Getting Businesses on Board With ESG Transparency
When it comes to environmental, social and governance (ESG) factors, many people, particularly sustainability rating firms, say more is more, much to the dismay of some publicly-traded companies. As ESG investing evolves from a niche strategy to a mainstream priority, firms are grappling with an ever-growing demand for information on everything from their carbon footprint to their cybersecurity initiatives.
"Institutional investors are often sending companies questionnaires that they want to use to solicit ESG information, but a lot of companies are overwhelmed," explained corporate sustainability expert Andrew Collins. He calls it "disclosure fatigue"...and he believes his organization can help.
Collins is the technical director of the Sustainability Accounting Standards Board (SASB), a non-profit group founded in 2011 to develop industry-specific accounting standards on "material sustainability issues" — ESG factors that traditionally haven't been included in financial reports but still affect corporate performance.
You might assume that accounting standards handed down by the SASB would add yet another burden to firms overwhelmed by information requests, but Collins explains that it's quite the opposite. That's because the group's work could make it easier for firms to produce and disseminate ESG data. Instead of scrambling to provide answers to a variety of ESG questionnaires, firms could rely on precise SASB standards — summarized in the group's materiality map here1 — to guide their disclosures. When investors ask an oil exploration firm about its impact on air quality, for instance, the firm could respond with emissions data on nitrogen oxide, sulfur oxide and other pollutants listed in the SASB's air quality accounting metric for oil and gas companies. Investors seeking information on labor relations at an automaker, meanwhile, would receive data on the percentage of workers covered by collective-bargaining agreements.
SASB didn't create its standards in a vacuum.
"We're trying to create a baseline. It should be a relatively cost-effective starting point for all companies across the market to provide information," Collins said. "That will alleviate, hopefully, repeated requests for information."
SASB, it's worth noting, didn't create its standards in a vacuum. It sought input from industry working groups early on, sending industry-specific surveys to investors with a cumulative $23.4 trillion in assets under management and corporate experts affiliated with publicly traded firms with a total market capitalization of $11 trillion. SASB also reached out to "public service intermediaries" — lawyers, accountants, non-profit groups and others with industry expertise. Survey participants, more than 2,800 in all, were recruited at conferences, through LinkedIn and more. Following the initial survey period, SASB has continued its outreach, setting up various meetings and conducting webinars, among other engagement efforts.
For publicly-traded companies, working with the SASB provides a chance to "shape the narrative" and, yes, push back when they feel certain disclosure guidelines might go too far, Collins said. "Companies were in a position to say some of this stuff is not as material as investors think."
Despite some disagreement between information-hungry investors and reticent corporations, SASB has managed to achieve consensus — or at least 70 percent approval — on hundreds of standards. Companies and investors alike are generally in favor of standards on employee diversity, health and safety and climate risk, to name a few, Collins said.
SASB's standards are not yet final. As the industry working group surveys concluded, the SASB staff continued its outreach, and has since conducted briefings and consultations with hundreds of companies and dozens of industry associations to gather more feedback. But even without finalized standards in place, the group is already seeing results, with corporations increasingly including SASB's suggested accounting metrics in their annual corporate responsibility reports.
One of the group's ultimate goals is for companies to include SASB accounting metrics in their 10k filings, but that could prove tricky. Within any given corporation, 10-K filings and ESG reporting are often handled by different teams following different timelines. Those hurdles notwithstanding, at least two publicly-traded firms — both in the real estate sector — did manage to include SASB metrics in their recent 10-Ks. And, Recent research by SASB shows that 69 percent of companies are already addressing at least three-quarters of SASB disclosure topics for their industry, and 38 percent are already providing disclosure on all SASB disclosure topics. However, more than half of sustainability-related disclosures in SEC filings use boilerplate language, which is inadequate for investment decision-making.
Whether companies improve sustainability disclosure in their 10K route or not, however, Collins expects that ESG disclosures will continue to grow.
"I don't see a scenario," he said, "where people stop asking for this information."
1. (n.d.). Retrieved May 16, 2017, from http://materiality.sasb.org/
Robert G. Eccles is the world’s foremost expert on integrated reporting and a leader on how companies and investors can create sustainable strategies. He is the Founding Chairman of the Sustainability Accounting Standards Board (SASB) and one of the founders of the International Integrated Reporting Council (IIRC). A serious weight-lifter, when Bob is not dead lifting 380 pounds he’s listening to Leonard Cohen.