB’s SICS™ provides the building
214 Fidelity, Equity Sectors: Essential Building Blocks for Portfolio Construction, June 2013 .
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blocks for a potentially more precise portfolio construction that takes into account the
impact of sustainability on the risk/return and correlation of industries and sectors .
For example, SASB analysis shows that the impact of climate change is both
ubiquitous and differentiated, which means that it cannot be divested and it cannot
be tracked across a portfolio with a single measure like greenhouse gas emissions .
Instead, investors must understand the industry-specific impacts of climate change
on risk and return—and manage their allocations accordingly .
For instance, climate change is likely to increase costs for companies in the
Insurance industry because of increased claims related to extreme weather events,
which are intermittent and unpredictable . Meanwhile, companies in Oil & Gas
industries face reduced revenues because of climate change — related regulation
and shifts in global demand, which are fundamental and continuous . These
sustainability-related risks are separate from the systematic market risk inherent in
owning equities .
SASB standards provide granularity on industry-specific sustainability risks,
enabling investors to make better-informed asset allocations that could lead to
more manageable portfolio risk (i .e . lower volatility) and greater diversification
benefits (i .e . higher risk-adjusted return) over the long run . SASB standards and the
SASB Materiality Map™ help investors overlay sustainability factors on top of their
traditional investment framework .
15 .3 . Industry Analysis
Sell-side analysts work to understand sector dynamics and the constituent
companies with the goal of determining companies’ competitive advantage going
forward . As such, they are interested in information about how companies can
manage future operational and strategic sustainability risks and opportunities . Sell-side
analysts identify changes in market dynamics that will affect a company’s earnings
capacity and assess the impact of legal and regulatory changes in each market .
Analysts typically provide buy/sell recommendations and stock price targets based
on an investment thesis and value drivers that are specific to a particular industry .
These rely on specific valuation methods and models that can easily incorporate
SASB sustainability metrics .
SASB’s analysis of sustainability issues and related financial impacts can
complement or improve the typical research analysis framework . It can do so
through two mechanisms:
1 . Providing additional value drivers or risk factors; and
2 . Providing factors that impact existing value drivers, risk factors, and valuation
models .
An example of how SASB’s analysis can be plugged into traditional methods is
shown here for the automobile industry .
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15 .4 . Company-Level Analysis
15 .4 .1 . Comparative Analysis
Investors and analysts routinely compare companies based on financial
fundamentals, such as price-to-earnings, enterprise multiple, and other key ratios .
The standardized data delivered to the capital markets in response to SASB standards
allow similar comparisons based on non-financial performance . With material
financial and sustainability information side-by-side, investors are empowered to
make more meaningful comparisons among companies .
Specifically, SASB standards help investors identify the firms that stand out
as sustainability leaders—or laggards—in their industry . Analysts use material
sustainability disclosures as an indicator of a company’s ability to respond to
emerging needs and demand trends . Analysts are using sustainability factors to
identify which companies are best at leveraging market opportunities and to analyze
the strength of their industry position .215
Analysts also identify and consider operating risks as part of traditional financial
analysis . Sustainability factors can negatively affect a company’s operations
215 United Nations, Principles for Responsible Investment, “Integrated Analysis: How Investors are Addressing Environmental, Social and Governance Factors in Fundamental Equity Valuation,” February 2013 .
Industry Drivers and Valuation Methods
ESG FactorsSustainability Impacts on
Value Drivers
Value Drivers
• Leverage; restructuring
• Global markets
• Product mix
Risk Factors
• Rising gas prices
• Demand for alternative energy
• Rising commodity prices
• Large unfunded pension plans
Valuation Methods
• Enterprise value /EBITDAPO for incumbents
• Discounted cash flow and revenue-based ratio for new entrants or new markets
• Product Safety
• Labor Practices
• Fuel Economy & Use-phase Emissions
• Materials Sourcing
• Materials Efficiency & Recycling
Revenue growth: Product mix alignment with demand for smaller, energy-efficient, and low-emission vehicles is a growth driver, with a corollary impact from switching away from larger, higher-margin vehicles .
Operating costs and CAPEX: Materials scarcity can lead to higher costs, R&D and CAPEX for substitution . Sourcing, materials used, and production efficiency can mitigate impact at the firm level .
Option value/scenario analysis: Risk profile is heightened by large investments (R&D, CAPEX) in alternative powertrains (EV/fuel cell hybrid) with uncertain outcomes .
Automobile Industry
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to the extent that one or more product lines—or even entire operations—are
compromised, and, in some cases, are shut down . Forward-looking companies that
understand and act on the sustainability factors relevant to their operating activities
will better mitigate such operating risks than their less proactive peers .216
Sell-side research and broker reports are increasingly covering sustainability
issues in their company evaluations, and some reports even focus on sustainability
issues exclusively . Financial information providers such as Thomson Reuters, MSCI,
and Bloomberg are making it easier for analysts to compare corporate financial and
sustainability data . Bloomberg’s new ESG Valuation Tool enables users to apply a
financially based methodology to assess and evaluate the impact of environmental,
social, and governance factors on a company’s earnings before interest & tax (EBIT)
performance and share price .217 Goldman Sachs developed its GS Sustain framework
to guide the long-term investment strategy of its Global Investment Research
Division . One key criterion of the strategy is assessing the management quality of
companies with respect to sustainability issues .218
216 United Nations, Principles for Responsible Investment, “Integrated Analysis,” February, 2013 .
217 CFA Institute, Centre for Financial Market Integrity, “Environmental, Social, and Governance Factors at Listed Companies: A Manual for Investors,” 2008 .
218 PwC, “Do Investors Care about Sustainability?” March 2012 .Goldman Sachs website, “GS Sustain .” Accessed August 14, 2014 .
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15 .4 .2 . Company Valuation
SASB standards—and the data they yield—can also be incorporated into the
fundamental analysis of specific firms and related discounted-cash-flow analyses .
For example, Bank of America Merrill Lynch has found sustainability metrics to
be valuable signaling tools, reliably indicating future volatility, earnings risk, price
declines and bankruptcies .219 By tracing each sustainability issue to its ultimate value
impact and helping to determine the likelihood and magnitude of those impacts,
investors and analysts can factor these issues into company valuations . More
predictable and/or quantifiable factors can be incorporated into earnings projections,
while less measurable factors can be reflected in a discount rate adjustment .
Unlike the majority of existing sustainability metrics, SASB’s are designed to
enable detailed financial analysis . Because SASB disclosure topics are determined
based on the likely materiality of their financial impacts, the associated metrics make
it easier to analyze how sustainability issues can affect an industry’s or a company’s
performance . For example, Product Innovation, which is a disclosure topic for the
Construction Materials industry, affects revenues through demand for products
and services . Among other evidence, SASB found credible estimates that the global
market for green construction materials is expected to grow from $116 billion in
2013 to more than $254 billion in 2020, more than half of current industry revenues
of $480 billion .220
One of the SASB metrics that measures performance on this topic is the
“percentage of products that can be used for credits in sustainability building design
and construction certifications .” Performance on this metric and related disclosures
can help an analyst assess a company’s positioning for a growing market in green
construction materials . The percentage of products that can meet the anticipated
market growth would factor into the financial analysis and growth projections for
companies in that industry .
The preceding chart outlines how SASB’s metrics are designed to facilitate
financial analysis, based on the types of financial impacts that emerge from the
evidence gathered during the standards-setting process .
SASB metrics are designed to enable analysis of the main type of financial
impacts identified for the topic they are associated with . Often, SASB topics can
lead to more than one type of financial impact . For example, hazardous waste can
potentially impact costs, liabilities, and cost of capital . Hazardous waste has a direct
and ongoing impact on costs for storage, treatment, and disposal . It can also be
associated with other costs, liabilities, and/or a higher cost of capital when unusually
high volumes of hazardous waste increase the risk of a leak or spill, which may lead
to fines, contingent liabilities, and an ultimately higher cost of capital .
219 Bank of America Merrill Lynch, “ESG: Good Companies Can Make Good Stocks,” Equity Strategy Focus Point (December 18, 2016) .
220 SASB, Construction Materials Industry Research Brief, June 2014 .
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In assessing the magnitude of financial impacts and their effect on shareholder
value, analysts may conduct valuation analyses, such as discounted cash flow
modeling . For example, they may use available data related to performance on
a sustainability topic (or reasonable assumptions where sample sizes for the data
are too small to identify a range of performance and benchmark a company) and
incorporate such data into a typical valuation model for a company . Through this
FINANCIAL DRIVER
REVENUE COST ASSETS AND LIABILITIES
COST OF CAPITAL
Type of Financial Impact
Demand for products and services
Intangible assets and long-term growth
Operational efficiency/cost structure
Valuation of core assets or liabilities
Operational risks and cost of capital
Metric Type
Quantitative & qualitative measures of product features sought by customers or required by law
Quantitative & qualitative measures of factors/actions that drive reputation and brand value
Quantitative measure of:- operational efficiency- regulatory compliance
Quantitative measure of:factors that affect the valuation of assets and liabilities
Quantitative measure of risk (VaR) or number of incidents
Qualitative measure of risk management
Financial Analysis
Market share and revenue forecast for DCFGrowth in the context of price-based ratios (PE or PEG ratios)
Long-term revenue growth and terminal value in DCF Growth in the context of price-based ratios (PE or PEG ratios)
Current cost drivers and estimates of future costs for DCF Operational performance & cost structure for profitability ratios (e .g ., ROI)
Impacts on valuation methods for assets and liabilities
Impact on asset and liabilities for asset-based ratio (ROI, RRR, solvency)
Quantification of risk to forecasted profits and adjustment of cost of capitals
Examples (Industry)
Product safety (Automobiles)
Counterfeit drugs (Biotechnology & Pharmaceuticals)
Environmental footprint of hardware infrastructure (Internet Media & Services)
Reserves valuation & capital expenditures (Oil & Gas - Exploration & Production)
Business Ethics (Commercial Banks)
DCF = Discounted cash flowPE = Price-earnings (stock price/earnings per share)
PEG = Price-earnings to growth (PE/annual earnings per share growth)ROI = Return on investment
RRR = Required rate of return
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integration, an analyst can evaluate the difference in impact on valuation, and
additionally, assesses the difference in valuation when considering scenarios of top-
and bottom-decile performers .
Assessing Impacts of ESG on Valuation of Hypothetical Company
The figure above illustrates one type of analysis used to assess impacts on
an individual company’s equity value . This analysis, taken from a hypothetical
company in the Electric Utilities & Power Generators industry, depicts the outputs
of ESG performance scenarios generated through a discounted cash flow model:
a fully integrated ESG scenario, which integrates median estimates of corporate
performance, as well as a High and a Low ESG performance scenario, each of which
assume best and worst case performance, respectively .
The model integrates three sustainability issues—GHG Emissions, Water Scarcity,
and Workforce Health & Safety . Such analyses are designed to incorporate actual
performance data when available, though the lack of adequate data (as well as
future performance projections) necessitates the depicted performance scenarios .
The financial impact of sustainability issues combined with insufficient performance
data leads to a range of uncertainty in market value . In this example, the market’s
range of uncertainty is $11/share (the difference between the high ESG performance
and low ESG performance scenarios) . One possible use of this range of uncertainty
would be to assess the potential upside of a company’s decision to address lagging
sustainability performance .
Assessing Impacts of ESG on Valuation
Current Value
ESG Impacts Fully Integrated Model
32.98
25
25
27
27
29
29
31
31
33
33
35
37
-2.59
-0.561.12 30.85
Current Value
Issue impacts future cash flows through:• Operating costs: Risk of carbon tax scenario & renewable energy purchases (-$1.19) • Capex requirements: upgrades to plant infrastructure (-$0.61) • One-time charges: Early plant retirements (-$0.33)
GHG Emissions Water Scarcity Risk
Increase Decrease Total
Workforce Health & Safety
Fully Integrated ESG
Company Stock Price
($ per share)
Fully Integrated
ESG
High ESG Performance
Low ESG Performance
Uncertainty of Value Impact
39
11.12
Illustrative
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15 .5 . Active Ownership
It can be difficult for investors to divest themselves of sustainability risks, especially
those that affect nearly every industry in some way, such as climate change . As a
result, it’s often more productive for investors to engage with the management of
the corporations they hold in their portfolios to encourage progress toward improved
corporate responsibility and sustainability practices and policies .
Investors can use sustainability disclosures to understand how the companies
they hold manage sustainability risks . They can also see how other companies
manage these same risks and compare performance within industries . They can use
this information when preparing to engage with corporations about sustainability
performance .
In lieu of performance data, however, investors can still use SASB’s standards
and research briefs as a playbook for engaging companies on the issues that matter
and to encourage improved sustainability disclosure . In 2015 Harvard Management
Company, which manages an endowment valued at more than $35 billion,
requested that the energy sector companies it holds in its portfolio incorporate SASB
standards into their public filings . This information improves Harvard Management
Company’s ability to craft an informed investment strategy .221
SECTION REVIEW
In this section, the following Learning Objectives were covered:
• Discuss the utility of SASB standards in investment decisions (e .g . portfolio
allocation, risk/return profile) .
• Explain the organization of SICSTM and the implications of a sustainability-
based industry classification .
• Explain why sustainability information is increasingly important to investors
for investment decisions (e .g ., reduced ratio of net assets to enterprise value,
increased risks and opportunities) .
? Questions to consider
√ How does the evidence of financial impacts collected during the development
of a standard impact how an analyst or investor can conduct industry analyses
and company-level analyses?
√ How do disclosures based on SASB standards help meet the needs of differ-
ent groups of investors, such as pension funds and other asset owners, asset
managers, and high-net-worth individuals?
221 Harvard Management Company website, “Investing for the Long Term: Integrating ESG Factors .” Accessed April 27, 2015 .
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150
As you have learned, the emergence of sustainability accounting is part of a
natural evolution of the capital markets . Sustainability factors can affect the financial
condition or operating performance of a company in the near, medium, or long
term, and sustainability information may therefore be material, as defined by the
U .S . Supreme Court . Under existing regulation, and using existing data collection,
management, and reporting processes, that information can be disclosed in statutory
filings alongside financial information .
However, sustainability issues are likely to have different material impacts in
different industries . Therefore, sustainability accounting standards must focus on
these key, industry-specific factors to:
• Cost-effectively empower corporate leadership to better manage performance
on the sustainability issues most likely to impact value creation .
• Improve the completeness of material information made available to investors
by enabling companies to disclose material sustainability data in a decision-
useful way .
By leveraging existing financial reporting infrastructure and processes,
sustainability accounting can be used to measure, manage, and report material
sustainability information to inform corporate decision-making as well as a variety of
mainstream investment analysis practices .
CONCLUSION
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151
PREPARING FOR THE EXAM
The preceding pages represent the testable content for the Fundamentals of
Sustainability Accounting Level I exam . Exam questions have been written by a
group of Subject Matter Experts to assess mastery of the Learning Objectives listed
at the beginning of and throughout the document .
The best way to prepare for the exam is to ensure that you can fulfill each
Learning Objective . The Questions to Consider listed at the end of each section
are designed to probe key takeaways but they are not necessarily reflective of
exam questions . The Learning Objectives use verbs such as “Recognize” and
“Distinguish” to specify the extent to which you should feel comfortable with the
associated content .
For more information about the exam, including how to register, and what to
expect on test day, please download the Candidate Handbook available on the
Fundamentals of Sustainability Accounting website . A limited number of sample
exam questions—reflective of the types questions found on the exam—are also
available on the website and on the next page .
For additional sample questions and to test your mastery of the Learning
Objectives in an un-proctored environment, you can access an approved exam
preparation provider listed on the website .
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SASB® FSA™ LEVEL I STUDY GUIDE
152
1 Describe the trends driving demand for the disclosure of sustainability information .
2 Explain why sustainability information is increasingly important to investors for investment decisions (e .g ., reduced ratio of net assets to enterprise value, increased risks and opportunities) .
3 Discuss the challenges that investors face in integrating sustainability information into investment decisions (e .g ., information is available, but often its quality varies, it is not comparable, and/or it lacks obvious financial implications) .
4 Describe the current state of disclosure of sustainability topics in the 10-K .
5 Distinguish SASB’s approach (sustainability accounting) from other approaches to sustainability tracking and reporting .
6 Discuss the Supreme Court definition of materiality and the implications of this definition .
7 Recognize key elements of Regulation S-K and other prominent legislation and what is required for disclosure (i .e ., financial and nonfinancial information that alters the total mix of information) .
8 Discuss the utility of SASB standards in investment decisions (e .g . portfolio allocation, risk/return profile) .
9 Discuss the stages of 10-K preparation where sustainability information could be incorporated .
10 Discuss the role of SASB standards in helping companies develop strategies for long-term value creation, and benchmark and improve operational performance .
11 Explain the cross-functional nature of preparing sustainability disclosures in the 10-K .
12 Explain the timeline and process for 10-K disclosure .
13 Explain why the MD&A section was added to the 10-K and why it is an appropriate place for the disclosure of sustainability information .
14 Explain the influences of internal controls and third-party assurance on the data quality of sustainability information and disclosures .
15 Explain the purpose and role of requiring public companies to disclose material information in SEC filings .
16 Explain the current state of financial accounting (codified, standardized, decision-useful) given the history and efforts of the FASB .
17 Explain the organization of SICSTM and the implications of a sustainability-based industry classification .
18 Distinguish SICSTM sectors based on their distinct sustainability profiles .
19 Explain the evidence basis that supports the identification of SASB disclosure topics .
20 Describe the principles that guide the selection of SASB’s industry-specific topics for disclosure .
21 Describe the criteria that guide the selection of SASB’s accounting metrics .
22 Explain the stakeholder consensus that supports the identification of SASB disclosure topics .
23 Describe the components of a sustainability accounting standard and their purpose for supporting disclosure .
24 Discuss the implications of making statements about materiality outside of SEC filings .
25 Describe the special disclosure considerations for multinational and diversified companies .
LEARNING OBJECTIVES
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SAMPLE QUESTIONSSASB® FSA™ LEVEL I STUDY GUIDE
1: B 2: B, C
FSA LEVEL I SAMPLE QUESTIONSThe following sample questions have been developed to mimic the style and rigor of the questions on the FSA Level I exam . As with the Level I exam, the correct answers are derived from the information contained in the Level I Study Guide .
1 An analyst wants to understand the connection between a company’s sustainability data and one of four financial drivers (revenue, cost, assets and liabilities, and cost of capital) that are relevant to a discounted cash flow (DCF) analysis. Choose the pairing that correctly matches a data type with its relevance to a DCF analysis.
A . Data about factors that drive brand value : impacts on valuation methods for assets and liabilities
B . Data about regulatory compliance : operational performance and cost structure
C . Data about product features required by law : cost structure for profitability ratios (e .g . ROI)
D . Data about the number of safety incidents : revenue growth in the context of price-based ratios (e .g . PE or PEG ratios)
2 Which two statements, if true, provide the best evidence that Labor Practices is not likely to be a topic that warrants disclosure for most companies in the Oil & Gas – Services industry? (Choose two)
A . “Labor Practices is a frequent topic in media coverage of the industry and shareholder resolutions in the industry but it is not important to our customers or our board of directors .”
B . “The industry is not unionized and strikes are a rare occurrence within the industry . Workers are generally extremely well paid and labor practices are healthy for the most part .”
C . “There are instances where labor practices is material in a specific set of circumstances—such as in Gabon in 2013—but it is not material across the industry .”
D . “Surveyed customers and suppliers indicated that cost containment strategies warranted disclosure except where it concerned what they viewed as a non-issue—labor practices—even though labor costs account for the 3rd greatest share of costs .”
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3 Which is the best description of the findings from a 2001 report from the Financial Accounting Standard Board’s (FASB) Business Reporting Research Project?
A . Non-financial information is useful to investors, and metrics for management of non-financial success factors are likely to become increasingly important
B . Non-financial information is not being disclosed by leading companies but would likely be useful to a wide range of investors
C . Non-financial information is interesting to socially responsible investors but it is not a good predictor of future core earnings, cash flows, or future financial condition
D . Non-financial information is required to satisfy mandatory disclosure requirements in certain industries
4 Completeness is an important concept in disclosures of material information. For a company in an industry where workplace safety is likely to be material, if a company with 0 fatalities but 1,000 near-misses only discloses the number of fatal accidents, then investors are missing the complete picture. In the Automobile industry, information about the safety of a company’s car models is likely to be material. Which three metrics, when taken together, are most likely to represent a complete disclosure? (Choose three)
A . Percent of customers injured by other motorists in the previous year
B . Number of safety-related defect complaints
C . Number of vehicles recalled
D . Number of suppliers satisfying third-party factory safety standards
E . Percentage of retired union employees diagnosed with chronic illnesses originating from the workplace
F . Percentage of vehicles with 5-star safety rating
5 Which sector has the lowest prevalence of SASB disclosure topics that are associated with the environment?
A . Health Care
B . Technology and Communications
C . Services
D . Transportation
3: A 4: B, C, F 5: B
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SAMPLE QUESTIONSSASB® FSA™ LEVEL I STUDY GUIDE
6 What are two elements of the 10-K preparation process that are most relevant for integrating SASB information? (Choose two)
A . Translating sustainability performance into monetary values and incorporating the results into financial statements
B . Updating the controller’s questionnaire to gather needed information about the magnitude and probability of events related to sustainability topics
C . Distributing the results of the “Stakeholder Material Aspects Survey” to business units and the external auditor
D . Identifying the material sustainability information, including that which may not be specifically required, necessary to ensure disclosures are not misleading
7 Why can sector-based diversification, including diversification based on SASB’s Sustainable Industry Classification System (SICSTM), assist with equity portfolio construction?
A . All sector classification systems equally facilitate diversification based on both sustainability risks and sustainability-based opportunities for alpha
B . Sector-based diversification improves the ability to integrate sustainability performance into portfolio risk/return calculations
C . Investors can achieve higher risk-adjusted returns due to the consistently lower correlation between sectors compared to correlation between factors in the “style box” classification
D . There’s evidence that sector exposure has historically been the most influential driver of stock returns, with the exception of information specific to the company issuing the stock
8 Companies that file documents with the Securities and Exchange Commission (SEC) are required to have disclosure controls and procedures, which encompass non-financial information considered for disclosure. What are three elements of disclosure controls and procedures? (Select three)
A . Information is communicated to management
B . Information is free from error
C . Information is timely
D . Information subject to the controls is mandated for reporting
E . Information gives the CFO comfort over her/his filing certification
6: B, D 7: D 8: A, C, E
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9 When considering information related to climate change for disclosure in Securities and Exchange Commission (SEC) filings, companies have been instructed to apply the “reasonable likelihood” test. The two elements of the “reasonable likelihood” test are a reasonable likelihood that: (choose two)
A . The company’s past earnings and cash flow is not necessarily indicative of future performance
B . The known trend, demand, commitment, event, or uncertainty will occur
C . The occurrence will have a material effect on the registrant’s financial condition or results of operations
D . The information, if omitted, would have assumed significance in the deliberations of a reasonable investor
10 In the context of the U.S. Supreme Court definition of “materiality,” what is an accurate characterization of the “total mix” of information?
A . As shareholders, investors are entitled to the total mix of information about the performance of the company
B . As a rule, disclosing more information to investors would significantly alter the total mix of available information than disclosing less, more select information
C . A company is expected to disclose information that represents a total mix of performance, both positive and negative
D . A small or statistically insignificant fact can impact the total mix of information available to the market
11 Which statement accurately characterizes the relationship between sustainability information (including environmental, social, and governance information) and diversification for risk/return assessments?
A . In industries such as the Software and IT Services industry, companies with more diverse employee demographics and Board composition can mitigate the risk of negative media coverage
B . Industry classifications based on sustainability characteristics can impact the risk correlation between sectors
C . In industries subject to intense competition, such as Household and Personal Products industry, the companies with diversified product portfolios mitigate the risk of bankruptcy
D . Industry diversification is independent of sustainability opportunities and risks, which are unique to a company and its strategy
9: B, C 10: D 11: B
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SAMPLE QUESTIONSSASB® FSA™ LEVEL I STUDY GUIDE
12 The Securities and Exchange Commission (SEC) guidance for the focus and content of the Management’s Discussion & Analysis (MD&A) of every company’s Form 10-K or 20-F includes which four elements? (Choose four)
A . Companies should eliminate immaterial information that does not promote understanding of the financial condition or results of operations
B . Companies should avoid discussing causes of trends that impact the company’s operating performance but that are outside the company’s control
C . Companies should describe requests from the company’s largest shareholders to adjust governance policies and/or dividend payment policies
D . Companies should identify known events, and uncertainties reasonably likely to impact financial condition, including forward-looking information
E . Companies should not only disclose information adhering to MD&A requirements, but also an analysis that is responsive to those requirements
F . Companies should present key performance indicators that management uses if they would be material to investors
13 Corporate disclosures serve which two of the following purposes in capital markets? (Choose two.)
A . Allow investors to assess risks and opportunities related to their investments
B . Demand additional regulation for corporations
C . Aid in valuation for financial analysts
D . Enable non-governmental organizations to draw investor attention to key sustainability issues
14 Companies can use SASB standards to guide their disclosures in the Management’s Discussion and Analysis (MD&A) section of Form 10-K because:
A . SASB’s “safe harbor” rule for forward-looking statements applies to MD&A section .
B . MD&A section was added to identify sustainability issues that cannot be quantified .
C . SASB standards align with MD&A goal of giving investors context within which financial information should be analyzed .
D . MD&A section is intended to focus solely on quantitative data used by management to run the business .
12: A, D, E, F 13: A, C 14: C
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SAMPLE QUESTIONSSASB® FSA™ LEVEL I STUDY GUIDE
15 Which two of these characteristics would require a software company based in California to face a special disclosure situation based on the SASB standards? (Choose two.)
A . The company’s revenues exceeded $1 billion for the first time
B . The company generated more than 50% of its revenue in European countries
C . The company generates a significant amount of its consolidated revenue from its aerospace business
D . The company elects three new directors over the course of a year
15: B, C
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SAMPLE QUESTION EXPLANATIONSSASB® FSA™ LEVEL I STUDY GUIDE
Explanations
Below are explanations for the sample questions provided above .
1: This question evaluates Learning Objective 25.
A . This is incorrect because brand value is associated with intangible assets and long-term revenue
growth, not assets and liabilities .
B . This is CORRECT . See Section 15 .4 .2 for more details .
C . This is incorrect because product features required by law are associated with market share and
revenue forecast in a DCF analysis, not cost structure .
D . This is incorrect because the number of safety incidents is associated with operations risks and cost
of capital adjustments, not revenue growth .
2: This question evaluates Learning Objective 16.
A . The principles for determining SASB’s disclosure topics are: applicable to investors, pertinent and
relevant across an industry, focused on driving value creation, expected to bring benefits that exceed
the costs, actionable by companies, and reflective of the views of stakeholders . This is incorrect
because the comment minimizes the frequency of Labor Practices in shareholder relations, which
is an indication that the topic is applicable to investors . Therefore, the statement is not the best
evidence that Labor Relations is not likely to warrant disclosure .
B . This is CORRECT because the comment indicates that Labor Practices is not a significant issue
(“The industry is not unionized and strikes are a rare occurrence”) so the costs for disclosure would
outweigh the benefits . See Section 12 .2 .1 for more details .
C . This is CORRECT because the comment indicates that Labor Practices is not pertinent and relevant
across the industry . See Section 12 .2 .1 for more details .
D . This is incorrect because the statement minimizes the value creation impact of Labor Practices (“labor
costs account for the 3rd greatest share of costs”) . A topic would be excluded from a SASB standard
if there was minimal evidence of financial impact, not the other way around .
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SAMPLE QUESTION EXPLANATIONSSASB® FSA™ LEVEL I STUDY GUIDE
3: This question evaluates Learning Objective 1.
A . This is CORRECT because the report identified that some non-financial information was useful to
investors and that the importance was likely to increase . See Section 7 .1 for more details .
B . This is incorrect because there’s no information in the 2001 report (or in the report summary
provided in the FSA Level I study guide) that suggests this . In fact, it says that leading companies
were voluntarily disclosing non-financial information .
C . This is incorrect because there’s no information in the 2001 report (or in the report summary
provided in the FSA Level I study guide) that suggests this .
D . This is incorrect because there’s no information in the 2001 report (or in the report summary
provided in the FSA Level I study guide) that suggests this . In fact, the report clearly identifies that
the information is voluntarily reported .
4. This question evaluates Learning Objective 13.
A . Completeness is described as provide enough information to understand and interpret performance
associated with the disclosure topic . Data about customers being injured by other motorists does
not reflect the safety of the company’s car models except in an indirect way if you assume that
the percent of customers injured might be lower if the company’s car models were safer . That
assumption is not justified given the information available in the question and the study guide, and
there are three other data that are clearly correct so this answer is incorrect .
B . This is CORRECT because data about safety-related defect complaints provides some information to
understand a company’s performance on car safety . See Section 12 .2 .2 for more details .
C . This is CORRECT because the vehicle recalls provides some information to understand a company’s
performance on car safety . See Section 12 .2 .2 for more details .
D . This is incorrect because suppliers are separate entities in different industries so different disclosure
topics and accounting metrics apply . Also, the safety of suppliers’ factories doesn’t determine the
safety of the car . For example, a company can use safe parts supplied by suppliers to build an unsafe
car .
E . This is incorrect because the chronic illness of employees is associated with a different disclosure
topic (Employee Health & Safety) and is unrelated to the safety of the company’s car models .
F . This is CORRECT because vehicles with 5-star safety ratings provides some information to understand
a company’s performance on car safety . See Section 12 .2 .2 for more details .
5: This question evaluates Learning Objective 17.
A . This is incorrect because the Health Care sector has a high prevalence of SASB disclosure topics
associated with the environment .
B . This is CORRECT because the Technology and Communications sector has a medium prevalence of
SASB disclosure topics associated with the environment while the other three sectors have a high
prevalence . See Section 13 .3 for more details .
C . This is incorrect because the Services sector has a high prevalence of SASB disclosure topics
associated with the environment .
D . This is incorrect because the Transportation Sector has a high prevalence of SASB disclosure topics
associated with the environment .
161© SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SAMPLE QUESTION EXPLANATIONSSASB® FSA™ LEVEL I STUDY GUIDE
6: This question evaluates Learning Objective 21.
A . This is incorrect because sustainability performance cannot always be translated into monetary value
on financial statements . See Section 7 .2 for more details .
B . This is CORRECT because the controller’s questionnaire is listed as an example for how to include
sustainability information in the 10-K preparation process . See Section 14 .4 .1 .3 for more details .
C . This is incorrect because a stakeholder survey does not represent a determination of materiality that
is consistent with financial reporting .
D . This is CORRECT because the Exchange Act Rule 12b-20 explains that information which may not be
specifically required in a line-item disclosure may be necessary to ensure other required disclosures
are not misleading . See Section 6 .3 for more details .
7. This question evaluates Learning Objective 25.
A . This is incorrect because not all sector classification systems equally facilitate diversification based on
sustainability risks and sustainability-based opportunities .
B . This is incorrect because sustainability issues tend to materialize on the industry level and
diversification by sectors will not necessarily improve the ability to integrate sustainability
performance from the industry level .
C . This is incorrect because there is not always consistently lower correlation between sectors compared
to correction between factors in the “style box” classification . While there is some research
suggesting that correlation between sectors is lower than correlation between “style box” factors (as
surfaced in Section 15 .2) the research is not definitive and more work is needed .
D . This is CORRECT because Fidelity research indicated that industry exposure accounted for 22% of
gains for U .S . stocks over the past 20 years . See Section 15 .2 for more details .
8. This question evaluates Learning Objective 23.
A . This is CORRECT because disclosure controls and procedures are designed to ensure that the
information disclosed under the Exchange Act is appropriately accumulated and communicated to
the issuer’s management . See Section 6 .6 for more details .
B . This is incorrect because the disclosure controls and procedures are intended to provide reasonable
assurance over the information, not guarantee that the information is free from error (which would
be an unreasonable and perhaps impossible expectation) .
C . This is CORRECT because effective disclosure controls and procedures are intended to enable timely
decisions . See Section 6 .6 for more details
D . This is incorrect because the 2010 SEC interpretive release indicates that issuers should consider
whether they have sufficient disclosure controls and procedures to process all relevant information
for potential disclosure, even if the information is not required to be disclosed, so it follows that
information subject to controls is not necessarily mandated for reporting .
E . This is CORRECT because Sarbanes-Oxley requires the CFO to certify the accuracy of the content of
their organization’s disclosures and disclosure controls and procedures are intended to give the CFO
comfort to provide that certification . See Section 6 .6 for more details .
162© SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SAMPLE QUESTION EXPLANATIONSSASB® FSA™ LEVEL I STUDY GUIDE
9. This question evaluates Learning Objective 7.
A . This is incorrect because indicating that a company’s past earnings and cash flow are not necessarily
indicative of future performance is an element of what should be incorporated in MD&A which has
different criteria than the reasonable likelihood test .
B . This is CORRECT . See Section 6 .3 for more details .
C . This is CORRECT . See Section 6 .3 for more details .
D . This is incorrect because the guidance that a small fact can impact the total mix of information is an
element of the determination of a material fact comes from the TSC v . Northway court ruling, which
is not part of the reasonable likelihood test .
10. This question evaluates Learning Objective 9.
A . This is incorrect because the “total mix” concept does not imply that investors are entitled to the
total mix of information available about a company . The “total mix” refers to determining whether
a specific fact about a company would impact the existing “total mix” of information available to
the investor (and it should be clear that investors don’t have access to all information about the
performance of a company) .
B . This is incorrect because, as the study guide explains, “simply adding content to the ‘total mix’ does
not necessarily ‘significantly alter’ it .”
C . This is incorrect because, although positive and negative information is expected to be disclosed, that
is not the best characterization of the total mix of information among the four options .
D . This is CORRECT because “total mix” isn’t intended to explain what information investors are
due, it’s intended as the gauge by which a fact is determined as material . Material information is
determined by assessing whether it impacts the total mix of information, and even a seemingly
small or statistically insignificant fact can impact that mix . In other words, a company is expected to
take the total mix of information available and then when determining if other information about
the company is material, does the omission of that information affect the reasonable investor’s
decisions? So the total mix concept doesn’t describe what the total mix is, it describes how to
determine if other information is material and even a small fact can be, which is why this is the best
characterization of the “total mix” concept of the four options available .” See Section 11 .1 for more
details .
11. This question evaluates Learning Objective 14.
A . This is incorrect because diversification for risk/return assessments refers to the risk exposure for a
given portfolio, not the risk of negative events in a specific industry based on employee or board
diversity .
B . This is CORRECT because the sustainability characteristics of SICSTM industries mean that the sectors
could be less correlated than sectors in traditional industry classification systems . See Section 15 .2
for more details .
C . This is incorrect because diversification for risk/return assessments refers to the risk exposure for a
given portfolio, not the risk of negative events in a specific industry based on diversified product
163© SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SAMPLE QUESTION EXPLANATIONSSASB® FSA™ LEVEL I STUDY GUIDE
offerings .
D . This is incorrect because SASB’s research has identified that different industries are exposed to
different sustainability opportunities and risks and can therefore be diversified based on their distinct
exposure profiles .
12. This question evaluates Learning Objective 8.
A . This is CORRECT because the SEC’s guidance for MD&A is: focus on material information, include
key performance indicators, disclose known trends and uncertainties that are reasonably likely, and
analyze the information that is disclosed . See Section 6 .3 for more details .
B . This is incorrect because even if a trend is outside of the company’s control, any known trends,
events, and uncertainties that are reasonably likely to have material effects should be disclosed .
C . This is incorrect because it’s not in the SEC guidance .
D . This is CORRECT . See Section 6 .3 for more details .
E . This is CORRECT . See Section 6 .3 for more details .
F . This is CORRECT . See Section 6 .3 for more details .
13. This question evaluates Learning Objective 2.
A . This is CORRECT because as Justice Frankfurter explained: “[T]he information which must be
furnished in the registration statement is intended to reveal facts essential to a fair judgment upon
the security offered .” See Section 3 .2 for more details .
B . This is incorrect because the purpose of disclosure is not to inform additional regulation based on the
disclosed information, but to provide investors information necessary for informed decision-making .
C . This is CORRECT because one the purposes of periodic public reporting after the initial public
offering (IPO) is intended to enable the markets to properly value securities . See Section 3 .2 for more
details .
D . This is incorrect because the study guide never explains or suggests that disclosure is sought for
the purposes of non-governmental organizations or for the purpose of drawing attention to
sustainability information specifically .
14. This question evaluates Learning Objective 8.
A . This is incorrect because even though the safe harbor rule applies to MD&A, this rule is provided by
the PSLRA, not SASB . See Section 6 .3 for more details .
B . This is incorrect because MD&A was not added specifically for sustainability information, but for
insight into an organization’s financial condition, results of operations, and management’s view of
known trends and uncertainties that are reasonably likely to have a material effect on results of
operations and financial condition . See Section 6 .3 for more details .
C . This is CORRECT because by identifying sustainability topics that are reasonably likely to impact the
financial performance of companies in an industry, the information companies disclose align closely
with the purpose of MD&A . See Section 14 .4 .2 .1 for more details .
D . This is incorrect because MD&A is not used solely for quantitative data, in fact, it is primarily used
for qualitative information, hence “discussion” and “analysis” in the title of MD&A (Management’s
164© SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SAMPLE QUESTION EXPLANATIONSSASB® FSA™ LEVEL I STUDY GUIDE
Discussion & Analysis) .
15. This question evaluates Learning Objective 24.
A . This is incorrect because it is not identified as a trigger for special disclosure in the context of SASB
standards .
B . This is CORRECT because Section 14 .1 .2 outlines how multinational SEC registrations may have
special considerations around certain SASB disclosure topics and/or accounting metrics .
C . This is CORRECT because registrants who generate significant revenue from multiple industries are
recommended to consider sustainability topics that SASB has identified for those industries and
disclose the associated SASB accounting metrics where relevant . See Section 14 .1 .2 for more details .
D . This is incorrect because it is not identified as a trigger for special disclosure in the context of SASB
standards .
© SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB® FSA™ LEVEL I STUDY GUIDE
165
The tables below provide the disclosure topics for each of the industries for which SASB has
issued sustainability accounting standards as of October 2018 .
APPENDIX I – SASB DISCLOSURE TOPICS
Disclosure TopicsConsumer Goods
Apparel, Accessories & Footwear
E-CommerceAppliance
ManufacturingHousehold &
Personal Products
Building Products & Furnishings
Toys &Sporting Goods
Multiline & Specialty Retailers
& Dist.
Envi
ronm
ent § Hardware
Infrastructure Energy & Water Management
§ Water Management
§ Energy Management in Manufacturing
§ Energy Management in Retail & Distribution
Soci
alC
apita
l
§ Management of Chemicals in Products
§ Data Privacy & AdvertisingStandards
§ Data Security
§ Product Safety
§ Product Environmental, Health & Safety Performance
§ Management of Chemicals in Products
§ Chemical & Safety Hazards of Products
§ Data Security
Hum
an
Cap
ital § Employee
Recruitment, Inclusion& Performance
§ Labor Practices
§ Workforce Diversity & Inclusion
B. M
odel
& In
nova
tion § Environmental
Impacts in the Supply Chain
§ Raw Material Sourcing
§ Labor Conditions inthe Supply Chain
§ Product Packaging & Distribution
§ Product Lifecycle EnvironmentalImpacts
§ Packaging Lifecycle Management
§ Environmental & Social Impacts of Palm Oil Supply Chain
§ Product Lifecycle EnvironmentalImpacts
§ Wood Supply Chain Management
§ Labor Conditions inthe Supply Chain
Lead
ersh
ip &
Gov
erna
nce § Product Sourcing,
Packaging & Marketing
7/26/19 © SASB8
Consumer Goods
166© SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB® FSA™ LEVEL I STUDY GUIDE
Disclosure TopicsExtractives & Minerals Processing
7/26/19 © SASB7
Oil & Gas –Exploration &
Production
Oil & Gas –Midstream
Oil & Gas –Refining & Marketing
Oil & Gas –Services
Coal Operations
Iron & Steel Producers Metals & Mining Construction
Materials
Envi
ronm
ent
§ Greenhouse Gas Emissions
§ Air Quality
§ Water Management
§ Biodiversity Impacts
§ Greenhouse Gas Emissions
§ Air Quality
§ EcologicalImpacts
§ Greenhouse Gas Emissions
§ Air Quality
§ Water Management
§ Hazardous Materials Management
§ Emissions Reduction Services & Fuels Management
§ Water Management Services
§ Chemicals Management
§ Ecological Impact Management
§ Greenhouse Gas Emissions
§ Water Management
§ Waste Management
§ Biodiversity Impacts
§ Greenhouse Gas Emissions
§ Air Quality
§ Energy Management
§ Water Management
§ Waste Management
§ Greenhouse Gas Emissions
§ Air Quality
§ Energy Management
§ Water Management
§ Waste & Hazardous Materials Management
§ Biodiversity Impacts
§ Greenhouse Gas Emissions
§ Air Quality
§ Energy Management
§ Water Management
§ Waste Management
§ Biodiversity Impacts
Soci
alC
apita
l
§ Security, Human Rights & Rights of Indigenous Peoples
§ Community Relations
§ Community Relations
§ Rights of IndigenousPeoples
§ Community Relations
§ Security, Human Rights & Rights of Indigenous Peoples
Hum
an
Cap
ital § Workforce Health &
Safety§ Workforce Health &
Safety§ Workforce Health &
Safety§ Labor Relations
§ Workforce Health & Safety
§ Workforce Health & Safety
§ Labor Relations
§ Workforce Health &Safety
§ Workforce Health & Safety
Busi
ness
Mod
el &
In
nova
tion
§ Product Specifications &Clean Fuel Blends
§ Product Innovation
Lead
ersh
ip &
Gov
erna
nce
§ Business Ethics &Transparency
§ Reserves Valuation & Capital Expenditures
§ Management of the Legal & RegulatoryEnvironment
§ Critical Incident Risk Management
§ Competitive Behavior
§ Operational Safety, Emergency Preparedness & Response
§ Pricing Integrity &Transparency
§ Management of the Legal & Regulatory Environment
§ Critical Incident Risk Management
§ Business Ethics &Payments Transparency
§ Management of the Legal & Regulatory Environment
§ Critical Incident Risk Management
§ Reserves Valuation & Capital Expenditures
§ Supply Chain Management
§ Business Ethics &Payments Transparency
§ Pricing Integrity &Transparency
Extractives & Minerals Processing
167© SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB® FSA™ LEVEL I STUDY GUIDEDisclosure Topics Financials
Commercial Banks
Investment Banking & Brokerage
Asset Management &
Custody Activities
Consumer Finance
Mortgage Finance
Security & Commodity Exchanges
Insurance
Envi
ronm
ent
Soci
al C
apita
l
§ Data Security
§ Financial Inclusion & Capacity Building
§ Transparent Information & Fair Advice for Customers
§ Data Security
§ Customer Privacy
§ Selling Practices
§ Lending Practices
§ Discriminatory Lending
§ Transparent Information & Fair Advice for Customers
Hum
an
Cap
ital
§ Employee Diversity & Inclusion
§ Employee Diversity & Inclusion
Busi
ness
Mod
el &
Inno
vatio
n
§ Incorporation of Environmental, Social & Governance Factors in Credit Analysis
§ Integration of Environmental, Social, & Governance Factors in Investment Banking & Brokerage Activities
§ Incorporation of Environmental, Social & Governance Factors in Investment Management & Advisory
§ Environmental Risk to Mortgaged Properties
§ Promoting Transparent & Efficient Capital Markets
§ Incorporation of Environmental, Social, & Governance Factors in Investment Management
§ Policies Designed to Incentivize Responsible Behavior
§ Environmental Risk Exposure
Lead
ersh
ip &
Gov
erna
nce
§ Business Ethics
§ Systemic Risk Management
§ Business Ethics
§ Professional Integrity
§ Systemic Risk Management
§ Employee Incentives & Risk Taking
§ Business Ethics
§ Systemic Risk Management
§ Managing Conflicts of Interest
§ Managing Business Continuity & Technology Risks
§ Systemic Risk Management
7/26/19 © SASB2
Financials
168© SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB® FSA™ LEVEL I STUDY GUIDE
Food & Beverage
Disclosure TopicsFood & Beverage
Agricultural Products
Meat,Poultry, &
Dairy
Processed Foods
Non-Alcoholic Beverages
Alcoholic Beverages Tobacco Food Retailers
& Distributors Restaurants
Envi
ronm
ent
§ Greenhouse Gas Emissions
§ Energy Management
§ Water Management
§ GreenhouseGas Emissions
§ Energy Management
§ Water Management
§ Land Use & Ecological Impacts
§ Energy Management
§ Water Management
§ Fleet Fuel Management
§ Energy Management
§ Water Management
§ Energy Management
§ Water Management
§ Fleet Fuel Management
§ Air Emissions from Refrigeration
§ Energy Management
§ Food Waste Management
§ Energy Management
§ Water Management
§ Food & PackagingWaste Management
Soci
alC
apita
l
§ Food Safety § Food Safety§ Antibiotic Use
In Animal Production
§ Food Safety§ Health &
Nutrition§ Product
Labeling & Marketing
§ Health & Nutrition
§ Product Labeling & Marketing
§ ResponsibleDrinking & Marketing
§ Public Health
§ Marketing Practices
§ Data Security§ Food Safety § Product Health &
Nutrition § Product Labeling
& Marketing
§ Food Safety§ Nutritional
Content
Hum
an
Cap
ital § Labor Practices § Labor Practices
Busi
ness
Mod
el &
Inno
vatio
n
§ Workforce Health & Safety
§ Environmental & Social Impacts of Ingredient Supply Chains
§ Ingredient Sourcing§ GMO Management
§ Workforce Health & Safety
§ Animal Care & Welfare
§ Environmental & Social Impacts of Animal Supply Chain
§ Animal & Feed Sourcing
§ Packaging Lifecycle Management
§ Environmental& Social Impacts of Ingredient Supply Chain
§ Ingredient Sourcing
§ Packaging Lifecycle Management
§ Environmental & Social Impacts of Ingredient Supply Chain
§ Ingredient Sourcing
§ Packaging Lifecycle Management
§ Environmental & Social Impacts of Ingredient Supply Chain
§ Ingredient Sourcing
Lead
ersh
ip &
Gov
erna
nce § Management of
Environmental & Social Impacts in the Supply Chain
§ Supply Chain Management & Food Sourcing
7/26/19 © SASB11
169© SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB® FSA™ LEVEL I STUDY GUIDE
Health Care
Disclosure Topics Health Care
7/26/19 © SASB1
Biotechnology & Pharmaceuticals Drug Retailers Medical Equipment
and Supplies Health Care Delivery Health Care Distributors Managed Care
Envi
ronm
ent § Energy Management
in Retail§ Energy Management
§ Waste Management
§ Fleet Fuel Management
Soci
al C
apita
l
§ Safety of Clinical Trial Participants
§ Access to Medicines
§ Affordability & Pricing
§ Drug Safety
§ Counterfeit Drugs
§ Ethical Marketing
§ Data Security & Privacy
§ Drug Supply Chain Integrity
§ Management of Controlled Substances
§ Patient Health Outcomes
§ Affordability & Pricing
§ Product Safety
§ Ethical Marketing
§ Patient Privacy & Electronic Health Records
§ Access for Low-Income Patients
§ Quality of Care & Patient Satisfaction
§ Management of Controlled Substances
§ Pricing & Billing Transparency
§ Product Safety
§ Counterfeit Drugs
§ Customer Privacy & Technology Standards
§ Access to Coverage
§ Plan Performance
§ Improved Outcomes
Hum
an C
apita
l
§ Employee Recruitment, Development & Retention
§ Employee Health & Safety
§ Employee Recruitment, Development & Retention
Busi
ness
Mod
el &
In
nova
tion
§ Supply Chain Management
§ Product Design & Lifecycle Management
§ Supply ChainManagement
§ Climate Change Impacts on Human Health & Infrastructure
§ Product Lifecycle Management
§ Climate Change Impacts on Human Health
Lead
ersh
ip &
G
over
nanc
e
§ Business Ethics § Business Ethics § Fraud & UnnecessaryProcedures
§ Business Ethics
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SASB® FSA™ LEVEL I STUDY GUIDE
Disclosure TopicsInfrastructure
Electric Utilities & Power Generators
Gas Utilities &
Distributors
Water Utilities & Services
Waste Management
Engineering & Construction
ServicesHome Builders Real Estate Real Estate
Services
Envi
ronm
ent
• Greenhouse GasEmissions & Energy Resource Planning
• Air Quality
• Water Management
• Coal Ash Management
• Energy Management
• Distribution Network Efficiency
• Effluent Quality Management
• Greenhouse Gas Emissions
• Fleet Fuel Management
• Air Quality
• Management of Leachate & Hazardous Waste
• Environmental Impacts of Project Development
• Land Use & Ecological Impacts
• Energy Management
• WaterManagement
Soci
alC
apita
l
• Energy Affordability • Energy Affordability
• Water Affordability &Access
• Drinking Water Quality
• Structural Integrity& Safety
Hum
an
Cap
ital • Workforce Health &
Safety• Workforce Health
& Safety
• Labor Practices
• Workforce Health & Safety
• Workforce Health& Safety
Busi
ness
Mod
el
• End-Use Efficiency &Demand
• End-Use Efficiency
• End-Use Efficiency
• Water Supply Resilience
• Recycling &Resource Recovery
• Climate Impacts of Business Mix
• Lifecycle Impacts of Buildings & Infrastructure
• Design for Resource Efficiency
• Community Impacts of NewDevelopments
• Climate Change Adaptation
• Management of TenantSustainability Impacts
• Climate Change Adaptation
• SustainabilityServices
Lead
ersh
ip &
Gov
erna
nce
• Nuclear Safety &Emergency Management
• Grid Resiliency
• Integrity of Gas Delivery Infrastructure
• Network Resiliency & Impacts of Climate Change
• Business Ethics • Transparent Information &Management of Conflict of Interest
7/26/19 © SASB10
Infrastructure
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SASB® FSA™ LEVEL I STUDY GUIDE
Disclosure TopicsRenewable Resources & Alternative Energy
Biofuels Solar Technology & Project Developers
Wind Technology & Project Developers
Fuel Cells & IndustrialBatteries
ForestryManagement
Pulp & Paper Products
Envi
ronm
ent
§ Air Quality
§ Water Management inManufacturing
§ Energy Management inManufacturing
§ Water Management inManufacturing
§ Hazardous WasteManagement
§ Ecological Impacts of Project Development
§ Energy Management
§ EcosystemServices & Impacts
§ Greenhouse Gas Emissions
§ Air Quality
§ Energy Management
§ Water Management
Soci
alC
apita
l § Rights of Indigenous Peoples
Hum
an
Cap
ital
§ Workforce Health & Safety
§ Workforce Health& Safety
Busi
ness
Mod
el&
Inno
vatio
n
§ Lifecycle Emissions Balance
§ Sourcing & EnvironmentalImpacts of Feedstock Production
§ Management of Energy Infrastructure Integration& Related Regulations
§ Product End-of-lifeManagement
§ Materials Sourcing
§ Ecological Impacts of Project Development
§ Materials Sourcing
§ Materials Efficiency
§ Product Efficiency
§ Product End-of-Life Management
§ Materials Sourcing
§ Climate ChangeAdaptation
Lead
ersh
ip &
Gov
erna
nce
§ Management of the Legal & Regulatory Environment
§ Operational Safety, Emergency Preparedness & Response
§ Supply ChainManagement
7/26/19 © SASB9
Renewable Resources & Alternative Energy
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SASB® FSA™ LEVEL I STUDY GUIDEDisclosure TopicsResource Transformation
7/26/19 © SASB5
Chemicals Aerospace & Defense Electrical & Electronic Equipment
Industrial Machinery & Goods
Containers & Packaging
Envi
ronm
ent
§ Energy Management
§ Hazardous WasteManagement
§ Energy Management
§ Hazardous WasteManagement
§ Energy Management § Greenhouse Gas Emissions
§ Air Quality
§ Energy Management
§ Water Management
§ Waste Management
Soci
alC
apita
l
§ Data Security
§ Product Safety
§ Product Safety § Product Safety
Hum
an
Cap
ital § Employee Health & Safety
Busi
ness
Mod
el &
In
nova
tion
§ Fuel Economy & Emissions in Use-phase
§ Materials Sourcing
§ Product LifecycleManagement
§ Materials Sourcing
§ Fuel Economy & Emissions in Use-phase
§ Materials Sourcing
§ Remanufacturing Design& Services
§ Product LifecycleManagement
§ Supply ChainManagement
Lead
ersh
ip &
Gov
erna
nce
§ Greenhouse Gas Emissions
§ Air Quality
§ Energy Management
§ Water Management
§ Hazardous Waste Management
§ Community Relations
§ Workforce Health & Safety
§ Product Design for Use-phase Efficiency
§ Safety & Environmental Stewardship of Chemicals
§ Genetically Modified Organisms
§ Management of the Legal & Regulatory Environment
§ Operational Safety, Emergency Preparedness & Response
§ Business Ethics § Business Ethics
Resource Transformation
173© SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB® FSA™ LEVEL I STUDY GUIDE
Services
Disclosure TopicsServices
EducationProfessional &
Commercial Services
Hotels & Lodging Casinos & Gaming
LeisureFacilities
Advertising & Marketing
Media & Entertainment
Envi
ronm
ent
§ Energy Management
§ Water Management
§ Ecological Impacts
§ Energy Management
§ Energy Management
Soci
alC
apita
l
§ Data Security
§ Quality of Education& Gainful Employment
§ Marketing & Recruiting Practices
§ ProfessionalIntegrity
§ Data Security
§ ResponsibleGaming
§ Customer Safety § Data Privacy
§ AdvertisingIntegrity
§ Journalistic Integrity & Sponsorship Identification
§ Media Pluralism
Hum
an
Cap
ital § Workforce
Diversity & Engagement
§ Labor Practices § Smoke-freeCasinos
§ Workforce Safety § WorkforceDiversity & Inclusion
B. M
odel
&
Inno
vatio
n
§ Climate ChangeAdaptation
Lead
ersh
ip &
Gov
erna
nce § Internal Controls
on Money Laundering
7/26/19 © SASB6
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SASB® FSA™ LEVEL I STUDY GUIDE
Technology & Communications
Disclosure Topics Technology & Communications
Hardware EMS & ODM Semiconductors Software & IT Services Internet Media & Services
Telecommunications Services
Envi
ronm
ent
§ Water Management
§ Waste Management
§ Greenhouse Gas Emissions
§ Energy Management inManufacturing
§ Water Management
§ Waste Management
§ Environmental Footprint of HardwareInfrastructure
§ EnvironmentalFootprint of Hardware Infrastructure
§ EnvironmentalFootprint of Operations
Soci
al C
apita
l
§ Product Security § Data Privacy & Freedom of Expression
§ Data Security
§ Data Privacy, Advertising Standards & Freedom of Expression
§ Data Security
§ Data Privacy § Data Security
Hum
an C
apita
l
§ Employee Diversity & Inclusion
§ Labor Practices§ Labor Conditions
§ Employee Health& Safety
§ Recruiting &Managing a Global & SkilledWorkforce
§ Recruiting & Managing a Global, Diverse & Skilled Workforce
§ Employee Recruitment,Inclusion & Performance
Busi
ness
Mod
el &
Inno
vatio
n § Product LifecycleManagement
§ Product LifecycleManagement
§ Product LifecycleManagement
§ Product End-of-Life Management
Lead
ersh
ip &
Gov
erna
nce § Supply Chain
Management§ Materials
Sourcing
§ Materials Sourcing
§ Materials Sourcing§ Intellectual
Property Protection & Competitive Behavior
§ Intellectual Property Protection & Competitive Behavior
§ Managing Systemic Risks from Technology Disruptions
§ Intellectual Property Protection& Competitive Behavior
§ Competitive Behavior & OpenInternet
§ Managing Systemic Risks from Technology Disruptions
7/26/19 © SASB3
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SASB® FSA™ LEVEL I STUDY GUIDE
Transportation
Disclosure TopicsTransportation
Automobiles Auto Parts Car Rental & Leasing Airlines Air Freight &
LogisticsMarine
TransportationRail
TransportationRoad
Transportation Cruise Lines
Envi
ronm
ent
§ Energy Management
§ Waste Management
§ GreenhouseGas Emissions
§ Greenhouse Gas Emissions
§ Air Quality
§ Greenhouse Gas Emissions
§ Air Quality
§ EcologicalImpacts
§ Greenhouse Gas Emissions
§ Air Quality
§ Greenhouse Gas Emissions
§ Air Quality
§ Greenhouse Gas Emissions
§ Air Quality
§ Discharge Management & Ecological Impacts
Soci
alC
apita
l § Product Safety
§ Product Safety § CustomerSafety
§ CustomerWelfare
§ Customer Health & Safety
Hum
an C
apita
l § Labor Practices
§ Labor Practices
§ Labor Practices
§ Employee Health & Safety
§ Employee Health & Safety
§ Employee Health & Safety
§ Driver WorkingConditions
§ Labor Practices
§ Employee Health & Safety
Busi
ness
Mod
el &
Inno
vatio
n
§ Fuel Economy & Use-phase Emissions
§ Materials Sourcing
§ Materials Efficiency & Recycling
§ Design for FuelEfficiency
§ Materials Sourcing
§ Materials Efficiency
§ Fleet Fuel Economy & Utilization
§ Supply ChainManagement
Lead
ersh
ip &
Gov
erna
nce
§ CompetitiveBehavior
§ Competitive Behavior
§ Accidents & Safety Management
§ Accidents & Safety Management
§ Business Ethics
§ Accidents & Safety Management
§ CompetitiveBehavior
§ Accidents & Safety Management
§ Accidents & Safety Management
§ Accident Management
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© SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB® FSA™ LEVEL I STUDY GUIDE
176
To delve further into some of the key ideas raised in the FSA Level I study guide,
consider the following resources:
Khan, Mozaffar, George Serafeim, and Aaron Yoon . “Corporate Sustainability: First
Evidence on Materiality .” The Accounting Review 2016 91:6, 1697-1724 .
• This paper compares stock returns and accounting performance for 2,300
companies from 1993 to 2013 based on 109 MSCI data points, which are
separated into SASB topics and non-SASB topics .
Eccles, Robert, Ioannis Ioannou, and George Serafeim . “The Impact of a Culture of
Sustainability on Corporate Behavior and Performance .” Harvard Business School
Working Paper, May 2012 .
• This paper compares the organizational processes and outcomes of 90
High Sustainability firms, as defined by the presence of many voluntary
sustainability policies in 1993, and 90 Low Sustainability firms, as defined by
the presence of few or no sustainability policies .
Business Reporting Research Project . ”Improving Business Reporting: Insights into
Enhancing Voluntary Disclosurse .” Financial Accounting Standards Board (FASB),
2001 .
• This report presents examples of several leading companies providing
extensive voluntary disclosures, including non-financial disclosures, and
promotes the value of industry-based analysis and company-specific
disclosures of “critical success factors .”
APPENDIX II – RESOURCES FOR ENHANCED UNDERSTANDING
© SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB® FSA™ LEVEL I STUDY GUIDE
177
UN PRI, “Integrated Analysis: How investors are addressing environmental, social
and governance factors in fundamental equity valuation .” February 2013 .
• This report describes case studies of leading financial institutions integrating
ESG factors into fundamental equity analysis through five stages of analysis –
economic analysis, industry analysis, company strategy, financial reports, and
valuation tools .
SEC, “Interpretation: Commission Guidance Regarding Management’s Discussion
and Analysis of Financial Condition and Results of Operations; Certain Investment
Company Disclosures, Securities and Exchange Commission,” Release Nos .33-
8350; 34-48960; FR-72, December 29, 2003 .
• This interpretive release from the SEC outlines the Commission’s most recent
guidance that is intended to elicit more meaningful disclosure in MD&A
section of Form 10-K .
Monsma, David and Timothy Olson, “Muddling Through Counterfactual Materiality
and Divergent Disclosure: The Necessary Search for a Duty to Disclose Material
Non-Financial Information,” 26 Stanford Envtl .L . J . 137, 1988, p . 168-172 .
• This legal journal article discusses materiality, public corporations’ duties for
disclosure, and why the social and environmental management of those
corporations can be considered material information that they have a duty to
disclose .
SASB, Conceptual Framework, February 2017 .
• This document serves as a foundational document that guides SASB’s
standards development process and explains the concepts and definitions
relevant to SASB’s work
Sustainability Accounting Standards Board
1045 Sansome Street, Suite 450
San Francisco, CA 94111
415 830-9220
sasb.org