For more than 20 years, the Holy Grail for sustainable business has been to engage investors. If only they could understand the competitive advantage and reduced risk afforded companies that manage their operations, people, and supply chains through the lens of environmental and social well-being — well, the theory goes, investors would vote with their dollars and companies would have no choice but to change.
Reality, of course, hasn’t been so simple. Few investors — particularly the large pension funds and other institutional investments that can move financial markets — have viewed sustainability as a relevant investment criterion. Even when shown studies that sustainability leaders outperformed their peers on key financial indicators and ratios, including stock price, most analysts and fund managers haven’t been impressed. Only hardcore "socially responsible investors" hew to the theory.
Times are changing, though. Today, in a world where extreme weather can disrupt global supply chains, and where companies’ right to operate can be threatened by perceived mismanagement of environmental or social issues, sustainability is creeping into the realm of risk managers, investor relations departments, and, in some cases, chief financial officers. How well companies manage these issues and insulate themselves from such risks and negative outcomes is becoming of interest to shareholders — at least some of them.
The reason is that sustainability issues are increasingly viewed as material.
“Materiality” is a legal term, defined by the U.S. Supreme Court as “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.” Or, simply put: If an investor knew about it, would it make a difference? If so, it's material.
U.S. companies are required to report material information quarterly on U.S. Securities and Exchange Commission Form 10-K, the form mandated by federal securities laws for publicly traded companies to disclose information on an ongoing basis. But materiality is subjective is best and, as I’ve written previously, the intersection of sustainability and materiality is decidedly murky.
A new nonprofit organization plans to change that. If it succeeds, it could be a game changer.
The Sustainability Accounting Standards Board, or SASB, officially launching this week after two years of development, aims to create and disseminate “industry-specific accounting standards for material sustainability issues for use by U.S. publicly listed corporations and their investors.” SASB’s goal is to have its standards incorporated into SEC rules for all publicly held companies, governing the specific kinds of sustainability information companies must disclose, how to disclose it. (Disclosure: I am one of more than 80 members of SASB’s advisory council, made up of industry, nonprofit, and academic representatives.)
As you may have guessed, the model for SASB is FASB — the Financial Accounting Standards Board set up nearly 40 years ago to establish and improve standards of financial accounting and reporting. FASB’s standards, which govern the preparation of financial reports, are officially recognized as authoritative by the SEC.
Sustainability executives may understandably groan over the idea of new required rules for disclosure. After all, as a recent survey by the GreenBiz Intelligence Panel found, companies uniformly complain about the number and complexity of surveys and disclosure forms sent to them by customers, investor groups, activist groups, and others. (Among other things, they express skepticism over whether anyone at the receiving end actually reads them.) So, a new, government-mandated disclosure standard may be the last straw. Jean Rogers, SASB’s founder and executive director, says companies describe this as “death by a thousand cuts.”
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