Why You Should Consider Adopting SASB
SASB: What is it?
SASB aims to develop a common language between companies and investors to discuss the financial impacts of sustainability in the same way that financial accounting standards have created a common language between companies and investors to discuss financial performance. SASB sets standards for disclosure of financially material sustainability issues and is focused solely on disclosure to investors. It connects businesses and investors on the financial impacts of sustainability through 77 industry-specific disclosure standards used by companies and investors globally.
Unlike the financial accounting ecosystem, the environmental, social, and governance (ESG) information ecosystem is new and at times difficult to understand. However, SASB aims for the ESG information ecosystem to reflect the financial accounting ecosystem in that it provides solid standards leading to disclosure that ultimately results in quality information flowing through to data aggregators, ratings agencies, and providers.
In a nutshell:
- SASB uses standards to identify the sustainability issues that are financially material, or reasonably likely to impact the financial performance of a company.
- The standards provide decision-useful information for investors.
- Anyone can access the standards, making them cost-effective.
- The standards are industry specific.
Standards are determined using a transparent process that is roughly modeled after the process used to develop accounting standards, in that it is evidence based and market informed.
What makes SASB different from the rest of the acronyms we hear around ESG?
The non-financial information and analytics landscape is undoubtedly a complex yet thriving ecosystem with many non-profit and for-profit providers playing different roles. These players can largely fit into four buckets:
- Publish guidance for voluntary disclosure, often with company feedback loops (CDSB, GRI, TCFD, SASB).
- Request data from companies through questionnaires (CDP, Dow Jones Sustainability Indexes (DJSI)).
- Aggregate publicly available data from companies (Bloomberg, Refinitiv).
- Create assessments of companies based on public and/or private information to sell to investors (MSCI, FTSE4Good, RepRisk, TruValue Labs, Sustainalytics).
Players can be further broken down by those who provide frameworks versus those who provide standards. Frameworks provide relatively high-level guidance about broad topics that should be disclosed (TCFD, CDSB, and IIRC). They use a set of principles-based guidance for how information is structured and prepared, and for what broad topics are covered. In contrast, standards are specific, replicable, and detailed requirements for what should be reported for each topic (SASB and GRI). Standards are developed using some sort of due process, making them a powerful tool to ensure there is comparable, consistent, and reliable information in the marketplace. While frameworks and standards vary, they are often used together.
How do SASB and GRI work together?
SASB and GRI are two broadly accepted international standards within the ESG disclosure space. SASB and GRI are complementary frameworks with different definitions of materiality for different purposes. SASB’s definition of materiality is financially material sustainability issues targeted solely at investors around how ESG issues are likely to impact a company’s financial performance in an industry-specific way. GRI’s definition of materiality is how a company’s actions are likely to impact the external environment. GRI standards are targeted to a very broad array of stakeholders including investors.
How do SASB and TCFD work together?
TCFD is a framework that provides macro-level guidance and asks companies to disclose their governance, strategy, risk management, and metrics and targets for climate risk. TCFD does not prescribe specific metrics, and instead has implementation guidance that suggests metrics. TCFD concepts should be applied to all financial material sustainability issues. SASB recommends that companies talk about TCFD’s governance, strategy, risk management, and metrics and targets for all of the issues in the SASB standards, not only climate-related issues.
How do I know what framework or standards to follow?
The European Union has the most advanced regulation around ESG disclosure in the world and constantly assesses regulation around ESG disclosure. A “double materiality” concept underpins their legislation, which can be helpful to understand how to think about non-financial disclosure (or sustainability or ESG disclosure). Most investor relations professionals are used to thinking about disclosure though the lens of serving only the investor audience, however, non-financial disclosure is of interest to multiple audiences ranging from investors to consumers, societies, employers, employees, and regulators. Further, when thinking about ESG disclosure strategy, a company must consider how it can meet the needs of the many different audiences interested in the information it discloses in addition to the many ways those audiences consume that information. Given that it is arguably impossible to meet the needs for each audience with a single tool or report, companies should think about segmenting audiences. Companies can do this by focusing on two sustainability disclosure standards in the marketplace to meet the needs of a broader range of audiences, with SASB being of interest primarily to investors as it is oriented towards financial materiality, and GRI being of interest to other stakeholder groups, as it is oriented towards environmental and social impact.
Why is SASB important?
While BlackRock’s letter to CEOs on disclosure in the context of ESG received the most press, it is only an indication of the broad and deep base of investor support for SASB. Morrow Sodali’s 2020 Institutional Investor Survey revealed when it comes to a company’s ESG performance and approach, 81% of investors recommend SASB as the best standards to communicate their ESG information, while 77% recommend TCFD.
Investors look for two things when evaluating a company:
- Intrinsic value: How much is a company worth?
- Risk: How risky is the investment?
Evaluating material ESG issues provides investors with additional insight relating to both the intrinsic value and risk of an investment. Investors are looking for how effectively a company is identifying and pursuing opportunities related to ESG issues that will give it a competitive advantage, which will ultimately influence the intrinsic value of what they believe that company is worth. Additionally, investors are looking to identify those risks that could negatively impact an investment, inclusive of ESG issues. Thus, investors use SASB standards as a starting point for their materiality analysis, and it is the first part of their ESG evaluation of companies as it identifies which issues will influence value and affect the riskiness of investment.