Financial Advisor contributor Paul Ellis recently interviewed Dr. Jean Rogers, CEO and founder of Sustainability Accounting Standards Board (SASB), to discuss SASB’s standard setting process.

Ellis: Jean, tell our financial advisor readers what’s next for SASB related to setting standards for material sustainability information in corporate SEC filings.

Rogers: We’ve just finished a period of deep consultation on the provisional standards. For the last six months, we’ve been looking for consistency of logic and approach in consultation with companies and investors, as well as looking at the full set 79 industries for patterns of materiality exposure. Where there is an issue unique to an industry we want to make sure the topic and metrics are appropriate, as well as be clear on the similarity of disclosures across industries since the standards were developed in silos and sector by sector.

This summer we will open the standards for a public comment period. The SASB technical board will then review the updated standards and vote to adopt them into code. Our goal is to have codified standards available for use in 2017 SEC filings of Form 10-K and 20-F.

Ellis: When did this process begin?

Rogers: The SASB standards were developed sector by sector starting in 2012. In March 2016, we reached a milestone by completing the full set of provisional standards for 79 industries across the economy. We are now able to use these standards to assess materiality and analyze exposure to ESG risks industry by industry. SASB is doing this across a diversified portfolio of these industries and in 10 major economic sectors.

Ellis: And these SEC filings are required for companies on an annual basis, correct?

Rogers: Yes, Regulation S-K requires companies to disclose material information in their annual SEC filings. What’s been missing, until now, are standards that help companies disclose material sustainability information in a way that’s decision-useful to investors.  

Ellis: What is SASB’s goal for use of these sustainability accounting standards?

Rogers: SASB’s vision is that any investor can type in a ticker symbol and access a company’s sustainability fundamentals alongside financial fundamentals. In order to achieve that vision, we must get material sustainability information into the company’s SEC filings, where investors find the company’s official financial information. The information is then freely accessible to all investors in the public reporting system.

Ellis: So, identifying what ESG information is likely to be material to a company’s performance is SASB’s work in standard setting.

Rogers: That is the essence of our work. If we don’t get that right, nothing else matters. We go industry by industry to look at how companies use resources, and how they impact society and the environment depending on the types of goods and services they produce.  

We’ve just put out a staff bulletin that details how SASB determines whether an issue is likely to materially impact the performance of a specific company or an entire industry. Disclosure topics for a health-care company are going to be quite different from those that are material to an oil and gas company. We had nearly 3,000 experts participate in industry working groups to identify those issues at the industry levels.

Our research has identified 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, most companies do this with minimal boiler-plate statements about the risks involved. We know two things: companies are already acknowledging these risks, and boiler-plate disclosure is not useful to investors.

Ellis: How are companies responding to the results so far?

Rogers: Some companies have challenged SASB by asking if we believe they are breaking the law by not reporting on material sustainability issues in 10-K filings.

This is about quality—companies often already disclose these issues, but not using standardized metrics. When companies disclose material information in SEC filings using boilerplate language, they are meeting the letter of the law in terms of securities disclosure, but not the investor need for information that is decision-useful related to owning the company stock. SASB is saying we need to move from boilerplate to useful disclosures, so that investors have what they need to make informed decisions.

Right now you can request this information through information brokers who gather and sell it to investors. We are trying to democratize that process so that all investors have access to material sustainability information without having to pay for it.

We are confident, given the underlying research and support of our working groups, that disclosure topics in SASB standards are likely to be material. We’re getting close to a set of standards that does reflect materiality for investors.

Ellis: Today many companies are producing extensive, non-mandatory corporate social responsibility (CSR) and sustainability reports.

Rogers: Yes, but these reports are designed for a broad group of stakeholders, not investors. Their 10-K documentation—which is designed to serve investors—has not caught up and still uses boilerplate language. One could argue that companies are not compliant if they know more than they are saying. We’ll see how the SEC interprets this going forward.

Ellis: Since company filings are annual, will SASB’s state of disclosure data be updated annually going forward?

Rogers: That’s exactly right. We review the filings every year and map the state of disclosure, which rates highest when it actually contains performance data. It’s still hard for investors to compare the different standards that exist today, but data provides a basis for comparison. We’re in favor of a corporate narrative that uses performance data to distinguish companies, one from another.

Ellis: Let’s talk about how investors, advisors and asset managers can use what SASB is producing. Tell our readers about SICS, the Sustainable Investing Classification System that SASB has developed.

Rogers: When we first started standard setting in 2011 one of the questions we asked was what classification system will we use? We researched all of them, from the commercial to the government system platforms. We did not have the budget to license any of the commercial systems, and the free government classification systems were sorely out of date.

Steve Lydenberg was a founding SASB board member and the “L” in the KLD Index, one of sustainable investing’s first indexes which is now owned by MSCI. He suggested we create our own classification system, so we could group industries with like sustainability characteristics. This enabled us to research 79 industries faster because they could be grouped around shared sustainability risks and opportunities.

In some cases, SASB has a fundamentally different approach to grouping industries from other classification systems. For example, oil, gas and coal are grouped with mining since they are all non-renewable resources. They have similar characteristics related to thinking about the environment and the effects of transitioning to lower carbon economies. They also have high-intensity carbon footprints.

Ellis: What else makes the SICS classification system different from others?

Rogers: What’s great about the SICS system is that you can see where certain kinds of ESG risks are concentrated and where they are diffused. You get a unique view because industries are grouped this way, which isn’t available using other systems. It’s a different lens on the ESG risks companies face.

SICS will have its day in the sun when we can see the overlay of the holdings and have performance data from the companies. We’re designing the infrastructure now to provide that point of view for investors.

Ellis: What is the best way for advisors to use the resources that SASB has developed to date, as well as the standards that will be codified?

Rogers: Advisors can begin with the SASB Materiality Map to avoid or diversify away from certain types of risk, as well to choose best-in-class companies. They can use the SASB Navigator to access company specific 10-K filings by entering a ticker symbol. They can compare one company to another using this tool, as well as compare a company’s SEC disclosures to their CSR and sustainability reports.  The best companies are already improving their 10-K filings to reflect the level of disclosure being used in their sustainability reports. Once we have more company performance data, SASB can be more specific about shaping exposure to risk.

These tools give advisors a better way to focus a discerning eye on company disclosures today and make an assessment of the company’s ESG risks or request additional information.

Right now, we are encouraging advisors and investors to engage with companies. Let them know where additional data or improved performance is needed on ESG issues. Active investors should remember they have a right to material information.     

Paul Ellis founded Paul Ellis Consulting to work with financial advisors who want to integrate sustainable and impact investment strategies for their clients.