During the last several years, there has been a significant increase in the number of U.S. public companies that include discussion of the company’s policies and performance regarding the environment, social responsibility, governance (ESG), and similar matters in their annual report to shareholders, or in a separate public report, often referred to as a sustainability report.  According to the Conference Board, in 2013, about 19 percent of all North American companies made disclosures concerning their environmental and social practices, nearly double the disclosure rate in 2012.1

Similarly, the Governance and Accountability Institute found that, in 2012, 53 percent of S&P 500 companies disclosed some level of ESG information, compared to approximately 20 percent in 2010.2 In its 2013 survey of the 100 largest companies in 41 countries, KPMG found that 71 percent report information concerning corporate responsibility, an increase of seven percent from 2011.3 The trend is clearly toward more such reporting.  Indeed, KPMG concluded that “the high rates of CR reporting in all regions suggest it is now standard business practice worldwide.4

Most U.S. public company ESG reporting is voluntary, and these disclosures and reports vary greatly in content, format, and detail level.  Voluntary ESG disclosures generally are not filed with the SEC or incorporated into filed documents, and there are no generally accepted rules or standards governing  sustainability reporting.  While there are several initiatives to create sustainability disclosure frameworks, one that focuses specifically on U.S. public companies is the work of the Sustainability Accounting Standards Board (SASB). 

What is the SASB?

The SASB is a U.S.-based non-profit organization which is attempting to establish industry-specific standards for the recognition and disclosure of material environmental, social and governance impacts by U.S. public companies.  The SASB, which is chaired by former New York Mayor Michael Bloomberg, has 16 members (including three former SEC Commissioners) and a staff of roughly 25. 

What is the legal effect of the SASB’s work?

The SASB is not a governmental body, and its standards have no legal effect.  However, since the SASB is explicitly attempting to identify ESG information that is material to investors under the existing securities law definition of materiality, there is a possibility that its standards will influence the law of materiality and could become de facto disclosure requirements, particularly with respect to MD&A disclosure.5  As the SASB states in its Conceptual Framework, “SASB standards are designed for disclosure in mandatory filings to the Securities and Exchange Commission (SEC), such as the Form 10-K and 20-F.” 

Importantly though, even if the standards are not or do not become “legal” requirements, widespread voluntary acceptance or use within the marketplace could render the SASB standards as functionally obligatory for many companies.  Due to the prominence and credibility of the Board members, the SASB has generated considerable momentum in a short period.  Combined with the velocity of standard issuance, SASB seems to have garnered increasingly serious consideration as a core source of sustainability disclosure standards.  At the same time, one current SEC Commissioner has expressed concern regarding SASB’s efforts at identifying sustainability materiality, reminding companies that “the Commission does not and should not delegate to outside, non-governmental bodies the responsibility for setting disclosure requirements” and that “groups like SASB have no role in the establishment of mandated disclosure requirements.6

How does the SASB define “sustainability”?

For the purpose of the SASB’s standards, “sustainability” encompasses more than the environmental and resource usage impacts of a company’s activities.  Sustainability refers broadly to the “environmental, social and governance dimensions of a company’s operation and performance” and “includes both the management of a corporation’s environmental and social impacts, as well as the management of environmental and social capitals necessary to create long-term value.7  Accordingly, the SASB’s sustainability disclosure topics are organized under five headings – environment, social capital, human capital, business model and innovation, and leadership and governance. 

As one example of the potential breadth of these standards, the “material sustainability” topics (with standards created for each) identified by SASB with respect to the pharmaceutical industry are:

  • Access to Medicines
  • Drug Safety and Side Effects
  • Safety of Clinical Trial Participants
  • Affordability and Fair Pricing
  • Ethical Marketing
  • Employee Recruitment, Development and Retention
  • Employee Health and Safety
  • Counterfeit Drugs
  • Energy, Water and Waste Efficiency
  • Corruption and Bribery
  • Manufacturing and Supply Chain Quality Management

In short, at least for some industries, the SASB has defined “sustainability” to reach diverse areas and issues, and its standards call for disclosures that touch on a wide range of sensitive business matters.

How are the SASB’s standards developed?

The SASB recognizes that the ESG information material to investors will vary, depending on the nature of a company’s business.  Accordingly, the SASB’s standards are industry-specific.  The SASB has divided public companies into 88 industries in ten industry sectors.  It develops standards by establishing working groups for each industry, including companies in that industry, investors, analysts, auditors, and consultants.  To date, the SASB has released standards for roughly 25 industries in four sectors – technology and communications, financials, healthcare, and non-renewable resources.  The SASB’s timetable anticipates that it will have formulated and released standards for all 88 industries by the end of 2015.  The SASB’s standard setting schedule is attached as Appendix A.

What is the format of the SASB’s standards?

SASB standards are comprised of disclosure guidance and accounting standards at an industry level.  The accounting standards provide “standardized accounting metrics to account for performance on industry-level sustainability topics.”  For many of the individual standards, there are multiple individual metrics derived from a variety of sources.  Using the pharmaceutical industry standard as an example, the SASB’s recommended accounting metrics are attached as Appendix B .8

How should public companies respond to the SASB’s work?

We recommend that –

  1. Public companies should be aware of the standards that the SASB issues relating to the industry or industries in which the company operates.  While these standards are not authoritative or legally binding, they provide useful guidance and perspective which companies may want to consider in making voluntary sustainability disclosures.  Companies may also want to consider the SASB’s standards in determining whether particular information should be disclosed in required SEC filings.
  2. Companies in those industries for which standards are still being developed (see Appendix A) should consider now whether to become actively involved in the SASB’s work. The decision whether to participate in the standard setting process has troubled many companies.  On the one hand, a decision to forego participation may lead to the development of inappropriate or unworkable standards or metrics when better alternatives are available and could have been advanced through engagement.  On the other hand, companies worry that their participation will lend legitimacy to a process and outcome they do not support.  This fundamental decision is an important one meriting senior management consideration. 
  3. If the decision is reached to participate, the company must also evaluate carefully how it will do so.  In particular, care should be taken in characterizing information relating to the company or its industry as material.  Because the SASB asserts that it is applying the same definition of materiality as does the SEC, a concession that particular information is material could have ramifications for the company’s present or future required disclosures.  Responses to SASB questionnaires and inquiries of this nature should be reviewed by internal or external counsel.
  4. Regardless of the participation decision, companies would be well-advised to monitor the SASB’s activities, the evolving market treatment of the standards, and the SEC’s position on the Board’s work.