Investor interest fuels SASB adoption, inspires new GRI tax disclosure standard
The argument for discussing financial metrics alongside environmental, social and governance data gains new supporters.
Alas, sustainability reporting teams, the complex array of frameworks for companies to frame and disclose environmental, social and governance (ESG) issues for external stakeholders won’t become simpler overnight.
But the role of different, sometimes competing standards is becoming clearer.
About a year ago, the Sustainability Accounting Standards Board (SASB) finalized its reporting framework for communicating about ESG issues to the financial and investment community. Today, there are more than 100 companies using it for disclosure — including an appreciable number of real estate management and investment companies like Boston Properties, CBRE, Kilroy Realty, Prologis and Vornado.
The SASB’s supporters page also includes familiar companies that have been proactive in using ESG factors to differentiate their company’s high-level strategic agenda on sustainability — e-commerce marketplace Etsy, food company General Mills, financial services firm ING, retailer Target and tech organizations Intel, Hewlett Packard Enterprise and Salesforce.
What’s inspiring this adoption? In a word, investors are hungry for more information about how ESG factors, including everything from climate change exposure to labor issues, might impact a company’s future financials. “Investors are asking for meetings just on this topic — not just with management but with directors,” said Peggy Smyth, chief financial officer for the utility National Grid US, during SASB’s annual symposium last week.
Smyth, who is also an Etsy board member and sits on the company’s audit committee, said the retailer recently combined its impact report with its financial reports for that reason.
“We see three key levers,” SASB’s new CEO, Janine Guillot, told GreenBiz, when asked about what's fueling interest. “One is investor demand and investor interest in these topics. The second is companies really finding value in the standards as a tool to communicate to their investors, and then the third, of course, is regulators. It’s because we’re a market-based organization that we have prioritized the investor demand lever.”
By embedding this information into the 10Q, this information gets “extreme exposure” to the investors and to the public, according to Smyth.
If an ESG-related, nonfinancial risk rises to the level of being material, it should absolutely be included in filings with the Securities and Exchange Commission (SEC) just like any other risk, even if such discussions aren't yet the norm, noted Mindy Lubber, CEO and president of NGO Ceres, who also spoke at the conference. “In some ways, we are overcomplicating the issue,” she said. “ESG risks are like every other risk. … There’s no need to call it a climate risk. It is just a financial risk.”
In many cases, businesses that are using the SASB disclosure guidelines, which focus on analyzing how ESG factors could affect a company’s risk exposure and financial performance, are doing so alongside more established reporting frameworks, like the widely used standards from the Global Reporting Initiative (GRI), which help communicate how a company’s ESG policies might impact people and the planet. A reference table of industry-centric SASB metrics, for example, might be embedded into a company’s GRI sustainability report, Guillot noted.
“That, then, meets two needs: it meets a need to communicate about stakeholder impact, and it meets a need to communicate to investors in a single report,” she said.
Of the world's 250 largest companies, 92 percent report on sustainability performance — of those, 74 percent use the GRI standards. There have been more than 23,000 GRI reports recorded in the organization's database. What's more, 35 countries use the framework within their sustainability policies.
There’s little to suggest that GRI's dominance will change in the near future. That was the motivation for the ongoing collaboration between the two organizations to use common metrics wherever possible, according to Guillot.
Keep it relevant
What many early corporate adopters of SASB reporting have in common is the conviction that using the framework will reframe conversations with investors, encouraging frank discussions about what risks might be material over a longer time horizon (three to five to 10 years rather than the just the latest quarter). They hope it will enable the companies to control the dialogue proactively by showing where they stand on certain issues, rather than letting the various ESG indices and ratings services serve as the only frames of reference.
“These are very helpful conversations,” said Yafit Cohn, chief sustainability officer and group general counsel for The Travelers Companies, during a SASB Symposium panel.
The insurance company has more than 100 employees involved in gathering the data for the SASB data gathering process. The shift to adopt the SASB framework inspired a decision to participate in fewer surveys, since many of them ask for the same sorts of information that is disclosed through SASB reporting. “Most companies don’t have the time or resources to respond to every single request,” Cohn said.
Hungarian-headquartered oil company MOL Group used SASB as a tool to completely overhaul its corporate sustainability report, said Mikkel Skougaard, sustainable development senior expert for MOL. The company shrank the publication from 90 pages and more than 500 individual data points to just 10 pages under the new model.
Institutional investor Calvert Research and Management, which has focused on ESG considerations for decades, uses SASB metrics as a way to engage with companies and better understand their long-term business strategy, said John Streur, president and CEO.
Because disclosure is still voluntary in the United States, unlike in many European countries where disclosure of “nonfinancial” factors is increasingly being mandated, executive teams that choose the path of disclosure are doing the right thing to remain competitive.
“We don’t want to say that the U.S. markets are behind, but over time, if the U.S. does not maintain its reputation for information and disclosure, we will become less attractive,” Streur said.
A push to refine the discussion about ‘social’ factors
As the field of ESG disclosure matures, the call for more concrete metrics to discuss risks related to ‘social’ factors is becoming more audible, another theme sounded often at last week's event.
“The G part is pretty well-developed,” said Doug Peterson, president and CEO of S&P Global, which owns Trucost, a pioneer in the field of ESG rating. S&P also recently assumed control for the RobecoSAM ESG rating and benchmarking business. “The ‘E’ can be developed further, but one of the advantages is that there are tangible metrics,” he said. “The ‘S' is the most recent to start, and there is not a definition of what the factors should be.”
One initial area of focus for SASB related to this gap is human capital management, the subject of a new research project focused on defining reporting metrics for a broad range of issues such as how to discuss the financial materiality of employee well-being, disclose diversity and inclusion issues or frame the impact of emerging technologies on a company’s workforce, including within its extended partner network and supply chain. Indeed, even the definition of employee is up for debate.
GRI is also moving to create frameworks that allow companies to more explicitly disclose information related to shifting social expectations. The latest demonstration is the organization’s launch last week of the GRI Tax Standard, a first-of-its-kind framework for encouraging multinational organizations to report not just how much tax they pay but also the jurisdictions that receive that money. The estimated annual losses to the global economy from corporate tax avoidance is $500 billion, according to the International Monetary Fund. The perception is that companies that engage in this behavior are preventing local governments from making necessary community investments.
“Tax avoidance comes with high human costs as it undermines governments’ ability to provide quality public services and promote economic development,” said Danie Bertossa, assistant general secretary of Public Services International, in a prepared statement. “We cannot tackle pressing global issues like poverty reduction, climate change and implementation of the Sustainable Development Goals without a fair and adequate tax system.”
The effort to create the tax standard started in 2017, and the new guidelines were developed over the course of 2018 by a multistakeholder technical committee. The board received more than 80 public comments on the new standard, which is already live on the company's web site.
Editor's note: This story was updated Dec. 17 to clarify the relationship between S&P Global and RobecoSAM.