By: George M. Wilson & Carol A. Stacey
In a recent post we discussed reasons why now is an opportune moment to begin learning about sustainability standards. Likely most of us have heard discussion or mention of how this reporting area is becoming important and that investors are beginning to ask for sustainability information.
When you embark on the sustainability reporting learning journey a number of questions arise. What exactly does sustainability reporting entail? Are there certain areas that should be included? Are there standards to follow? It turns out, through the Sustainability Accounting Standards Board (“SASB”), that there is a substantial amount of industry specific guidance.
A Starting Point
Our current reporting model focuses on historical financial information and related non-financial information that helps us build context to understand financial performance. In addition to history, public companies also make disclosures about what is “out there” that might hurt financial performance in the future. (For example, MD&A known-trend disclosures.)
Sustainability information goes well beyond our current model. Here is a quote from a report prepared by the SASB titled “The State of Disclosure 2016: An analysis of the effectiveness of sustainability disclosure in SEC filings”:
“Investors and their portfolio companies have become increasingly aware of the link between sustainability factors and business outcomes. For example, increased energy efficiency can lead to operational cost savings; effective resource management can reduce input price volatility and the risk of supply disruptions; and stronger data security practices can mitigate the risk of fines, litigation, and reputational harm, while also lowering a firm’s cost of capital. As a result, the investment community—in particular, investors with longer term views—are increasingly asking for improved disclosure around financial risks based on non-financial statement information, while companies have begun to disclose more information about how they manage key sustainability issues but provide little in the way of information on financial impact.” (Emphasis added.)
This goes well beyond our historical reporting model. For example, our current disclosures about environmental matters focus on where we may have problems with a state or federal regulator and how much of our capital expenditures are related to environmental compliance. Sustainability reporting is an extension of this thought process and looks at whether a long-term investor might also want to know about whether a company is committed to investing in technology that focuses on reducing such costs on an overall basis, and how much cost savings are expected.
A simple example would be a company with a large fleet of vehicles. If all the company’s current vehicles are powered by internal combustion engines and all burn regular gas or diesel fuel, an investor might be interested to know whether the company plans to replace vehicles as they are retired with vehicles that burn alternative fuels or even electric vehicles. The economics of such issues are not simple. Electric vehicles may have larger original costs, but they have dramatically fewer moving parts and are expected to have lower maintenance costs. If a company commits to such a strategy an investor might look at that company differently than one that plans to replace its fleet with regular internal combustion powered vehicles. The differences in future financial performance between companies pursuing these different strategies could be a very relevant issue for investors.
Here is a quote from the SASB’s web page:
Investors increasingly acknowledge that environmental, social and governance (ESG) factors impact a company’s ability to manage risk and deliver financial performance over the long-term. As such, many investors use ESG information to develop a comprehensive view of company performance and to evaluate a company’s long-term value. However, to do so in a rigorous and scalable way, investors need data that is relevant, reliable, and comparable. This is the need SASB was created to address.
Standard Setting by Industry
Building guidance for these kinds of disclosures is a massive task. The issues and relevant information vary by industry. An industry based approach is actually hard-wired into the SASB’s mission:
The Sustainability Accounting Standards Board sets industry-specific standards for corporate sustainability disclosure, with a view towards ensuring that disclosure is material, comparable, and decision-useful for investors.
The SASB has initially built their standard-setting process to tailor standards based on this sector breakdown:
Health Care
Financials
Technology & Communications
Non-Renewable Resources
Transportation
Services
Resource Transformation
Consumption I
Consumption II
Renewable Resources & Alternative Energy
Infrastructure
To begin learning about the guidance for sustainability standards in your industry you start with your sector. Each sector is then divided into industries. For example, the Consumption/Sector includes the following industries:
Agricultural Products
Alcoholic Beverages
Meat, Poultry and Dairy
Tobacco
Processed Foods
Household and Personal Products
Non-Alcoholic Beverages
A tailored set of standards is then built for each of these industries within the sector. The volume of information, not to mention the amount of work behind this process is substantial. Here for example, for Consumption I, is a summary of areas addressed:
Agricultural Products | Greenhouse Gas Emissions |
Energy & Fleet Fuel Management | |
Water Withdrawal | |
Land Use & Ecological Impacts | |
Food Safety & Health Concerns | |
Fair Labor Practices & Workforce Health & Safety | |
Climate Change Impacts on Crop Yields | |
Environmental & Social Impacts of Ingredient Supply Chains | |
Management of the Legal & Regulatory Environment | |
Meat, Poultry, & Dairy | Greenhouse Gas Emissions |
Energy Management | |
Water Withdrawal | |
Land Use & Ecological Impacts | |
Food Safety | |
Workforce Health & Safety | |
Antibiotic Use in Animal Production | |
Animal Care & Welfare | |
Environmental & Social Impacts of Animal Supply Chains | |
Environmental Risks in Animal Feed Supply Chains | |
Processed Foods | Energy & Fleet Fuel Management |
Water Management | |
Food Safety | |
Health & Nutrition | |
Product Labeling & Marketing | |
Packaging Lifecycle Management | |
Environmental & Social Impacts of Ingredient Supply Chains | |
Non-Alcoholic Beverages | Energy & Fleet Fuel Management |
Water Management | |
Health & Nutrition | |
Product Labeling & Marketing | |
Packaging Lifecycle Management | |
Environmental & Social Impacts of Ingredient Supply Chains | |
Alcoholic Beverages | Energy Management |
Water Management | |
Responsible Drinking & Marketing | |
Packaging Lifecycle Management | |
Environmental & Social Impacts of Ingredient Supply Chains | |
Tobacco | Public Health |
Marketing Practices | |
Household & Personal Products | Water Management |
Packaging Lifecycle Management | |
Product Environmental, Health, & Safety Performance | |
Environmental & Social Impacts of Palm Oil Supply Chain |
As you might expect, how to build and codify a set of standards dealing with such a variety of issues is constantly evolving process. You can read about the SASB’s plans to codify their standards and how this will change their topical organization in their technical agenda.
In our next post we will look at some of the detailed standards and actual disclosures in a few industries.
As always, your thoughts and comments are welcome!