Mandatory Sustainability Reporting: The Necessary Fire to Ignite Change

We may still have a long way to go before sustainability reporting becomes mandatory.  Let’s take a look at the current landscape.

1997: The Global Reporting Initiative (GRI), an international non-profit organization is formed, with the objective of promoting sustainability reporting and accountability among companies who wish to contribute to a sustainable future.  Key words, “companies who wish”…i.e., the GRI is voluntary.  Nonetheless, today, more than 4,000 organizations from 60 different countries use the Sustainability Reporting Framework engineered by the GRI.  This framework encourages corporations to use specific principles in reporting economic, environmental, and social performance.

2010: The forming of the International Integrated Reporting Council (IIRC), a global alliance of regulators, investors, and corporations who share a mutual vision of integrated reporting as mainstream business practice.  Lead by Professor Mervyn King and Paul Druckman, the IIRC provides an “International Framework”, or guiding principles, to help govern the overall content of an integrated report.  The thesis behind integrated reporting is that all issues (both financial and non-financial) that affect a company’s long-term value creation, should be reported.  Makes sense.  If sustainable factors are relevant to the longevity of a company and the ability of a company to create value, why should they be reported separately?  The IIRC argues they shouldn’t.

2011: Here in the U.S., under the leadership of Robert Eccles (Professor of Management at Harvard Business School) and Michael Bloomberg (Founder of Bloomberg, LP and 108th Mayor of NYC), the Sustainability Accounting Standards Board (SASB), has been developing sector-specific key performance indicators (KPI’s) for material ESG issues.  What is material?  SASB adheres to the Supreme Court’s definition of material, “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.”  Importantly, the company makes the ultimate decision on what constitutes materiality.  The goal of the SASB is for publicly-listed companies to disclose material sustainability issues in their SEC filings, such as the Form 10-K and 20-F.  Quoted on the SASB website, “Sustainability accounting standards are intended as a complement to financial accounting standards, such that financial fundamentals and sustainability fundamentals can be evaluated side by side to provide a complete view of a corporation’s performance.”

In theory, voluntary reporting is a good concept, as it allows volunteering companies a competitive edge.  By disclosing information that is not required, a company can prove to its investors and consumers that it truly cares about issues relevant to all stakeholders.  The major impediment is that, in reality, only companies who adhere to high environmental, social, and governance standards will disclose what’s going on behind the scenes.  Similar to survivorship bias in hedge fund reporting, the market is left with a skewed view of the “sustainable landscape” as only the good is reported.

If companies are forced to adhere to a higher level of transparency and disclose both the good and the bad, will consumers and investors change their buying decisions based on what they know?  Today, it seems that only a small ensemble of consumers and investors make purchasing and investing decisions based on ESG factors first. Perhaps it is not that the masses “don’t care” if companies and products negatively impact society and the environment, but rather, that most people simply do not have enough information to understand.

6 thoughts on “Mandatory Sustainability Reporting: The Necessary Fire to Ignite Change

  1. The methodology of the SASB is flawed. The standards are specific to particular industries; thus each sector will have different reporting requirements. There is no ability to compare companies across industries. The value of the FASB is that each industry is evaluated on the same metric: dollars. Companies can be compared using financial analysis. With SASB, you will have disclosure which will be not be as helpful as it should be. Well intentioned, but …

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    • John – I understand your mindset, but ultimately, I disagree. Even global issues like climate changes are more pertinent to certain industries than others. Although accounting standards remain constant across companies, sustainability factors are less black and white. Attempting to compare companies across different industries in terms of “sustainability-friendliness” is like attempting to compare cars to books.

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  2. Agree that SASB’s methodology is flawed (maybe limited is a better adjective). Right now, their standards limit investor comparison to companies within industries. Better than nothing, I say. Hopefully a SASB 2.0 would come up with standards for all publicly traded companies.

    The bigger question is voluntary vs. required. It seems to me that, with so many companies reporting to GRI, CDP, and taking part in SASB, it wouldn’t be a big leap for the SEC to jump in and say all companies have to report ESG data in some way. My hope is this happens sooner rather than later.

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    • Mandatory reporting would be a game-changer. The GAAP and IFRS accounting standards were formed at a time when a company’s ability to create value was largely based on its financials. However, the landscape has changed. It is becoming increasingly apparent that non-financial risks and opportunities are material to a company’s ability to create long-term value. My hope is that the necessary regulatory bodies will come to this realization and take action.

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  3. The SEC already requires management to report any material factors affecting a company . So it comes down to defining what is material . The Common Definition is something is material if it would affect the stock price if disclosed. But if investors don’t care about ESG, then nothing is material. Not sure SASB brings that much to the party extra, so I am guessing you will not see this adopted by the SEC as a requirement . Their view will likely be that companies are already required to comply. Adopting some format as the standard will be a stretch decision.

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