Podcast transcript: How to improve ESG monitoring with SASB standards
29 min approx | 11 Oct 2019
Welcome to Sustainability Matters, a regular podcast series of Ernst & Young, EY. My name is Chris Hagler. I’m one of the leaders of our Climate Change and Sustainability Services Practice and your host for this series. We designed this podcast series to provide leading trends and practical advice around environmental, social and governance issues and opportunities facing businesses today.
Today, we are talking with Jeff Hales, the chairman of the Sustainable Accounting Standard Board, SASB, and John DeRose, a colleague and leader in EY’s Climate Change and Sustainability Services Practice. Welcome, gentlemen.
Jeff, you seem to have the perfect qualifications to be the chair of SASB. Can you tell us a little bit about your background and the current work you’re doing?
Sure, absolutely. First, thanks for having me here today. It’s wonderful to be here and to talk about what I see as being really important issues for corporate reporting around ESG issues. My background is not at all in the sustainability world. I come from a very traditional financial accounting background and training. I’ve been a faculty member, teaching financial accounting for years, and I’m currently at Georgia Tech and now in the sustainability center there at Scheller, Anderson, the Ray C. Anderson Center for Sustainable Business.
The way that I got there was really through the founder of SASB; Jean Rogers, when she was organizing SASB, contacted me and was looking for individuals that had a traditional accounting and corporate reporting background that also had policy experience. I had spent time at the Financial Accounting Standards Board and had been involved in research and teaching around traditional accounting standards for a long time.
She was looking for somebody like that with those qualifications. And really, she completely educated me on this area of corporate reporting. It’s been one of the most exciting things that I’ve learned about in my career. I’m just really happy to be a part of this process.
John, I know you’ve been doing this type of reporting for a pretty long time now, so can you share with us a bit about the clients that you work with and the challenges that you work with them on?
I work with a broad range of clients and they fill almost every spectrum as far as industries go. I primarily focus on a lot of our nonfinancial reporting types of services, although we do provide a host of services around sustainability, environmental health and safety. My clients wrestle with reporting, understanding what to report, how to report and when to report. We help them through that, as well as providing assurance or verification services on the information that they do report, so it can be used in the marketplace.
Before we jump into sort of some of the details of the SASB Standard, maybe we should step back a little bit and make sure that everyone listening knows what SASB even is and why it’s here.
SASB is a nonprofit organization that was founded in 2011, and it was founded with the mission of trying to address what the founder, Jean Rogers, saw as a gap in the landscape of corporate reporting. What she saw was that corporations were doing a great job with financial reporting because of the long history that we have and good standard-setting around traditional assets, liabilities, revenue, expenses and whatnot, and also that there had been a big evolution in the ability for companies to communicate with broad stakeholders around important environmental and social issues and governance issues.
What she saw was that there was really a gap in that type of communication to the capital markets. The vision started with a paper that she published in 2011 with a couple of co-authors that said look there are different forces at play in the world in which companies operate. They are creating risks and opportunities that companies have to manage in order to be run successfully over the long term and that investors need to know about.
SASB’s mission was to develop industry-specific standards that would identify material issues around environment and social and human capital and the governance over those issues, and doing it on an industry-specific basis, so that you could really get to the core issue of what’s fundamental to the way that businesses operate in any given industry.
I know material issues sounds very financial and sometimes makes people nervous. What does material mean in the context of SASB?
SASB’s focus on materiality is first and foremost about communicating what would be of interest to investors. Mainstream investors are interested in are things that are likely to have a financial impact on the company. We look at these ESG-type factors, but we’re looking for links to financial drivers. And so, rather than being a one-issue organization, or an everything kind of organization, we really try to tailor it to the things that would be among the first things that you would want to engage with your investors on or the investors would want to engage with companies on.
Just to provide a little more context for the listeners, I would encourage them to go and look at, just google SASB’s materiality map. It’s got a heat map of what we see, because we’ve developed 77 different standards. We’ve got 26 types of issues that could be of material interest to any given industry. It could be in the environmental domain, thinking about greenhouse gas emissions, or water, or hazardous chemicals.
In the social capital, where we’re thinking about outwardly facing what is your brand reputation, how are you viewed in the communities in which you operate and need access to natural resources there; or the human capital side, how is it that you’re managing the health and safety of your employees or getting access to the talent that you need. Across those issues, we actually identify what we call 26 general issue categories. And we look at that across 77 industries, 11 sectors. In our research and outreach that we do in standards development we are looking for what those key topics are. And for any one industry, there’s variation of course.
We have identified five to seven topics that would be likely to be of interest to investors and then to support the performance reporting on those issues. We usually have around 10 or 11 KPIs for the set of topics.
Material means, if I’m an investor, this is information I want to know before I make a choice of whether or not to invest in a company. You’ve done it across 77 different industries, so that sounds like a lot of work. I know I actually participated in developing some of the standards. I’m guessing John did too.
Can you take us a little bit through sort of that multi-stakeholder process that you all went through?
It was really meant to be designed after what we saw as best practice in standards development from looking at the work of the Financial Accounting Standards Board, or the International Accounting Standards Board and other similar types of agencies and organizations.
In doing our provisional standards development, it started with just basic research, looking at what is it that in any industry, corporations are talking about in their corporate filings, in press releases, what are we seeing in the financial press, what are issues that are popping up as being things that are newsworthy, and using algorithms and whatnot to sort through all of that data.
That was an initial start for identifying what might be the types of issues and KPIs that would be useful to investors. We formed what we called the Industry Working Groups, which is basically doing outreach to individuals that we had identified and contacted that had the appropriate background, expertise in a given industry, the right type of job experience to be able to speak to these issues. We asked them, are these the right topics? Are these the right KPIs? Have we missed anything? Is there anything that we should exclude?
We took that feedback and revised the proposals and eventually had provisional standards that we put out for public comments and went through a whole series of outreach and engagement with companies and investors to get more feedback about that. That culminated with the launch of our 77 industry standards in the fall of, November of last year.
That’s important to understand, because my clients, and companies that we work with at EY, come to us a lot and say there’s rating agencies, there’s ranking agencies, there’s a lot of different acronyms, there’s a lot of different things to report on. They see SASB, which codified the standards late last year but have been in development for a number of years. And they sometimes see that as additive, or oh geez, now here’s some more.
If you understand the process that went through it, it actually helps eliminate some of the noise or eliminate some of the effort to understand the concept you mentioned earlier as far as material. If you look at SASB, you understand the process of what went through determining what’s material, it could actually help leapfrog in some effort forward to get that information to investors that’s needed and wanted, because it’s already been kind of filtered and judged and weighed in upon.
I have the same thing with my clients. Is this one more reporting standard that I have to do? Do I do a SASB report, or how does that fit in with GRI or IIRC or TCFD or STG, or whatever acronym we want to throw out there? How does SASB fit into an overall corporate reporting strategy for our clients?
In today’s world, rather than just reporting on a lot of stuff to do it, to report, companies are starting to think about what’s material. And there are information gatherers. There are the Bloombergs, the Reuters, that typically provide information for investors and asset managers to understand the financial well-being and make decisions on a company.
The way I see SASB as a differentiator, as a tool to help companies, is it’s gone through the vetting process as far as what’s material.I It provides criteria for companies to report against on those material issues. It’s getting, or trying to get, apples to apples information in the marketplace for investors to make decisions. It’s not a flip the switch type of event at an organization to say we want to report on SASB. It’s also not an insurmountable challenge because most companies are reporting on something already.
I would share maybe an anecdote representative of what I see companies struggling with. Part of this is not that companies are trying to obfuscate or ignore key issues. I think they just haven’t realized that their large investors, their long-term investors are interested in knowing more about certain issues. They were unaware that that’s changing.
A mid-cap rail company that said we had a shareholder resolution that said we want you to talk more around, disclose more around ESG-type issues. They were not even sure exactly what that means, we’re not sure what that would do, and we’re thinking are we going to have to invent, create, put together a team to figure out what it is in the world that this would do and how we could communicate it in a useful way. They started looking around at what was available. They saw SASB’s work and looked at the standard for a rail company and said, yes, this make sense, it relates to issues around safety, for example, and this is actually great, because we’re already dealing with these issues. We can see how it would matter to investors.
And so, they went and met with the shareholders, and the shareholders said, like, what are you going to be reporting on, and they said, we’re going to be using SASB standards. There was practically applause in the room at the time, which was nice for us to hear. They did come to me and say, we do want to talk to you more about what’s going on at SASB and the process. We see this as a solution to help us meet a demand that we’re now aware of with respect to what our investors want to know about.
And that’s SASB fitting into this changing, evolving landscape is that investors want to know about certain types of issues. They want to communicate with companies about them and they want to know that companies are managing them well.
SASB is not going to be the last word on these topics, but it is a great opening dialogue, and a way not to communicate your entire story to the capital markets, but a great way to start that communication in a way that’s going to be comparable.
SASB gives you a basis for comparable numbers. And that’s what investors keep asking for. But it may not be your entire story.
John, can you tell us about some of your clients maybe start with SASB and add on things that are important to them, alignment to sustainable development goals or volunteer programs or some of the other things that are harder to tie to financial value, but still provide value for society?
It may be the other way around, where companies have been reporting under different standards that serve a broader base of stakeholders, take the Global Reporting Initiative, or the GRI, they’ve been around a long time. Most companies are reporting in some manner using a GRI metrics and framework.
They’re concerned with a broader base of stakeholders, not just investors. That’s where other types of reporting frameworks come in. Think about your employees, your customers, your communities where you do business, etc. And that’s where these other standards still have a role in play in this space, along with SASB. The market is still relatively warming up to SASB and this type of reporting.
Since the codification, which was only five, six months ago, we’ve seen more companies start to put metrics related to SASB in the public domain, we’ve seen more requests around how does this fit within our annual reports or when we’re telling our story from a financial perspective to those who care about the financial perspective — again investors and asset managers — and thus turning to SASB to help tell that story.
If I could share one anecdote about the comparability issue. I was at an event, and people were talking about the reporting that they were doing. There was a lot of large companies from around the world, and there was somebody that was representing a large iron producer in India and talked about the process of managing and reporting on issues around ESG topics. And then putting together a report and taking that report to the CEO. The CEO looked at it and said, what I want to know is are we doing better or worse than our competitors on these issues. The frustration of this executive he said, I couldn’t answer that question. It was frustrating because either these issues aren’t being discussed by our competitors, our peers, or they’re being talked about in a way that is idiosyncratic, we can’t compare to what they’re doing. And that’s where the real value of SASB is being a way for companies to also be able to gauge their own performance. Yes, you can see year to year if you’re managing something idiosyncratically.
But wouldn’t it be nice to know whether you’re below or above what is actually possible, given what you know that your peers are doing?
That’s a great point, because a lot of my clients, and even companies that just call to inquire, hey, what’s going on, when you start to talk about these standards, they say well, take a look at our website and how do we compare against the others. Everybody wants to know that benchmark of how you compare against the others. When you look at SASB and you say, some of these may be net new and some of these we may already be doing. But if we follow them and the criteria that’s based within them, we’ll be able to answer that question ourselves.
I suspect listeners are familiar with the challenges around GAAP reporting, not capturing everything a company wants to communicate on non-GAAP reporting that’s out there, that’s done in a fairly company-specific manner. There is a lot of value in those numbers particularly if they’re done in a consistent way over time.
Imagine if that was the only type of information that was being produced and you didn’t have the common financial statements asset underlying benchmark for comparison. It would be a real challenge for companies to compare themselves to each other and for investors to figure out which companies are embracing the opportunities and managing the risks well.
I’d like to pick up on something we were talking about what metrics do you use. Do you use other standards, how does it fit together? There are still a lot of organizations that do not have consistent reporting on ESG issues. If you were starting from scratch, what kind of advice would you give a company? Would you say start with SASB, and/or where would you go with this?
It’s not just companies starting from scratch. What we see in the marketplace today is companies reevaluating what they’ve been doing. Companies may have been reporting on environmental, social and governance metrics for decades.
But since the launch of SASB, we’ve seen an uptick in this materiality assessment. What do we need to report on, how do we go back and look at what we’ve been doing and do it better or do it more efficiently, or effectively? It’s not just those who, we do see a fair share saying okay, now we’ve got a shareholder resolution, or now we’re being rated by Bloomberg or others and we aren’t rated high, because they haven’t really done much in this disclosure and reporting space at all. There are a broad base of stakeholders you’re actually trying to provide information to. SASB definitely helps from an investor perspective, and others like the GRI help with the broad base. If you’re starting to valuate, it’s understand your stakeholder base. It’s understand the influence and impact that that they have on your company. It’s taking a look at SASB and these other standards like the GRI.
And that helps really form what should be reported on but carving out and saying let’s also be mindful of what’s happening now in the capital markets space as far as these ranking and ratings. It allows us to put a little bit more light on that aspect, which often engages then at our clients, and at our more mature clients, it engages right up through the finance function to the CFO, including SEC reporting, investor relations, which may not have always been really hand in hand with those responsible for this type of reporting in the past.
I would say to companies that feel like they are just starting out on this: first, do a real assessment to figure out what actually is being measured and tracked within your organization. Don’t wait for a shareholder resolution to be the stimulus to acting, or don’t wait for a rating agency to rate you poorly and then have it become an issue.
Look internally, see what is it that you’re already tracking, how are you managing this within the corporation. SASB standards are freely available, so go to the website and look at your particular industry and see what we’re suggesting would be the topics and KPIs. Think about gathering the information, managing this internally. And when you feel like it’s appropriate and you have the right controls in place to feel confident around the numbers that you’re going to put out there into the public domain, then do that.
It’s definitely an evolution, and we see that time and time again. And I’ve also heard from investors. They’ve said, we understand this is an evolution. What we’re trying to do is just get better information. Investors are relying on ratings agencies that are getting that data from opinion and alternative data sources and not always, and often not, from the corporations themselves.
Just to add on to that, look at what we’re already doing. This reporting is not necessarily going to be net new. If we think about how we discuss SASB industry and sector metrics, we’re already set up through this long process. These metrics are already key to the operations and well-being or risk management of your organization. So more than likely, they align with what you may be monitoring from a business perspective anyhow. That assessment’s important. It’s not necessarily a net new.
Take the airline industry, for example. They probably know how much fuel they’re using and probably have been tracking greenhouse gas emissions, and they certainly know what percentage of their labor force is under collective bargaining agreements. Some of this is a language problem, where we’re sometimes using new words that individuals that have been involved in the management and reporting around mainstream business activities have been thinking about these topics but haven’t necessarily been using the same language around them. It’s cutting through the language barrier and making sure that individuals realize that these are strategic business opportunities, they are risks, but they’re fundamentally business issues. They’ve probably been managing them well already. It’s a matter of telling the story.
Let’s just take one more topic. You were talking that these are business issues that they’ve already been managing, and there may be just a language issue. The language concern that I think I hear with clients is, how does this fit into my financial reporting? How does this fit into my 10k? Am I held liable for this? There’s a lot of concern that when we start putting this information along with financial information that there is additional risk in the disclosures themselves.
There certainly is concern when it comes to communicating to investors. If investors are relying on information that a company is putting out there, then there is risk around that. The answer isn’t to say nothing necessarily. That’s not the best corporate disclosure strategy isn’t not disclose. Companies need to take control of those issues.
Investors are going to be looking primarily for information that’s available and that they can rely on. Companies should be comfortable with the information that they’re putting out there, and they should make sure that it’s consistent across the different channels in which they do communicate. We’ve seen a diversity of perspectives and the appropriate place for a given company to be communicating with investors on these issues.
A major online retailer announced that they were going to be using SASB standards in their 10k, because they felt like it was reflective of the core of their company, this was important issues that their investors wanted to know about, and that they wanted to make sure that they had the same level of controls around the information that was going into their corporate reports and wanted it to be on cycle, so that investors when they were making decisions about the company, had all the information that they would need.
We’ve certainly seen other companies say, we’re going to include that information in that broader stakeholder report. We’ve seen this with a number of major consumer goods companies that have put together a SASB table, a summary of the topics, the metrics, the KPIs and where they can read more about those issues, and you can find that usually on websites, investor relations page, or inside the actual PDF file itself.
A way to just mitigate risk is to think about this data from a controls and processes perspective. We see more companies moving away from Excel files when they manage this information. There’s many software packages out there now that help track and manage and monitor this. More mature companies are involving their internal audit function.
This falls now within the purview of internal audit. I’ve provided training to a number of EY clients and their internal audit departments, and when we get done, they say is this going to be helpful for us to actually manage the risk of our organization, but it’s a great recruiting tool because I can go out there and say sustainability, ESG, environmental health and safety fall within our purview.
If you have internal audit involved, you have the finance function involved because they are always thinking about disclosures. EY conducts a global investor and asset management survey every year. We’re in our fourth year doing so. We’ve seen that external assurance or verification of this information helps from a confidence perspective of the company putting the information in public domain, it also helps from an investor perspective when they look at it, they know it can be reliable.
If a company starts with, this is what investors care about, then take a look at here are some of the things we’re already reporting or at least gathering information on, getting comfortable that those align or somewhat align, and then work on getting the data to the same level of quality that your financial data is at and use the same tools that you’re using on the financial side, use internal audit, use controls, things like that.
That’s true regardless of where you decide to disclose it. Whether it’s on your website, whether it’s in your regulatory filings, whether it is in a sustainability or CSR report, wherever it is you’re communicating these issues, it is important for companies to have good disclosure practices out there. It is important that when you talk about a particular issue that it is consistent with what you’re saying elsewhere. The only way a company can be sure that that is the case is if they’re actually managing the disclosure process broadly and centrally within the organization.
And managing the decision-making process internally. If investors care about this information, then obviously the company should care about it as well because it’s important to their own financial results. Making it good decision, useful information internally, as well as externally is part of the opportunity here.
For public companies that face the quarterly earnings cycle, and it’s just this constant pressure to feel like you’ve got to meet these short-term benchmarks, most people that are in companies know that they want to manage the business well for the long term.
They want to make good business decisions and they don’t want to be focused just on like what’s going to happen over the next three months. And one of the great things about these sustainability issues is that by starting to have these conversations with your investors, it’s a way to attract investors that are more interested in the long term and not the transitory investors that are coming and going and selling every few minutes.
My last question is about what’s next. What do we see next for SASB and also in general for reporting? I’m going to let you go first Jeff and talk a little bit about SASB. John talk a little bit about long-term value and how that concept is helping companies tell their value story.
From SASB’s perspective, having launched the standards in November and seeing a big uptick in interest from corporations around the world. About half of our disclosures right now are from outside the US. We’re very interested in trying to facilitate use of our standards by companies when they’re reporting and, ultimately, then by investors when they’re making capital allocation decisions and engaging with companies.
We are working on trying to address the global applicability of our standards and the decision usefulness of what we’ve identified as topics and as well as listening to see what are the challenges, realizing that this is not an evolved state of reporting for companies and, so, where are their friction points and what is it, is there anything that we can do as an organization to help facilitate companies as they move along in this evolution, in this journey.
We’ve seated a sector advisory group — sorry, a Standards Advisory Group — that is right now around 150 individuals that are from major companies around the world that are about 60 percent corporate representatives and 40 percent investors, subject-matter experts, legal experts, and academics and others.
The whole point of the Standards Advisory Group is to be able to communicate with companies and investors, our stakeholders, to understand what it is we can do to facilitate the use of SASB standards around the world.
If you take that concept of let’s not worry or manage, it still happens, you know, quarter to quarter from financials perspective, let’s think about these bigger and broader issues — environmental, and social-wise — and how we need to address them, how we need to figure metrics to measure and understand our impact on these different metrics; start to think about longer-term value. You can probably just look in any newsfeed and you’ll see companies that talk about their purpose, and they’ll talk about what they’re doing longer term. Companies are starting to understand their value chain, they’re starting to understand their impacts on this broad base of stakeholders, and they’re measuring it and they’re setting goals.
These goals, as you mention, align with the UN Sustainable Development Goals, which are a broader base of goals globally in the marketplace. As you get to this long-term value concept and you start to think of all these little pieces, it always boils back down to your talent. Talent today, younger generation, want to work for companies with a purpose. They want to work for companies who are thinking more long term. We’re getting requests to say how do we start thinking this way. Again, it may not be net new, but it’s a way of reevaluating in today’s marketplace.
Thank you both for sharing your insights and examples. One of the things I like about this topic is that it’s not just for sustainability people or the ESG people, this is corporate reporting. It’s disclosures, it’s your finance, your operations. This is a great topic to bring people together across the organization. People that were listening came away with some good ideas that would be applicable to their own organization.
If you want to learn more about long-term value, you can look up EPIC-value.com, which has some really great information. You can follow EY @EY_sustainable. I’m @ChrisHagler if you want to follow me, and SASB is SASB.org. We look forward to you joining us on other podcasts and welcome any ideas you may want to share in terms of future podcasts. Thank you all very much.