The Value Reporting Foundation, the group overseeing the Sustainability Accounting Standards Board and the International Integrated Reporting Council, has released a "
The standards deal with the sustainability issues that are most likely to affect financial performance of companies in 77 industries. For every industry, the guide suggests some questions to help corporate directors assess the long-term risks facing their organizations. The questions in the guide are based on disclosure topics and accounting metrics in the 77 SASB standards.
Companies are coming under increasing pressure from shareholders and regulators to demonstrate how they are responding to the accelerating pace of climate change, and to do more standardized reporting on environmental, social and governance (ESG) matters. The Securities and Exchange Commission appears to be moving to require greater disclosure of climate change risks to their companies after posting a request for comments last year that provoked a deluge of suggestions. In the European Union as well, the European Commission proposed a Corporate Sustainability Reporting Directive last year that would apply to companies over a certain size. SASB has been producing sustainability accounting standards for years and as part of the Value Reporting Foundation, it’s in the process of being consolidated into the new International Sustainability Standards Board by the end of June, along with the Climate Disclosure Standards Board (
“Boards are really concerned about their mix of competencies and skills and their performance,” said Neil Stewart, director of corporate outreach at the Value Reporting Foundation. “In almost every conversation I have with directors currently, they’re saying how do we identify the knowledge and skills we need and how do we acquire them. I think the new directors guide can be a really good and useful reference tool because it conveys in clear and simple language the questions that board directors should be asking of management in each industry. These are the questions that stakeholders, particularly investors, would likely be asking independent directors if they find themselves in those kinds of situations.”
The guide is divided into sections for 107 industries, ranging from apparel, accessories and footwear to road transportation. “Every topic in the SASB standards, instead of being written as an accounting standard, is written as a series of questions,” said Stewart. “It really becomes a very good executive summary or desk reference for senior management or the board of directors.”
A survey released last month by Deloitte and the Center for Audit Quality found that the agenda for audit committees on corporate boards includes cybersecurity, data privacy, ethics and risk management, but only 10% of audit committees have oversight of ESG reporting (
“Enlightened audit committees are generally getting their arms around ESG,” said Stewart. “They do see it as part of enterprise risk management, but I think the unenlightened ones are still saying, ‘Not our problem. Call us back when it gets into the 10-K.’ It’s like they’re turning their back to it. I think they’re hiding their heads in the sand. They’re going to have to wake up to this.”
He believes the transition of SASB into the IFRS Foundation will raise the level of sustainability disclosure to a comparable level as financial reporting. The IFRS Foundation, which also oversees the International Accounting Standards Board, will also be overseeing the ISSB.
“It has to be investor grade data if it’s being used for investment decisions, stock picking and voting decisions,” said Stewart. “Directors are seeing that ESG is being used as the basis for decisions around access to capital, and for that matter for the company’s own capital allocation, how they look at debt, how they look at financing, how they look at borrowing and raising capital. It’s being used as the basis for executive remuneration. It’s being used as a basis for evaluating M&A opportunities. Companies are looking at potential acquisitions and saying, ‘Will this raise our ESG score?’ They’re using ESG factors in the same types of assessments, due diligence, as well as financial ones we used in the past.”
The Value Reporting Foundation is still working on its standard-setting work, even though it’s scheduled to merge into the International Sustainability Standards Board.
“We’re in a period of transition now and the ISSB is being stood up now,” said Stewart. “The chair of the ISSB, Emmanuel Faber, was just appointed in December. There will be exposure drafts of the first standards coming out for comment, and the SASB standards need to move through a rigorous due process with the ISSB to become industry-specific requirements under the new IFRS sustainability disclosure standards. That’s going to be hard work, and it’s not going to be overnight. It needs the attention of the full ISSB board as it’s set up. It needs public comment and market input, so the world shouldn’t expect to wake up on July 1 and find that the SASB standards become the IFRS Foundation sustainability disclosure standards. There’s due process to go through. The research that we’re doing, whether it’s around human capital or content moderation on internet platforms, that work doesn’t stop either. The world doesn’t stop changing and the SASB standards in advance of being transitioned into the IFRS Foundation can’t get frozen either.”
The transition is turning into a pivotal time for the SASB standards. “This really brings to life the vision that the standards were founded upon, establishing a global baseline of metric-based standards allowing companies and investors to communicate around ESG performance, and ultimately to improve ESG performance, and this is exactly what we envisioned,” said Stewart. “The announcement of the IFRS Foundation and the consolidation of the Value Reporting Foundation and the CDSB, and then bringing in the work of the other members of the Technical Readiness Working Group, bringing their stakeholder capitals and metrics, and the TCFD [Taskforce on Climate-related Financial Disclosure], as well as the IASB itself, this really creates the institutional arrangements to make ESG part of the fabric of the global capital markets, and it sets us on this path to finally having one common language to communicate around ESG.”
The accelerating pace of climate change and demands for greater diversity in corporate America are prompting boards of directors to look for improved ESG disclosures.
“I think that directors now understand the urgency of these issues,” said Stewart. “Whether it’s climate risk or human capital issues, diversity and inclusion, they recognize that these are business risks. It’s about performance, it’s about mitigating risk for the enterprise, it’s about creating value for stakeholders, but they need to get down a level from the top-level goals. This is not just about some net zero commitment at some year in the future. It’s no longer just about some kind of proportion of gender breakdown or ethnic breakdown of the workforce and pay parity. This is now about what are the levers available to management to make sure of change, and what are the interim targets. I think that investors have gone past just what year are you going to hit net zero. It’s more about exactly how you are going to do that. Is it better management of your supply chain? Is it better design of your products? Is it managing the distribution and packaging? Is it managing the degree and sourcing, or is it managing your energy usage, or is it managing your emissions? That comes through very strongly in the directors’ guide.”
