Sustainability in the spotlight: the SASB framework

The Sustainability Accounting Standards Board (SASB) framework is quickly becoming the de facto global standard for corporate sustainability disclosure. We detailed the growing momentum behind sustainability reporting in a previous blog post [1]. We concluded that sustainability reporting is no longer optional for publicly traded companies and there is coalescence around two disclosure standards: the Task Force on Climate-related Financial Disclosure and SASB. Last month, we provided an in-depth analysis of the TCFD framework and highlighted considerations for sustainability managers looking to build a TCFD-aligned disclosure [2].  In this post, we take a closer look at SASB. What is it? Why is it important? What does it say? And how can my company comply?
 

What is SASB?

In 2011, the SASB Foundation set out to establish disclosure standards across a diverse array of ESG (Environmental, Social, and Governance) topics. The standard recognizes that each industry is unique and therefore needs a unique set of relevant ESG topic areas. The goal of the standard is to enhance communication between investors and companies on sustainability topics. What distinguishes SASB standards from other sustainability reporting frameworks is a focus on financially material information. Not all sustainability topic areas are relevant or useful. SASB’s looks to cut out the fluff that is typical of many sustainability reports. The information should be “relevant, reliable and comparable across companies on a global basis” [3].

To meet this objective the SASB Foundation established an independent standard-setting arm to develop unique, industry-specific disclosure standards [4]. In total, there are 77 different industry standards that have been developed by SASB (see Figure 1). These standards identify the minimal financially material sustainability topics and metrics.
 
Figure 1 – SASB provides 77 disclosure standards to reflect that sustainable corporate activities vary across industries [5]

 

Why is SASB important?

Sustainable investment is growing

SASB is important because sustainable investment is becoming an increasingly prominent investment philosophy. The incorporation of ESG-related factors into investment decision-making has ballooned in the last five years. When looking globally at ESG mutual funds and exchange-traded funds (ETFs) the value of assets under management has increased from $453B in in 2013 to $760B in 2018 [5]. This rapidly rising asset allocation strategy has brought with it confusing and, in some cases, outright misleading investment approaches to defining what constitutes a sustainable investment product. “Sustainable investing” means many different things to different stakeholders. Without a common definition, asset owners struggle to make informed decisions about the actual sustainability characteristics of their investments.

This is where SASB comes in. SASB seeks corporate-level sustainability metrics and information that can then be rolled up into investment products with a sustainability theme. SASB not only helps to address the proliferation of disclosure frameworks, but also helps to harmonize reporting standards to allow for consistent comparison across sustainable investments. SASB also provides clarity and simplicity to corporate-issuer disclosures. Gone are the days where companies need to navigate a slew of overlapping sustainability frameworks.
 

Regulation drives sustainable investment

Regulation is also driving the trend toward investor interest in sustainable investing. BlackRock outlines these regulatory trends in detail [5]. Here we highlight regulatory trends in three markets most relevant to our stakeholders:

• Canada – the Canadian Securities Administrators (CSA) issued Staff Notice 51-358 on Reporting of Climate Change-Related Risks [6] to address the growing interest among issuers and investors in voluntary disclosure regimes, including the TCFD and SASB frameworks. The Staff Notice provides details on how issuers can identify and improve disclosure on material risks posed by climate change.
• United States – The United States has taken a less prescriptive approach to ESG disclosure. Sustainability-related risk is governed by the Securities and Exchange Commission’s (SEC) traditional materiality standard. This however, does not mean it is status-quo for US-based issuers. As issues like climate change increase in prominence, traditional risk disclosure topics such as regulatory risk, commodity-price risk, and corporate reputational risk will come to reflect these new sustainability-related issues.
• Europe - The European Union is likely the furthest along in the development of regulations for sustainable investment. Through its Action Plan for sustainable finance, the EU has set out to build a comprehensive agenda to incorporate sustainability into the existing regulatory approach for financial markets. There are four key legislative and regulatory proposals that underpin the approach:
  1. Sustainability disclosure regulations
  2. MiFID amendments to make product marketing and intermediation process more responsive to clients’ sustainability preference
  3. Sustainability integration rules into investment and risk management
  4. Taxonomy regulations that will build a framework of common reference for sustainable investment

SASB is the leading disclosure standard

As referenced above, there is a proliferation of disclosure frameworks. Frameworks include CDSB (Climate Disclosure Standards Board), GRI (Global Reporting Initiative), IIRC (International Integrated Reporting Council), the CDP, and more. While each offers a slightly different focus, SASB appears to be the clear front-runner for providing a comprehensive set of standards for reporting sustainability information across a wide range of issues. The TCFD is a must for climate-specific disclosure, but for all the sustainability issues that fall outside of climate, SASB should be your company’s go-to framework. BlackRock, the world largest asset manager agrees. Earlier this year, they asked that all companies publish disclosures in line with SASB guidelines and disclose climate-related risks in line with TCFD’s recommendations [7]. 
 

What does the SASB say?

With an understanding of what SASB is and why it is important. We now provide details of the SASB disclosure framework itself. SASB’s sustainability topics are organized under five broad sustainability dimensions. These topics include:

• Environment – This includes environmental impacts such as the use of nonrenewable natural resources. It also includes harmful releases into the environment that may impact a company’s financial condition or operating performance.
• Social Capital – Highlights the expectation that a business will contribute to society. It addresses the management of relationships with key outside stakeholders. It also includes human rights, economic development, access to and quality of products and services, affordability, responsible marketing, and privacy.
• Human Capital – This dimension refers to the fact that employees and contractors are key to delivering long-term business value. Productivity, labor relations, and health and safety are some of the key metrics that fall under this category.
• Business Model and Innovation – Includes aspects such as resource recovery, innovation, responsibility in the design, use phase, and disposal of products.
• Leadership and Governance - Includes regulatory compliance, risk management, safety, sourcing, conflicts of interest, anticompetitive behavior, and anticorruption.

These topic form what SASB refers to as their Materiality Map (see Figure 2). The Materiality Map may seem overwhelming, but remember, the focus of SASB is on financially material information only. Not all these metrics will be relevant to your company. Each industry has its own unique set of corporate activities and a unique sustainability profile. Therefore, the disclosure topics included in your industry’s specific disclosure standard will be a sub-set of this universe of sustainability issues.

Figure 2 – SASB’s Materiality Map [8] outlines the universe of sustainability issues for discloser to consider

How can my company comply?

Getting started with the SASB framework may feel like an overwhelming task, but if you have already been doing some degree of sustainability or regulatory environmental reporting, you will have a good head start. The most exciting part of the SASB disclosure process is its ability to identify risk and fundamentally transform business strategy. The SASB disclosure guidelines, will strike as the heart of your company’s governance and risk management processes and could even bring to light significant oversights in your company’s strategic plans. Disclosure therefore can be a hugely valuable strategic activity for your organization to undertake.

The reporting company’s journey will vary depending on the sector or sector(s) that are applicable to your operating activities. For example, in the oil and gas exploration and production sector, the focus of the disclosure is on environmental impacts (i.e. GHG emissions, air quality, water management and biodiversity impacts), social impacts (i.e. security, human rights, rights of indigenous peoples, community relations, health and safety) and issues related to governance, strategy and risk management (i.e. reserves valuation, capital expenditures, business ethics and transparency, legal and regulatory management, and critical incident risk management). Regardless of what sector your company operates in, the SASB standards include four common areas:

1. Disclosure topics – A minimum set of industry-specific disclosure topics reasonably likely to constitute material information, and a brief description of how management or mismanagement of each topic may affect value creation.
2. Accounting metrics – A set of quantitative and/or qualitative accounting metrics intended to measure performance on each topic.
3. Technical protocols – Each accounting metric is accompanied by a technical protocol that provides guidance on definitions, scope, implementation, compilation, and presentation, all of which are intended to constitute suitable criteria for third-party assurance.
4. Activity metrics – A set of metrics that quantify the scale of a company’s business and are intended for use in conjunction with accounting metrics to normalize data and facilitate comparison.

The first step towards a SASB-aligned sustainability disclosure is download the current standard that is most applicable to your sector [9]. As you work through the standard, we suggest that sustainability managers take the following steps:

• Ensure your organization has the proper risk management and governance process in place. Sustainability-related risk is not unlike the other diverse risks your business faces. Seek to integrate sustainability-risk into your company’s existing risk management framework.
• Going through the strategy and risk management guidance analysis could reveal organizational gaps. A sustainability manager that can champion the need to integrate risk-analysis with investment decision-making will show their worth. The goal is to make investments and build an organization that is resilient under a variety of future scenarios. If you are successful in helping to build a more resilient company, you will be rewarded for your efforts.
• Robust disclosure requires good data. Have the right tools in place to measure and track key sustainability-related metrics. This is particularly important for the more quantitatively-driven environmental data. Key metrics could include:
  • GHG emissions
  • Air quality
  • Energy management
  • Water and wastewater management
  • Waste and hazardous materials management
  • Ecological impacts

Conclusion

Investors see a correlation between long-term profitability and corporate transparency. Companies have a responsibility to provide investors with the information that will impact investment decisions. This includes sustainability-related information. This not only helps investment decision-making but will become increasingly important for a company’s ability to attract capital in the future.

BlackRock has declared the time for sustainability disclosure has come. If a company fails to provide a robust disclosure on sustainability-related risk, BlackRock will assume that the risk is not being adequately managed. To compel a company to provide adequate risk disclosure, BlackRock will vote against management and board directors that are not making progress on sustainability-related disclosures. In short, sustainability disclosure is no-longer voluntary. Now is the time to start your SASB-aligned disclosure. 
 

References

[1] https://mailchi.mp/a409e3edfd48/sustainability-in-the-spotlight-is-your-company-ready
[2] https://mailchi.mp/daf7e0a1514b/sustainability-in-the-spotlight-the-tcfd-has-arrived
[3] https://www.sasb.org/standards-overview/
[3] https://www.sasb.org/governance/
[4] https://www.sasb.org/wp-content/uploads/2018/11/SICS-Industry-List.pdf
[5] https://www.blackrock.com/corporate/literature/whitepaper/viewpoint-towards-a-common-language-for-sustainable-investing-january-2020.pdf
[6] https://www.securities-administrators.ca/aboutcsa.aspx?id=1833
[7] https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter
[8] https://www.sasb.org/standards-overview/materiality-map/
[9] https://www.sasb.org/standards-overview/download-current-standards-2/