FUNDAMENTALS OF SUSTAINABILITY ACCOUNTING (FSA) …

Part I The Need for Sustainability Accounting Standards

Part II Understanding SASB Standards

Part III Using SASB Standards

LEVEL I STUDY GUIDE

FUNDAMENTALS OF SUSTAINABILITY ACCOUNTING (FSA) CREDENTIAL™

Learning Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Part I: The Need for Sustainability Accounting Standards

1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

2. A Growing Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

2 .1 . Changing Valuations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

2 .2 . Sustainability Issues Are Business Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

2 .3 . Existing, Evolving, and Emerging Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

2 .4 . Increasing Investor Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

3. Historical and Legal Basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

3 .1 . The Aftermath of the Stock Market Crash of 1929 . . . . . . . . . . . . . . . . . . . . . . . 21

3 .2 . Disclosure as the Basis of the Securities Acts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

3 .3 . The SEC and Its Work . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

4. The Role of Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

4 .1 . Early Statements on Generally Accepted Accounting Principles . . . . . . . . . . . . . . 27

4 .2 . Historical Cost Accounting and the Rise of the APB . . . . . . . . . . . . . . . . . . . . . . . 28

4 .3 . Decision-Usefulness Enters the Lexicon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

4 .4 . The Founding of the FASB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

4 .5 . The FASB’s Conceptual Framework Project . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

5. Materiality: The Guiding Principle of Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

5 .1 . Foundational Cases: TSC v. Northway and Basic v. Levinson . . . . . . . . . . . . . . . . . 33

5 .2 . The SEC’s and FASB’s Views of Materiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

5 .3 . The NRDC’s Rule-Making Petition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

6. SEC Disclosure Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

6 .1 . Periodic Filing Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

6 .2 . Regulation S-K Requirements for Form 10-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

6 .3 . MD&A Section Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

6 .4 . The SEC’s Climate Change Guidance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

6 .5 . Consequences of Inadequate Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

6 .6 . The Sarbanes-Oxley Act and Controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

6 .7 . The SEC’s Disclosure Effectiveness Initiative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

7. Sustainability Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

7 .1 . Pointing the Way Forward: the AICPA, the FASB, and the CFA Institute . . . . . . . . 52

7 .2 . Sustainability Accounting and the Accounting Profession . . . . . . . . . . . . . . . . . . 53

7 .3 . External Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

7 .4 . Internal Decision-Making . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

7 .5 . Current Initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

8. The State of Sustainability Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

8 .1 . Voluntary Sustainability Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

8 .2 . Disclosure Overload . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

8 .3 . Securities Law, Not Semantics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

8 .4 . Sustainability Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

8 .5 . Benefits of Improved Sustainability Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

CONTENTS

Last Updated: March 2020

Part II: Understanding SASB Standards

9. The Importance of Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

9 .1 . Financial and Non-Financial Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

9 .2 . State of Sustainability Disclosure in SEC Filings . . . . . . . . . . . . . . . . . . . . . . . . . . 68

10. Introduction to SASB Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

10 .1 . U .S . Capital Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

10 .2 . Likely to Be Material . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

10 .3 . Decision-Useful . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

10 .4 . Cost-Effective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

10 .5 . Industry-Specific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

11. Identifying Industry-level Disclosure Topics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76

11 .1 . The Reasonable Investor Revisited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

11 .2 . Evidence-Based Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

11 .3 . Stakeholder Consensus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87

11 .4 . Evolving with the Marketplace . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90

12. Components of a Standard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93

12 .1 . Disclosure Guidance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93

12 .2 . Disclosure Topics and Accounting Metrics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95

12 .3 . Technical Bulletins and Interpretations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100

13. Cross-Sector Themes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102

13 .1 . Climate Change: Ubiquitous but Differentiated . . . . . . . . . . . . . . . . . . . . . . . . . 102

13 .2 . Other Sustainability Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104

13 .3 . Unique Sector Sustainability Profiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107

Part III: Using SASB Standards

14. Corporate Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112

14 .1 . Considerations for Corporate Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114

14 .2 . Collecting Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119

14 .3 . Managing Sustainability Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121

14 .4 . Reporting Material Sustainability Information . . . . . . . . . . . . . . . . . . . . . . . . . . 126

15. Investor Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139

15 .1 . Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139

15 .2 . Portfolio Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141

15 .3 . Industry Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143

15 .4 . Company-Level Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144

15 .5 . Active Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150

Preparing for the Exam . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151

Sample Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153

Appendix I – SASB Provisional Disclosure Topics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165

Appendix II – Resources for Enhanced Understanding . . . . . . . . . . . . . . . . . . . . . . . . . . . 178

CONTENTS CONTINUED

A GROWING DEMAND

Describe the trends driving demand for the disclosure of sustainability information .

Explain why sustainability information is increasingly important to investors for investment decisions (e .g ., reduced ratio of net assets to enterprise value, increased risks and opportunities) .

HISTORICAL AND LEGAL BASIS

Explain the purpose and role of requiring public companies to disclose material information in SEC filings .

THE ROLE OF ACCOUNTING STANDARDS

Explain the current state of financial accounting (codified, standardized, decision-useful) given the history and efforts of the FASB .

MATERIALITY: THE GUIDING PRINCIPLE OF DISCLOSURE

Discuss the Supreme Court definition of “materiality” and the implications of this definition .

Discuss the implications of making statements about materiality outside of SEC filings .

SEC DISCLOSURE REQUIREMENTS

Recognize key elements of Regulation S-K and other prominent legislation and what is required for disclosure (i .e ., financial and nonfinancial information that alters the total mix of information) .

Explain why MD&A section was added to the 10-K and why it is an appropriate place for the disclosure of sustainability information .


SUSTAINABILITY ACCOUNTING



Discuss the challenges that investors face in integrating sustainability information into investment decisions (e .g ., information is available, but often its quality varies, it is not comparable, and/or it lacks obvious financial implications) .

Distinguish SASB’s approach (sustainability accounting) from other approaches to sustainability tracking and reporting .

Discuss the role of SASB standards in helping companies develop strategies for long-term value creation, and benchmark and improve operational performance .

LEARNING OBJECTIVES

THE STATE OF SUSTAINABILITY DISCLOSURE



Discuss the implications of making statements about “materiality” outside of SEC filings .


THE IMPORTANCE OF STANDARDS



Describe the current state of disclosure of sustainability topics in the 10-K .

INTRODUCTION TO SASB STANDARDS


Explain the organization of SICSTM and the implications of a sustainability-based industry classification .

IDENTIFYING INDUSTRY-LEVEL DISCLOSURE TOPICS

Explain the evidence basis that supports the identification of SASB disclosure topics .

Explain the stakeholder consensus that supports the identification of SASB disclosure topics .


Discuss the Supreme Court definition of materiality and the implications of this definition .

COMPONENTS OF A SASB STANDARD

Describe the principles that guide the selection of SASB’s industry-specific topics for disclosure .

Describe the criteria that guide the selection of SASB’s accounting metrics .

Describe the components of a sustainability accounting standard and their purpose for supporting disclosure .


LEARNING OBJECTIVES CONTINUED

CROSS-SECTOR THEMES

Distinguish SICSTM sectors based on their distinct sustainability profiles .


CORPORATE USE

Explain the cross-functional nature of preparing sustainability disclosures in the 10-K .

Explain the timeline and process for 10-K disclosure .

Discuss the stages of 10-K preparation where sustainability information could be incorporated .

Discuss the role of SASB standards in helping companies develop strategies for long-term value creation, and benchmark and improve operational performance .

Explain the influences of internal controls and third-party assurance on the data quality of sustainability information and disclosures .

Explain why MD&A section was added to the 10-K and why it is an appropriate place for the disclosure of sustainability information .

Describe the special disclosure considerations for multinational and diversified companies .

Recognize key elements of Regulation S-K and other prominent legislation and what is required for disclosure (i .e ., financial and nonfinancial information that alters the total mix of information) .


INVESTOR USE

Discuss the utility of SASB standards in investment decisions (e .g ., portfolio allocation, risk/return profile) .



LEARNING OBJECTIVES CONTINUED

© SUSTAINABILITY ACCOUNTING STANDARDS BOARD 7

EXECUTIVE SUMMARY

In 2015, nearly 11,000 companies around the world filed annual reports with

the U .S . Securities and Exchange Commission (SEC) . Each of those filings was the

product of a complex system of workflows, involving dozens or even hundreds of

professionals with specific corporate, legal, accounting, or other expertise—people

like you . For a group so large and varied to communicate effectively—not just with

one another but also with the investors and creditors whose capital helps fund their

business—a common language is required .

For centuries, accounting has served as “the language of business,” and like

any language it has evolved—along with the world around it—to meet the needs

of its users . In English, new words, inflections, and even grammatical constructions

emerge while others fall into disuse . Likewise, concepts new and old have regularly

entered into and disappeared from the accounting lexicon—from the rise of

double-entry bookkeeping in medieval Europe to the establishment of decision-

useful financial accounting standards in the 1970s .

In today’s rapidly changing world, businesses face a unique set of challenges

that call for a new type of non-financial accounting and for a new set of standards

to ensure that it is useful . Large-scale issues such as population growth, resource

constraints, urbanization, technological innovation, and climate change can

and do have profound effects on business outcomes . As a result, managers are

incorporating non-financial performance measures into their decision-making

processes and investors are looking beyond traditional financial statements for a

more complete picture of how companies create value over the long-term . The

language of business is evolving yet again to meet this growing demand .

However, as non-financial value drivers have grown in significance, sustainability

accounting initiatives have struggled to effectively sharpen their focus on the

factors most relevant to internal and external decision-makers . Consequently, the

market is faced with an avalanche of information that is costly for companies to

produce; lacks comparability, reliability, and timeliness for investors; and is often

useless to both .

EXECUTIVE SUMMARYSASB® FSA™ LEVEL I STUDY GUIDE

© SUSTAINABILITY ACCOUNTING STANDARDS BOARD

SASB® FSA™ LEVEL I STUDY GUIDE

8

Increasingly, a wide range of market participants—including companies,

investors, accountants, and lawyers—recognizes the need for a shared

understanding of how these non-financial value drivers impact corporate

performance and for a common language to communicate those impacts .

Founded in 2011, the Sustainability Accounting Standards Board (SASB)

addresses this need by developing industry-specific standards that help public

corporations disclose material, decision-useful sustainability information to investors .

SASB standards are developed—and designed to be considered—using the

U .S . Supreme Court definition of materiality . Alignment with the SEC’s existing

legal framework helps to bring companies and their investors together around the

factors that have, or are anticipated to have, a material effect on the business . By

facilitating the collection, management, and reporting of sustainability information

that is relevant, reliable, and comparable, SASB empowers both corporate and

investor decision-making, risk management, and strategy-setting .

Against the backdrop of this changing business landscape, practitioners in

sustainability, finance, accounting, securities law, and investing must understand

how to identify, quantify, and communicate the sustainability factors that are

material to a company’s financial condition and operating performance . In the

content that follows:

• Part I sets the context for sustainability accounting, describing the current

market landscape and explaining the relevant legal considerations .

• Part II outlines how SASB standards are designed to fit within that context .

• Part III covers the implications of sustainability accounting for both

companies and investors .

This content is intended to help readers gain insight into how sustainability

accounting can inform their own work for the benefit of their organization, its

shareholders, the capital markets, and the economy at large .

EXECUTIVE SUMMARY

THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS

PART I



10

INTRODUCTION

Like the world around it, today’s business climate is increasingly complex .

Companies face an ever-expanding laundry list of risks and opportunities, many

of which are not captured by traditional financial statements . Macroeconomic

trends such as population growth, climate change, globalization, technological

innovation, and resource constraints can (and do) have profound effects on

business outcomes .

Daily news reports offer a litany of examples: Insurance companies must identify

the vulnerability of their insured assets to rising sea levels, increasing drought,

and more severe winters; hardware companies must consider how to source

minerals from unstable regions where

mining can fuel conflict; credit card

companies must consider how to

protect against data breaches .

These are just a few cases that

illustrate how such emerging trends

are already affecting business

performance, and consequently, must

be appropriately reflected in business

reporting . This development is the

continuation of a natural evolution of corporate disclosure—the history of which

is rooted in the U .S . Securities Acts of the 1930s, and traces its lineage from the

establishment of the SEC in 1934 to the formation of the Financial Accounting

Standards Board (FASB) in 1973 and beyond .

Sustainability accounting represents the next step in the progression of

corporate disclosure for the benefit of the capital markets .

1DEFINITION : BUSINESS REPORTING

The information that a company provides to help investors with capital allocation decisions about the company

Source: FASB. Improving Business Reporting

PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS



11

2A GROWING DEMAND

Learning Objectives Covered in This Section

Describe the trends driving demand for the disclosure of sustainability

information .

Explain why sustainability information is increasingly important to investors

for investment decisions (e .g ., reduced ratio of net assets to enterprise value,

increased risks and opportunities) .

Investors and business professionals alike recognize the need for business

reporting to evolve . They see it in their declining ratio of net assets to enterprise

value, in their frequently short-sighted earnings guidance, and in a changing

regulatory landscape . Investors are increasingly requesting information about how

companies are prepared to navigate and adapt to this changing modern landscape .

And companies, for their part, are recognizing the value in addressing these issues

head-on .

Members of both groups have come to a shared realization that financial returns

and value creation can only be sustained if companies are well governed and the

social and environmental assets underlying those returns are not depleted .

2 .1 . Changing Valuations

The dynamic of a changing world and changing investor focus is perhaps most

readily apparent in our financial markets, where the difference between the book

values listed on balance sheets and the market values reflected in stock prices grows

wider each year .

In 1975, only 17 percent of the assets in the S&P 500 were intangible; in 2015,

the number was 84 percent .1 When market valuations are increasingly based on

intangibles, such as intellectual capital, customer relationships, brand value, and

other “soft” assets that create shareholder value in a knowledge-driven economy,

1 Ocean Tomo “Annual Study of Intangible Asset Market Value from Ocean Tomo, LLC” (2015) . Accessed July 22, 2015 .


12© SUSTAINABILITY ACCOUNTING STANDARDS BOARD

SASB® FSA™ LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS

traditional financial statements tell an

increasingly smaller part of the story —by

some estimates, as little as five percent .2

Conventional accounting does not treat

nonfinancial resources—things like human,

social, and natural capital—as assets, even

though they undeniably represent sources

of future value . This point has long been

acknowledged by the FASB3 and helps

explain why investors are now looking

beyond financial statements: because

sustainability issues are business issues .

Of course, it’s not simply that these

intangible assets represent nonfinancial

capitals that are unaccounted for by

traditional methods . What further complicates this shift is the fact that, in the

absence of applicable accounting metrics to aid efficient pricing, the market value of

these intangibles is particularly sensitive to impairment by mismanagement .

2 Lev, Baruch, The End of Accounting and the Path Forward for Investors and Managers, Wiley Finance (June 27, 2016) .

3 FASB Business Reporting Research Project, Improving Business Reporting: Insights into Enhancing Voluntary Disclosures, January 29, 2001 .

DEFINITION : SUSTAINABILITY

The concept of sustainability, or sustainable development, was defined in the Brundtland Report (Our Common Future) as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs .”

As it relates to corporate activities, and for the purpose of the SASB standards, “sustainability” refers to environmental, social, and governance (ESG) dimensions of a company’s operation and performance .

Components of S&P 500 Market Value

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1975 1985 1995 2005 2015

Components of S&P 500 Market Value

Intangible Assets Tangible Assets



The increasing dependence of market capitalization on value that is not captured

by financial statements (and the precariousness of that value in a highly liquid

marketplace)—particularly in human capital-intensive, high-technology, innovative

industries—contributes to an increasing interest among investors, who are looking

to nonfinancial reporting to close the information gap .4

2 .2 . Sustainability Issues Are Business Issues

Another factor driving the disclosure of nonfinancial information, particularly

sustainability information, is a growing acknowledgement among academics

and corporate executives that an important link exists between sustainability

performance and financial performance . For example, according to research from

Harvard Business School, companies with a high commitment to sustainability in

their organizational processes, structures, and disclosures not only enjoy increased

market returns over firms that lack a similar commitment, but also achieve better

performance on accounting returns .5 This finding mirrors much research on the

subject—in fact, a 2015 review of more than 2,000 empirical studies found that

approximately 90 percent showed a non-negative relation between sustainability

criteria and corporate financial performance .6

Although research tends to

support the idea that sustainability

management and business outcomes

are linked, the evidence suggests only

correlation, not necessarily causation,

and in many cases the connection has

been somewhat weak . Most studies,

however, have considered a broad

set of sustainability issues or broadly

defined individual issues . Very little

research has focused on material

sustainability issues—those that would

be of interest to a reasonable investor .

This distinction is extremely

important, and the remainder of

this document will cover the reasons

why in more detail . Seminal research

in this area, also from Harvard Business School, has found that firms focusing

their sustainability investments on material factors enjoyed significantly higher

4 OECD, Corporate Reporting of Intangible Assets: A Progress Report, April, 2012 .

5 Eccles, Robert, Ioannis Ioannou, and George Serafeim . “The Impact of a Culture of Sustainability on Corporate Behavior and Performance .” Harvard Business School Working Paper, May 2012 .

6 Gunnar Friede, Timo Busch, and Alexander Bassen, “ESG and Financial Performance: Aggregated Evidence from More than 2000 Empirical Studies,” Journal of Sustainable Finance & Investment, Volume 5, Issue 4, p . 210-233 (December 2015) .

Stock returns (in annualized alpha) by type of sustainability performance

Performance on MATERIAL factors

Performance on IMMATERIAL factors

LOW

HIG

H

LOW HIGH

4.8% 1.5%

-2.2% -0.4%



accounting and risk-adjusted market returns (see table on the previous page) than

those focused on immaterial sustainability factors .7

Meanwhile, corporate executives have reached their own consensus on the

matter . According to a 2011 McKinsey survey (The Business of Sustainability), 76

percent of global CEOs consider strong sustainability performance to contribute

positively to their businesses in the long term . Increasingly, firms are addressing

sustainability not as a set of piecemeal initiatives, but rather as a core component

to integrate it into their strategy . Indeed, according to a 2013 Accenture report

(CEO Study on Sustainability), 80 percent of CEOs believe that their company is

approaching sustainability as a route to competitive advantage .

Nevertheless, just 14 percent of investors believe the companies they invest in are

doing so, according to a related Accenture report from 2014 (The Investor Study: Insights from PRI Signatories) . This apparent disconnect between executives and

investors illustrates the fact that firms, even those with strong performance, are

struggling to effectively tell their sustainability story .

2 .3 . Existing, Evolving, and Emerging Regulation

These changes—the transformation of market value and an evolving view of

the role of sustainability in business—continue to unfold against a backdrop of

regulatory uncertainty . A growing list of countries has passed legislation or issued

directives to increase reporting of sustainability information, including China,

the European Union (“E .U .”), Denmark, Germany, Japan, Norway, Sweden, and

Malaysia . These countries recognize that it is a subject of increasing public interest

and integral to long-term economic growth .

Perhaps most notably, in September 2014, the E .U . adopted an amendment

to its general accounting directives . The amendment requires large, publicly listed

companies to disclose in their management report relevant and material information

on environmental and social matters, as well as those related to employees, human

rights, anticorruption, bribery, and diversity .

Although the reporting regime in the U .S . already requires the disclosure of

material information (financial and otherwise) to investors as appropriate, the SEC

has issued specific guidance on a handful of sustainability issues—most notably

climate change in 2010 .8 The SEC also launched a Disclosure Effectiveness Initiative

in 2013 with the goal of improving the quality of disclosures and issued a related

Concept Release in April 2016, which indicated that sustainability information may

be within the scope of its reform .

At the same time, a growing number of stock exchanges are pushing for

standards related to responsible investment and sustainability issues . Many

7 Khan, Mozaffar, George Serafeim, and Aaron Yoon . “Corporate Sustainability: First Evidence on Materiality .” The Accounting Review 2016 91:6, 1697-1724 .

8 SEC, “Commission Guidance Regarding Disclosure Related to Climate Change,” Release Nos . 33-9106; 34-61469; FR-82, February 2, 2010 (hereafter cited as “2010 Release”) .



exchanges, particularly in emerging markets, already require listed companies to

make sustainability disclosures . Meanwhile, the World Federation of Exchanges

(WFE) and its 60 member exchanges (including New York Stock Exchange – NYSE –

and NASDAQ in the U .S .) have engaged the investment and regulatory community

on the efficacy of sustainability disclosures as part of a broader commitment to

creating transparency and fairness in the capital markets . In addition, the United

Nations Sustainable Stock Exchanges initiative connects exchanges, investors,

regulators, and companies in a collaborative endeavor to improve transparency and

disclosure of sustainability performance, and to encourage long-term approaches

to investment . In 2017, the London Stock Exchange Group released “Your Guide to

ESG Reporting,” guidance aimed at supporting high quality reporting and effective

communication around sustainability factors between issuers and investors .

2 .4 . Increasing Investor Interest

As a result of these and other factors, demand for the disclosure of sustainability

information is on the rise . Indeed, 82 percent of global institutional investors

surveyed by PwC in 2014 (Sustainability Goes Mainstream) had considered

sustainability information in their investment decisions in the last 12 months .

Meanwhile, a 2014 global survey by EY (Tomorrow’s Investment Rules) of a broad

range of investors—from banks and insurance companies to third-party investment

managers and pension funds—found that 65 percent incorporate sustainability

information to some extent during investment reviews . Meanwhile, 84 percent of

North American respondents indicated that sustainability performance played a

pivotal role in their investment decision-making process at least once in the last 12

months .

In fact, approximately half of global institutional assets—about $60 trillion, as

of 2017—are managed by signatories to the Principles for Responsible Investment

(PRI), which promotes the incorporation of ESG factors into investment decisions .

Assets Under Management (AUM in US$ trillion)

Source: UN PRI

Number of signatories



That figure has grown steadily every year

since the PRI’s inception in 2006 .

In addition to the increased use of

sustainability information by mainstream

investors, the “sustainable, responsible,

and impact investing” field has grown

dramatically in the U .S . According to U .S .

Forum for Sustainable and Responsible

Investment (U .S . SIF) (Report on Sustainable, Responsible and Impact Investing Trends, 2016), such investments represent $8 .72

trillion—more than 20 percent of the total

assets under professional management in the

U .S .—an increase of 33 percent in just two years .

These developments make sense in the context of the trends outlined above .

As the value of equities becomes less tangible, it also becomes more sensitive to

sustainability risks, the management of those risks, and any regulatory attempts to

address them . Investors factor the price of risk into the returns they require, raising a

firm’s cost of capital . In other words, as risk increases, value decreases—and vice versa .

In one high-profile example of increasing investor interest, a group of 62

institutional investors representing nearly $2 trillion in assets under management

sent a letter to the SEC in April 2015 calling for improved disclosure by oil and gas

companies of “critical climate change-related business risks that will ‘profoundly

affect the economics of the industry .’” These investors cited growing concerns about

strategic planning and risk management in the industry .9 Other prominent examples

abound . For instance, in a separate letter in July 2016, a group of 45 investors

representing $1 .1 trillion in assets under management called on the SEC to improve

sustainability disclosure, arguing that such information needs to be material,

comparable, and useful .10 Similarly, in July 2017, the Human Capital Management

Coalition—a group of institutional investors collectively managing $2 .8 trillion in

assets—petitioned the SEC to require corporate issuers to disclose information

regarding their management of human capital .11

Investors have begun making their case not only to regulators, but directly to

companies . In a June 2016 letter to S&P 500 CEOs, the chief executive of BlackRock,

the world’s largest asset manager, urged them to focus on long-term sustainability,

saying, “Over the long-term, environmental, social and governance issues—ranging

from climate change to diversity to board effectiveness—have real and quantifiable

financial impacts .” More recently, in August 2017, Vanguard, one of the world’s

9 Ceres, “Investors Push SEC to Require Stronger Climate Risk Disclosure by Fossil Fuel Companies,” April 17, 2015 .

10 Ceres, “Re: File Number S7-06-16: Business and Financial Disclosure Required by Regulation S-K” (letter to SEC dated July 20, 2016) .

11 Human Capital Management Coalition, letter to the SEC dated July 6, 2017, available at https://www .sec .gov/rules/petitions/2017/petn4-711 .pdf .

“ While many US CEOs are worried about the next three months, our global competitors are making long-term investments in their companies and in their economies . . . .We’ve created an environment where a company’s long-term value and health are all too easily sacrificed at the altar of meaningless short-term performance .”

– Thomas Donohue, President and CEO of the US

Chamber of Commerce



largest investment management companies, penned an open letter calling on

public companies to “embrace the disclosure of sustainability risks that bear on a

company’s long-term value creation prospects” using a suitable framework like the

SASB standards .

2 .4 .1 . Response to Short-Termism

To some extent, the increased focus of investors on sustainability information may

be viewed as a market correction . In recent years, investors and business leaders

alike have bemoaned the deleterious effects of extreme “short-termism”: a growing

pressure put on corporate executives to meet near-term earnings projections at

the expense of long-term value creation . Although short-term investors increase

market liquidity, critics argue that persistent, extreme short-termism will result in

diminished public confidence, depressed economic growth, and reduced investment

returns . At its worst, short-termism may undermine the efficiency of capital markets

by contributing to the mispricing and misallocating of assets because of a lack of

reliable information about long-term prospects .

Evidence shows that earnings myopia is both real and pervasive . Surveys indicate

that the overwhelming majority of CFOs would destroy economic value to meet

short-term earnings targets . For example, 80 percent have said they would decrease

discretionary spending (such as R&D or advertising), while 39 percent have said they

would incentivize customers (i .e . offer them discounts) to make early purchases .12

Warren Buffett, the billionaire chairman of Berkshire Hathaway, says the

practice of telling Wall Street what to expect from quarterly earnings can distort

management’s priorities . “Guidance can lead to a lot of malpractice,” he told CNBC

in July 2016 . “It doesn’t have to, but I think if the CEO goes out and says, ‘We’re

going to earn $1 .06 next quarter,’ I think that if they’re going to come in at $1 .04,

there’s a lot of attempts to find a couple extra pennies someplace .”

Officers explain that a fickle market forces them to play this “earnings game .”

To put the trend in context, the average holding period for stocks in 1960 was 100

months . That holding period dropped every decade until it was just six months in

2010 . At the same time, the first decade of the 2000s was by far the most volatile in

recorded history for the S&P 500, according to a September 2011 New York Times analysis .

Despite these pressures, according to a 2013 McKinsey Quarterly survey of global

board members and C-suite executives, 86 percent believed that “using a longer time

horizon to make business decisions would positively affect corporate performance

in a number of ways, including strengthening financial returns and increasing

innovation .” Research supports this position . For example, a 2017 study found that

12 Graham, John R ., Campbell R . Harvey, and Shiva Rajgopal, “Value Destruction and Financial Reporting Decisions,” Financial Analysts Journal, 2006, Vol . 62, No . 6, p . 31 .



firms taking a long-term mindset consistently outperform industry peers on nearly

“every financial measure that matters .”13

In recent years, more and more companies have ended their practice of providing

earnings guidance . In fact, in November 2015, seven of the world’s 10 most

valuable companies had moved away from quarterly guidance . Overwhelmingly,

these companies believe that such guidance detracts from their focus on long-term

performance . Further, many see value in attracting more “patient” capital, so ceasing

guidance is an affirmative strategy to attract investors interested in prioritizing

long-term value . In 2016, prominent corporate CEOs such as Mary Barra of GM,

Jamie Dimon of JPMorgan Chase, and Jeff Immelt of GE and heads of institutional

investment firms such as Larry Fink of Blackrock, Bill McNabb of Vanguard, and

Ronald O’Hanley of State Street Global Advisors published an open letter which

said, “Our financial markets have become too obsessed with quarterly earnings

forecasts . Companies should not feel obligated to provide earnings guidance —

and should do so only if they believe that providing such guidance is beneficial to

shareholders .”14 Research shows that ending guidance may significantly reduce

information asymmetry, result in increased long-term investor holdings, and have

no significant impact on analyst following or return volatility .15 Nevertheless, there

remains significant demand for quarterly earnings guidance from Wall Street .

Guidance or no, a 2015 UBS report (The Investment Drought) points out that

companies’ capital (CAPEX) and research and development (R&D) expenditures

have decreased significantly in recent years as an increasing portion of corporate

earnings is being distributed to shareholders as dividends or share repurchases . In

other words, investors are getting returns today, but they may be coming at a long-

term cost . Overcoming the effects of extreme short-termism is likely to require a

commitment by all key participants in the investment value chain: not just companies,

but asset owners and asset managers, as well .16

2 .4 .2 . Fiduciary Duty

The debate over short-termism is related to, and partly rooted in, a similar

dispute over the fiduciary duty of asset managers and other trustees . Fiduciary

obligations exist to ensure that trustees who manage other people’s money act

in the best interests of their clients or beneficiaries, rather than serving their own

interests . Although different definitions and legal interpretations of fiduciary duty

exist, a common misconception is that it legally compels asset managers to solely

maximize financial returns .

13 Dominic Barton, James Manyika, and Sarah Keohane Williamson, “Finally, Evidence that Managing for the Long Term Pays Off,” Harvard Business Review (Feb . 7, 2017) .

14 Commonsense Corporate Governance Principles website . “Commonsense Corporate Governance Principles .” Accessed September 20, 2017 .

15 KKS Advisors and Generation Foundation, Implementing Integrated Guidance (November 2015) .

16 Kelly Tang and Christopher Greenwald, “Long-Termism vs . Short-Termism: Time for the Pendulum to Shift?” S&P Dow Jones Indices Research (April 2016) .



However, this view is changing as the material impacts of sustainability issues

on financial performance become more clearly defined . In fact, a 2005 U .N .

report stated: “In our opinion, it may be a breach of fiduciary duties to fail to take

account of [environmental, social, and governance (ESG)] considerations that are

relevant and to give them appropriate weight, bearing in mind that some important

economic analysts and leading financial institutions are satisfied that a strong

link between good ESG performance and good financial performance exists .” A

follow-up report (Fiduciary Duty in the 21st Century), published in 2015, stated

unequivocally, “Failing to consider long-term investment value drivers, which include

environmental, social and governance issues, in investment practice is a failure of

fiduciary duty .”

This evolving perspective has also extended to regulatory oversight . For example,

the U .S . Department of Labor, which administers the Employee Retirement Income

Security Act (ERISA), clarified its stance on the issue in 2015, stating explicitly,

“Fiduciaries need not treat commercially reasonable investments as inherently

suspect or in need of special scrutiny merely because they take into consideration

environmental, social or other factors .”

The largest institutional investors own such significant amounts of assets that

many have adopted a “universal owner” approach: They consider not only portfolio-

level returns, but also the opportunity to stimulate wider economic growth, which

is also in the best interests of their beneficiaries . The fiduciary’s duty of loyalty

calls for impartial treatment of different types of beneficiaries, including different

generations . Because sustainability impacts can shift wealth between generations,

the “failure of fiduciaries to adopt a sustainable development investment approach

has fiduciary duty implications and raises questions about the ability of fiduciaries

to efficiently allocate investment capital to growth opportunities and manage risks

to economic growth and future portfolio returns .”17 Other strategies for integrating

sustainability into fund management also exist, and are legally viable when they are

assessed within prudent investment rules . These rules are outlined in the Uniform

Prudent Investor Act (UPIA) of 1992 and other legislation outlining the modern

prudent investor rule . In fact, fiduciaries, who have a duty of prudence, benefit from

considering material sustainability information as sustainability becomes increasingly

relevant to a company’s performance, for both risk management and growth

opportunities .

2 .4 .3 . Time-consuming Alternatives

Even so, these investors have few options for obtaining material sustainability

information, or for compelling companies to address sustainability performance .

According to PwC, 89 percent of surveyed investors, representing more than

50 percent of total U .S . institutional assets, say they are “very likely” to request

17 Johnson, Keith, “Introduction to Institutional Investor Fiduciary Duties,” International Institute for Sustainable Development, February 2014, p . 8 .



this information directly from the company, and 50 percent are similarly likely to

sponsor or cosponsor a shareholder proposal . Indeed, 67 percent of the shareholder

resolutions filed during 2016’s proxy season were related to sustainability, up from

45 percent in 2013 . The SEC has also refined its view on shareholder proposals

to make it increasingly difficult for companies to exclude proposals that deal

with climate change or sustainability . Although studies show that firms improve

sustainability performance when they have been targeted by a related shareholder

proposal,18 it is nevertheless an expensive and time-consuming means for getting

investors the information they need .

Lacking that information, long-term investors at times opt for divestment .

According to Fossil Free, more than 700 organizations with $5 .45 trillion in assets

under management have committed to cutting their exposure to fossil fuels in

recent years . For example, the $860 million Rockefeller Brothers Fund joined the

Global Divest-Invest initiative, which is part of a movement by philanthropists to

divest from fossil fuel assets .

SECTION REVIEW

In this section, the following Learning Objectives were covered:

• Describe the trends driving demand for the disclosure of sustainability

information .

• Explain why sustainability information is increasingly important to investors



? Questions to consider

√ Why does the increasing influence of intangible assets on market valuation

matter to sustainability?

√ Why is sustainability information relevant to the fiduciary duty of asset man-

agers and other trustees?

18 Grewal, Jody, George Serafeim, and Aaron Yoon . “Shareholder Activism on Sustainability Issues .” Harvard Business School Working Paper, No . 17-003, July 2016 .



21

HISTORICAL AND LEGAL BASIS

Clearly the demand for information on corporate sustainability performance

is growing rapidly . However, few “best practices” for the disclosure of material

sustainability information to investors have been well established among publicly

listed firms in the U .S .

Nevertheless, the mechanism for delivering this data to the capital markets

already exists; no new regulation is required . To fully understand and appreciate the

key features of our disclosure regime, it’s necessary to examine its origins .

3 .1 . The Aftermath of the Stock Market Crash of 1929

Starting in September 1929, the frantic selling of securities on the New York Stock

Exchange (NYSE) led the market to lose about 80 percent of its value by the end of

June 1932 . The stock market crash of 1929 accelerated the Great Depression, which

was marked by a wave of bank failures, a record unemployment rate, and declining

income . The U .S . economy did not recover until the 1940s .

On the political front, the public reacted angrily to the economic collapse, with

most of the ire aimed at Wall Street . Reform and regulation of the capital markets

became an effective rallying cry for politicians . The Senate Committee on Banking

and Currency commenced hearings on securities transactions and stock exchanges,

which uncovered evidence of many unethical and risky financial practices . These

included bankers and companies failing to fully disclose information about the

companies whose securities were being offered for sale . The Committee’s Report

(the “Fletcher Report”) describes many examples of securities being sold using false

or misleading information .19

19 11 Senate Banking and Currency Committee, Stock Exchange Practices (“Fletcher Report”), S . Rep . No . 73-1455, (1934) .

3Learning Objectives Covered in This Section

Explain the purpose and role of requiring public companies to disclose material

information in SEC filings .




As a result of the drive for reform and regulation, Congress passed the Securities

Act of 1933 (“Securities Act”) and the Securities Exchange of 1934 (“Exchange

Act”) . The Securities Act regulates the sale of securities to the investing public .

Before a company can offer securities under federal jurisdictional means, Section

5(c) of the Securities Act requires companies to fully and truthfully disclose

information about the company in a registration statement filed with the SEC .

The Exchange Act regulates the stock exchanges and provides ongoing reporting

requirements of companies that register securities with the SEC . The Exchange Act

also established the SEC, which will be discussed later in Part I .

3 .2 . Disclosure as the Basis of the Securities Acts

Disclosure was the concept that drove reform and securities regulation . In 1914,

Supreme Court Justice Louis Brandeis articulated the benefit of disclosure:

Publicity is justly commended as a remedy for social and industrial diseases . Sunlight is said to be the best of disinfectants; electric light the most efficient policeman .20

Brandeis influenced President Franklin Delano Roosevelt’s views about disclosure

as the appropriate method of securities regulation . Brandeis also greatly influenced

the thinking of Felix Frankfurter, a future associate justice of the Supreme Court, on

the benefits of disclosure . Frankfurter played a leading role in writing the Securities

Act and guiding it through Congress .

In addition to Brandeis and Frankfurter, lawyer Adolf Berle and economist

Gardiner Means had a large intellectual influence on the Securities Acts, although

they were not directly involved in writing the laws . As coauthors of a seminal work

on corporate governance, Berle and Means saw mandatory disclosure as a method

to hold managers accountable to their shareholders and to promote the public

interest .21 They also believed that disclosure would advance the ability of the capital

markets to efficiently price securities .22

Frankfurter’s thinking about disclosure echoed the sentiments of Brandeis, Berle,

and Means . Not surprisingly, Frankfurter emphasized that disclosure was about

investors making informed decisions: “[T]he information which must be furnished

in the registration statement is intended to reveal facts essential to a fair judgment

upon the security offered .”23 At the same time, Frankfurter stated the Securities

Act’s disclosure requirements were designed to establish new standards of behavior

for managers, banks, and accountants .

20 Brandeis, Louis D . Other People’s Money and How the Bankers Use It, 1967 edition . Harper Torchbooks, 1914, p . 62 .

21 Berle, Adolf A ., and Gardiner C . Means . The Modern Corporation and Private Property . Harcourt, Brace & World, 1967 (1932), p . 310; Cynthia A . Williams, “The Securities and Exchange Commission and Corporate Social Transparency .“ 112 1197, (1999), p . 1217 .

22 Williams, p . 1216 .

23 Frankfurter, Felix, “The Federal Securities Act: II,” Fortune, Vol . 7, No . 2 (August 1933): 53 .



The Securities Act is strong insofar as it is potent; it is weak insofar as publicity is not enough . … Many practices safely pursued in private lose their justification in public . Thus social standards newly defined gradually establish themselves as new business habits .24

Representative Sam Rayburn chaired the House Committee on Interstate and

Foreign Commerce to which Frankfurter reported . Rayburn sponsored the Securities

Act and argued that the separation of ownership and control made managers

trustees, and therefore managers had a duty to provide reliable information to

owners of the corporation:

Today the owner of shares in a corporation possesses a mere symbol of ownership, while the power, the responsibility, and the substance which have characterized ownership in the past have been transferred to separate group which holds control . … These managers are truly trustees . One of their duties as trustees is to furnish security owners, in being and in prospect, with reliable information .25

The Securities Act’s objective was “full publicity and information, and that

essentially no important element attending the issue shall be concealed from the

buying public .”26 The Supreme Court affirmed this objective 20 years later, saying

the Securities Act was designed “to protect investors by promoting full disclosure

of information thought necessary to informed investment decisions .”27 Roosevelt

argued that the law “adds to the ancient rule of caveat emptor, the further rule

‘let the buyer beware .’”28 The Securities Act did not supplant caveat emptor; it

supplemented the principle with the obligation to disclose to the investing public .

Investors were still free to make poor investment decisions .

The legislative history of the Securities Act demonstrates that the law had

two equally important purposes: to protect investors and to influence corporate

behavior . Professor Cynthia Williams explains:

Yet, following Brandeis, disclosure was not an end in itself nor meant solely to protect investors, although investor protection was clearly a major goal . … In the spirit of Brandeis—who was specifically invoked—Congress hoped that disclosure of this information would change the way business was conducted .29

Professor Marc Steinberg concludes that Congress’s intent regarding corporate

conduct has come to fruition: “[T]here is little question that disclosure has had

a substantial impact on the normative conduct of corporations .”30 In proposing

24 Id . at 55 .

25 77 Cong . Rec, p . 2918 (1933) .

26 Address to Congress by Franklin D . Roosevelt, reprinted in Michael F . Parrino, Truth in Securities, p . 23 . Queensland Publishing Company (1968) .

27 SEC v . Ralston Purina Co ., 3467 US 119, 124 (1953) .

28 Ibid .

29 Williams, pp . 1233-34 .

30 Steinberg, Marc I . Corporate Internal Affairs: A Corporate and Securities Law Perspective, p . 29 . Praeger (1983) .



corporate governance regulations in 1978, the SEC acknowledged the positive

effects of disclosure on corporate behavior .31

Because of the limited scope of the Securities Act, which focused on the

disclosure requirements for the initial offering of securities to the public, in 1934

President Roosevelt pushed for a second bill that would fill in the gaps left by

the 1933 Act, especially gaps concerning the regulation of stock exchanges . The

Exchange Act gives the SEC the power to establish rules to regulate speculation

and market manipulation on the stock markets . Speculation was addressed through

prohibitions on short sales, limits on margin trading, and capital requirements for

trading . Market manipulation was addressed through prohibitions on manipulative

and fraudulent devices to purchase or sell securities, prohibitions on manipulative

pricing, and the regulation of brokers and dealers . Rule 10b-5, a broad anti-fraud

prohibition established by the SEC in 1942, prohibits the making of misleading,

untrue statements or engaging in fraud or deceit in the purchase or sale of any

security . The rule has served as the primary basis for securities fraud lawsuits .

The Exchange Act, like the Securities Act, has the disclosure of information as its

underlying principle . Section 12 of the Exchange Act prohibits trading of securities

on a U .S . stock exchange unless they are first registered, and the information

requirements are similar to the Securities Act’s disclosure requirements for new

securities issues . In describing the rationale for the registration of all securities

traded on a national exchange, the Senate Committee Report stated that disclosure

was about the “furnishing of complete information relative to the financial

condition of the issuer, which information shall be kept up to date by adequate

public reports .”32

Section 13 of the Exchange Act contains the periodic reporting requirements to

keep the information filed under Section 12 current . The periodic reports include

annual reports on Forms 10-K, 20-F, or 40-F, quarterly reports on Form 10-Q, and

current reports on Form 8-K . The periodic reporting requirements are intended to

promote “‘honest publicity’ so that the markets could operate properly to value

securities,”33 where “publicity” means the disclosure of accurate, complete financial

information on an ongoing basis .34

3 .3 . The SEC and Its Work

The Exchange Act also established the Securities and Exchange Commission .

The mission of the SEC is to protect investors; maintain fair, orderly, and efficient

markets; and facilitate capital formation .

31 Sec . Ex . Act Rel . 15,384, 16 SEC Dock . 348, 350 (1978) .

32 S . Rep . No . 73-793, p . 10 .

33 House of Representatives Report No . 73-1383, p . 11 .

34 Williams, p . 1244 .



The SEC is governed by five commissioners and is organized into divisions and

offices, which cover substantive areas of rulemaking, analysis, and enforcement .

For the purposes of this discussion, the most relevant division is the Division

of Corporation Finance (“Corp Fin”) . Corp Fin has responsibility for corporate

disclosure of information to the investing public . The division reviews corporate

disclosure filings with the SEC, advises companies on interpreting disclosure rules

and regulations, and makes recommendations to the Commission concerning new

rules or modifications to existing rules .

Corporate disclosure filings are reviewed for whether they meet the requirements

for disclosure . Specific disclosure requirements will be discussed in more detail later

in Part I, however the SEC broadly describes the requirements as follows:

To meet the SEC’s requirements for disclosure, a company issuing securities or whose securities are publicly traded must make available all information, whether it is positive or negative, that might be relevant to an investor’s decision to buy, sell, or hold the security .35

The Exchange Act gives the SEC authority to establish accounting principles

for the companies that register securities (the “registrants”) . In 1938, the SEC

commissioners voted to allow the private sector to establish generally accepted

accounting principles (“GAAP”) to guide the preparation of financial statements .

The SEC cannot delegate authority to establish GAAP, and it has carefully overseen

the private sector’s efforts to create accounting standards . This includes overseeing

the activities of the American Institute of Accountants in the 1930s through the

current activities of the FASB . FASB has no enforcement powers; only the SEC does .

The evolution of GAAP and its implications for corporate reporting and the capital

markets will be discussed later in Part I .

Consistent with the SEC’s authority over accounting principles, the Sarbanes-

Oxley Act (SOX) of 2002 gave the SEC oversight power over the newly formed

Public Company Accounting Oversight Board (“PCAOB”) . The PCAOB protects

investors and the public interest by working toward useful independent audit

reports and by establishing standards for audits and auditors . The PCAOB has

oversight over the external audit profession . The SEC regularly communicates with

and provides feedback to the PCAOB, the FASB, the International Accounting

Standards Board (“IASB”), and the American Institute of Certified Public

Accountants (“AICPA”) regarding accounting standards .

35 This language is a user-friendly version of the language in the Acts and their rules, SEC guidance statements, and court opinions . It is therefore not controlling . Securities and Exchange Commission “The Investor’s Advocate: How the SEC Protects Investors, Maintains Market Integrity, and Facilitates Capital Formation .” Accessed July 20, 2014 .



SECTION REVIEW


• Explain the purpose and role of requiring public companies to disclose

material information in SEC filings .


√ How can disclosure improve the ability of the market to efficiently price

securities?

√ What effects might disclosure have on the conduct of managers, banks, and

accountants?



27

The SEC’s oversight relationship with the FASB and PCAOB demonstrates the

importance of understanding how accounting principles shape the context in

which corporate disclosures are made . Therefore, it is important to consider how

developments in accounting have influenced disclosure .

4 .1 . Early Statements on Generally Accepted Accounting Principles

As Congress was drafting the Securities Act, the accounting profession took

measures following the stock market crash of 1929 to buttress its legitimacy . In

1932, the American Institute of Accountants (“AIA”) recommended five generally

accepted principles of accounting to the NYSE .

After the SEC voted to delegate the creation of financial accounting standards to

the private sector in 1938, the AIA’s Committee on Accounting Procedure (“CAP”)

began to publish Accounting Research Bulletins (“ARB”) . The ARB were designed

to give the SEC authoritative support for the GAAP .36 In 1939, an AIA committee

recommended that the auditor’s report contain the language “present [financial

information] fairly … in conformity with generally accepted accounting principles .”37

Through these statements about generally accepted accounting principles, the

profession attempted to demonstrate a commitment to consistency in financial

reporting procedures . The CAP became the accounting standard setter in the U .S .

36 Zeff, Stephen A ., “The Evolution of US GAAP: The Political Forces Behind Professional Standards: Part 1, 1930–1973,”The CPA Journal .” (January 2005): 20 (hereafter “Zeff 2005”) .

37 Zeff 2005, p . 20

4Learning Objectives Covered in This Section

Explain the current state of financial accounting (codified, standardized,

decision-useful) given the history and efforts of the FASB .

THE ROLE OF ACCOUNTING STANDARDS




4 .2 . Historical Cost Accounting and the Rise of the APB

In 1935, the SEC stated that historical cost accounting must be used to create

financial statements to avoid “misleading disclosures .” Historical cost accounting

is a measure of an asset’s value that is the actual cost paid for the asset . Under this

approach, the original cost is reported on the balance sheet even if the value of the

asset changes over time .

The Commission’s insistence on historical cost accounting, together with the

1940 publication of An Introduction to Corporate Accounting Standards, by

Professors William Paton and A .C . Littleton, two members of the AIA executive

committee, established historical cost accounting as the dominant accounting

method, and an embedded element of GAAP, for nearly 40 years .

Despite the SEC’s commitment to historical cost accounting, some quarters

of the accounting profession started calling in the 1940s for departures from

and/or exceptions to historical cost accounting . As the accounting standard

setter, the CAP and the AIA (known as the American Institute of Certified Public

Accountants, or AICPA, since 1957), became the focal point for philosophical and

political disagreements regarding historical cost accounting and broader notions of

uniformity and flexibility in general . During the 1940s, the CAP allowed for multiple

accounting methods when several accepted practices existed for the same issue . The

large accounting firms on the CAP could not agree on one best practice . As a result,

more than one accepted practice arose . Therefore, the question became whether

“generally accepted” necessarily meant a uniform set of methods or allowed for a

diversity of practice .

The tension between uniformity and diversity, as well as questions surrounding

the basis for accounting methods, created momentum for changes in standards-

setting . In response to the pressure for clear accounting principles, in 1959, the

AICPA established the Accounting Principles Board (“APB”) to reduce variation in

accounting practice . The APB consisted of members from all Big Eight accounting

firms and, for the first time, company financial executives, because of their growing

influence on the CAP .

Early in the APB’s history, the SEC objected to a 1962 proposal promoting the use

of current replacement costs for inventories and fixed assets . The APB subsequently

rejected it . This not only confirmed the Commission’s power to set the direction of

accounting standards-setting, but it also indicated differences between the SEC and

some members of the accounting profession .



4 .3 . Decision-Usefulness Enters the Lexicon

When the SEC rebuffed the APB’s attempts to establish accounting principles

that deviated from historical cost accounting, the American Accounting Association

(“AAA”), a group of accounting academics, decided that a more normative

approach to accounting was needed . In 1966, the AAA published A Statement of Basic Accounting Theory (“ASOBAT”) that deemphasized the asset valuation

purpose of financial statements and instead focused on their decision-usefulness .

The document defined accounting as “the process of identifying, measuring, and

communicating economic information to permit informed judgments and decisions

by users of the information .”38

The emphasis on users of information was new and normative . In addition,

ASOBAT proposed that users of financial information cared primarily about that

information’s ability to predict future earnings . Robert Sterling, a prominent

accounting academic, called the report revolutionary because it recast accounting

measurements as related to a specific purpose, and not primarily to the accuracy of

the measurements .39

Therefore, “the purpose of accounting is to provide information which will be

of assistance in making economic decisions .”40 This new theory of accounting,

explains Professor Stephen Zeff, “was a coherent theory which effectively linked

decision-usefulness to the information required to make investment decisions:

using discounted future cash flows as the most relevant attribute of assets and

liabilities .”41

4 .4 . The Founding of FASB

During the late 1960s and early 1970s, dissatisfaction grew over the APB’s inabil-

ity to propose and garner widespread support for accounting principles . Several of

the Big Eight accounting firms became increasingly worried about the influence of

corporations on the APB .42 In 1970, the APB affirmed the decision-usefulness objec-

tive in the fourth statement of its basic concepts and accounting principles, which

stated:

The basic purpose of financial accounting and financial statements is to provide quantitative financial information about a business enterprise that is useful to statement users, particularly owners and creditors, in making economic decisions . This purpose includes providing information that can be used in evaluating management’s

38 American Accounting Association . A Statement of Basic Accounting Theory, Evanston, IL: AAA, 1996: p . 1 .

39 Robert Sterling . “A Statement of Basic Accounting Theory: A Review Article,” Journal of Accounting Research, Vol . 5, No . 1, pp . 95-112 .

40 Staubus, George J . The Decision Usefulness Theory of Accounting: A Limited History, 1961, p . 11 .

41 Zeff, Stephen A ., “The Objectives of Financial Reporting: A Historical Survey and Analysis,” January 1, 2013, Accounting and Business Research . Accessed August 17, 2014 .

42 Zeff, Stephen A . “The Evolution of the Conceptual Framework for Business Enterprises in the United States,” Accounting Historians Journal, Vol . 26, No . 2, December 1999: 99 (hereafter, “Zeff 1999”)



effectiveness in fulfilling its stewardship and other managerial responsibilities .43

However, the APB’s statement could not be considered a strong endorsement

of decision-usefulness, as a statement is not authoritative, while an opinion is

authoritative . Further, the statement spent most of its time explaining GAAP rather

than proposing a normative objective of financial statements . As a result, the AICPA

came under greater pressure to produce a normative statement once and for all .

In 1971, the AICPA formed two special committees to address consternation over

the APB’s inability to propose standards: the Trueblood Committee and the Wheat

Committee . The Trueblood Committee’s purpose was to propose the objectives of

financial reporting, based on the underlying belief that identifying objectives would

help improve financial reporting . The Trueblood Committee’s report seconded the

decision-usefulness objective that ASOBAT had articulated, with a strong emphasis

on future cash flows to investors .

The Trueblood Committee stated that the economic and social goals of business

are equally important .44 The committee pointed to pollution as an example of

“enterprise activities which require sacrifices from those who do not benefit .”45 In

other words, some corporate activities impose externalities on the rest of society .

Therefore, one objective of financial statements is “to report on those activities of

the report affecting society which can be determined and described and measured

and which are important to the role of the enterprise in its social environment .”46

The Wheat Committee was charged with identifying ways to improve the

establishment of accounting standards . In 1972, it proposed the formation of the

Financial Accounting Standards Board (“FASB”) . The FASB was to be an independent

organization dedicated to the development of financial accounting standards, unlike

the APB, which was made up of individuals serving part-time . The AICPA adopted

the Wheat Committee’s recommendation, and in July 1973, the FASB began

operations and replaced the APB with the SEC’s approval .

In 1973, in Accounting Series Release No . 150, the SEC recognized the FASB as

the authoritative source of GAAP shortly after the FASB’s formation . By endorsing

the pronouncements of its predecessors, the FASB began to codify GAAP . The

FASB’s own statements further developed GAAP .

4 .5 . The FASB’s Conceptual Framework Project

The FASB decided to embark on a Conceptual Framework project that would

provide principles for financial accounting . Statements of Financial Accounting

43 Accounting Principles Board . Basic Concepts and Accounting Principles Underlying Financial Statements of Business Enterprises, 1970, Chapter 4 .

44 Zeff 1999, p . 101 .

45 American Institute of Certified Public Accountants, “Objectives of Financial Statements” (Trueblood Committee report), 1973, p . 54 .

46 Ibid ., p . 55 .



Concepts (“SFAC”) focused on discrete topics within financial accounting .

Understanding the early SFAC provides insight into how financial accounting

standards evolved in the United States .

SFAC No . 1, issued in 1978, addressed the objectives of financial reporting by

business enterprises . In it, the FASB identified the primary purpose of financial re-

porting as “provid[ing] information to help present and potential investors and credi-

tors and other users in making rational investment, credit, and similar decisions .”47

SFAC No . 2 concerned the qualitative aspects of accounting information, and

was published in 1980 . The goal was to define the characteristics of decision-useful

information for users of financial reporting in making decisions .

• The two most important characteristics were identified as “relevance”

and “reliability .” “Relevance” means the ability of information to make a

difference in a decision, including its timeliness, predictive value, and feedback

value . “Reliability” means reasonably free from error and bias and faithful

representation of what the information purports to represent .

• Information produced from standards should be neutral: that is, not favoring

a purpose other than better decisions by investors and creditors, or favoring

one economic interest over another .

• A secondary quality of useful information is comparability, or enabling users to

identify similarities and differences between two sets of economic outcomes .

• The statement also noted that useful information must be material, or of a

large enough magnitude to affect decisions

• Finally, information must possess benefits that exceed the costs of producing

it in order to be useful .48

SFAC No . 2 is often cited as the most respected and copied of the FASB’s concept

statements because of its clear definitions, logic, and organization .49

In 2010, the FASB issued SFAC No . 8, which replaced SFAC No . 1 and No . 2 .

SFAC No . 8 reinforces the value of financial reporting—to provide investors, lenders,

and other creditors information to help them assess the prospects for future net cash

inflows . But it also recognized that financial reporting does not, and cannot, provide

all the information those users need . The FASB also reinforced the importance of the

decision-usefulness of information . In doing so, it adjusted some of the characteris-

tics of useful financial information . The new characteristics are:

• Relevance, which explicitly recognizes the importance of materiality; and

47 FASB, Statement of Financial Accounting Concepts No . 1, 1978, paragraph 34 .

48 FASB, Statement of Financial Accounting Concepts No . 2, 1980; Miller, Paul B .W ., Rodney J . Redding, and Paul R . Bahnson . The FASB: The People, the Process, and the Politics, Third Edition, 1994 ., pp . 105-107 .

49 Donald J . Kirk . “Looking Back on Fourteen Years at the FASB: The Education of a Standard Setter,” Accounting Horizons, Vol . 2, No . 1, 1988, p . 13; Zeff 1999, p . 110 .



• Faithful representation, which more specifically means that the information is

complete, neutral, and free from error .

To enhance the relevance and faithful representation of the information, it should

also be:

• Comparable;

• Verifiable;

• Timely;

• Understandable .50

SECTION REVIEW


• Explain the current state of financial accounting (codified, standardized,

decision-useful) given the history and efforts of the FASB .


√ Given the value of decision-usefulness for financial accounting, what lesson

can be applied to sustainability accounting?

√ Why did the establishment of the FASB help resolve the challenges that faced

the CAP and the APB?

50 FASB, Statement of Financial Accounting Concepts No . 8, 2010, pp . 16-18 .


Materiality is a fundamental principle of financial reporting in the United States .

It lies at the intersection of the regulatory and accounting issues already discussed

in Part I . Federal regulation prescribed under the Securities Act requires U .S . public-

ly listed companies to provide investors and other users with material information

that is necessary to form an understanding of the company’s financial condition and

operating performance, as well as its prospects for the future . To fully understand

this legal concept and its role in corporate disclosures, it is important to explore how

materiality and its components have been viewed by the courts and the SEC .

5 .1 . Foundational Cases: TSC v. Northway and Basic v. Levinson

Transparent disclosure is the philosophical underpinning of the federal securities

law regime . Yet, a company is not required to disclose all relevant or interesting

information about itself to the capital markets, which would place undue burden on

the company . The limitation on disclosure is materiality .

Two Supreme Court cases, TSC v. Northway, 426 U .S . 439 (1976) and Basic v. Levinson, 485 U .S . 224 (1988), articulated the principle of materiality in the securities

law context . A more recent federal district case, Reese v. Malone, No . 12-35260 (U .S .

Court of Appeals for the Ninth Circuit, February 13, 2014), provides one example

of how materiality can be demonstrated . Along with SEC rules and regulations, the

cases provide the legal standard for the disclosure of material information in SEC

filings and other forms of corporate reporting .

In TSC, National purchased 34 percent of TSC’s voting securities from TSC’s

founder and principal shareholder and his family . Soon thereafter, the founder and

5MATERIALITY: THE GUIDING PRINCIPLE OF DISCLOSURE

Learning Objectives Covered in this Section

Discuss the Supreme Court definition of materiality and the implications of this definition .

Discuss the implications of making statements about “materiality” outside of

SEC filings .

PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDSSASB® FSA™ LEVEL I STUDY GUIDE



his son resigned from TSC’s board of directors, and five National nominees were

placed on the board, including National’s president and executive vice president,

who subsequently became chairman of the board and chairman of TSC’s executive

committee . The TSC board approved a proposal to liquidate and sell all of TSC’s

assets to National by exchanging TSC stock for National stock . TSC and National

then issued a joint proxy statement to their shareholders recommending approval of

the proposal . The proxy solicitation was successful, TSC was placed in liquidation and

dissolution, and the exchange of shares was completed . A TSC shareholder brought

an action for damages against TSC and National, claiming that their joint proxy

statement was incomplete and materially misleading, in violation of Exchange Act

14(a) and Rule 14a-9 in that it omitted material facts relating to the following:

• the degree of National’s control over TSC (i .e ., it failed to disclose the positions

National’s president and executive vice president held within TSC, as well as

reports filed with the SEC by National and TSC indicating that National “may

be deemed a ‘parent’ of TSC”), and

• the favorability of the proposed acquisition to TSC shareholders (i .e ., it failed

to disclose certain unfavorable information about the proposal contained in

a letter from an investment banking firm whose earlier favorable opinion of

the proposal was reported in the proxy statement, and also recent substantial

purchases of National’s common stock, suggestive of manipulation, by

National and a mutual fund) .

The shareholder alleged that the omission materially affected the decision of how

to vote on the change-of-control transaction .51

The issue was what standard should guide the determination of material

information . After examining existing case law, the Court announced the following

standard of materiality:

There must be 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 .52

The Court elaborated:

It does not require proof of a substantial likelihood that disclosure of the omitted fact would have caused the reasonable investor to change his vote . What the standard does contemplate is a showing of a substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder.53 (emphasis added)

51 TSC v . Northway, 426 US 439 (1976)

52 TSC, 426 US 449 .

53 TSC, 426 US at 449 .



Therefore, information does not have to have changed the shareholder’s decision

to be material . The information needs only to be likely to be considered by the

reasonable shareholder . That is a higher standard than saying the information

“might” be considered, which was the appeals court’s standard that the Supreme

Court rejected on the ground that the standard was not stringent enough .54 The

Supreme Court emphasized that materiality is a question of law applied to the

specific facts of a case .55

The Supreme Court addressed materiality again in Basic . Combustion Engineering

Inc . and Basic Inc . agreed to merge . For two years leading up to the agreement, the

companies had meetings and conversations about the possibility of a merger . During

that time, Basic made three public statements denying that any merger negotiations

were taking place . It also denied that it knew of any corporate developments that

would account for heavy trading activity in its stock . Former Basic shareholders,

who sold their stock between Basic’s first public denial of merger activity and the

suspension of trading in Basic stock just prior to the merger announcement, filed a

class action suit against the company and some of its directors . The suit alleged that

Basic’s statements had been false or misleading - in violation of Section 10(b) of the

Exchange Act and Rule 10b-5 - and that shareholders were injured by selling their

shares at prices artificially depressed by those statements .56

Section 10(b) and Rule 10b-5 prohibit: (1) the use of deceptive devices or

schemes, (2) the making of a material misstatement or omitting information such

that the statements made are not misleading, and (3) committing a fraud or deceit,

in the sale or purchase of securities .57 Shareholders can bring Rule 10b-5 suits

alleging materially false or misleading statements against the company, its executives,

and/or its board members .

After reviewing several standards of materiality, the Supreme Court held that the

TSC standard for materiality applied . Further, upon analyzing conflicting standards

for the materiality of merger discussions from two federal circuit courts, the Court

held that preliminary merger discussions are material . Their materiality, the Court

said, depends on a balancing of the probability the transaction will be completed

and its significance to the issuer of the securities .58 Probability turns on evidence

of interest in the transaction at the highest levels of the companies . A relatively

small transaction for the issuer of the securities, or one that involves a small price

premium, probably will not meet the standard of materiality . Thus, the Basic test for

materiality is called the probability/magnitude test . The materiality inquiry depends

on the facts of the merger negotiations, and this fact-specific approach is consistent

with the TSC approach .

54 TSC, 438 US at 448-449 .

55 TSC, 438 US at 450 .

56 Basic v . Levinson, 485 US 224 (1988) .

57 15 U .S .C . § 78j; 17 C .F .R . 240 .10b-5 .

58 Basic, 485 US at 238-241 .



Materiality of information can be demonstrated in numerous ways . In Reese, the

plaintiffs brought a Rule 10b-5 suit, alleging that British Petroleum (“BP”) and certain

executives made materially false and misleading statements about their knowledge

of corrosion in an oil pipeline, which later experienced a large spill . Plaintiffs focused

on three statements that they alleged to be materially false or misleading: (1) press

statements by BP’s senior executive in charge of the pipeline project, one of which

was general in nature and two of which related specifically to a large oil spill; (2)

a general statement by BP’s CEO to the press that the large oil spill had occurred

notwithstanding “BP’s world class corrosion monitoring and leak detection systems”;

and (3) statements in BP’s annual reports, one about management’s belief that BP

materially complied with applicable environmental laws and regulations and one

about BP’s “environmental best practices .”

The Ninth Circuit concluded that the statements, except for the CEO’s general

statement, taken together sufficiently pled material falsity under federal securities

laws . The senior executive’s statement (that the pipeline corrosion that ultimately

caused the spill had been detected earlier at a “low manageable rate”) was false

because it contradicted BP internal documents . Further, the court found that the

senior executive’s statements were material, because BP’s knowledge of pipeline

problems prior to the spill were central questions raised by the media and in

government investigations . The court concluded that “facts demonstrating public

interest in the withheld information demonstrate its materiality .” Although the public

may have doubted the effectiveness of BP’s pipeline maintenance practices after the

spill, the disclosure that BP may have ignored significant warning signs would have

altered the total mix of information made available to investors .59

5 .2 . The SEC’s and FASB’s Views of Materiality

Although materiality is a nuanced legal concept that cannot be reduced to a

bright-line test, the views of the SEC and the FASB provide useful insights into its

application . In Staff Accounting Bulletin No. 99—Materiality, the SEC states that

companies should not use financial thresholds or rules of thumb to make ultimate

materiality determinations . For example, the bulletin rejects the rule of thumb that

a misstatement or omission of less than five percent is not material .60 Similarly,

the FASB has stated that materiality cannot be captured by a formula61 and that

quantitative thresholds should not be used to make materiality determinations .62

Financial rules of thumb and formulas cannot, by definition, capture material

information that investors are interested in . The bulletin states that companies should

59 Basic, 485 US at 231-232 .

60 17 C .F .R . Part 11, SEC Staff Accounting Bulletin No . 99—Materiality (August 11, 1999)

61 FASB, Statement of Financial Accounting Concepts No . 2, Qualitative Characteristics of Accounting Information, 131 (1980) .

62 FASB, Statement of Financial Accounting Concepts No . 8, Qualitative Characteristics of Useful Accounting Information, 17 (2010) .



perform “a full analysis of all relevant considerations,” including both quantitative

and qualitative factors, when deciding whether information is material .

In November 2014, the FASB announced a tentative decision to revise the

description of materiality in SFAC No . 8 to state that materiality is a legal concept .

The statement will incorporate the U .S . Supreme Court’s description of materiality,

which is an entity-specific determination .63 Once this decision becomes final, the

FASB’s standard of materiality will presumably align with the Supreme Court’s

standard .

5 .3 . The NRDC’s Rule-Making Petition

Materiality is intrinsically tied to the reasonable investor . After all, what is material

depends on what the reasonable investor would find important in her investment

decisions . Yet, courts have not explicitly or clearly defined the reasonable investor

as they have materiality itself . Instead, the reasonable investor has been ascribed a

number of traits across many cases .64 As a result, the definition of the reasonable

investor is not settled, though the definition is intended to be objective .65

During the 1970s, through a series of cases brought by the National Resources

Defense Council (“NRDC”) against the SEC, the SEC indirectly addressed

how it thinks about the reasonable investor . The late 1960s and early 1970s

saw shareholders and organizations ask companies to disclose more social,

environmental, and civil rights information . For example, Campaign GM was a proxy

proposal that involved General Motors shareholders asking the company to provide

more information on its environmental and civil rights performance, as well as on

safety and design issues . In 1971, the NRDC brought a rule-making petition before

the SEC, asking the Commission to expand civil rights and environmental disclosure

under the federal securities laws .66 After a number of investigations and public

hearings spanning almost a decade, the SEC decided in administrative proceedings

that the requested disclosures were not needed . Two federal courts ultimately

upheld the SEC’s rule-making authority and actions . What happened during those

administrative and court proceedings provides insight into the relationship between

materiality and the reasonable investor .

The federal district court ordered the SEC to work on two critical factual issues

regarding materiality . First, the prevalence of what they called “ethical investor”

interest in greater environmental and civil rights disclosure . Second, what other

avenues ethical investors can use to combat corporate actions that negatively

affect the environment or the practice of equal employment . Regarding expanded

63 The Board may alter tentative decisions at future Board meetings, and decisions become final only after the Board votes on a written ballot to issue a standard . Details available at FASB .org, accessed February 20, 2015 .

64 Lin, Tom C .W ., “The New Investor,” 60 UCLA L . Rev . 678, 694-695 (2013); Padfield, Stephen . “Is Puffery Material to Investors? Maybe We Should Ask Them,” 10 U . Ap . J . Bus . & Emp . L . 339, 344-348 (2008) .

65 Padfield, 2008, pp . 346, 365 .

66 See NRDC v . SEC, 389 F .Supp . 689, 693-694 (D .D .C . 1974) .



disclosure on environmental and social topics, the SEC found that less than one

percent of the total value of stocks and bonds in the United States in 1974 was

invested using ethical investing principles . Likewise, shareholder proposals on

environmental and social issues received, on average, between two and three

percent support from voting stockholders during the 1970s . These findings led

the SEC to conclude ethical investing was not an important or significant type of

investing .67

The SEC’s decision turned on a level of interest insufficient to conclude that the

reasonable investor was interested in social and environmental information . The

Commission’s analysis of what is material to the reasonable investor depended

on the portion of investors and/or assets under management . That reasoning

suggests that when a sufficiently large percentage of investors and/or assets under

management consider sustainability information to be material, sustainability

disclosure would be justified because the reasonable investor views that information

as decision-useful .

Because investors presumably invest primarily for economic gain, the Commission

decided to adhere to an economic understanding of materiality . Further, the SEC

stated that it could not require disclosure solely for the purposes of changing

corporate behavior, although it recognized the disclosure might have an indirect

effect on such behavior .68 To require disclosure solely for the goal of changing

corporate behavior, it stated, would go beyond the Commission’s authority to require

disclosure that is: “necessary or appropriate for the protection of investors or the

furtherance of a fair, orderly and efficient market or for fair opportunity of corporate

suffrage .” This reasoning contrasts with the legislative intent of the Securities Acts .

Moreover, expanded social disclosure can provide useful information to investors that

directly relates to the goals of investor protection and informed voting .69

Indeed, on a couple of occasions the SEC has expanded corporate governance

disclosure to protect investors and/or inform their voting without the disclosures

constituting material information in the economic sense . In 1978, it issued new

requirements for disclosing attendance statistics, as well as the committee structure

of the board of directors to increase the corporation’s accountability to society .70 In

1992, it expanded disclosure of executive compensation in response to public outcry

over compensation levels .71

Finally, the SEC reasoned that if social disclosures were economically important,

then the information was material, and current regulations required that the

information be disclosed .72 This last point is debatable because, according to the

67 Commission Conclusions and Rule Making Proposals, Securities Act Release No . 5627, Exchange Act Release No . 11773, [1965–1976 Transfer Binder] Fed . Sec . L . Rep (CCH) ¶ 80, 820 at 85,719-720 (October 14, 1975) .

68 Commission Conclusions, Securities Act Release No . 5627, at 85, 713 .

69 Williams, 1999, pp . 1272-1273 .

70 Ibid ., p . 1265 .

71 Ibid ., p . 1266 .

72 Commission Conclusions, Securities Act Release No . 5627, at 85,723-24 .



traditional view, material information does not have to be disclosed unless there

is a duty to disclose it (e .g ., line item disclosure requirement; omission of material

information makes a statement misleading) .73

SECTION REVIEW


• Discuss the Supreme Court definition of materiality and the implications of

this definition .

• Discuss the implications of making statements about “materiality” outside of

SEC filings .


√ How does the concept of materiality improve the usefulness of corporate

disclosures?

√ Given that the “reasonable investor” has not been explicitly defined by the

Supreme Court, what implications does this have for the definition of materi-

ality?

73 Monsma, David, and Timothy Olson, “Muddling Through Counterfactual Materiality and Divergent Disclosure: The Necessary Search for a Duty to Disclose Material Non-Financial Information,” 26 Stanford Envtl .L . J . 137, 1988, pp . 168-172 .



40

Such debate has created a lack of clarity for issuers and investors alike . As a

result, despite the regulatory obligation to disclose material information, corporate

reporting today still fails to systematically account for non-financial value drivers

in a way that helps investors make informed decisions . To understand what can

be done, it’s helpful to ask some fundamental questions: What are the disclosure

requirements? Do they apply to sustainability information? If so, how?

6 .1 . Periodic Filing Requirements

Companies that issue a class of securities registered under the federal securities

laws (also called issuers or registrants) are subject to periodic and current reporting

requirements:

• Form 10-K annual report: Form 10-K provides a comprehensive overview

of the company’s business and financial condition, including audited financial

statements . Regulation S-X governs the format and presentation of financial

reports,74 while Regulation S-K governs a wide range of information, including

nonfinancial information, in Forms S-1, 10-K, 20-F, 10-Q, and 8-K .75

• Form 10-Q quarterly reports: Form 10-Q includes unaudited financial

statements and gives a continuing view of the company’s financial condition

74 17 C .F .R . Part 210 .

75 17 C .F .R . Part 229 .

6SEC DISCLOSURE REQUIREMENTS


Recognize key elements of Regulation S-K and other prominent legislation and

what is required for disclosure (e .g ., financial and nonfinancial information that

alters the total mix of information) .

Explain why MD&A section was added to the 10-K and why it is an appropriate

place for the disclosure of sustainability information .


information .




during the year . The issuer files Form 10-Q for the first three quarters of its

fiscal year .

• Form 8-K current reports: The Form 8-K provides current information about

major events that shareholders should be aware of .

6 .2 . Regulation S-K Requirements for Form 10-K

Regulation S-K, which lays out the reporting requirements for U .S . publicly listed

companies, contains several requirements relevant to the disclosure of sustainability

information . In addition to the Management’s Discussion & Analysis section of Form

10-K (discussed in detail below), other sections of Form 10-K may be relevant to

sustainability information, including the following:

• Description of business: Item 101 of Regulation S-K requires issuers to

provide a description of the issuer’s business and its subsidiaries . Specifically,

Item 101(c)(1)(xii) expressly requires disclosure regarding certain costs of

complying with environmental laws . Appropriate disclosure shall also be

made regarding the material effects that compliance with federal, state, and

local provisions that have been enacted or adopted regulating the discharge

of materials into the environment, or otherwise relating to the protection

of the environment, may have upon the capital expenditures, earnings, and

competitive position of the registrant and its subsidiaries .

• Legal proceedings: Item 103 of Regulation S-K requires companies to briefly

describe any material pending or contemplated legal proceedings . Instructions

to Item 103 provide specific disclosure requirements for administrative or

judicial proceedings arising from laws and regulation targeting discharge of

materials into the environment or primary atmosphere for the purpose of

protecting the environment .

• Risk factors: Item 503(c) of Regulation S-K requires filing companies to

provide a discussion of the most significant factors that make an investment

in the security speculative or risky . Companies must clearly state the risk and

specify how a particular risk affects the particular filing company .

6 .3 . MD&A Section Disclosure

One appropriate place in Form 10-K to disclose sustainability information is

Item 303 of Regulation S-K, also known as Management’s Discussion & Analysis

of Financial Condition and Results of Operations (“MD&A”) . Introduced in 1968,

MD&A took its current form in 1980 . A company is expected to discuss its overall

financial condition, results of operations, and management’s view of known trends



and uncertainties that are reasonably likely to have a material effect on results

of operations and financial condition .76 This last requirement provides the nexus

between material sustainability information and MD&A .

The SEC’s Interpretive Releases on MD&A provide useful guidance to registrants

on what information to disclose and how to disclose it . Of particular relevance

to sustainability information, issuers are required to disclose “known trends or

uncertainties that the registrant reasonably expects will have a material impact

on net sales, revenues, or income from continuing operations .” Registrants “shall

focus specifically on material events and uncertainties known to management that

would cause reported financial information not to be necessarily indicative of future

operating results or of future financial condition .”77

The 1989 Interpretive Release explains the important distinction between required

disclosure and voluntary forward-looking information to be included in MD&A .

Both required disclosure regarding the future impact of presently known trends, events or uncertainties and optional forward-looking information may involve some prediction or projection . The distinction between the two rests with the nature of the prediction required . Required disclosure is based on currently known trends, events, and uncertainties that are reasonably expected to have material effects, such as: a reduction in the registrant’s product prices; erosion in the registrant’s market share; changes in insurance coverage; or the likely non-renewal of a material contract . In contrast, optional forward-looking disclosure involves anticipating a future trend or event or anticipating a less predictable impact of a known event, trend or uncertainty.78 (emphasis added)

Therefore, the issuer has a duty to disclose the known trends and uncertainties

that are reasonably likely to have a material effect on results of operations and

financial condition .

In determining whether a known trend or uncertainty is reasonably likely to have

a material effect, the Commission advises management to ask two questions:

(1) Is the known trend, demand, commitment, event, or uncertainty likely to

come to fruition? If management determines that it is not reasonably likely to

occur, no disclosure is required .

(2) If management cannot make that determination, it must evaluate

objectively the consequences of the known trend, demand, commitment,

event, or uncertainty, on the assumption that it will come to fruition . Disclosure

is then required unless management determines that a material effect on the

76 The “reasonably likely” test is a lower standard of disclosure than “more likely than not,” meaning that the likelihood need not reach 50 percent . See Commission Guidance Regarding Disclosure Related to Climate Change, p . 17 (“2010 Release”) .

77 Regulation S-K, 17 C .F .R . 229 .303 .

78 SEC, “Interpretation: Commission Guidance Regarding Management’s Discussion and Analysis of Financial Condition and Results of Operations; Certain Investment Company Disclosures, Securities and Exchange Commission,” Release Nos .33-6835; 34-26831; IC-16961; FR-36, May 18, 1989 (hereafter “1989 Release”) .



registrant’s financial condition or results of operations is not reasonably likely

to occur .79

Forward-looking statements are often identified by words including “believe,”

“expect,” “anticipate,” “will,” “should,” “optimistic,” and “intend .” Corporations

may be wary of making forward-looking statements because of concerns about

potential legal liability—for example, if a shareholder made decisions based on the

statements and the company’s outcomes turned out to differ materially from those

suggested by the statement . However, these concerns can be addressed through

safe harbors . The Securities Act and the Exchange Act contain safe harbors for

“forward-looking statements” that predate the Private Securities Litigation Reform

Act of 1995 (PSLRA) .80 These safe harbors apply both to the required disclosures on

known trends and uncertainties, as well as to voluntary forward-looking disclosures

in MD&A .81 Protection under the PSLRA requires the company to accompany

forward-looking statements with “meaningful cautionary statements identifying

important factors that could cause actual results to differ meaningfully from those in

the forward-looking statement .82 The cautionary statements should be specific to the

company and not boilerplate .83

The Commission’s 2003 interpretive release reminds issuers of three main goals of

MD&A disclosure:84

• To provide a narrative explanation of a company’s financial statements that

enables investors to see the company through the eyes of management;

• To enhance the overall financial disclosure and provide the context within

which financial information should be analyzed; and

• To provide information about the quality of, and potential variability of,

a company’s earnings and cash flow, so that investors can ascertain the

likelihood that past performance is indicative of future performance .

The Commission also emphasizes four points regarding the focus and content of

MD&A:85

• Focus on material information: Companies should focus on material

79 Footnote 27 of the 1989 Release states that the probability/magnitude test for materiality of Basic v . Levinson does not apply to MD&A disclosure: “MD&A mandates disclosure of specified forward-looking information, and specifies its own standard for disclosure—i .e ., reasonably likely to have a material effect . This specific standard governs the circumstances in which Item 303 requires disclosure . The probability/magnitude test for materiality approved by the Supreme Court in Basic, Inc ., v . Levinson, 108 S .Ct . 978 (1988), is inapposite to Item 303 disclosure .”

80 Exchange Act, § 21E; Securities Act, § 27A .

81 Rule 175(c) under the Securities Act, 17 CFR 230 .175(c), and Rule 3b-6(c) under the Exchange Act, 17 CFR 240 .3b-6 .

82 15 U .S .C . § 78u-5(c)(1)(A)(i) .

83 See Slayton v . Am . Express Co ., 604 F .3d 758, 2010 WL 1960019 (2d Cir . May 18, 2010) .

84 SEC, “Interpretation: Commission Guidance Regarding Management’s Discussion and Analysis of Financial Condition and Results of Operations; Certain Investment Company Disclosures, Securities and Exchange Commission,” Release Nos .33-8350; 34-48960; FR-72, December 29, 2003 (hereafter “2003 Release”) .

85 2003 Release .



information and eliminate immaterial information that does not promote

understanding of companies’ financial condition, liquidity, and capital

resources, changes in financial condition and results of operations (both in the

context of profit and loss and cash flows) . Moreover, Exchange Act Rule 12b-

20 requires issuers to provide other material information that is necessary to

make the required statements, in light of the circumstances in which they are

made, not misleading .86

• Include key performance indicators: Companies should identify and

discuss the key performance indicators—including non-financial performance

indicators—that management uses to manage the business and that would

be material to investors . The Commission encourages the use of non-financial

metrics that promote comparability across companies within an industry .

• Disclose known trends and uncertainties that are reasonably likely: Companies must identify and disclose known trends, events, demands,

commitments, and uncertainties that are reasonably likely to have a material

effect on financial condition or operating performance, including forward-

looking information, as discussed previously . The Commission has specified

that the “reasonably likely” threshold for disclosure “is lower than ‘more likely

than not .’”87

• Analyze the information that is disclosed: Companies should provide

not only disclosure of information responsive to MD&A’s requirements,

but also an analysis that is responsive to those requirements . The analysis

must explain management’s view of the implications and the significance

of that information and satisfy the objectives of MD&A . The analysis should

explain the underlying reasons or implications of the trends or uncertainties,

interrelationships between their parts, or their relative significance . Further,

the analysis should describe the causes of the trends and uncertainties .

6 .4 . The SEC’s Climate Change Guidance

In its interpretive guidance, the SEC has explicitly acknowledged that certain

Regulation S-K requirements, including those outlined above, may create

sustainability-related disclosure obligations for companies . For example, in response

to investor petitions and regulatory, legislative, business, and market developments,

the SEC released guidance in 2010 (“2010 guidance”) regarding disclosure related

to climate change . The purpose of the release was to give the Commission’s views

regarding existing disclosure obligations as they apply to climate change issues . The

86 See Securities Act Rule 408 [17 CFR 230 .408], Securities Act of 1933 Section 10(b) [15 U .S .C . §78j(b)], Exchange Act Rule 10b-5 [17 CFR 240 .10b-5], and Exchange Act Rule 12b-20 [17 CFR 240 .12b-20] .

87 Securities and Exchange Commission, “Commission Statement about Management’s Discussion and Analysis of Financial Condition and Results of Operations,” Release Nos . 33-8056; 34-45321; FR-61, January 22, 2002 .



release elaborates four climate change issues that registrants should consider for

disclosure:

1. The impact of legislation and regulation: Changes in federal and state

legislation on climate change may trigger disclosure obligations in different Items

of Regulation S-K, as discussed below . Examples of potential effects of pending

legislation and regulation related to climate change include:

• Costs to purchase and/or profits from sales of, allowances or credits under a

“cap and trade” system;

• Costs required to improve facilities and equipment to reduce emissions

in order to comply with regulatory limits or to mitigate the financial

consequences of a “cap and trade” regime; and

• Changes to profit or loss arising from increased or decreased demand for

goods and services produced by the registrant, which result directly from

legislation or regulation, and/or indirectly from changes in costs of goods sold .

2. International accords: Issuers should disclose material impacts of international

agreements and protocols regarding climate change mitigation .

3. Indirect consequences of regulation or business trends: Risks, as well

as opportunities, arising from developments in climate change law, politics, and

technology should be considered for disclosure if they are determined to be material .

Examples of such consequences include: increased or decreased demand for goods

depending on the amount of greenhouse gas emissions they produce; greater

competition to develop innovative, sustainable products; and greater demand for

energy from alternative and renewable sources . Another indirect impact from climate

change that should be considered for disclosure is a reputational impact’s effect on

business operations and financial condition, depending on the registrant’s business,

competitive conditions, and public opinion . Some companies may experience bigger

reputational damage than others because of their inaction or nondisclosure of their

climate change response .

4. Physical impacts of climate change: Severe weather events, changes in sea

level, decreases in arable farmland, and changes in water quality and supply can

affect a company’s operations and financial results . Examples of possible physical

impacts of climate change and severe weather events include:

• Property damage and disruptions to operations, including manufacturing

operations or the transport of manufactured products, for registrants with

operations concentrated on coastlines;



• Indirect financial and operational impacts from disruptions to the operations

of major customers or suppliers from severe weather, such as hurricanes or

floods;

• Increased insurance claims and liabilities for insurance and reinsurance

companies;

• Decreased agricultural production capacity in areas affected by drought or

other weather-related changes; and

• Increased insurance premiums and deductibles, or a decrease in the availability

of coverage, for registrants with plants or operations in areas subject to severe

weather .

All four climate change issues could potentially need to be disclosed in MD&A .

A company should apply the same “reasonable likelihood” test to the four climate

changes issues that it does to the rest of MD&A .

In the 2010 guidance, the Commission reiterated that “unless management

determines that a material effect is not reasonably likely, MD&A disclosure is

required .”88 When doubts about materiality arise, the company should lean toward

disclosure: “In view of the prophylactic purpose of the securities laws and the fact

that disclosure is within management’s control, ‘it is appropriate that these doubts

be resolved in favor of those the statute is designed to protect .’”89

In identifying and disclosing known material trends and uncertainties, the SEC

reminds registrants that they “are expected to consider all relevant information

even if that information is not required to be disclosed, and, as with any other

disclosure judgments, they should consider whether they have sufficient controls

and procedures to process this information .”90 Thus, registrants must have disclosure

controls and procedures that can effectively allow them to identify, collect, and

consider non-financial information that they may need to disclose . The controls are

discussed in more detail in Part III: Using SASB Standards .

Although this guidance specifically addresses climate change, its reasoning may

be readily applied to other material sustainability factors . As the guidance makes

clear, climate change is not a special case requiring unique treatment or additional

line-item disclosures; rather, the reporting of material information related to climate

risk is rooted in existing, long-established requirements and the core principles that

guide all disclosure .

88 2010 Release, p . 23 .

89 2010 Release, p . 11 (internal citation omitted) .

90 2010 Release, pp . 17-18 (internal citation omitted) .



6 .5 . Consequences of Inadequate Disclosure

Under the Exchange Act, the officers and directors who cause statements to

be made in SEC filings may be liable for materially false or misleading statements

contained in Commission filings .91 Shareholders can bring civil actions for

damages for violations of Exchange Act Section 10(b) and Rule 10b-5 against

the company’s executives and board members for alleged material omissions and

misrepresentations .92 In one Rule 10b-5 case concerning non-financial information,

the Ninth Circuit reversed the district court’s dismissal of the complaint, concluding

that the plaintiffs had sufficiently pled materiality because a reasonable investor

would have found information concerning maintenance costs and operations and

a Federal Aviation Administration (“FAA”) investigation of an airline to significantly

alter the total mix of information .93 In a Rule 10b-5 suit alleging that certain

boilerplate disclosures about environmental compliance were materially misleading,

the Central District of California denied defendants’ motion to dismiss .94 This ruling

suggests that boilerplate disclosures about sustainability topics carry legal risks .

Boilerplate disclosures are discussed in more detail in Part II: Understanding SASB

Standards .

The Exchange Act grants authority to the SEC to bring civil actions for aiding or

abetting antifraud violations of the securities laws . In addition to civil liability for

individuals, the SEC can provide comments to a company regarding the adequacy of

its disclosures . The company must respond to the SEC’s comments and might have

to submit a revised filing . In extreme cases, the companies can face sanctions and

delisting from a stock exchange .

6 .6 . The Sarbanes-Oxley Act and Controls

Other existing regulation that is relevant to the disclosure of material sustainability

information is included in the Sarbanes-Oxley Act of 2002 . This legislation was

enacted in the wake of several highly publicized corporate and accounting scandals,

including Enron and WorldCom . In addition to establishing the PCAOB, which was

discussed previously, the act covers a variety of aspects of how public corporations

91 Exchange Act, §§ 18 .

92 Exchange Act, § 10(b) (15 U .S .C . § 78j) and Exchange Act Rule 10b-5 (17 CFR 240 .10b-5) . See, for example, Howard v . Everex Systems, Inc ., 228 F .3d 1057 (Ninth Cir . 2000) (a corporate officer who signs aN SEC filing containing representations “makes” the statement in the filing and can be liable as a primary violator of Section 10(b) of the Exchange Act) .

93 No . 84 Employer-Teamster Joint Council Pension Trust Fund v . Am . W . Holding Corp ., 320 F .3d 920 (Ninth Cir . 2003) . The plaintiffs brought suit against America West and its officers and directors, alleging that America West made false and misleading statements and omissions concerning the company’s maintenance operations and continuing safety investigations by the FAA . As a result of the FAA’s investigation, the FAA and America West reached a settlement agreement under which the company agreed to pay $5 million for violating the FAA’s aircraft inspection and maintenance rules . The Ninth Circuit pointed out that the price of America West’s stock dropped 31 percent after the full economic effect of the settlement agreement with the FAA became known . (The number of governmental enforcement actions of aviation safety regulations is a metric for the Airline industry in the SASB Transportation sector standards .)

94 David M . Loritz et al . v . Exide Technologies et al ., No . 2:13-cv-2607-SVW-Ex, General Minutes—Civil (C .D . Cal . August 7, 2014) . The court concluded that whether the reasonable investor would consider boilerplate disclosure sufficient such that disclosure about the full extent of environmental issues would not have significantly altered the total mix of information is a question of fact .



and their boards of directors are expected to comply with the law, including the use

of disclosure and internal controls .

Sarbanes-Oxley requires that the CEO and CFO certify the content of the issuer’s

periodic reports as well as the procedures used to prepare financial statements and

its other disclosures . Corporate officers who sign the Sarbanes-Oxley certifications

regarding the accuracy of the company’s disclosures can face civil and criminal

penalties for signing false certifications .95

The corporate officers are required to certify: (1) the material accuracy and fair

presentation of the disclosures in the report, (2) that the issuer has established

and maintained effective disclosure controls and procedures, and (3) inadequacies

in, or material changes to, internal controls over financial reporting .96 “Disclosure

controls and procedures” are designed to ensure that the information disclosed

under the Exchange Act is appropriately accumulated and communicated to the

issuer’s management, including its CEO and CFO . Effective disclosure controls and

procedures allow for timely decisions regarding required disclosure and give the CEO

and CFO comfort so that they can provide the required certifications .

“Internal controls over financial reporting,” which are also included in the

Sarbanes-Oxley certifications, refer to a process designed by, or under the

supervision of, the issuer’s CEO and CFO, and effected by the issuer’s board of

directors, management, and other personnel, to provide reasonable assurance of

financial reporting reliability . The controls over financial reporting also assist in the

preparation of financial statements for external purposes in accordance with GAAP .

As described in the 2010 Release, issuers should consider whether they have

sufficient disclosure controls and procedures to process all relevant information for

potential disclosure, even if the information is not required to be disclosed . The SEC

has reminded issuers that the scope of disclosure controls and procedures is not

limited to the specifically required disclosures:

As we have stated before, a company’s disclosure controls and procedures should not be limited to disclosure specifically required, but should also ensure timely collection and evaluation of “information potentially subject to [required] disclosure,” “information that is relevant to an assessment of the need to disclose developments and risks that pertain to the [company’s] businesses,” and “information that must be evaluated in the context of the disclosure requirement of Exchange Act Rule 12b-20 .”97

Therefore, an issuer should evaluate whether, and to what extent, its disclosure

controls and procedures are being maintained and are effective with respect to

financial and non-financial information that may be incorporated into materiality

determinations .

95 Sarbanes-Oxley Act, §§ 302 and 906 .

96 Sarbanes-Oxley Act, § 302; Exchange Act, Rules 13-14(a) and 15d-14(a) .

97 2010 Release, p . 19, n . 62 .



6 .7 . The SEC’s Disclosure Effectiveness Initiative

In December 2013, the SEC published a report reviewing the disclosure

requirements of Regulation S-K and announced its Disclosure Effectiveness Initiative .

The report noted that MD&A disclosure is more about principles-based requirements

than about line-item, rules-based requirements . The intent of MD&A, it said, is to

elicit meaningful, company-specific disclosure .98

The initiative is an opportunity for the SEC to undertake a large-scale evaluation

of Regulation S-K’s disclosure requirements in light of the many economic and

technological changes since 1996, when the requirements were last reviewed .

Although much information gathering and discussion will occur before any revisions

are implemented, the director of the Division of Corporation Finance observed that

the initiative may result in new disclosure requirements:

While always mindful of the costs and burdens of our regulation, we will ask whether there is information that is not part of our current requirements but that ought to be . While looking for ways that we can streamline our disclosure requirements is an important element of our review, reducing the volume of disclosures is not the sole end game . You may be surprised to learn that there are many investors who have expressed an appetite for more information, not less . If we identify potential gaps in disclosure or opportunities to increase the transparency of information, we may very well recommend new disclosure requirements .99

As part of this initiative, the SEC issued a Concept Release in April 2016 seeking

public feedback on how it might modernize disclosures to make them more useful

for today’s investors . Two-thirds of the non-form comment letters it received in

response addressed sustainability matters, and 80 percent of those called for

improved disclosure of this type of information .100

The initiative is about making disclosure more effective, not only about reducing

the amount of disclosure . However, the initiative aims to meet the dual goals of

streamlining requirements for companies, including emerging growth companies,

and focusing on useful, material information for investors .101

98 SEC, “Report on Review of Disclosure Requirements in Regulation S-K,” December, 2013, pp . 41-42 (hereafter “Disclosure Effectiveness Report”) .

99 Higgins, Keith, “Disclosure Effectiveness: Remarks Before the American Bar Association Business Law Section Spring Meeting,” SEC .gov, April 11, 2014 .

100 Sustainability Accounting Standards Board, “Business and Financial Disclosure Required by Regulation S-K – the SEC’s Concept Release and Its Implications” (Sept . 14, 2016) .

101 Disclosure Effectiveness Report, p . 96 .



SECTION REVIEW


• Recognize key elements of Regulation S-K and other prominent legislation

and what is required for disclosure (e .g ., financial and nonfinancial information

that alters the total mix of information) .

• Explain why MD&A section was added to the 10-K and why it is an

appropriate place for the disclosure of sustainability information .


information .


√ Given requirements to disclose known trends, events, and uncertainties in

MD&A section of Form 10-K, what are the implications for sustainability dis-

closures?

√ What did the SEC’s 2010 Release on climate change suggest about the

Commission’s views regarding existing disclosure obligations as they apply to

sustainability information?



51

As non-financial value drivers continue to grow in significance, accountants have

grappled with questions of how to identify what data to collect, how to measure that

information, which controls and monitoring process are appropriate, how to analyze

the information to inform management decisions, and what to disclose externally .

These questions can be more complex when the information is difficult to quantify .

Undaunted, a number of initiatives have pressed forward with the conviction that all

participants in the capital markets will benefit from an improved ability to account

for all of the capitals—financial, natural, social, human, and others—that enable and

impact corporate performance . As the AICPA has pointed out, “accountants’ widely

acknowledged expertise and skills in measurement, control, reporting, and assurance

place them in an excellent position to help an organization link sustainability activities

to strategies using accounting measures, tools, theories, and techniques .”102

102 AICPA, “Accounting for the Sustainability Cycle: How the Accounting Profession Can Add Value to Sustainability-Oriented Activities,” October 2013 .

7SUSTAINABILITY ACCOUNTING



information .




Discuss the challenges that investors face in integrating sustainability

information into investment decisions (e .g ., information is available, but

often its quality varies, it is not comparable, and/or it lacks obvious financial

implications) .

Distinguish SASB’s approach (sustainability accounting) from other approaches

to sustainability tracking and reporting .

Discuss the role of SASB standards in helping companies develop strategies

for long-term value creation, and benchmark and improve operational

performance .




7 .1 . Pointing the Way Forward: the AICPA, the FASB, and the CFA Institute

Sustainability accounting aims to meet a need that was identified by two of the

major financial accounting organizations in the 1990s and 2000s . Motivated by

a variety of factors, including the declining ratio of net assets to enterprise value

among publicly traded firms, the AICPA and FASB each commissioned a report to

review the state of business reporting . Both organizations saw signs that business

reporting, which includes financial and non-financial reporting, could be improved to

better serve investors and other users that depend on relevant and useful disclosures .

Despite the fact that both organizations focus on financial accounting and reporting,

both reports identified a need for non-financial information to make business

reporting more meaningful .

In 1991, the AICPA formed the Special Committee on Financial Reporting

(also known as the Jenkins Committee) because of concerns about the relevance

and usefulness of business reporting . The committee’s key conclusions and

recommendations called for improved business reporting that, in addition to financial

statements, would include valuable non-financial information . Specifically, the report

identified the value of “material trends, demands, commitments, concentrations,

or events … known to management that would cause reported information not

to be indicative of future core earnings, net income, cash flows, or future financial

condition .”103 This includes forward-looking information, such as management’s

plans and the company’s opportunities and risks, and non-financial information that

captures drivers of long-term value creation .104

Shortly after the AICPA’s report, the Association for Investment Management

and Research (“AIMR”), now called the CFA Institute, released a report in 1993 that

reached similar conclusions . Titled Financial Reporting in the 1990s and Beyond, the

report concluded that financial statements are one component of a comprehensive

business reporting model that serves users, and the report encouraged management

to “disclose and discuss their strategies, proposed tactics and plans, and expected

outcomes .”

Following these findings, the FASB formed the Business Reporting Research

Project to review how companies could improve their reporting to be more relevant

and useful . In 2001, the FASB issued Improving Business Reporting: Insights into Enhancing Voluntary Disclosures . The FASB found that leading companies in select

industries voluntarily included some non-financial information that was useful to

investors . It also found that the importance of this information was likely to increase .

The FASB noted that the most useful and relevant disclosures included the factors

103 AICPA, Jenkins Committee Report, 1994, p . 54 .

104 Ibid ., p . 4 .



that influence a company’s success, its strategy for managing those factors, and the

metrics for measuring management of those success factors .

As prominent organizations in the financial accounting, financial reporting,

and financial analysis professions, the AICPA, the FASB, and the CFA Institute

helped validate the claims made by sustainability professionals about the need

for sustainability accounting . Although the approaches of the three organizations

differed in scope, they identified similar purposes for complementary financial and

non-financial information .

7 .2 . Sustainability Accounting and the Accounting Profession

Compared with financial accounting, sustainability accounting is a nascent

practice with no universally agreed-upon definition . However, a consensus is

beginning to emerge .

The AICPA explains that “accounting for sustainability involves linking

sustainability initiatives to company strategy, evaluating risks and opportunities, and

providing measurement, accounting and performance management skills to ensure

that sustainability is embedded into the day-to-day operations of the company .”105

Without explicitly offering a definition for sustainability accounting, the

Institute of Management Accountants (“IMA”) describes the relationship between

sustainability and accounting as identifying “where connections can be made

between non-financial reporting, financial value, and the sustainable worth of the

entity .”106

SASB’s Conceptual Framework defines sustainability accounting as the

measurement, management, and reporting of corporate activities that maintain

or enhance the ability of the company to create value over the long term .107 This

includes activities that involve human, social, and environmental capital, but also

the impacts of governance, leadership, and innovation on value creation . Although

sustainability accounting metrics may not be expressed in monetary units, the

performance they measure can have a financial impact .

Although not identical, these three notions of sustainability accounting share

a common theme: They all identify a connection between sustainability and a

company’s overall performance—traditionally defined as financial performance .

As such, sustainability accounting is relevant to both financial and managerial

accountants for the purposes of external reporting and internal decision-making .

105 AICPA .org, accessed November 24, 2014 .

106 Institute of Management Accountants, “The Evolution of Accountability,” 2008 .

107 SASB, Conceptual Framework, February 2017 .



7 .3 . External Reporting

Financial accountants have traditionally explained how a company creates value

and answered investors’ questions with four financial statements: the balance

sheet, the income statement, the statement of cash flows, and the statement of

stockholders’ equity . As those questions evolve, accountants will need additional

tools to answer them .

Although many companies now issue annual sustainability reports, the

information contained in them is aimed at a broad set of stakeholders and is

often immaterial to the reasonable investor .108 Financial accounting, on the other

hand, focuses primarily on the needs of investors and other providers of capital . It

encompasses information about a company’s resources, claims against the company,

and how efficiently and effectively the company’s management and board have used

the company’s resources .109 When reported to the public, that information serves

investors, lenders, and other creditors as they make decisions to provide resources to

the company .

For those groups to make informed decisions, they require more information

than what is captured by financial accounting alone .110 111 A decision to invest in

or provide debt or credit to a corporation reflects an assessment of the likelihood

of the corporation improving the investment, repaying the debt, or remaining

creditworthy—which is to say an assessment of future performance . Financial reports

account for the financial performance in the past or at a certain point in time . They

can include indicators of future performance, but critics of financial reporting often

argue that the financial reports do not generally offer enough information on their

own to make adequate projections of a company’s future performance .112 Financial

analysts and other users of business reporting use financial analysis models to project

future performance . As material sustainability data becomes more readily available,

those financial models are beginning to incorporate the data to help improve

investment decisions and provide a more accurate picture of a company’s current

and future performance .113

Accounting for the sustainability information that influences a company’s ability

to create value in the future is therefore valuable for the same users of financial

accounting data . There is ample research to suggest that select non-financial

information, which may include sustainability information, can serve as a leading

indicator for future financial performance .114 Sustainability factors, particularly a

108 PricewaterhouseCoopers, “Sustainability Goes Mainstream,” May 2014 .

109 FASB, Statement of Financial Accounting Concepts No . 8, 2010, p . 2 .

110 Ibid .

111 Jenkins, Edmund, “The FASB’s Role in Serving the Public: A Response to the Enron Collapse,” p . 2 .

112 American Accounting Association, “Recommendations on Disclosure of Nonfinancial Performance Measures,” 2002 (hereafter “Recommendations on Disclosure”) .

113 UN PRI, “Integrated Analysis: How Investors are Addressing Environmental, Social and Governance Factors in Fundamental Equity Valuation .” February 2013 .

114 American Accounting Association’s Financial Accounting Standards Committee “Comments to the FASB on Nonfinancial Performance Measures,” April 2002, pp . 1-6 .



company’s future plans, opportunities, risks, and uncertainties, can add context

and perspective to financial reports .115 Investors and other users of financial reports

can therefore make more informed decisions about the company’s ability to create

value in the long-term .116 Moreover, since financial accounting has not developed

techniques and standards to fully capture the difference between market value and

book value,117 sustainability accounting can help account for that uncaptured value .

7 .4 . Internal Decision-Making

A fundamental question facing executives is how to best allocate corporate

resources . Such decisions are typically made on the basis of a formal or informal cost-

benefit analysis . However, when dealing with non-financial resources—things like

human, social, and natural capital—the costs and benefits are difficult to quantify .

Traditional accounting does not treat these things as assets, even though they

undeniably represent sources of future benefits .

“You can’t manage what you can’t measure” is a timeworn business axiom—

largely because it contains at least a kernel of truth . However, measurements don’t

necessarily need to be expressed in fungible units of financial currency .

Managerial accounting helps companies measure both financial and non-

financial resources in order to manage those resources and deploy them to

maximize performance and/or minimize risk . Sustainability accounting metrics can

enhance or be incorporated into managerial accountants’ performance evaluation

systems to promote goal congruence and coordination, communicate expectations,

motivate unit managers, provide feedback to top-level decision-makers, and inform

benchmarking efforts . They can help managers to identify those areas of their

operation that are falling short of expectations, and to focus their attention on what

needs improvement .

Sustainability accounting can provide insight on where resources are being wasted

and how a company can further improve its operational efficiency . Also, it may

help managerial accountants develop further insight into cost drivers and create

more robust activity-based costing analyses . And because they’re tied to specific

value impacts, they fit neatly into a balanced scorecard approach to performance

evaluation .

In addition to offering insight on day-to-day operational performance, non-

financial measures can also help managerial accountants align a company’s activities

with its key strategic objectives and provide support for the identification or

exploration of growth opportunities .

Managerial accountants’ focus on performance management and corporate

strategy parallels sustainability accounting’s objective to draw the link between

115 “Recommendations on Disclosure,” p . 360 .

116 AICPA Special Committee on Financial Reporting, “Meeting the Information Needs of Investors and Creditors,” 1991 .

117 Institute of Management Accountants, “The Evolution of Accountability,” 2008, p . 11 .



today’s performance and tomorrow’s ability to create value . A 2008 IMA report

(The Evolution of Accountability: Sustainability Reporting for Accountants) explains:

“The management accountant who fails to identify the factors contributing to the

sustainability of the organization is not providing management with a full picture

of the organization’s value or of the breadth of risks that need to be addressed

in maintaining and enhancing the organization’s value .” The role of sustainability

accounting in value creation will be discussed in Part III: Using SASB Standards .

7 .5 . Current Initiatives

One of the more prominent organizations for sustainability reporting is the

Global Reporting Initiative (“GRI”) . Since 2000, GRI has offered a framework for

organizations to engage in a multi-stakeholder process to identify, and then report

on, the company’s significant economic, environmental, social, and governance

aspects as well as the aspects that substantively influence the assessment and

decisions of stakeholders .118 The organization—which could be a company,

a governmental institution, or an NGO, among others—determines who its

stakeholders are, which could include those who have invested in the organization

or those who have other relationships to the organization, such as employees,

customers, or civil society .119 The GRI introduced a set of standards in 2017, including

three universal standards applicable to all organizations and a series of topic-specific

standards to report information on economic, environmental, and social impacts .

The standards are not specific to a given country, industry, or sector, but the GRI has

provided supplemental guidance for a limited number of sectors .

Another prominent organization is the International Integrated Reporting Council

(“IIRC”), which provides a principles-based framework for companies to create an

integrated report . It defines this framework as a “concise communication about how

an organization’s strategy, governance, performance and prospects, in the context

of its external environment, lead to the creation of value over the short, medium

and long term .”120 Integrated Reporting <IR>, from the perspective of the IIRC,

is primarily conducted by private-sector, for-profit companies by adhering to the

Guiding Principles and Content Elements of the International <IR> Framework . The

<IR> Framework is not specific to a given country, industry, or sector . It does not

specify key performance indicators (“KPIs”) or measurement methods . It is up to the

company to determine what to disclose and how .

The CDP (formerly Carbon Disclosure Project) is a global system for companies

and cities to measure and disclose carbon emissions, water use, deforestation, and

supply chain data . The data are then published to help investors better understand and

118 GRI, “G4 Sustainability Reporting Guidelines” .

119 Ibid .

120 IIRC website . Accessed February 20, 2015 .



mitigate risks in their investment portfolios based on those topics .121 One special project

of CDP—the Climate Disclosure Standards Board (CDSB)—has developed the Climate

Change Reporting Framework . The framework helps companies report greenhouse gas

emissions and, according to the company’s management, the extent to which climate

change will affect the company’s strategy and operational performance .122

The UN Global Compact is a participant-based policy initiative, including

businesses and other participants, such as academics, public sector organizations,

and cities .123 Business participants in the UN Global Compact commit to

incorporating the Global Compact Ten Principles into their strategies and day-

to-day operations . In addition, they issue an annual Communication on Progress

highlighting their progress in incorporating the Ten Principles, which relate to human

rights, labor issues, the environment, and anticorruption . Business participants

receive a variety of resources to support their work and advance sustainable business

models and markets .

The Financial Stability Board, an international body established by the G20,

formed the Task Force on Climate-Related Financial Disclosures (TCFD) in 2015

to develop recommendations for climate-related disclosures . With a range of

stakeholders and a global remit, the TCFD recommendations, which were released

in December 2016, reach beyond current disclosure requirements and emphasize

forward-looking scenario analysis—for example describing the potential impact of

an international effort to limit the global increase in temperature to 2°C above pre-

industrial levels .

Finally, SASB is an independent nonprofit organization that develops sustainability

accounting standards to help U .S . publicly listed companies disclose material

121 CDP website, “About Us .” Accessed November 2, 2014 .

122 CDSB, “Climate Change Reporting Framework—Edition 1 .1,” October 2012 .

123 United Nations website, “Overview of the UN Global Compact .” Accessed November 2, 2014 .

SASB GRI IIRC CDSBUN Global Compact

TCFD

Subject Sustainability Sustainability Non-financial & financial

Climate change Non-financial Climate change

Type of guidance Standards Standards Framework Framework Principles Framework

Scope Industry-specific General General General General General and sector-specific

Target Audience Investors All stakeholders Investors Investors All stakeholders Investors, lenders, and insurance underwriters

Initiatives Related to Sustainability Reporting



information in SEC filings in a way that is decision-useful for investors . The SASB

standards address sustainability issues with industry-specific disclosure topics, and

include both accounting metrics and disclosure guidance . SASB’s standards and its

standard-setting process will be covered in more detail in Part II: Understanding

SASB Standards .

Although many initiatives exist, SASB was established to fill a void in the

sustainability reporting landscape: To provide investors with accessible, decision-

useful information regarding a company’s performance on the small handful of

industry-specific sustainability topics that are reasonably likely to have material

impacts on its financial condition or operating performance . Some of the challenges

investors have faced will be discussed in the following sections .

SECTION REVIEW



information .




• Discuss the challenges that investors face in integrating sustainability



implications) .

• Distinguish SASB’s approach (sustainability accounting) from other approaches


• Discuss the role of SASB standards in helping companies develop strategies for

long-term value creation, and benchmark and improve operational

performance .


√ In what ways did prominent financial accounting organizations suggest that

non-financial information could make business reporting more meaningful?

√ In what ways can sustainability information be useful to decision-makers

inside and outside of an organization?



59

Although sustainability disclosure has proliferated with the rise of voluntary

corporate social responsibility (CSR) and sustainability reports, creating a greater

level of transparency on a broad set of sustainability issues, investors and companies

continue to face challenges . In particular, investors have been faced with disclosure

overload—a preponderance of sustainability data that is generally neither material

nor decision-useful . Meanwhile, these reports present potential legal pitfalls

for issuers . As a result, many initiatives have begun to move toward integrating

sustainability reporting with existing financial reporting processes (and standardizing

material disclosures with comparable metrics) to better serve the needs of investors .

8 .1 . Voluntary Sustainability Reporting

Despite the lack of mandated disclosure requirements in most countries, an

increasing number of companies have begun reporting on sustainability issues

in voluntary, stand-alone reports on corporate social responsibility (CSR) or

sustainability . Indeed, as of 2014, 71 percent of the top 100 companies in 41

countries reported on sustainability factors and 124 95 percent of the largest 250

124 UN PRI website . Accessed August 14, 2014 .

8 THE STATE OF SUSTAINABILITY DISCLOSURE





implications) .



Discuss the implications of making statements about materiality outside of SEC

filings .


information .




companies in the world produced a sustainability report .125 According to the

Corporate Register, the largest repository for CSR/sustainability reports, more than

85,000 reports have been issued by nearly 14,000 companies .

It is not enough to simply report sustainability information . The information needs

to be in a place that is convenient to investors, in a format that is useful for them,

and relevant for investment decision-making . The timing of the reporting is also

important because the CSR report and Form 10-K tend to be issued months apart

and therefore impact investors’ ability to incorporate the information . These and

other reasons help explain why, in a 2015 survey of investment professionals, 61

percent of respondents thought that public companies should be required to report

annually “on a cohesive set of sustainability indicators in accordance with the most

up-to-date reporting framework .”126

8 .2 . Disclosure Overload

One of the major issues with current sustainability/non-financial disclosures is

the sheer volume of reported information . Comprehensive CSR and sustainability

reports can exceed 200 pages . Due to the lack of clear, uniform disclosure standards,

companies have been disclosing enormous amounts of information that may be

immaterial to and lacks decision-usefulness for the reasonable investor . Indeed, much

of the information contained in these reports lacks clear financial implications .

This has led to the increasing use of the phrase “information overload” in regard

to companies’ disclosure of sustainability data and the disclosure of information in

general . “Information overload” is described by the U .S . Chamber of Commerce as

“a phenomenon in which ever-increasing amounts of disclosure make it difficult for

an investor to wade through the volume of information she receives to ferret out

the information that is most relevant .”127 The Chamber of Commerce states that the

issue of information overload must be addressed to promote transparency and the

interests of all investors and American business .

This view aligns with the sentiments of the authors of Disclosure Overload and

the UK’s Financial Reporting Council’s report on Cutting Clutter: Combating Clutter in Annual Reports, both of which state the need for decreasing redundancies

and immaterial issues in reports . The sentiment is echoed by the IASB’s broad-

based disclosure initiative, which reiterates the need for addressing materiality in

reporting . The lack of focus on material issues is evident in the fact that “more

than 500 sustainability issues are currently tracked by dozens of entities, relying on

2,000 indicators,” which “leads to confusion in the marketplace about quality and

credibility .”128

125 EY, “Tomorrow’s Investment Rules,” 2014 .

126 CFA Institute, ESG Survey (June 2015) .

127 US Chamber of Commerce, Center for Capital Market Competitiveness, “Corporate Disclosure Effectiveness: Ensuring a Balanced System that Informs and Protects Investors and Facilitates Capital Formation,” 2014 .

128 AccountAbility, “Redefining Materiality II: Why it Matters, Who’s Involved, and What It Means for Corporate Leaders and Boards,” 2013 .



Perhaps even more concerning for

investors is the positive bias of these

reports . A 2013 study of highly rated

sustainability reports revealed that 90

percent of known negative events were

not reported by the company .129 This

phenomenon is sometimes referred to as

“greenwashing .”

Meanwhile, corporations have their

own concerns about the proliferation of

sustainability information . In addition to

sustainability reports, which are costly

to produce, companies frequently field

requests for sustainability information

in the form of broadly focused surveys

and questionnaires from investors,

data aggregators, indices, and ratings

agencies, creating a significant burden

on the preparer with limited benefit to

its shareholders . At GE, responding to over 650 ESG questionnaires involved more

than 75 employees and took several months .130 In a 2016 IMA webinar survey of

100 members, 7 .5 percent of respondents reported completing more than 250 ESG

surveys per year . This practice can also contribute to information asymmetry in the

market, potentially raising red flags with regulators in the context of Regulation FD,

which , which prohibits companies from selectively disclosing material nonpublic

information to analysts, institutional investors, and others without concurrently

making widespread public disclosure .131

As the SEC has stated, “as a practical matter, it is impossible to provide every

item of information that might be of interest to some investor in making investment

and voting decisions .”132 Indeed, a fine line separates appropriate transparency from

disclosure overload, and the concept of materiality defines that line .

8 .3 . Securities Law, Not Semantics

To complicate matters, many companies are using different definitions of

“materiality” in their sustainability reports and SEC filings . In fact, on average, just 29

percent of the issues deemed “material” in a company’s sustainability report are also

129 Olivier Boiral, Sustainability Reports as Simulacra? A Counter-Account of A and A+ GRI Reports, ACCOUNTING, AUDITING & ACCOUNTABILITY JOURNAL, Vol . 26, No . 7, p . 1036–71 (2013), http://www .emeraldinsight .com/doi/pdfplus/10 .1108/AAAJ-04-2012-00998 .

130 Klee, Ann, “Ratings Good for the Environment?” Environmental Forum (May/June 2015) .

131 17 C .F .R . 243 .100 -243 .103 .

132 Securities and Exchange Commission, Securities Act Release No . 5627 (October 14, 1975) .

PROPRIETARY DEFINITIONS OF MATERIALITY

Proprietary definitions of materiality, such as that used by GRI, broaden the concept to capture information that is not as relevant to investors . GRI’s definition, for example, is as follows:

The Materiality Principle states that the report should cover Aspects that: reflect the organization’s significant economic, environmental and social impacts; or substantively influence the assessments and decisions of stakeholders .

Source: G4 Sustainability Reporting Guidelines: Frequently Asked Questions. p.11. Last updated October 27, 2014.



disclosed in its mandatory filings .133 This discrepancy is more than semantics—it’s

risky business for companies .

SEC registrants who publish a sustainability report using a proprietary definition

of “materiality”—such as the definitions offered by GRI, IIRC, and others—may be

exposed to legal liability . Consider the definition the U .S . Supreme Court adopted in

TSC v. Northway (discussed in greater detail earlier): Information is material “if there

is a substantial likelihood that the omitted fact would have significantly altered the

total mix of information available to the reasonable investor .”

The differences in the Supreme Court definition and proprietary definitions fall

into three categories: whose perspective is considered, what kinds of decisions

are affected, and the threshold for disclosure . The securities law definition takes

the perspective of the reasonable investor . Information is material if it is important

to investors in their decisions to buy, hold, or sell a security, or how to vote on a

corporate matter . The threshold for disclosure is whether the information would have

assumed significance in the deliberations of the reasonable investor .

By contrast, proprietary definitions of materiality often consider what matters to

a broad range of stakeholders, including local communities, customers, employees,

and interest groups . While the decisions and assessments affected are not specifically

identified, they might include the company’s attractiveness as an employer, or how

prospective customers view the company .

For SEC registrants, their use of a definition of materiality that deviates from the

securities law definition entails risks, because this definition is among the elements

that can trigger legal liability in Rule 10b-5 lawsuits .134

This risk of using more than one more definition of materiality in the U .S . can be

seen in the following situation . A company publishes a sustainability report following

a proprietary definition of materiality . To do so, it completes an extensive stakeholder

engagement process, asking stakeholders what is relevant or important to them . The

company compiles the results, creates the report, and publishes it . At the same time,

the company discloses some information on sustainability in its Form 10-K filing .

However, that information is not the same as, is described in a different way from,

or conflicts with, what it reported in its sustainability report . Shareholders could

begin to wonder whether the statements made in the sustainability report, on issues

that they think are important to them, are materially false and misleading . Since the

company has called the contents of the sustainability report material, shareholders

may ask why there are discrepancies between Form 10-K and the sustainability

report .

Companies can ensure compliance with SEC disclosure obligations, and reduce

potential legal risks, by taking the time to distinguish between material and

immaterial sustainability information and ensuring the description of that information

133 WBCSD, Sustainability and Enterprise Risk Management: The First Step Towards Integration (January 2017) .

134 Basic v . Levinson, 485 U .S . 224 (1988) .



is appropriate and consistent across all corporate reporting channels . Writing in

the American Bar Association’s Business Law Today, Nancy Cleveland, David Lynn,

and Stephen Pike explained that information that is relevant to stakeholders other

than investors should be labeled as “significant,” “important,” or “key,” and not

“material,” if the information does not satisfy the definition outlined in U .S . federal

securities laws .

8 .4 . Sustainability Ratings

As a result of the increase in sustainability data, there has been a similar increase

in the number of sustainability ratings . According to a 2012 International Finance

Corporation report (Redefining Value: The Future of Corporate Sustainability Ratings), there are currently more than 100 organizations—a mix of independent

ratings agencies and media enterprises such as Newsweek and CRO Magazine—

that provide sustainability ratings . Some of these organizations (such as MSCI,

Sustainalytics, GIIRS, FTSE4Good, and Vigeo Eiris) rate companies across a full range

of sustainability issues . Others (including CDP and GMI), meanwhile, focus on specific

issues such as governance, climate, and other environmental issues .

Ideally, ratings give companies incentives to compete on the performance of one

or more aspects of sustainability . When ratings are transparent and comparable for

companies across industries, investors can apply ratings to portfolio management,

which further incentivizes companies to outperform their peers .

However, the fragmented and diverse group of sustainability ratings makes it

difficult for investors to rely on them . There is a lack of uniformity and consistency

among the ratings . But more importantly, the information they rely on may or

may not be material . As a result, a single company can be (and often is) scored at

opposite ends of the spectrum, depending on the ratings system .135 This only adds to

the confusion and lack of clarity about the potential value of material sustainability

information .

135 Ibid .



8 .5 . Benefits of Improved Sustainability Disclosure

Despite the absence of decision-useful

standards, some companies and investors

have already been able to take advantage

of some of the benefits .

For companies:136 137 138

• Opportunity for competitive

advantage

• Improved access to capital

• Enhanced reputation

• Increased efficiency and waste

reduction

• Improved employee loyalty

• Lower cost of capital

• Expanded revenue growth

• Improved risk management

For investors:139 140

• Increased transparency

• More effective allocation of capital

• Improved market stability

• Greater market liquidity

However, the benefits of sustainability reporting cannot be fully realized without

standardized, comparable sustainability metrics that allow corporations, investors,

and others to better manage performance and make resource allocation decisions

based on material, non-financial information . Part II will explore how SASB standards

are designed to help achieve this goal .

136 COSO, “Demystifying Sustainability Risk,” May 2013 .

137 EY and Boston College Center for Corporate Citizenship, “Value of Sustainability Reporting,” 2013 .

138 UNEP Finance Initiative, “Sustainability Management and Reporting,” December 2006 .

139 Chatham House, “The Future of Sustainability Reporting,” January 2012 .

140 Climate Disclosure Standards Board, “Benefits of CDSB’s Work,” 2013 .

“You have to compare among peers and among the industry segment itself to make it meaningful . We’re all releasing numbers and we’re all talking more and more about sustainability, but very often it is hard to get that tangible comparison and know what the benchmark is, or even how that relates to somebody else’s benchmark .”

— Hyatt Hotels Corp. Chief Financial Officer Gebhard Rainer



SECTION REVIEW





implications) .



• Discuss the implications of making statements about “materiality” outside of

SEC filings .


information .


√ Why does the “disclosure overload” of immaterial sustainability information

actually make it more difficult to incorporate sustainability information into

investment analysis?

√ Why is it important for companies to consistently label material and

immaterial information across all reporting channels?

UNDERSTANDING SASB STANDARDS

PART II


Globally, and throughout history,

standards have contributed to improved

economic function . Going as far back

as some of the first standards (standard

measurements for weight and volume

in the barter economy of ancient Egypt)

accepted standards have improved trade

and valuation . Standards contribute to

improved economic efficiency by reducing

variety and improving compatibility, which fosters markets for materials, products,

and information . Standards also reduce information asymmetry between buyers

and producers—a pound is a pound is a pound—which helps limit market failures .

Furthermore, standards tend to promote trade by reducing barriers to access new

markets . A gram in France is the same as a gram in Germany, so you don’t have to

reconfigure your supply chain or pricing structure .

9THE IMPORTANCE OF STANDARDS





implications) .



Describe the current state of disclosure of sustainability topics in the 10-K .

“[Without standards] there would be no consistency, no comparability, little transparency and a lack of trust in the information, which would lead to higher costs of capital and increased risks for investors .”

— Edmund L. Jenkins, FASB Chairman

PART II: UNDERSTANDING SASB STANDARDSSASB® FSA™ LEVEL I STUDY GUIDE



9 .1 . Financial and Non-financial Accounting

Accounting standards are no exception . They exist to ensure that the decisions

facing accountants, managers, investors, regulators, taxpayers, reporters, and other

users of financial information can be made in an informed, reasonable way . They

create comparability, enforce transparency, and emphasize relevance .

However, although the FASB has been establishing and improving U .S . GAAP

since 1973 to create officially recognized standards for financial accounting, no

such standards had been developed for non-financial accounting until recently . That

includes reporting of sustainability information .

9 .2 . State of Sustainability Disclosure in SEC Filings

SASB’s research shows that, in their SEC filings, 69 percent of companies are

already addressing at least three-quarters of the sustainability topics included in their

industry’s SASB standard, and 38 percent are already providing disclosure on every

SASB topic . However, this information is rarely disclosed in a decision-useful way .

The actionable value of a statement tends to increase as it becomes more specific .

However, more than half of these disclosures contain boilerplate language: broad,

nonspecific wording that does not describe the realities of the registrant’s particular

operating context . Rather, it could apply to multiple companies and/or a variety of

industries . Meanwhile, less than 24 percent of these sustainability disclosures use

metrics .

Even when companies disclose specific sustainability information, it may not be

useful to investors if it is not comparable to information from other companies,

especially industry peers . Indeed, in the absence of standardized data about material

sustainability factors, all stakeholders—including businesses, investors, and others—

are challenged to make informed decisions in a changing world . Research shows

that when a topic is not effectively disclosed using metrics that can establish a level

of performance with respect to peers, but instead is buried underneath boilerplate

language that is not decision-useful, analysts have less certainty about its impact on

valuation and therefore its risk to shareholders .141

141 Ole-Kristian Hope, Danqi Hu, and Hai Lu, The Benefits of Specific Risk- Factor Disclosures (working paper, University of Toronto, Feb . 26, 2016) .



9/18/19 © SASB1

Current State of Disclosure on SASB Topics

Source: SASB analysis performed for FY 2016 using the latest annual SEC Filings (i.e. Form 10-Ks and 20-Fs) for the top companies, by revenue, per SICS industry (maximum of 10 companies).

Health Care

Financials

Technology & Communications

Extractives & Minerals Processing

Transportation

Services

Resource Transformation

Food & Beverage

Consumer Goods

Renewable Resources & Alternative Energy

Infrastructure

Current State of Sustainability Disclosure

Source : SASB

Sector Resource Transformation

Industry Chemicals

Topic Product Design for Use-phase Efficiency

BoilerplateCompany-Tailored

Narrative Metrics

“ New Business Opportunities . We seek to pursue new business opportunities by developing new and specialized products and technologies … We are seeking a strong position in the technological development of chemicals from renewable resources and/or using production processes that generate fewer emissions by investing in research, development and technological innovation .”

“ On April 15, 2015, the Company announced its 2025 Sustainability Goals, the third set of sustainability-related goals since 1995 . The 2025 Sustainability Goals include aggressive sustainability targets designed to develop breakthrough product innovations, positively impacts the lives of one billion people and deliver $1 billion in cost savings or new cash flow for the Company by valuing nature in business decisions .”

“ Sustainable Solutions net sales accounted for about 2 percent of the company’s total consolidated net sales for the years ended December 31, 2105, 2014 and 2013, respectively .”



SECTION REVIEW





implications) .



• Describe the current state of disclosure of sustainability topics in the 10-K .


√ How do standards benefit companies, investors, and other users of disclosed

information?

√ How does the percentage of boilerplate disclosures compare between the

Technology & Communications sector and the Extractives & Minerals Process-

ing sector? The percentage of metrics-based disclosures?


To address the market need for standardized disclosure of material sustainability

information, SASB began developing sustainability accounting standards in 2012 and

has since issued standards for 79 industries in 11 sectors .

A unique set of characteristics make SASB standards stand apart from other

sustainability reporting initiatives . SASB standards are designed to:

1 . Focus on the U .S . capital markets;

2 . Surface sustainability information likely to be material;

3 . Yield decision-useful data;

4 . Be cost-effective for corporate issuers;

5 . Identify industry-specific disclosure topics .

By emphasizing these characteristics, SASB standards are intended for easy

integration into companies’ existing processes for identifying, managing, and

reporting on the sustainability factors that impact their performance .

10 .1 . U .S . Capital Markets

SASB standards are uniquely focused on U .S . capital markets . They are compatible

with U .S . securities laws, and help companies comply with existing regulation

(Regulation S-K) to make complete, useful disclosures of material information in

MD&A section of Form 10-K (or 20-F or 40-F) . SASB standards follow the U .S .

Supreme Court’s definition of material information, which has a singular and

10 INTRODUCTION TO SASB STANDARDS




Explain the organization of SICSTM and the implications of a sustainability-based

industry classification .




unwavering focus on the reasonable investor’s decision to buy, sell, or hold a

security .

Although the Standards are intended for use in filings made with the SEC, it

is important to note that companies from all over the world are subject to U .S .

disclosure requirements . For example, foreign-domiciled companies represent nearly

one-third—32 .4 percent—of the aggregate market capitalization of companies listed

on the NYSE, along with 8 .9 percent on NASDAQ .142

10 .2 . Likely to Be Material

In order to standardize disclosure on the most crucial sustainability issues, SASB

surfaces those environmental, social, and governance topics that are reasonably likely

to have material impacts on the financial condition or operating performance of

companies in a given industry . SASB has designed a standards-development process

to achieve this objective by focusing on evidence-based research, market-informed

vetting, quantitative back-testing, and independent oversight—all guided by the legal

concept of materiality, a high threshold .

This helps to address the problem of “disclosure overload” (covered in Part I),

raising the signal-to-noise ratio for investors . It also helps to surface information that

is useful for management, while satisfying the disclosure requirements of Regulation

S-K and improving cost-effectiveness for issuers .

Although SASB standards identify the sustainability-related disclosure topics

most likely to constitute material information for companies within a given industry,

the final determination of materiality is the responsibility of the corporation . Each

company is ultimately responsible for determining which information it will include in

its Form 10-K or 20-F and other periodic SEC filings .

10 .3 . Decision-Useful

For sustainability disclosures to be decision-useful to the reasonable investor,

they need to be representationally fair, useful, applicable, comparable, complete,

verifiable, aligned, neutral, and distributive .

SASB standards are designed to meet all of these criteria by helping issuers

to regularly report accurate, objective information that allows investors to better

understand how today’s management decisions affect tomorrow’s performance and

provide them with the ability to make apples-to-apples comparisons among peer

companies .

142 Data from Bloomberg Professional Service, accessed May 5, 2017 .



10 .4 . Cost-Effective

By incorporating the U .S . Supreme Court’s high bar for separating material from

immaterial information, SASB’s standards development process is designed to surface

the minimum set of disclosure topics that are likely to constitute material information

for companies in a given industry . (The standards have a median of five topics and

13 metrics per industry, 78 percent of which are quantitative .) Furthermore, when

selecting or developing related metrics for each disclosure topic, SASB considers

whether the data are already being collected by most companies or could be

collected in a timely manner and at a reasonable cost .

This approach helps make SASB standards less costly to implement than the more

comprehensive frameworks that may be used in sustainability reports aimed at a

broader set of stakeholders (i .e . other than the reasonable investor) .

10 .5 . Industry-Specific

Different sustainability topics affect different industries in different ways . Even

those issues that affect all industries have varying impacts . Although climate

change touches nearly every industry in some way, a single metric applied across all

industries can’t capture meaningful information about event readiness or disease

migration in Health Care Delivery, stranded assets in fossil fuel-based industries, or

the energy intensity of data centers in Software & IT Services .

Because SASB standards are industry-specific, investors can use them to inform

the sector-allocation strategies they use for portfolio construction . Meanwhile,

companies can use them to benchmark performance against peers .

10 .5 .1 SICS™

The most commonly used industry classification systems, such as GICS® and

ICB, use financial concepts, such as sources of revenue, to assign companies

to a given industry or sector . These systems often result in categorizations that

are either too granular or not granular enough for understanding their shared

sustainability challenges and opportunities . In order to group industries based on

their sustainability impacts, SASB developed the Sustainable Industry Classification

System™ (SICS™) .

Where other traditional classification systems take either a supply-side,

production-oriented approach or a demand-side, market-oriented approach to

classifying companies, SICS use a methodology focused on impacts, which can

have implications for either side . Thus, it builds on and complements traditional

classification systems by grouping issuers into sectors and industries in accordance

with a fundamental view of their business model, their resource intensity and

sustainability impacts, and their sustainability innovation potential .



Using a sustainability-based industry classification helps SASB to surface the

disclosure topics that are likely to impact all or most companies in an industry . For

example, GICS® identifies five industries related to electronics hardware, including

communications equipment, computers and peripherals, and office electronics .

Although these industries may differ in financial characteristics, they produce similar

products and face similar regulatory environments from a sustainability perspective .

Separating them would therefore create overlap and repetition between the industry

sustainability accounting standards . With SICS™, these types of companies all

belong to one industry—Hardware . Conversely, GICS® identifies the Oil, Gas and

Consumable Fuels industry, which includes oil and gas exploration companies,

as well as oil and gas refining and marketing companies . In sustainability terms,

however, these industries are different, so investors are likely to benefit from

different disclosures .

Within a SICS™ industry, companies

tend to have similar business models, face

similar growth and innovation opportunities,

operate in the same legal environment,

rely on similar resources, and produce

comparable products and services, as well

as comparable impacts on society and the

environment .143 Just as the price-to-earnings

ratio is assessed in the industry context (since

different industries have different norms for

this ratio), sustainability data, such as carbon

emissions or employee safety, are best considered in an industry context . Industry-

level disclosure topics offer a balance between comparability and materiality .

143 Eccles, Robert G ., Michael P . Krzus, Jean Rogers, and George Serafeim, “The Need for Sector-Specific Materiality and Sustainability Reporting Standards,” JACF 2012 (24:2) p . 71 .

SICS LOOK-UP TOOL

Companies looking to benchmark performance and investors seeking to integrate sustainability considerations into their investment decisions can find the primary SICS™ industry of almost any U .S .-listed company by entering its ticker symbol into the SICS™ look-up tool on the SASB website .



SECTION REVIEW




• Explain the organization of SICSTM and the implications of a sustainability-

based industry classification .


√ What five characteristics help distinguish SASB’s standards from other

sustainability reporting initiatives?

√ What are the commonalities that unite companies within a SICS™ industry?


To identify its disclosure topics—those sustainability factors that are likely to

have material impacts for companies in a given industry—SASB has designed

a rigorous, evidence-based, multi-stakeholder process, with the U .S . Supreme

Court’s definition of materiality as its focus . In addition to helping produce quality

outcomes—disclosure topics and metrics that yield material, decision-useful

information in a cost-effective way—this particular emphasis also makes SASB’s

process an appropriate one for companies to adapt and use when making their

own materiality assessments .

11IDENTIFYING INDUSTRY- LEVEL DISCLOSURE TOPICS


Explain the evidence basis that supports the identification of SASB disclosure

topics .

Explain the stakeholder consensus that supports the identification of SASB

disclosure topics .



Discuss the Supreme Court definition of materiality and the implications of this

definition .




SASB Research Methodology

Assessing materiality Testing the reasonableness of the materiality assessment

Surfacing Issues

SASB identifies topics in each industry that would be of interest to a reasonable investor and:

› Pose direct financial risks

› Are or may be regulated in the near future

› Are becoming industry norms and drive competitive best practices

› Are raised by investors and other stakeholders and threaten brands or license to operate

› Represent opportunities for innovation and growth

Analysts conduct in-depth research to gather evidence on whether the topic affects the company’s financial condition or operating performance. Analysts then map the sustainability topic to a specific impact on financial fundamentals:

› Revenue Impacts

› Operating Costs

› Asset Value

› Impact on Liabilities and/or

› Financing Costs

Analysts conduct valuation analysis, such as Discounted Cash Flow (DCF)modeling across a five-year time horizon, to assess the probability and magnitude of a potential financial impact for the top and bottom deciles of performance on sustainability factors.

SASB hosts industry working groups with issuers, corporate experts, investors, and market intermediaries to vet the evidence and assess consensus regarding the materiality of the topic, with generally a 75% approval benchmark for inclusion in the standards.

SASB evaluates the current state of disclosure in mandatory filings (Forms 10-K and 20-F) for the topics in SASB standards to verify that companies are already making disclosures and to assess the quality of disclosure on material topics.

Analysts perform quantitative analysis to assess the effect on price values. With better data, back-testing can be conducted in the future.

Materiality Assessment

Vetting Verification ValidationCharacterizing Nature of

Financial Impact

1 2 3 4 5 6

Although SASB does not prescribe what constitutes a material disclosure for

any company or industry, its process serves to establish a basis for standard-setting

that is aligned with existing U .S . securities law . This rigorous, dynamic approach is

rooted in evidence, shaped by the market, and subject to quantitative testing and

qualitative vetting . Key steps in this process are discussed below .

11 .1 . The Reasonable Investor Revisited

As the SEC has pointed out, “the federal securities laws are dynamic and respond

to changing circumstances .”144 Therefore, as changes occur in the broader economy,

the information markets need to efficiently allocate capital may also change in ways

that may require, public companies to adjust their disclosures . As mentioned in

Part I, the Court’s definition of materiality is fundamentally linked to the reasonable

investor, the notion of which evolves over time, based on the “ordinary experience

and understanding” of society’s citizens . Therefore, the concept of materiality

evolves along with the “reasonable investor,” and in so doing “provides a framework

for addressing new issues and shedding issues whose importance has waned .”145

144 Statement of the Commission Regarding Disclosure of the Year 2000 Issues, Securities and Exchange Commission (August 4, 1998) .

145 The Materiality Standard for Public Company Disclosure: Maintain What Works, Business Roundtable (October 2015) .



As the trends outlined in Part I reveal, the reasonable investor is increasingly

interested in more than just a company’s financial information, to the extent that

non-financial information can impact the total mix of information . Non-financial

information can cover topics including brand loyalty or intellectual property as well

as sustainability topics . SASB assesses evidence of investor interest and financial

impact to gauge whether a reasonable investor might consider information about

how the company manages a particular sustainability topic as part of the total mix of

information .

It is important to note that the total mix of information is not equivalent to a

comprehensive set of information . The Supreme Court-defined “total mix” concept

is intended to assist in determining the materiality of individual disclosures within the

context of all company information that is available to the capital markets . “Total

mix” does not imply that investors are entitled to the totality of information that

could be made available, but rather asks what impact a given piece of information

has on the bigger picture from the reasonable investor’s point of view . Simply adding

content—of any amount—to the “total mix” does not necessarily “significantly

alter” it . At the same time, even a seemingly small or statistically insignificant fact is

considered material when it is decision-useful to the reasonable investor .



11 .2 . Evidence-Based Research

SASB’s process begins with a universe of sustainability issues . The initial set of

issues is comprehensive, including factors related to each of SASB’s five sustainability

dimensions: Environment, Social Capital, Human Capital, Business Model &

Innovation, and Leadership & Governance .

This comprehensive list (next page) is filtered down through a series of steps

designed to identify those issues likely to have material impacts on companies in an

industry . In the earliest of those steps, SASB’s research team examines two types of

evidence: evidence of interest and evidence of financial impact . This is to determine

a minimum set of disclosure topics for each industry .

UNIVERSE OF ESG ISSUES

SUSTAINABILITY ISSUES

Industry Research

Market Input

Evidence VettingStandards Board Review

Public Comment

Revisions & the SASB Approval

SASB StandardAverage of

6 topics and 13 metrics

Standards maintenance

Ongoing

Rigorous Process Drives SASB StandardsStandards for each industry are rooted in evidence and shaped by market input

Industry Working Groups and Issuer, Investor Consultation

Evidence of Financial Impacts

(Exposure Drafts)90 days

11/13/17 © SASB1

When determining the sustainability information that is material to their business,

companies can benefit from using the industry-specific SASB standards as a starting

point, and then consider evidence of interest and evidence of financial impact .



DIMENSIONS GENERAL TOPIC

EnvironmentGreenhous Gas Emissions

Air Quality

Energy Management

Water & Wastewater Management

Waste & Hazardous Materials Management

Ecological Impacts

Social CapitalHuman Rights & Community Relations

Customer Privacy

Data Security

Access & Affordability

Product Quality & Safety

Customer Welfare

Selling Practices & Product Labeling

Human CapitalLabor Practices

Employee Health & Safety

Employee Engagement, Diversity & Inclusion

Business Model & Innovation

Product Design & Lifecycle Management

Business Model Resilience

Supply Chain Management

Materials Sourcing & Efficiency

Physical Impacts of Climate Change

Leadership & Governance

Business Ethics

Competitive Behavior

Management of the Legal & Regulatory Environment

Critical Incident Risk Management

Systemic Risk Management

SASB’s Five Sustainability Dimensions



11 .2 .1 . Sources of Evidence

In its standards-setting, SASB relies heavily on evidence to ensure that the process

is robust and the outcomes are reliable . The evidence SASB considers is extensive and

screened to ensure it comes from credible sources . It primarily serves to uncover the

disclosure topics that are likely to constitute material information for companies in an

industry .

Typical sources of evidence for SASB’s initial research include, in no particular

order: Forms 10-K, 20-F, 40-F, and other SEC filings; legal news and litigation

reports; shareholder resolutions; corporate sustainability/CSR reports; industry and

academic research reports; sell-side research; investor call transcripts; third-party case

studies; SEC comment letters; media reports; and innovation-related news . Other

sources include: ESG data (such as CDP data and ESG research reports), industry

association websites, government statistics and reports (such as the Department of

Energy, the Occupational Safety and Health Administration, and the Census Bureau),

as well as reports from the prominent accounting, consulting, and research firms .

When assessing the quality of information and sources, SASB considers, as

objectively as possible, the known or perceived level of rigor used by the publication

to check facts and references . It excludes irrelevant or low-quality pieces of evidence

from the standards-development process . SASB publishes the key external evidence

sources for each industry in an industry research brief, which can be accessed with

the SASB Standards Navigator .

11 .2 .2 . Evidence of Interest

SASB’s process for identifying evidence of interest begins with a data-driven,

five-factor test, which represents a reliable and consistent methodology from topic to

topic and industry to industry . The five-factor test aims to objectively and impartially

strike a balance between considering a wide range of potential sustainability topics

with the need to assign relative importance to some topics over others .146 Based

on research from AccountAbility (Redefining Materiality) and from the Initiative

for Responsible Investment at Harvard University, the five-factor test addresses the

following:

1 . Financial impacts and risk

2 . Legal, regulatory, and policy drivers

3 . Industry norms and competitive drivers

4 . Investor/Stakeholder concerns and social trends

5 . Opportunities for innovation

146 Lydenberg, Steve, Jean Rogers, David Wood, “From Transparency to Performance,” Harvard University, Initiative for Responsible Investment, 2010, p . 22 .

http://www.sasb.org/standards-navigator/



Each factor draws from different

source documents and encompasses

different perspectives that are relevant

to a reasonable investor . The factors

are not equivalent to the total mix

of information, either individually or

collectively, but they objectively point to

elements of the total mix of information .

Each factor involves an algorithm that

searches source documents for keywords

associated with the comprehensive set of

sustainability issues . Although investors

don’t always consult all of the sources,

topics that appear in multiple source

documents are likely to overlap with the topics the reasonable investor is already

considering, or to represent leading topics that are of interest to the reasonable

investor . The aggregate frequency of a keyword, across tens of thousands of source

documents in the five domains, helps indicate the extent to which a reasonable

investor is likely to be interested in that keyword’s parent topic . This is not to say that

the frequency is equivalent to the materiality of the topic .

• Factor 1: Financial impacts and risk. This factor relates to the likelihood

that the issue may have an impact on near-, medium-, or long-term financial

performance of companies in the industry . Sustainability issues can impact

financial performance in very specific ways, and SASB ties each of its

disclosure topics to specific types of financial impact . These are grouped into

three broad categories: revenues and costs, assets and liabilities, and cost

of capital . SASB applies the first factor by searching documents that provide

the perspective of companies’ management teams, such as 10-K and 20-F

forms . These forms include information that companies have determined to

be material .

• Factor 2: Legal, regulatory, and policy drivers. This factor relates to

existing, emerging, or evolving regulatory considerations, including the

likelihood that legislation or policy will be enacted by government that will

require companies in the industry to take action to address the issue . For

this factor, SASB searches documents that provide the perspective of the

government and the courts, such as legal news and litigation reports . These

documents identify topics that are being shaped by emerging or evolving

government policy and litigation or regulation regarding sustainability topics .

New policy or regulation may translate to costs or opportunities that affect

the entire industry . The greater the intensity of the discussion around these

To consider

The five-factor test suggests questions that can also help corporations make materiality assessments . • If performance were improved would

it add value to the bottom line?

• Is there possible regulation pending?

• Is it in the news as an industry issue?

• Are peers disclosing this information?

• Are shareholders raising the topic?

• Is there opportunity to innovate?



topics, the greater the relevance of the legal and regulatory environment for

the industry . Recent discussion about regulation or legislation around topics—

such as consumer fraud, hydraulic fracturing, and carbon taxes—highlights

the increased potential that a topic may be likely to yield material information .

Finally, SASB considers Item 103 disclosures in the industry . As discussed

above, Item 103 of Regulation S-K compels companies to disclose material

legal proceedings . The SEC has indicated that Item 103 should also include

potential environmental proceedings .147

• Factor 3: Industry norms and competitive drivers. This factor evaluates

the current and best practices by industry firms in addressing or disclosing

information on the topic . To apply this factor, SASB searches documents

that provide the perspective of industry peers, such as corporate social

responsibility (CSR) reports . These documents present topics on which

companies in the industry already manage and measure their performance,

often because it drives business value in some way . Peer companies within

an industry tend to face similar issues because of the manner in which they

use resources to produce the goods and services they bring to market, and

therefore the manner in which they impact society and the environment .

They are also often subject to the same regulations, tax structures, incentives,

societal concerns and pricing pressure that shape the evolution of industries .

Identifying industry issues that are being addressed by peers can provide

insight into topics that are material for a particular company .

• Factor 4: Investor/Stakeholder concerns and social trends. This factor

evaluates the importance of the issue to a broad range of stakeholders,

including shareholders, communities, NGOs, and the general public, that

might indicate whether the issue reflects social and consumer trends that

are likely to rise to the level of investor interest when they result in economic

implications . In this part of the test, SASB searches documents that provide

the perspective of shareholders and the general public, such as shareholder

resolutions and general media documents . These documents serve as proxies

for what is, or should be, of interest to investors and other stakeholders . They

can include the cultural (e .g ., the role of diversity in the workforce) as well

as the highly technical (e .g ., the safety of nanotechnology), and they often

have economic implications .148 Stakeholder concerns can be material for

investors when they affect revenue (boycotts), operations (labor strikes), brand

reputation (intangible value), license to operate (future cash flows, assets and

liabilities), and/or may result in legal challenges .

147 Monsma, Olson, p . 149 .

148 Lydenberg, Steve . “On Materiality and Sustainability: The Value of Disclosure in the Capital Markets .” Harvard University, Initiative for Responsible Investment, 2012, p . 60



• Factor 5: Opportunities for innovation. This factor evaluates the potential

for competitive advantage from innovation of new products and services,

or from the ability to serve new markets in order to address a particular

sustainability issue . To perform this part of the test, SASB searches innovation-

related news that provides the perspective of corporate leaders in the industry .

These documents identify innovative solutions that benefit the environment,

customers, and/or society . By implementing these solutions, the company can

demonstrate industry leadership and create competitive advantage . These

documents help distinguish innovations that add incremental value from those

that can help solve pressing societal needs or serve untapped customers (e .g .,

financial services to unbanked or underbanked customers) . The latter is an

innovation opportunity likely to be material to a reasonable investor .149

149 On Sustainability and Materiality, p . 60 .

DIMENSIONS GENERAL TOPIC

Environment

Greenhouse Gas Emissions

Air Quality

Energy Management

Water & Wastewater Management

Waste & Hazardous Materials Management

Ecological Impacts

Every general sustainability topic for each dimension

Five-factor Data-driven Test

Factor 1 Factor 2 Factor 3 Factor 4 Factor 5

Keywords Keywords Keywords Keywords

Objective, quantitative data that contributes to the overall evidence of interest for the general sustainability topic

Five Dimensions

Keywords



This data-driven test, which is more

objective than stakeholder surveys, helps

to identify the issues likely to have material

impacts . Collectively, these five factors

and the perspectives they represent—

management, government, industry peers,

stakeholders, and industry leaders—capture

elements of the total mix of information

that are relevant to a reasonable investor . To

rise to the level of a SASB disclosure topic,

however, there must also be additional

evidence of interest (as well as evidence of

financial impact, which is discussed in the

next section) .

The results of the five-factor test represent

just one data point among many that SASB

uses to determine evidence of interest .

The results are a valuable and objective

representation of potential materiality,

but the test is not a complete assessment .

Therefore, the outcomes are complemented by additional quantitative and qualitative

research and vetting to assess the economic implications of a specific topic on

companies’ financial condition or operating performance .

11 .2 .3 . Evidence of Financial Impact

Material information is linked with the relevance of that information to a

company’s financial condition and the potential for financial impacts .150 Without

evidence of financial impact, a sustainability factor is not included as a SASB

disclosure topic . When it comes to sustainability information, financial impacts can

extend beyond simple cost savings . Sustainability initiatives, provided they address

issues with material impacts, can be in a corporation’s best interest and can improve

financial performance in a variety of ways .151

150 Monsma, Olson, p . 182 .

151 Meese, Alan J ., “The Team Production Theory of Corporate Law: A Critical Assessment,” William and Mary Law Review Vol . 43, No . 4 (2002): 1693 .

FOR CONTEXT: PRIOR WORK ON FINANCIAL IMPACTS

Others have demonstrated the connection between financial factors and sustainability topics . John Elkington outlined five financial categories that might identify indicators of sustainable, long-term performance: costs, demand for products or services, pricing and profit margins, innovation programs, and the business ecosystem . Andrew Winston tied material sustainability strategies to four financial factors: brand value, revenue growth, eco-efficiencies, and risk exposure . Sheila Bonini, et . al . not only identified groups of financial value that can be impacted by CSR initiatives–growth, returns on capital, risk management, and management quality–but they also segmented the data into categories that investors commonly consider, such as new markets or operational efficiency .

Revenue

• Market size/share

• Pricing power

Recurring costs

• Cost of goods sold (COGS)

• Research and development (R&D)

Extraordinary expenses

Capital expenditures (CAPEX)

Assets & Liabilities

• Tangible assets

• Intangible assets

• Contingent liabilities and provisions

• Pension and other liabilities

Cost of capital

• Risk premium

• Industry divestment risk



Sustainability issues can impact financial performance in very specific ways that

vary by topic and industry . One issue might affect revenues, another might be tied

to costs, and a third might have multiple types of impacts . Therefore, SASB has

identified three drivers of financial impact: revenues and costs, assets and liabilities,

and cost of capital .

SASB further segments the three financial drivers into more specific types of

financial impacts that mirror the way mainstream analysts and investors value

corporations, and which therefore may be easily plugged into a range of financial

analysis tools and calculations . See preceding page .

For example, the sustainability performance of competing products and services

can impact revenues through market share and pricing power . Sustainability issues

can change availability and pricing of raw materials and inputs, impacting expenses

through the supply chain via cost of goods sold . Tangible and intangible assets—

such as plant, property, and equipment (PP&E) or brand value, respectively—can

be impaired by the impacts of sustainability issues such as climate change . Realized

or contingent liabilities can arise from sustainability issues such as severe weather-

related events or regulatory action related to climate change . Finally, sustainability

issues can affect a firm’s cost of capital by raising its risk profile or limiting its access

to capital .

Each of SASB’s disclosure topics is tied to specific types of financial impact . For

example, water management is a disclosure topic in the Oil & Gas - Exploration

& Production industry . Based on SASB’s research, five types of financial impact

were identified for this topic: market size, cost of goods sold, capital expenditures,

tangible assets, and cost of capital . The evidence for these impacts is summarized in

the SASB industry brief .

Sustainability issues can have positive and negative financial impacts . SASB also

makes a distinction between acute and chronic financial impacts . Acute impacts

11/5/17 © SASB1

FinancialImpact

Types of Financial Drivers

COST OF CAPITALREVENUE COST ASSETS &

LIABILITIES

Demand for Core Products and Services

Intangible Assets and Long-Term

Growth

Operational Efficiency/Cost

Structure

Valuation of Core Assets

and Liabilities

Governance, License to

Operate and Risk

Drug safety Diverse

workforce in technology

Energy-efficient

chemicals production

Stranded coal assets

Operational safety of gas

pipelines

Disclosure Topics Examples

Expected Value DriversSASB’s process identifies disclosure topics with evidence of impact on financial condition, operating performance or risk



correspond to events that may be rare or unlikely but can have a significant impact,

such as extreme weather, unanticipated spills or accidents, or financial collapse from

systemic risk . Chronic financial impact presents less extreme impacts in any given

year, but they are persistent and erode a company’s value over time .

Financial impacts can also be either actual or potential . Actual impacts, for

example, might materialize in the form of existing regulation and known changes

in consumer demand . Potential impacts, on the other hand, are latent . This is due

to pending regulation on sustainability issues, threats of competition from products

or services that embed sustainability factors, or increased interest in sustainability

performance .

SASB relies on the SEC’s recommended “reasonable likelihood” test to assess

potential impacts:

• A reasonable likelihood that the known trend, demand, commitment, event,

or uncertainty will occur; and

• A reasonable likelihood that the occurrence will have a material effect on the

registrant’s financial condition or results of operations

11 .3 . Stakeholder Consensus

A key challenge for SASB is ensuring that its standards are developed in a way

that is equitable, accessible, and responsive to the needs of a variety of stakeholders .

Investors want decision-useful information, issuers have cost-benefit questions, and

other market participants—from asset managers and analysts to accountants and

attorneys—want a seat at the table to voice their own needs .

To meet this challenge, SASB uses a transparent, multi-stakeholder approach that

is open to public comment and subject to independent oversight .

11 .3 .1 . Industry Expertise

Stakeholder consultation is an integral part of SASB’s operation, and the

organization has established communication channels to encourage market and

public input into every phase of its standards-setting process .

For example, for each of the 79 SICS™ industries, SASB convened an Industry

Working Group to provide feedback on the disclosure topics and accounting metrics

identified in the initial research phase of the provisional standards-development

process . Each Industry Working Group was composed of balanced representation

from corporate professionals, investors, and intermediaries (such as accountants,

lawyers, consultants, and NGO representatives) . These individuals participated in a

specific industry based on their background and expertise .152

152 Each group (investors, corporations, and intermediaries) consists of professionals who provide feedback in their individual capacity, not on the behalf of the organization that employs them .



A balance among these three

perspectives offers valuable insight into

the views of the reasonable investor .

Professionals with corporate backgrounds

in the industry understand what is likely

to affect the financial condition and/

or operating context for companies

in the industry . Investors and analysts

understand what information helps them

evaluate companies in the industry . Other

intermediaries provide insights into other

relevant aspects of materiality, such as

how to account for a disclosure topic in a

verifiable or decision-useful way, or how it

conforms to securities law .

This stakeholder input helped translate

the topics and metrics that SASB proposed

into more refined versions that enable the

measurement of sustainability performance

as well as the disclosure of related information for the benefit of the reasonable

investor . Industry Working Group feedback not only provided additional evidence,

but also clarified whether, and how, SASB’s proposed disclosure topics could best be

captured in a sustainability accounting standard .

The participants were surveyed to offer feedback on the likely materiality of

proposed disclosure topics for the industry . This feedback was then incorporated into

an Exposure Draft of the standard . The SASB Standards Council (described below)

then reviewed the standard, disclosure items, accounting metrics, and the outcome

of Industry Working Groups to ensure consistency, completeness, and accuracy .

In addition to performing evidence-based research, SASB vets each of its

disclosure topics with a group of industry experts—including balanced representation

of corporate, investor, and other perspectives—to assess the likelihood that they will

have material impacts on companies in an industry . During the provisional phase of

standard-setting, over 85 percent of investors and issuers (on average) agreed on the

likely materiality of SASB’s sustainability disclosure topics .153 When a topic failed to

reach at least 75 percent consensus, it was either flagged for further review (if close

to 75 percent) or not carried forward .

Going forward, as SASB codifies and maintains the standards, industry expertise

is incorporated into the process via ongoing, targeted stakeholder consultation

and through Advisory Committees and ad hoc Advisory Groups, which may be

153 The chart reflects only those sustainability topics proposed to SASB’s Industry Working Groups that were also eventually included in the provisional sustainability accounting standard . On average, 78 .2 percent of corporate professionals and 88 .7 percent of investors agreed the topics were likely to constitute material information for companies in the industry .

FOR CONTEXT: ASSESSING METRICS

The Committee on Metrics Quality ensures that SASB metrics meet the two following characteristics:

1 . Does the metric capture company performance on the relevant sustainability topic, either directly or by proxy? Can it be used to define an industry benchmark, with sufficient range of performance and ability to track performance over time?

2 . Does the metric support financial analysis of performance? Does it enable analysts to translate company performance into effects on traditional financial analysis of performance, on a fundamental or comparative basis?



established to provide market input on thematic or technical matters related to

specific sustainability issues, industry topics, or other factors .

11 .3 .2 . Independent Oversight

During provisional standards-setting, the SASB Standards Council served as

an independent oversight body composed of volunteer experts in standards

development, securities law, environmental law, metrics, and accounting . The

Standards Council reviewed SASB’s provisional process for each sector to ensure

that it was transparent, based on evidence and multi-stakeholder feedback, and

consistent from sector to sector .

The Standards Council strove to represent the various investor types within the

U .S . capital market system, and the independent perspectives of its members served

to strengthen the standards development process .

Additionally, to help with the evaluation of the metrics for the provisional

standards, SASB consulted with the Committee on Metrics Quality, a subcommittee

of the Standards Council . The committee’s purpose was to help ensure that SASB

fulfilled its goal of producing decision-useful and cost-beneficial metrics to measure

corporate performance on sustainability topics . To reflect the views of investors, the

committee was composed of sell-side analysts and asset managers .

During SASB’s post-provisional phase, codification and maintenance of the

standards is subject to similar due process oversight and technical feedback by an

expert-led board .

Health Care

Financials



Transportation

Services


Food & Beverage

Consumer Goods

Renewable Resources & Alt. Energy

Infrastructure

0

All % Corporations %

Stakeholder-specific feedback on likely materiality of all proposed disclosure topics

(% of respondents, by interest group, who think suggested topics are likely to constitute material information)

Investors/Analysts %

10 20 30 40 50 60 70 80 90 100

Health Care

Financials



Transportation

Services


Food & Beverage

Consumer Goods

Renewable Resources & Alt. Energy

Infrastructure

1

2

3

4

5

6

7

8

9

10

11

0

All % Corporations %

Stakeholder-specific feedback on likely materiality of all proposed disclosure topics

(% of respondents, by interest group, who think suggested topics are likely to constitute material information)

Investors/Analysts %

10 20 30 40 50 60 70 80 90 100



11 .3 .3 . Public Comment Period

SASB conducts periods for public comment for all proposed standards and

updates to the standards . For example, after SASB revised its initial disclosure topics

and related metrics based on Industry Working Group feedback, and its process and

outcomes had been reviewed by the Standards Council, SASB made an Exposure

Draft of each industry standard available for public comment .

The 90-day public comment period is a critical step for a standards-setting

organization, allowing for a range of perspectives on each topic . During this phase,

any member of the public can download the Exposure Draft Standard from SASB’s

website and provide feedback .

Specifically, SASB seeks feedback addressing the following:

• Identification of disclosure topics that may not be material to a reasonable

investor

• Suggestions for disclosure topics not included in the standards that may be

material to a reasonable investor, including supporting evidence

• Comments that correct, improve, or add to accounting metrics in the

standards

• Additional or alternate accounting metrics to measure performance with

respect to a disclosure topic

• Assessments of how costly it would be for companies to collect, analyze, and

report information required for the proposed accounting metrics

SASB publishes all the comments that are received during the public comment

period, as well as SASB’s response to each comment .

11 .4 . Evolving with the Marketplace

The sustainability issues that businesses face evolve quickly . Therefore, SASB

standards are not set in stone once they have been released . SASB has developed a

long-term plan to assess and maintain the standards, a virtuous cycle of feedback-

informed updates that will capture evolving market dynamics . This process involves

ongoing research, expert outreach and consultation, multiple rounds of public

comment and exposure, and due process oversight .

11 .4 .1 . Provisional Standards Release

Each provisional standard, which has been vetted by an IWG and exposed

for public comment, serves as a starting point for the SASB’s ongoing standards

maintenance . SASB incorporated feedback into the standard at the conclusion of the

public comment period for each of the 79 SICS industries, after which the Provisional



Sustainability Accounting Standard was published and became available to the

public .

SASB standards are considered provisional for at least one year after their initial

release . During this time, SASB continues to welcome feedback from the public

and engages in direct consultation with issuers and investors to interrogate the

materiality, decision-usefulness and cost-effectiveness of the standards .

In the meantime, investors and companies can use the provisional standards;

being provisional does not impair their usability .

11 .4 .2 . Reviewing Provisional Standards

For every sector, SASB reviews each provisional standard following its release . The

Rules of Procedure for this review process were published in 2016, exposed for public

comment, and finalized in 2017, prior to the review of any provisional standards .

Each provisional standard is reviewed and subsequently refined as necessary

based on additional research and market-based input for the disclosure topics and

accounting metrics . This process involves multiple rounds of public comment and

exposure .

The review process involves research, consultation, agenda setting, updates and

public comment, and, finally, ratification of updates . A robust governance structure

will oversee all reviews, proposals, and updates, ensuring due process, transparency,

the inclusion of stakeholder views, and technical rigor .

11 .4 .3 . Updating the Standards

As businesses and industries grow and change, the sustainability topics that

are likely to constitute material information will adjust over time . Therefore, over

time, some topics will need to be removed from the standards and others added .

However, such changes are subject to the same level of rigor as the development

of the provisional standards . The process for updating the standards involves

a systematic, independent evaluation of evidence-based research, stakeholder

consultation, technical agenda-setting, proposals, public comment, and ratification—

all of which are subject to public transparency .

Before updating standards, SASB also considers each potential modification in

the context of the essential concepts of sustainability accounting outlined in its

Conceptual Framework . For example, any proposed change is judged against the

impact it will have on reporting organizations and their ability to provide year-to-year

comparisons .

SASB’s process endeavors to balance the need for timely outcomes with the need

for comprehensive research and broad stakeholder participation . It carries out its

process for maintenance and improvement of the standards on a recurring three-year

cycle . However, SASB may address more urgent issues outside this regular schedule,

as it deems necessary or useful .



SECTION REVIEW


• Explain the evidence basis that supports the identification of SASB disclosure

topics .

• Explain the stakeholder consensus that supports the identification of SASB

disclosure topics .



• Discuss the Supreme Court definition of materiality and the implications of

this definition .


√ What are the five factors in SASB’s data-driven test that contribute to

identifying topics likely to have material impacts on companies in an industry?

√ How does evidence of a topic’s financial impact influence the development of

a SASB standard?



93

12 COMPONENTS OF A SASB STANDARD

SASB builds rigor into its standards development process to ensure quality

outcomes . The final product, a SASB sustainability accounting standard, must help

registrants disclose material, decision-useful sustainability information to investors in

a way that is cost-effective for the preparer .

A Provisional SASB standard has two main parts . First, SASB provides disclosure

guidance, which includes a brief overview of the types of companies in the industry

and an overview of how to include information about those topics in SEC filings .

(This is done when the topic is determined to be likely to constitute material

information .) Then, the standard presents the list of the disclosure topics, along with

associated accounting metrics, including technical protocols for each metric . The

technical protocols describe how to properly capture and disclose the data from the

metric .

12 .1 . Disclosure Guidance

Each SASB standard offers specific guidance for the corporations that use it to

disclose material sustainability information in SEC filings . The guidance is intended

to help companies in performing their own materiality assessments, determining

the scope of disclosure and the format of reporting, reporting activity metrics for

Learning Objectives Covered in this Section

Describe the principles that guide the selection of SASB’s industry-specific topics

for disclosure .

Describe the criteria that guide the selection of SASB’s accounting metrics .

Describe the components of a sustainability accounting standard and their

purpose for supporting disclosure .



PART II: UNDERSTANDING SASB STANDARDS



normalization (see sidebar), and making

other important considerations related to the

disclosure of sustainability information with

SASB standards .

SASB recommends that registrants use

SASB standards specific to their primary

industry as identified in the SICS™ . If a

registrant generates significant revenue from

multiple industries, SASB recommends that it

consider the materiality of the sustainability

topics that SASB has identified for those

industries and disclose the associated SASB

accounting metrics . Consolidated entities

are recommended to calculate metrics for

the whole entity, regardless of the size

of the minority interest, but data from

unconsolidated entities does not need to be included .

NORMALIZATION OF METRICS

In addition to the accounting metrics in the standards, SASB identifies activity metrics that help financial analysis calculations . Activity metrics capture basic industry-specific data about a company that may assist in the accurate evaluation and comparability of disclosures . These may include operational data, such as the total number of employees or quantity of products produced or services provided . It also may include industry-specific data, such as plant capacity utilization and hospital-bed days . SASB does not include metrics for information that is already disclosed in Form 10-K (e .g ., revenue, EBITDA, etc .) .

Disclosure Topics Accounting Metrics

Technical Protocols



12 .2 . Disclosure Topics and Accounting Metrics

In addition to Disclosure Guidance, SASB standards also include one or more

accounting metrics associated with each industry-specific disclosure topic, along with

technical protocols for using the metrics .

12 .2 .1 . Disclosure Topics

Disclosure topics represent the industry-specific impacts of broader sustainability

issues . For example, Health & Nutrition is a disclosure topic in a number of Food

& Beverage industries, representing one aspect of the broader issue of Customer

Welfare . This same issue, however, manifests itself in terms of Counterfeit Drugs

in the Biotechnology & Pharmaceuticals industry, Quality of Education & Gainful

Employment in the Education industry, and so on . (See table .)

Sustainability Dimension

Environment

Sustainability Issue Environmental Impacts on Assets & Operations

Disclosure Topic Climate Change Adaptation

Accounting Metric

Number of lots located in 100-year flood zones

Technical Protocol

The entity shall disclose the number of controlled lots that are located in 100-year flood zones .1 .1 100-year flood zones are defined as land areas subject to a one-percent or greater chance of flooding in any given year . Such areas may also be referred to as being subject to the one-percent annual chance flood, the one-percent annual exceedance probability flood, or the 100-year flood .1 .1 .1 Examples of 100-year flood zones may include, but are not limited to, coastal flood plains, flood plains along major rivers, and areas subject to flooding from ponding in low-lying areas .1 .2 For controlled lots located in the U .S ., 100-year flood zones shall include those land areas designated by the U .S . Federal Emergency Management Agency (FEMA) as special flood hazard areas (SFHA) .1 .2 .1 SFHAs are defined as land area in the flood plain subject to a one-percent or greater chance of flooding in any given year . The area may be designated in the applicable flood insurance rate map, as per the U .S . National Flood Insurance Program, as Zones A, AO, AH, A1-30, AE, A99, AR, AR/A1-30, AR/AE, AR/AO, AR/AH, AR/A, VO, V1-30, VE, and V . This definition is derived from U .S . 44 CFR 59 .1 .1 .3 The scope of controlled lots includes all lots owned or contractually available for ownership through option contracts or other equivalent types of contracts .2 The scope of disclosure shall include all of the entity’s controlled lots that are located in 100-year flood zones, regardless of the country of their location .3 The entity may disclose its risks, opportunities, and potential impacts resulting from reclassifications of 100-year flood zones, including the risk of expansion of such areas into lots controlled by the entity or its active selling communities .



Five fundamental principles help guide SASB’s determination of topics for

disclosure, aimed at balancing the needs of the various user groups:154

• Of interest to investors: SASB addresses issues likely to be of interest

to investors by assessing whether a topic emerges from the “total mix” of

information available through the existence of, or potential for, impacts on

five factors: (1) direct financial impacts and risk; (2) legal, regulatory, and

policy drivers; (3) industry norms, best practices, and competitive drivers;

(4) stakeholder concerns that could lead to financial impacts; and (5)

opportunities for innovation .

• Relevant across an industry: SASB addresses topics that are systemic to an

industry and/or represent risks and opportunities unique to the industry and

which, therefore, are likely to apply to many companies within the industry .

Disclosure topics that are not relevant across an industry are not included

in the SASB standard . For example, 70 percent of all rubber is used by the

tire industry, so sustainably sourced rubber attracts attention among auto

tire manufacturers . However, the Auto Parts industry manufactures more

than tires—including catalytic converters, engine exhaust, wheel rims, and

electronic equipment—so sustainably sourced rubber is not included as a

topic for disclosure .

• Potential to affect corporate value: Through research and stakeholder

input, SASB identifies topics that can or do affect operational and financial

performance through three channels of impact: (1) revenues and costs, (2)

assets and liabilities, and (3) cost of capital or risk profile . This principle often

results in topics being excluded if they attract substantial interest but have

only minimal evidence of financial impact . For example, SASB research found

evidence to indicate investor interest in Waste Management as a topic in the

Oil & Gas - Exploration & Production industry . However, the topic did not

demonstrate the potential to significantly affect corporate value, and was

therefore not included in the standard .

• Actionable by companies: SASB assesses whether broad sustainability

trends can be translated into industry-specific topics that are within the

control or influence of individual companies . For example, the disclosure topic

Climate Change Adaptation assesses the risks that increased weather events

or a rise in sea levels pose to infrastructure . Road networks, both in the U .S .

and around the world, constitute some of the most extensive infrastructure

networks in existence . However, because government agencies build and

maintain these roads, the topic was not included in the Road Transportation

industry’s provisional standard . Rail companies do build and maintain rail

154 The following principles are drawn from SASB’s 2017 Conceptual Framework .



tracks, however, so the topic was included as a Watch List topic in the Rail

Transportation industry .

• Reflective of stakeholder (investor and issuer) consensus: SASB considers

whether there is consensus among issuers and investors that each disclosure

topic is reasonably likely to constitute material information for most companies

in the industry . SASB recognizes that industry experts are able to provide

significant and valuable insight on the topics that are likely to be material in

their industry . SASB actively solicited input during its provisional standards-

setting process, specifically from Industry Working Groups, one-on-one expert

interviews, the Committee on Metrics Quality, and the public at large during

public comment periods . Stakeholders lend insightful perspective and point

to valuable evidence . When needed, SASB acts as the final determinant of

standards . It bases such determination on research, industry consultation,

public input, SASB’s judgment, and careful deliberation about the usefulness,

materiality, and cohesiveness of resulting information . For example, there

was significant agreement among Industry Working Group participants (93

percent) that Product Safety was a topic likely to constitute material information

for companies in the Automobiles industry . The topic was included in the

provisional standard . However, although SASB’s initial research surfaced Local

Community Engagement as a proposed disclosure topic, only 37 percent of

Industry Working Group participants agreed that it was likely to constitute

material information . That topic was excluded from the provisional standard .

It is important to note, however, that while a topic may be excluded from an

industry standard based on the preceding principles, information about that topic

may nevertheless be material to a specific company’s circumstances and may warrant

disclosure . Likewise, a topic that has been included in an industry standard based

on these principles may be unlikely to materially impact a specific company given its

circumstances and may not warrant disclosure . The determination of materiality and

duty to disclose lies with corporations, which are subject to federal securities laws .

12 .2 .2 . Accounting Metrics

The most effective metrics yield data that can be analyzed and acted upon by a

variety of parties . An ideal metric allows corporate management to benchmark and

measure sustainability performance, while also allowing investors and analysts to

evaluate companies’ performance and incorporate their conclusions into investment

decisions .

Just as the SASB Disclosure Topics are guided by a set of fundamental principles,

the accounting metrics are determined based on the following criteria .155

155 The following criteria are drawn from SASB’s 2017 Conceptual Framework .



• Fair Representation: A metric adequately

and accurately describes performance

related to the aspect of the disclosure topic

it is intended to address, or is a proxy for

performance on that aspect of the disclosure

topic .

• Useful: A metric will provide useful

information to companies in managing

operational performance on the associated

topic and to investors in performing financial

analysis .

• Applicable: Metrics are based on definitions,

principles, and methodologies that are

applicable to most companies in the industry

based on their typical operating context .

• Aligned: Metrics are based on those already

in use by issuers or are derived from standards,

definitions, and concepts already in use by

issuers, governments, industry associations, and others .

• Comparable: Metrics will yield primarily (a) quantitative data that allow

for peer-to-peer benchmarking within the industry and year-on-year

benchmarking for an issuer, but also (b) qualitative information that facilitates

comparison of disclosure .

• Complete: Individually, or as a set, the metrics provide enough data and

information to understand and interpret performance associated with all

aspects of the sustainability topic .

• Distributive: Metrics are designed to yield a discernable range of data

for companies within an industry or across industries allowing users to

differentiate performance on the topic or an aspect of the topic . Not every

topic will need metrics that are directional . For instance, a topic such as

“employee diversity” does not need to, and cannot, always be increasing .

• Neutral: Metrics are free from bias and value judgment on behalf of SASB, so

that they yield an objective disclosure of performance that investors can use

regardless of their worldview or outlook . (see sidebar .)

• Verifiable: Metrics are capable of supporting effective internal controls for

the purposes of data verification and assurance .

FOR CONTEXT: NEUTRALITY OF SASB METRICS

SASB metrics are designed to be neutral and apolitical to the extent that it is possible . SASB avoids standardizing metrics that imply that companies with certain inherent data profiles (e .g . because of their size, scope of operations, or degree of integration) are “better” or “more sustainable .” Although some of SASB’s disclosure topics relate to politicized issues, it attempts to develop metrics that do not advance a political agenda . A disclosure topic on Employee Relations with a metric on the percentage of unionized employees does not offer a judgment on whether or not it is positive or negative to have a high or low percentage . Those judgments are for the market to make .



Each SASB metric is developed differently,

depending on the type of financial impact with

which it is linked, whether or not performance

can be easily measured either directly or via proxy .

It also depends whether or not existing metrics

are able to capture decision-useful information .

Wherever possible, SASB harmonizes its metrics

with those already in use . Elsewhere, it makes

every effort to develop new metrics that reference

existing benchmarks or standards . For instance,

the SASB standard for the Household & Personal

Products industry includes a metric encompassing

the percentage of palm oil consumption certified

to the Roundtable on Sustainable Palm Oil

standard . Here, SASB references an agreed-upon

benchmark rather than creating a proprietary

definition or description .

Each disclosure topic is associated with between

one and six accounting metrics . SASB uses one metric if that metric captures the

information necessary for financial analysis of a company’s performance on the topic .

For example, “product design for use-phase efficiency” is a disclosure topic in the

SASB standard for the Chemicals industry, and it is associated with only one metric .

That metric is revenue from products designed for use-phase resource efficiency .

Where one metric does not allow for complete analysis, additional metrics are included

as needed to capture performance in different ways so that all the metrics, as a

complete whole, present a full picture .

For example, when considering employee health and safety, SASB might

determine that two metrics are needed: the number of near misses and the number

of injuries and deaths . If a company has zero near misses but 100 fatalities, the

metric for near misses would not present the full picture . The opposite is true in a

situation where a company has zero fatalities but 1,000 near misses—the metric for

fatalities would not give a reasonable investor all the information she needs .

As SASB develops its metrics, it pays close attention to the ability of the metrics

to fit into standard investment analysis methods . Thus, approximately 80 percent

of SASB metrics are quantitative in nature, and because they are tied to specific

value impacts, they can be incorporated into conventional analytical tools, such as

discounted cash flow analyses .

12 .2 .2 .1 . Quantitative vs . Qualitative

While quantitative data are extremely useful for fundamental and comparative

analysis, investors and other users of sustainability information also benefit from

FOR CONTEXT: TECHNICAL PROTOCOLS

In the SASB standard for the Oil & Gas - Exploration & Production industry, one of the accounting metrics is “Gross global Scope 1 emissions, percentage methane, percentage covered under emissions-limiting regulations” One of the technical protocol instructions indicates which greenhouse gases should be measured for emissions quantity: carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, sulfur hexafluoride, and nitrogen triflouride . Another technical protocol clarifies that disclosure shall exclude emissions covered under voluntary trading systems and disclosure-based regulations (e .g ., the US Environmental Protection Agency EPA mandatory reporting rule) .



a contextual understanding of a firm’s operations and future initiatives . SASB

standards facilitate sustainability disclosure that delivers both quantitative information

on performance and qualitative context underlying that performance . This approach

is in keeping with SEC guidance on MD&A, which explains that the section is

intended to provide a “narrative from management’s perspective” that “identif[ies]

and discuss[es] key performance indicators, including non-financial performance

indicators, that their management uses to manage the business and that would be

material to investors .”

In some cases, qualitative metrics are the best way to provide decision-useful

sustainability information to the reasonable investor . For example, in the Software &

IT Services industry, a reasonable investor would gain substantially from a qualitative

discussion of management’s approach to identifying and addressing data security

risks, which represent a material trend or uncertainty . This information may be

particularly useful when evaluating companies with no previous data breaches or

related corrective actions—events that are easier to quantify .

12 .2 .3 . Technical Protocols

For each metric, the SASB standard clarifies which data are encompassed by

the scope of the metric and which data are not . These technical protocols provide

multiple clarification points for each metric . By providing definitions, scope,

accounting guidance, compilation instructions, and presentation guidance, the

technical protocols ensure that disclosures from companies in the same industry are

comparable and verifiable .

Objectives

Standardized

Criteria forTopic Selection

Principles for Metric Selection

• Fair Representation• Useful• Applicable• Comparable

• Complete• Verifiable• Aligned• Neutral• Distributive

METRICS

Fundamental Tenets of SASB’s Approach

Evidence-Based Industry-Specific Market-Informed

TOPICS

PRESENTATION

INFORMATION

APPROACH

• Relevant across an industry

• Actionable by companies

• Reflective of stakeholder concensus

• Potential to affect value creation

• Of interest to investors



12 .3 . Technical Bulletins and Interpretations

SASB issues technical bulletins as needed to address questions or current subjects

that fall outside the standards-setting process . For example, technical bulletins may

be issued in response to issues or questions raised by stakeholders with regard to

adoption or use of the standards that do not warrant an update or interpretation .

While intended to provide additional guidance or clarification, or to enhance

the standards’ utility, they do not impact the fundamental substance of SASB’s

sustainability accounting standards, nor do they provide interpretations of the

standards .

Periodically, SASB issues documents called “interpretations” to address clarifying

questions related to sustainability standards that have been ratified . Interpretations

do not change the content of the standards, but rather attempt to resolve questions

regarding aspects of the standards that are unclear . SASB considers issuing an

interpretation when there is sufficient interest from stakeholders to clarify aspects of

the standards that may be ambiguous or lead to different interpretations .

SECTION REVIEW


• Describe the principles that guide the selection of SASB’s industry-specific

topics for disclosure .

• Describe the criteria that guide the selection of SASB’s accounting metrics .

• Describe the components of a sustainability accounting standard and their

purpose for supporting disclosure .




√ How do each of the six principles for disclosure topics influence whether or

not a topic is included or excluded from a SASB standard?

√ What is the purpose for each of the criteria that guide SASB’s accounting

metrics?



102

13 CROSS-SECTORTHEMES

Because each industry has a unique profile with respect to the resources it

uses to create goods and services to meet societal needs, the key dimensions of

sustainability—and what needs to be managed to create value—change from

industry to industry . Sustainability has no one-size-fits-all definition . Through its

research and standards development process, SASB reveals the unique sustainability

profile of each business sector and industry, which helps make otherwise intractable

macroeconomic trends actionable for companies and investors alike .

13 .1 . Climate Change: Ubiquitous but Differentiated

For example, issues related to climate change are likely to have material impacts

in 72 out of 79 SICS industries, representing $27 .5 trillion, or 93 percent of the U .S .

equity market . Although it’s tempting, as a result, to consider climate change as

ubiquitous, it’s important to note that climate change manifests differently in nearly

every industry .

For companies in the Health Care Delivery industry, for instance, one of the

more important issues related to climate change is event readiness . Extreme

weather events can significantly impact the core assets and operations of these

firms . According to Kaiser Health News, Hurricane Sandy cost NYU Langone

Medical Center in New York City $1 .2 billion in damages and lost revenue in 2012 .

Meanwhile, a 2011 study estimated that the health care costs associated with six

climate-related events between 2000 and 2009 were $740 million, reflecting more

than 760,000 encounters with the health care system .156

156 Knowlton, Kim, “Six Climate Change–Related Events in the United States Accounted for About $14 Billion in Lost Lives and Health Costs,” Health Affairs, November 2011 .


Distinguish SICSTM sectors based on their distinct sustainability profiles .



PART II: UNDERSTANDING SASB STANDARDS



However, in the Financials sector, climate change becomes a very different beast .

Although the competitive landscape in the Commercial Banking industry is not

directly impacted by environmental concerns in any significant way, banks must

respond to mounting investor and regulatory pressure to monitor and manage

their financed emissions . Nevertheless, a recent study found that in the six-year

period following the implementation of the Kyoto Protocol, the top 10 banks nearly

doubled their financial support of the coal industry, financing more than $150

billion worth of coal operations .157 When a bank invests in, or provides lending

to, firms that produce significant greenhouse gas emissions, the bank indirectly

exposes itself to climate-related risks that could diminish returns and reduce value for

shareholders . For example, if governments pass legislation aimed at avoiding a rise in

global average temperature of more than 2°C above preindustrial levels, HSBC bank

analysts suggest that equity valuations could be reduced by 40 to 60 percent . This

would result in higher costs of capital, ratings downgrades to existing bonds, and

difficulties repaying or refinancing existing debt .158

As climate change impacts industries in unique ways, simply reporting GHG

emissions across the board doesn’t tell investors anything about event readiness or

disease migration in health care . It doesn’t tell them anything about the potential for

stranded assets in fossil fuel-based industries . It doesn’t even tell them much about

the energy intensity of data centers in technology and communications . In fact,

GHG emissions is likely to be a material disclosure in only 23 of 79 industries and,

indeed, data from CDP indicates that only seven industries account for 85 percent of

reported Scope 1 GHG emissions .

SASB’s industry-specific approach provides key insights on the ultimate source

of GHG emissions . It focuses on pressure points and signals for market-based

approaches to mitigation and innovation . For example:

• Energy management and Scope 2 emissions: By providing for disclosure

on energy management rather than Scope 2 GHG emissions, SASB standards

focus on the role that big electricity consumers can play, through energy

efficiency and choice of energy mix . For industries that indirectly contribute

to greenhouse gas emissions through their use of purchased electricity,

SASB recommends metrics related to understanding the amount, type

(i .e ., conventional or renewable), and source (i .e ., if it is self-generated or

purchased) of energy . SASB research and engagement has concluded that

these measures provide a better understanding of potential material risks

related to indirect emissions than a Scope 2 emissions figure does .

• 80/20 rule: The most cost-effective climate change data addresses the largest

sources of emissions (i .e ., 80 percent of the effects come from 20 percent

157 Urgewald, GroundWork, Earthlife Africa Johannesburg and BankTrack, “Bankrolling Climate Change: A Look into the Portfolios of the World’s Largest Banks,” December 2011 .

158 Carbon Tracker Initiative, “Unburnable Carbon 2013: Wasted Capital and Stranded Assets,” 2013 .



of the sources) . For example, in the Automobiles industry, SASB focuses

on use-phase emissions rather than those generated during production, as

life-cycle analyses have found that 80-90 percent of vehicle-related GHGs

are emitted during use . In banking, SASB focuses on financed emissions

rather than emissions from branches, which are comparatively negligible . In

manufacturing, it focuses on the link in the value chain where the impact

is most significant—for example, auto parts and its supply chain for auto

manufacturing .

• Financed emissions: As mentioned above, carbon imbedded in a bank’s

loan portfolio, an insurer’s investment portfolio, or an oil and gas company’s

reserves can lead to significant loss in value . Disclosing this risk and integrating

it into the risk-adjusted value of those assets would likely result in scarcer and

more expensive capital to finance carbon-intensive industries .

13 .2 . Other Sustainability Issues

Although climate change may have the most extensive reach, other important

sustainability trends have emerged from SASB’s standards development process .

Many other issues cut across disparate sectors—again with industry-specific

impacts—including Product Alignment and Safety, Resource Intensity and Efficiency,

Labor Practices and Skill Development, Closed-Loop Economies, Supply Chain

Management, Materials Sourcing & Efficiency, Ecological Impacts and Biodiversity,

and Operational Safety . Other issues create systemic impacts across the industries

within a sector, such as Financing and Responsible Lending in the financials sector . A

few of these issues are discussed in more detail below:

• Product Alignment and Safety: Responsible product stewardship

means strategically addressing a $431 billion counterfeit drug market in

the Biotechnology & Pharmaceuticals industry . Mitigation strategies in an

increasingly complex, global supply chain could stem or reverse the loss of

consumer confidence and company revenues . More importantly, they can

prevent up to 100,000 deaths each year .159 160 Meanwhile, issues of product

safety can have similar impacts on revenues, reputation, and people’s lives .

Electrical fires in residential U .S . buildings cause more than 360 deaths, 1,000

injuries, and $995 million in damages each year .161 Eighty-nine percent of these

fires are caused by electrical failures, including malfunctioning equipment,

short-circuited arcs, and defective wire insulation . Companies in the Electrical

& Electronic Equipment industry that fail to proactively manage these risks can

lose market share while facing increases in legal costs and cost of capital .

159 Anis, Khurrum, “Stopping Fake Drugs from Pakistan Is Too Late for Victims,” Bloomberg, May 17, 2012 .

160 Miller, Henry, “Fake and Flawed Medicines Threaten Us All,” Forbes, July 25, 2012 .

161 United States Fire Administration, Residential Building Electric Fires, March 2008, p . 1 .



• Resource Intensity and Efficiency: Population growth and industrial

activity are increasing demands on a decreasing supply of natural resources .

From production to pricing, this imbalance affects a variety of industries in

nearly every sector, with impacts at all stages of operations . For example,

an estimated 2,200 gallons of water are used for creating an integrated

circuit (IC) on a 300 mm wafer, placing significant constraints on the water

supplies of local communities where semiconductors are manufactured . For

companies in this industry, large water withdrawals in water-scarce regions

create operational risks related to price and availability, as well as possible

tensions with local communities . Meanwhile, in the Automobiles industry, the

price of aluminum—a key input—is projected to rise 29 percent through 2018

as demand outstrips supply .162 Therefore, manufacturers able to maximize

efficiency and minimize dependency will better insulate themselves from price

volatility and supply disruptions .

• Financing and Responsible Lending: The financial crisis highlighted the

importance of financial transparency and responsible lending . Between 2003

and 2006, the percentage of mortgage originations that were subprime

increased from eight to 20, driven by strategic decisions to steer borrowers

into more risky products, as well as to offer loans to those who were

previously unable to qualify .163 These practices increased the risk of default

and led to an estimated four million foreclosures between 2007 and 2012 .164

Meanwhile, increasing tuition is pushing more students to take on federal

and private loans . By the second quarter of 2014, total student debt in the

U .S . reached $1 .2 trillion, the second largest category of household debt after

mortgage loans .165 To remain competitive, for-profit colleges need to provide

high-quality education in order to increase the likelihood that graduates will

obtain employment and pay off loans .

These issues do not represent radical departures from what companies currently

address in their SEC filings . In fact, SASB’s research shows that 69 percent of

companies already report on at least three-quarters of the disclosure topics included

in their SASB industry standard, and 38 percent provide disclosure on every SASB

topic . However, these disclosures are rarely presented in a decision-useful way .

SASB research indicates that more than half of these disclosures contain boilerplate

language, while less than 24 percent use metrics .

Meaningful—not boilerplate—disclosures on sustainability topics enable investors

to more efficiently allocate capital . For example, by breaking down climate change

162 Fedorinova, Yuliya, and Marina Sysoyeva, “Carmakers Use Aluminum Over Steel in Boost for Rio: Commodities,” Bloomberg News, February 6, 2013 .

163 Joint Center for Housing Studies of Harvard University, “The State of the Nation’s Housing,” 2008

164 Brennan, Morgan, “The Foreclosure Crisis Isn’t Over Just Yet,” Forbes, December 1, 2012 .

165 Hsiao, Justin, “U .S . For-Profit Schools Need to Be Bigger and Better in Order to Survive,” National University of Singapore’s Credit Research Initiative, Weekly Credit Brief, September 30–October 6, 2014 .



into its specific impacts, SASB helps investors

understand which industries will be facing

headwinds as a result of global sustainability

challenges and to diversify their portfolios

through sector allocation . Meanwhile,

comparable data allows investors to perform

more robust benchmarking and valuation,

helping to identify leaders and laggards on

specific sustainability issues and determine

which companies are well positioned to address

these material factors .

EXAMPLES OF QUESTIONS FOR THE EXAM

• How does the Health Care sector

differ from Extractives & Minerals

Processing?

• What do Health Care and Services

share in common?

• In which sectors are Environmental

impacts most prominent? What

about Human Capital? Business

Model & Innovation?



13 .3 . Unique Sector Sustainability Profiles

As reliable data begins to emerge, the unique sustainability profiles of the

SICS™ sectors will become more clearly defined . In the meantime, however,

investors can develop a fuller understanding of industry- and sector-specific

sustainability impacts by surveying the outcomes of SASB’s standard-setting

process, which are outlined in the table below and the tables in Appendix I .

The table shows an aggregate view of SASB’s research findings at the top level,

according to sector and sustainability topic .

How to read the table:

The table below depicts the 30 general sustainability issue categories separated into the five dimensions of sustainability—Environment; Social Capital; Human Capital; Business Model & Innovation; and Leadership & Governance . A red dot (•) indicates that 50 percent or more of the industries in that sector have a disclosure topic linked to the general sustainability topic . A grey dot (•) indicates that fewer than 50 percent of the industries in that sector have a disclosure topic linked to the general sustainability topic . For example, half of the industries in the Health Care sector have a disclosure topic linked to “Supply chain management,” but less than half of the industries in the Transportation sector have a disclosure topic linked to “Supply chain management .” A box without a dot indicates that none of the industries in that sector have a disclosure topic linked to the general sustainability topic .In addition, each sustainability dimension is assigned a high, medium, or low prevalence for disclosure topics in that sector . A dark red rectangle (n) indicates that there is a high prevalence of disclosure topics for that sustainability dimension in the identified sector . A dark grey rectangle (n) indicates that there is a medium prevalence of disclosure topics for that sustainability dimension in the identified sector . A white rectangle indicates a low prevalence but not necessarily no prevalence . For example, there is a high prevalence of disclosure topics for the Human Capital dimension in the Technology & Communications sector, a medium prevalence in the Extractives & Minerals Processing sector, and a low prevalence in the Financials sector .As the table reveals, many sectors have a dominant sustainability dimension . For example, Environment is the defining dimension in Extractives & Minerals Processing, where management of resources, emissions, and ecological impacts are crucial . Human Capital stands out in Technology & Communications, where skilled workers drive R&D and create valuable intellectual property . Meanwhile, Social Capital is key in the Health Care sector, where managing patient relationships is a critical success factor . Although the red areas of the table represent those with the highest prevalence of material sustainability factors, it’s important to note that even the white, low-prevalence areas may contain some SASB disclosure topics . This table represents only one view of SASB’s research findings, and the sector-specific differences it reveals are only the tip of the iceberg . Each sector contains a variety of industries, in which sustainability topics can manifest themselves in unique ways . Therefore, these broader issues warrant context-specific disclosure topics . For example, a Social Capital issue, such as Customer Welfare, will mean different things in different industries . In the Biotechnology & Pharmaceuticals industry (Health Care), it will be related to drug safety, so an appropriate disclosure would include a list of products flagged by the FDA and related fatalities . Meanwhile, in the Education industry (Services), the issue manifests itself in terms of quality of education and gainful employment, so graduation and job placement rates are more appropriate for disclosure .For a more in-depth and multi-tiered understanding of this information and the patterns that have emerged from it, consult the Materiality Map™, an interactive and multi-tiered version of the information contained these tables, which is available on SASB’s website . SASB’s industry-specific disclosure topics are listed in the tables in Appendix I .

http://materiality.sasb.org/



HC FN TC EM TR SV RT FB CG RR INF

GHG Emissions • • • • • • • •Air Quality • • • • •Energy Management • • • • • • • • • •Water & Wastewater Management • • • • • • • •Waste & Hazardous Materials Management • • • • • • • •Ecologial Impacts • • • • • •

Environment

HC FN TC EM TR SV RT FB CG RR IF

Human Rights & Community Relations • • • •Customer Privacy • • • •Data Security • • • • • • •Access & Affordability • • •Product Quality & Safety • • • • • • •Customer Welfare • • •Selling Practices & Product Labeling • • • •

Social Capital


Labor Practices • • • • • • •Employee Health & Safety • • • • • • • • •Employee Engagement, Diversity & Inclusion • • • • •

Human Capital

High Prevalence Medium Prevalence Low Prevalence

HC: Health Care FN: Financials TC: Technology & Communications EM: Extractives & Minerals Processing TR: Transportation SV: Services

RT: Resource Transformation FB: Food & Beverage CG: Consumer Goods RR: Renewable Resources & Alternative Energy IF: Infrastructure




Product Design & Lifecycle Management • • • • • • • • • •Business Model Resilience • •Supply Chain Management • • • • • • • •Materials Sourcing & Efficiency • • • • • • •Physical Impacts of Climate Change • • • • •

Business Model & Innovation

High Prevalence Medium Prevalence Low Prevalence

HC: Health Care FN: Financials TC: Technology & Communications EM: Extractives & Minerals Processing TR: Transportation SV Services

RT: Resource Transformation FB: Food & Beverage CG: Consumer Goods RR: Renewable Resources & Alternative Energy IF: Infrastructure


Business Ethics • • • • • • •Competitive Behavior • • • •Management of the Legal & Regulatory Environment • • •Critical Incident Risk Management • • • • •Systemic Risk Management • • •

Leadership & Governance



SECTION REVIEW


• Distinguish SICSTM sectors based on their distinct sustainability profiles .




√ What are some of the prominent sustainability issues that have emerged in

multiple, disparate industries?

√ Why do industry-specific standards help make broad macro-trends more

actionable for companies and investors?

USING SASB STANDARDS

PART III



112

14 CORPORATE USE


Explain the cross-functional nature of preparing sustainability disclosures in the

10-K .

Explain the timeline and process for 10-K disclosure .

Discuss the stages of 10-K preparation where sustainability information could

be incorporated .

Discuss the role of SASB standards in helping companies develop strategies


performance .

Explain the influences of internal controls and third-party assurance on the data

quality of sustainability information and disclosures .

Explain why MD&A section was added to the 10-K and why it is an appropriate

place for the disclosure of sustainability information .

Describe the special disclosure considerations for multinational and diversified

companies .

Recognize key elements of Regulation S-K and other prominent legislation and

what is required for disclosure (i .e ., financial and nonfinancial information that

alters the total mix of information) .




implications) .

PART III: USING SASB STANDARDS


PART III: USING SASB STANDARDSSASB® FSA™ LEVEL I STUDY GUIDE

Using SASB Standards

SASB standards are designed to be useful to both corporate issuers and the

investing community . They’re intended to meet the needs of the reasonable investor

without creating an undue burden on issuers .

For companies, they offer:

• A minimum set of cost-effective disclosure topics that are likely to constitute

material information for companies in an industry;

• A standard for disclosing those factors in a decision-useful way for investors;

• A method for understanding and improving performance on sustainability-

related value drivers; and

• A way to comply with Regulation S-K .

For investors, they offer:

• Comparable data for benchmarking and evaluating company performance;

• Standardized, decision-useful information in a trusted, convenient channel

(e .g ., Form 10-K); and

• Data to inform analysis and understanding of sustainability risk at the portfolio

level .

Part III provides a general overview of how both companies and investors

incorporate SASB standards—and the data they yield—into their existing strategic

planning and tactical processes .



SASB standards serve the dual purpose of helping companies:

• Prepare disclosure for external financial reporting, like Form 10-K (or 20-F);

and

• Establish and/or improve their approach to managing the sustainability topics

most likely to impact long-term value creation .

In addition to satisfying external reporting requirements, SASB standards provide

an opportunity to create a foundation for evaluating performance and supporting

business decisions .

14 .1 . Considerations for Corporate Use

Business organizations are increasingly complex, involving a large number

of interconnected and interdependent roles, departments, business units, and

subsidiaries . Although each business operates in its own unique fashion, the

following considerations are likely to be applicable to most companies .

14 .1 .1 . Cross-functional Nature

For companies to disclose financial statements in SEC filings, cross-functional

groups must effectively cooperate to accomplish a wide range of tasks . These

include:

• Collecting data about a company’s finances;

• Engaging an independent auditor to review the data;

• Assessing legal requirements and implications concerning disclosure;

• Presenting the statements to the board and management for approval;

• Communicating the results to investors, creditors, and other users .

Disclosing material sustainability information will similarly depend on effective

cross-functional collaboration . Companies can rely on the same or similar

collaborative policies and procedures they’ve established for accomplishing the

tasks necessary for disclosing financial statements and related material information .

However, these practices may need to be expanded to include sustainability data .

Companies will likely also need to include new individuals—such as sustainability

staff—in the disclosure process . Improved collaboration can in turn enhance a

company’s understanding of the ways sustainability affects operational and financial

performance .166 Collaborative companies can adapt faster, innovate more, and

166 Craig, Pamela J ., Bruno Berthon, Steven Culp, and Donniel Schulman, “The Chief Executive Officer’s Perspective,” Accenture, p . 8 .



engage more completely with the marketplace to understand and respond to

customer needs and competitive pressures .167

14 .1 .1 .1 . Business Roles Applicable to Sustainability Disclosures

To determine what information to disclose in SEC filings, many public companies

establish a disclosure committee, which often includes the following positions

(or their equivalents): CEO, CFO, legal counsel, controller, chief audit executive

and internal audit team, risk management team members, investor relations

professionals, and managers of business units and information technology . With the

addition of the chief sustainability officer, the same employees can be involved in the

disclosure of material sustainability information .

However, the activities and responsibilities involved in preparing external

disclosures are not limited to these roles . Others that may participate are discussed

in the table below, although it is important to note that this is not meant to

represent a comprehensive or universal list . In many cases, the roles identified may

not be involved to a significant degree, while others that are not identified—such

as Risk Management, Compliance, or Environmental, Health, & Safety—may be

integral to the process . Although not comprehensive, the table details how certain

business roles could be involved in the collection, management, and/or disclosure of

sustainability information .

167 Chang, Beiting, Robert G . Eccles, Daniela Saltzman, eds ., “Integrated Reporting and the Collaborative Community: Creating Trust through the Collective Conversation,” The President and Fellows of Harvard College, 2010, p . 186 .

CEO and CFO

• Sign SEC filings and certifications about the accuracy and completeness of

the information disclosed as well as the effectiveness of internal controls and

disclosure controls

• Participate in annual assessments of sustainability information for materiality

(this includes but is not limited to previous disclosures)

• Develop and communicate a business-specific strategy for incorporating

sustainability into core activities, decision-making, and performance evaluation

Legal Counsel

• Fully understand sustainability disclosure requirements and provide relevant

information and analysis when companies are determining what information to

disclose



• Help manage legal risks related to the omission of material information,

informed risk management, and informed decision-making to fulfill duties of

care, as subpar performance on material sustainability factors can pose a risk to

a company’s financial condition or operating performance

• Review all of the company’s communications on sustainability, such as corporate

social responsibility and sustainability reports, to ensure consistency and the

appropriate use of “materiality” to describe sustainability information

Chief Sustainability Officer

• Participates in both new and established processes for collecting and reporting

sustainability data for sustainability reports and 10-K disclosures

• Establishes collaborative relationships with the internal audit and/or finance

teams

• Contributes to assessing the materiality of sustainability information by helping

to identify how sustainability impacts the company’s business performance

Chief Audit Executive and Internal Audit

• Systematically evaluate the organization’s risk management, control, and

governance processes

• Work closely with the independent assurance provider

• Work with the audit committee of the board of directors to keep the board

informed about the policies and procedures surrounding the controls

• Provide data control and risk management oversight to inform management

about the company’s sustainability performance

Independent Assurance Provider

• Assesses the data quality of sustainability disclosures, including the design

and operation of the internal controls, for purposes of getting comfort over

management’s assertion



Board of Directors

• Accepts or assigns to the audit committee responsibility for overseeing the

preparation of certain aspects of SEC filings and reviews and approves filings

before they are submitted

• Oversees the internal audit team to ensure appropriate controls are in place, that

the team is objective and competent, and that it has the necessary training and

support

• Oversees the external assurance provider, assesses its independence, and

reviews its activities and the final report

• Engages in other relevant activities, including discussion of financial statements,

the contents of MD&A, the company’s risk assessment, and sustainability’s role

in business strategy

• Establishes sustainability committee to oversee relevant disclosures

Investor Relations

• Crafts and presents the company’s message to the investment community

• Communicates investors’ opinions to management

• Communicates with a range of roles, including finance, communication,

marketing, and securities law/compliance

• Places earnings in the context of near- and long-term goals and/or strategies,

which may be informed by the consideration of material sustainability information

• Provides perspective on the company’s sustainability performance, effectively

and convincingly communicating the value of initiatives to shareholders

Managers of Business Units

• Use unit-specific knowledge and understanding to inform measurement,

management, and reporting of sustainability data

Information Technology

• Helps decision-makers consider the architecture (technology, platform, software,

etc .) that will support reliable, accurate, and complete reporting that meets

management’s expectations for disclosure in a statutory filing and/or allows for

effective measurement and management of performance



14 .1 .2 . Special Disclosure Situations

The structural complexities that require companies to use cross-functional teams

when preparing external disclosures may also present challenges related to the

scale and scope of a company’s operations . When a firm is vertically or horizontally

integrated, or when it operates in a multinational context, special disclosure

situations may arise .

14 .1 .2 .1 . Operational Considerations

SASB recommends that registrants use SASB standards specific to their primary

industry as identified by SICSTM . If a registrant generates significant revenue from

multiple industries, SASB recommends that it consider sustainability topics that

SASB has identified for those industries and disclose the associated SASB accounting

metrics where relevant .

SASB recommends that consolidated entities calculate metrics for the whole

entity, regardless of the size of the minority interest, but data from unconsolidated

entities does not need to be included . A registrant should disclose, however,

information about unconsolidated entities when it is deemed necessary for investors

to understand the effect of sustainability topics on the company’s financial condition

or operating performance (typically, this disclosure would be limited to risks and

opportunities associated with these entities) .

14 .1 .2 .2 . Regional Considerations

Multinational or non-U .S . domiciled SEC registrants may have special

considerations around certain SASB disclosure topics and/or accounting metrics . In

some cases, those registrants may conclude that a given SASB accounting metric

does not constitute material information and therefore does not warrant disclosure in

SEC filings .

For example, SASB recommends Responsible Lending & Debt Prevention as a

disclosure topic for companies in the Mortgage Finance industry . The related metrics

are likely to yield material information for companies domiciled in the U .S ., where a

robust secondary market for securitized mortgages facilitates capital efficiency but

may increase the risk of default and present systemic risk management challenges .

However, the metrics are less likely to constitute material information for companies

issuing mortgages in the U .K ., where these loans typically remain on the balance

sheets of originating banks and capital adequacy is more heavily regulated .

In some cases, the information captured by SASB metrics may be incomplete

or otherwise materially misleading without accounting for differences associated

with multinational or non-U .S .-domiciled registrants . Consequently, SASB aims to

incorporate the consideration of international factors into its metrics, disclosure

guidance, and/or normalization .



Nevertheless, in some cases, a company may need to provide contextual

information to make its disclosures decision-useful for investors . For instance,

Recruiting & Managing a Global, Diverse & Skilled Workforce is a recommended

disclosure topic for companies in the Software & IT Services industry . However, when

reporting gender and racial/ethnic group representation, where those percentages

are significantly influenced by the country or region where the workforce is

located, the registrant should provide contextual disclosure to ensure the proper

interpretation of the results .

14 .1 .3 . Alignment with Sustainability Reporting

Although sustainability reports and SEC filings serve different stakeholder

groups, most companies will find some overlap in the information they contain . A

company can ensure its compliance with SEC disclosure obligations by taking care to

distinguish between material and immaterial sustainability information and ensuring

the description of that information is consistent and appropriate across all reporting

channels .

To reduce the risk of shareholder scrutiny and lawsuits, the company can take

several steps .

1. Use “material” to describe only sustainability information inside SEC filings. Once shareholders begin to examine statements outside of SEC filings,

the risk of litigation regarding those statements increases . One solution is for a

company to explicitly state that information contained in its sustainability report is

relevant or interesting, but not material .

2. Have legal counsel review sustainability reports. A review by legal

counsel can help ensure that any inconsistencies or conflicts between the

contents of a company’s sustainability report and its SEC filings are identified and

addressed . The review can help a company understand the risks involved, decide

what information to disclose for what purpose, and determine how to describe

the information .

3. Include material sustainability information in SEC filings. The inclusion of

sustainability information in SEC filings as appropriate can help a company fulfill

its SEC disclosure obligations .

14 .2 . Collecting Data

Data quality is a critical aspect of reliable disclosures . Corporations and investors

cannot fully benefit from sustainability information if the information is not reliable .

For example:



• Corporate management will not be as comfortable making decisions based on

the information; and

• Investors and analysts will be less likely to include sustainability information in

their financial analysis models .

Many of the questions that arise around the reliability of sustainability disclosures

are the very same ones that made financial auditing an obligatory practice in the

wake of the stock market crash of 1929: Is the underlying data accurate? Is the

underlying data complete? Are there controls in place to mitigate risks and improve

reliability in the data collection processes?

This section addresses the topic of internal controls, which are intended to

ensure data accuracy . The issue of assurance, a process intended to strengthen user

confidence, is addressed later in the section on reporting .

14 .2 .1 . Internal controls

Internal controls are activities that help companies achieve their objectives by

mitigating risks of incorrect data and disclosures . When effectively implemented

and maintained, they provide assurance to management that the organization has

achieved its operations, reporting, and compliance objectives .168

Some examples of internal control activities include:

• Calibration testing of measurement equipment (e .g ., electricity meters)

• Establishing automated tolerance limits that trigger warnings when anomalies

occur;

• Protecting data access (i .e . minimizing possible data corruption);

• Reconciling invoices to the general ledger;

• Performing analytical reviews to follow up on unusual fluctuations,

adjustments, etc .; and

• Establishing independent reviews during the data entry process .

Before a public corporation prepares its financial statements for disclosure in an

SEC filing, it is expected to establish internal controls, which help mitigate the risk

of misstating information . The internal controls for financial reporting (ICFR) are

the responsibility of the CEO and CFO .169 The Sarbanes-Oxley Act (SOX) stipulates

that the CEO and CFO sign certifications regarding the review and effectiveness of

internal controls (Sections 302 and 906 of SOX) .

168 Committee of Sponsoring Organizations of the Treadway Commission, “Internal Control—Integrated Framework,” Executive Summary, May 2013 .

169 Sarbanes-Oxley 404 .



Sustainability disclosures typically rely on information systems and processes

outside the financial reporting domain and its established controls environment .

Information is often prepared in spreadsheets aggregating data points from global

facilities with few formal controls . Due to these and other factors, 71 percent

of investors have expressed dissatisfaction with the quality of currently available

sustainability data .170

Sustainability disclosures in SEC filings are subject to the same SOX certifications

regarding disclosure controls and procedures and the accuracy and completeness of

the information that apply to financial reporting .171 Although the SOX certification

does not explicitly cover internal controls over non-financial information, the

certification requirements place a higher standard of accountability on sustainability

disclosures in SEC filings than may exist in other communication channels, such as a

sustainability or CSR report .

Therefore, SASB recommends registrants integrate sustainability disclosures with

existing financial reporting processes, including the internal control framework . The

COSO Internal Control Integrated Framework specifically references non-financial

reporting objectives, which allows companies to integrate sustainability reporting

objectives into their existing internal control framework .172 Two non-financial

reporting objectives relevant to SASB are the inclusion of SASB information in SEC

filings and the assurance of SASB information . By applying the COSO framework

to SASB information, a company can implement internal controls that mirror the

rigor and robustness of ICFR . Establishing internal controls over SASB information

can support the SOX certification requirement regarding sustainability information

included in SEC filings, and also support an external party’s assurance of SASB

information .

14 .3 . Managing Sustainability Performance

As understanding of the link between sustainability and performance becomes

more sophisticated, companies can progress from short-term risk avoidance

and regulatory compliance to long-term value creation and the development of

competitive advantage . Many businesses have begun to realize this . An Accenture

survey of senior executives (Long-Term Growth, Short-Term Differentiation and Profits from Sustainable Products and Services, 2012) shows that 77 percent of U .S .

respondents believe that sustainability is “vital to future growth .” This is a shift from

prior surveys that indicated sustainability was primarily a factor in compliance or cost

considerations . Indeed, 88 percent of U .S . respondents indicated that sustainability

expenditures are an investment, not a cost . The Accenture results coincide with data

170 PwC, Investors, corporates, and ESG: bridging the gap (October 2016) .

171 SEC, “Commission Guidance Regarding Disclosure Related to Climate Change; Final Rule,” February 2010 .

172 McNally, J . Stephen, “The 2013 COSO Framework & SOX Compliance–One Approach to an Effective Transition,” Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), p . 4 .



from McKinsey (Valuing Social Responsibility Programs, 2009) which shows that the

companies creating financial value from their sustainability initiatives are doing so by

targeting common financial drivers, such as revenue growth and return on capital .

Although sustainability efforts often make good business sense, companies that

want to maximize their ability to create value will need to develop a sustainable

business strategy as opposed to a sustainability strategy . Sustainability strategies

represent tactical, focused responses to a specific performance area . Sustainable

business strategies, on the other hand, represent a more proactive, forward-thinking

approach to creating shareholder value over the long run .

14 .3 .1 . Creating a Sustainable Business Strategy

A sustainability strategy is a company’s standalone strategy for improving

its performance on one or more sustainability topics . Sustainability strategies

often address managing risk, such as exposure to climate change or potential

liabilities in the supply chain . A sustainability strategy—and any goals that may be

communicated to the public—often reflects popular topics in the media or society

at large (e .g ., reducing building energy use by 20 percent by 2020, serving 80

percent locally sourced food in staff cafeterias by 2025, or auditing an entire supply

chain for adherence to a “no child labor” policy within three years) . Consequently,

sustainability strategies can be one way a company responds to requests from

stakeholders or generates positive media attention . However, by virtue of its focus on

a specific element of the business, a sustainability strategy tends to be independent

of the company’s business strategy and does not necessarily translate into sustained

long-term success .

A sustainable business strategy, on the other hand, is a company’s plan to

improve its performance managing the financial and non-financial capitals that

impact its ability to create value over the long-term . Just as investors need both

financial and non-financial information to make informed decisions, managers must

consider both types of information to create a sustainable business strategy . In

both cases, it’s necessary to have useful information about the sustainability issues

that can have material impacts on a company’s financial condition or operating

performance .

The first step on the pathway to a sustainable business strategy is identifying the

proper metrics .

Identify metricsDevelop

knowledge from data

Craft strategy based on findings



This process mirrors many other frameworks for translating business information

into business strategy for value creation . For example, Deloitte outlines a Business

Intelligence framework that identifies a linear, iterative value-creation pathway that

starts with metrics, which yield data, that become knowledge when supplemented

with additional context and understanding . When that knowledge guides

appropriate action, it yields innovation that impacts the entire business, which

subsequently can create value for the company .173

The most relevant sustainability metrics for strategists are those most closely

linked to the company’s ability to create value . That link is incorporated into SASB

metrics by the process through which they are developed . (See Part II .)

14 .3 .2 . Connecting SASB Metrics to Strategy

Companies regularly analyze their ability to create and sustain competitive

advantage within their industries . These analyses consider industry context, the

competitive landscape, and the capabilities and resources of the firm and their

supply chains . Through this process, companies develop and assess potential options

to create value and test or implement those deemed likely to succeed . They then

monitor results and refine their practices as needed . Incorporating SASB metrics into

this process and other existing strategy frameworks can help leaders in two ways .

First, their analyses will be more complete, which can prevent unwelcome surprises

for the company and its shareholders . Second, they can more effectively differentiate

themselves from their peers, helping to attract customers and investors .

Harvard Business School research indicates that firms can achieve superior

accounting and market returns by efficiently focusing their efforts on material

sustainability factors .174 These represent the issues most likely to be incorporated into

a company’s core strategy as well as those identified in SASB disclosure topics .

SASB began publishing its provisional standards in 2013 and they were first used

in SEC filings for fiscal year 2016 . However, most corporations that want to report

with SASB standards are still implementing the data collection, management, and

reporting processes necessary to embed the standards into the company’s financial

reporting cycle . Nonetheless, because the metrics are developed based on evidence

of financial impact, there are many examples of public corporations that have

generated significant value from strong performance on metrics included in SASB

standards .

For example, tire manufacturer Pirelli capitalized on an opportunity to create value

related to one of SASB’s metrics for the Materials Efficiency topic—the percentage

of input materials consisting of recycled or remanufactured content . Such initiatives

not only lower the environmental lifecycle impact of vehicles, they also help auto

parts companies more effectively manage risks related to the pricing volatility and

173 Pant, Prashant, “Business Intelligence (BI): How to Build Successful BI Strategy,” Deloitte, 2009 .

174 Khan, et al .



availability of key inputs, improve operational efficiency, and potentially reduce

the cost of revenue, thereby enhancing margins . In 2009, Pirelli launched a Green

Performance Strategy to produce tires that combine performance and environmental

sustainability . As part of the strategy, the company identified an opportunity to

minimize its costs and attract new customers by developing high-performance

silica—which improves the safety and durability of tires—from food waste such as

rice husks .

The Green Performance tires now account for 49 .8 percent of Pirelli’s sales,175

with their growth rate more than doubling the company’s overall sales growth .176

Using this approach, Pirelli’s input costs are reduced,177 its manufacturing

process consumes less energy, and its products reduce fuel consumption by 5-7

percent—with a corresponding impact on CO2 emissions—due to their low rolling

resistance .178 The initiative’s success is due in part to its alignment with Pirelli’s

business strategy, which deeply embeds sustainability considerations into the culture

of the firm . An unexpected benefit of the strategy led to a doubling in the number

of analysts covering the Pirelli stock, from 12 to 25 . Although the SASB metric didn’t

exist when Pirelli launched its Green Performance Strategy, this case serves as an

example of how SASB metrics’ inherent connection to industry-specific value drivers

makes them useful starting points for identifying opportunities for value creation .

14 .3 .3 . Performance Management

When a company pursues its sustainable business strategy, its performance goals

should be chosen based on their financial impact or operating results .179 180 Because

they are directly linked to specific value drivers, SASB metrics can be incorporated

into existing performance evaluation systems to set targets and measure progress .

In the Pirelli example above, SASB’s Materials Efficiency disclosure topic is correlated

with multiple value drivers—Market Share, New Markets, Cost of Revenue, Research

& Development, and Contingent Liabilities & Provisions .

This approach contrasts with a common strategy for establishing corporate

sustainability targets . Companies that identify sustainability goals in their CSR reports

tend to include an extensive list of initiatives and targets . However, firms are likely to

gain more economic value from their performance evaluation systems by focusing on

a limited set of key performance indicators (KPIs) .181 182

175 Pirelli, Annual Report 2018 (May 17, 2019) .

176 UN PRI and Global Compact LEAD, The Value Driver Model: A Tool for Communicating the Business Value of Sustainability (December 2013) .

177 Jose M Asumendi, .Pirelli & C. SpA, J .P . Morgan-Cazenove Europe Equity Research (July 18, 2013) .

178 Shared Value Initiative, “Pirelli Uses Rice Husks in Tires to Reduce Waste and Save Fuel”; available at https://www .sharedvalue .org/examples/silica-tires-made-part-rice-husks-reduce-waste-and-save-fuel (accessed July 26, 2019) .

179 Chartered Institute of Management Accountants, “Accounting for Climate Change: How Management Accountants Can Help Organisations Mitigate and Adapt to Climate Change,” February 2010 .

180 Casazza, Carol, “Oversight of Corporate Sustainability Activities,” NACD, 2014 .

181 Bonini, Sheila, and Steven Swartz, “McKinsey Profits with Purpose: How Organizing for Sustainability Can Benefit the Bottom Line,” 2014 .

182 Casazza

https://www.sharedvalue.org/examples/silica-tires-made-part-rice-husks-reduce-waste-and-save-fuel

https://www.sharedvalue.org/examples/silica-tires-made-part-rice-husks-reduce-waste-and-save-fuel



It’s common practice for a specific role or team to assume responsibility for

financial performance management, and the same approach is likely to be beneficial

for sustainability data .183 By having a dedicated individual or group focused on

sustainability KPIs linked to financial performance, a company is more likely to identify

and take advantage of increasingly significant opportunities for value creation .

Successfully capitalizing on those opportunities tends to follow certain stages of

value creation . These stages, which move along a continuum from “doing things

differently to doing different things,”184 have been identified in research and analysis

by thought leaders such as the Harvard Business Review, MIT Sloan Management Review, Accenture, and Deloitte .

In the initial stage, value emerges from cost and risk management initiatives—

the low-hanging fruit . As that type of value is captured, the organization tends to

move on to the second stage: optimizing efficiencies and redesigning products and

processes in order to further enhance value .185

Those first two stages—minimizing costs and optimizing efficiencies—yield

incremental value . The next two stages begin to deliver much more . In the third

stage, when key sustainability KPIs are integrated into performance evaluation

systems, savvy companies will see opportunities for new products and technologies,

which foster new business models and sources of value . As those mature and

become more embedded in the organization, the most successful companies will

enter the fourth stage, having differentiated themselves and their value proposition

from competitors . The corporate culture and brand leadership that emerge as a

result help to secure the company’s competitive advantage .186 187 188 189 Below is a

chart that summarizes the four stages and provides an example initiative for each

stage .190 The examples represent the Environment dimension of sustainability, but the

four stages can also be applied to the other dimensions .

Not all corporations that implement sustainability performance evaluations

will reach the final stage of value creation, but those that are most effective at

recognizing the opportunity for value creation stemming from sustainability will be

best positioned to do so .

183 Bonini and Swartz .

184 Goh, Eugene, Knut Haanaes, David Kiron, Nina Kruschwitz, Martin Reeves, “The Innovation Bottom Line,” MIT Sloan Management Review, Winter 2013 .

185 Esty, Daniel C ., and David A . Lubin, “The Sustainability Imperative,” Harvard Business Review, May 2010 .

186 Kiron, et al, “The Innovation Bottom Line .”

187 Esty, Daniel C . and David A . Lubin, “Bridging the Sustainability Gap,” 2014 .

188 Accenture and CECP, “Business at Its Best: Driving Sustainable Value Creation—Five Imperatives for Corporate CEOs,” 2011 .

189 Grocery Manufacturers Association/Food Products Association and Deloitte, “Sustainability: Balancing Opportunity and Risk in the Consumer Products Industry,” 2007 .

190 Esty and Lubin, “Sustainability Imperative .”



14 .4 . Reporting Material Sustainability Information

14 .4 .1 . 10-K Preparation Process

The preparation of an SEC filing, such as Form 10-K, is a complex, detailed, and

time-consuming process that involves a long list of sensitive regulatory requirements,

a great deal of procedural discipline, and important contributions from a variety of

sources .

14 .4 .1 .1 . The Disclosure Committee

In 2002, the SEC recommended that public companies establish a non-board

disclosure committee . Although it is a recommendation and not a legal requirement,

most public companies have created the committee to develop and evaluate their

disclosure controls and procedures, according to the National Investor Relations

Institute . Many companies use the committee to help review disclosure controls,

internal controls, and the accuracy and completeness of the disclosure statements

that are subject to the CEO and CFO certification requirements under SOX .

The committee’s function and scope are usually outlined in a formal governance

charter, which clarifies the roles and responsibilities . The committee often meets

at least once each quarter, usually as the quarterly/annual financial statement

are nearing finalization . The committee tends to review internal procedures for

data collection and disclosure controls, and analyzes the materiality of collected

information in order to make recommendations for inclusion in SEC filings . The

recommendations are made far enough in advance of filing deadlines so the CEO,

CFO, and audit committee can decide and act upon the recommendations .

Four Stages of Value Creation Examples

1 . Minimizing costs Since 1975, 3M has saved $1 .7 billion by changing products or processes and recycling or reusing materials (e .g ., replacing a solvent-based paper treatment process with a water-based process) .

2 . Optimizing efficiencies Through its “zero waste” initiative, DuPont weighed future earnings against business and environmental risks, eliminating divisions with significant waste products (e .g ., carpets and nylons) .

3 . New products and/or technologies

Dow’s focus on sustainability innovation led to new products and breakthroughs such as solar roof shingles and hybrid batteries, which helped shift Dow’s core business from commodity chemicals to advanced materials and high-tech energy .

4 . New business models and differentiated value proposition

GE’s ecomagination initiative generated $160 billion in revenue between 2005 and 2014 based on $12 billion in R&D . Consequently, GE has emerged as a differentiated energy and environmental solutions provider .



For those companies whose fiscal year ends on December 31, the following

timeline represents a common 10-K preparation process . Frequently, the CSR report

preparation timeline occurs several months later and is not as thorough and robust .

When making sustainability disclosures in Form 10-K, companies should consider

how to adjust their disclosure controls and procedures to cover sustainability

information that may need to be disclosed under the securities laws .

14 .4 .1 .2 . Common Form 10-K Preparation Timeline

December

• Hold planning meeting and update controller’s questionnaire

• Review prior year Form 10-K

• Review new regulatory developments/rules and peer practices and industry

trends

- Consider changes to known trends, uncertainties for MD&A

- Determine information necessary to ensure disclosures are complete and

accurate

January

• Draft the following sections:

- Business section

- Risk factors

- Compensation discussion and analysis

- Exhibits

• Executive officers review business section

• Request compensation data

February (and potentially March for filers with later deadlines)

• Disclosure committee meets to review Form 10-K drafts and to evaluate

disclosure and internal controls

• Submit for audit committee and compensation committee reviews

• Gather board signatures

• File with SEC via EDGAR

The formal structure of the disclosure committee, the inclusion of high-ranking

officers, and the tight preparation timeline reinforce the fact that the preparation

of Form 10-K is a highly sensitive corporate activity . Not only are the CEO and CFO



subject to potential liability, but there are also significant costs associated with

correcting a misstatement . Misstatements subject the company to potential liabilities .

14 .4 .1 .3 . Disclosure Process

Sustainability disclosures based on SASB standards should focus on enhancing the

quality and context of factors that impact value creation—not simply add volume

to current disclosures . To that end, SASB standards are designed to help companies

focus on the disclosure topics most likely to be material in their industry .

Companies consider and

re-consider the materiality of

information throughout the

financial reporting process,

typically on a quarterly basis . The

consideration of the sustainability

topics included in the standards

should be integrated within the

financial reporting disclosure

processes that occur on a regular

basis, rather than being reviewed

in a “one-off” ad-hoc process . For

example:

• The controller’s

questionnaire can be

instrumental in gathering

additional information

needed to assess the

magnitude and probability

of the topic in future

periods .

• In addition, the cross-

functional team may also

identify specific research

and/or analysis that will

better inform future

evaluation of the materiality

of sustainability events,

trends, demands, and uncertainties .

• Lastly, the company may wish to engage directly with investors and/or

shareholders to seek their input on sustainability disclosures .

THE FIVE-FACTOR TEST

When determining which of the SASB topics might be material, based on the legal and regulatory interpretations of that term, companies can use the following five-factor test . (See “Part II: Understanding SASB Standards” for more detail .)

• Financial impacts and risks: Consider the likelihood that the topic may have a material impact on the entity’s ability to create value in the short-, medium-, and long term through other factors .

• Legal, regulatory, and policy drivers: Consider the current and future regulatory environment surrounding the topic .

• Industry norms and competitive drivers: Consider the completeness of current disclosures by evaluating the practices of industry peers .

• Investor/Stakeholder concerns and social trends: Consider whether the topic has been raised by investors and other stakeholders in the form of questionnaires or shareholder resolutions .

• Opportunities for innovation: Consider the organization’s business model and the potential to capitalize on opportunities relevant to the sustainability topic .



Specific parts of the disclosure process will be more relevant to sustainability

reporting than others, as identified in the chart on the next page .

14 .4 .2 . Sustainability in Form 10-K (or 20-F)

SASB standards are most useful in helping management comply with disclosure

obligations under Management’s Discussion and Analysis of Financial Condition

and Results of Operations (MD&A) of Regulation S-K . The purpose of MD&A is to

give investors a meaningful, candid assessment of a company’s performance and

prospects through the eyes of management .

In addition to being included in MD&A, SASB disclosures may also be warranted

within a company’s description of business,191 legal proceedings192 and risk factors .193

These four locations are consistent with those highlighted in the SEC’s interpretive

guidance on disclosure requirements related to climate change and cybersecurity .

14 .4 .2 .1 . MD&A Disclosures

Item 303 of Regulation S-K requires a company to provide a discussion and

analysis of management’s view of the business . MD&A requirements call for

registrants to provide investors and other users with material information that

is necessary to form an understanding of the company’s financial condition and

operating performance, as well as its prospects for the future .194 Such requirements

are intended to satisfy three principal objectives (see the “For Context: Purpose of

MD&A” sidebar following) .

While sustainability matters may be implicated by any of the requirements of Item

303, the most prominent is the requirement to disclose material events, trends, and

uncertainties . Registrants are required to disclose “any known trends or uncertainties

that have had or that the registrant reasonably expects will have a material

favorable or unfavorable impact on net sales or revenues or income from continuing

operations . If the registrant knows of events that will cause a material change in the

relationship between costs and revenues (such as known future increases in costs

of labor or materials or price increases or inventory adjustments), the change in the

relationship shall be disclosed .”195 Item 303 states that MD&A “shall focus specifically

on material events and uncertainties known to management that would cause

reported financial information not to be necessarily indicative of future operating results or of future financial condition .”196 (emphasis added)

The SEC provides a likelihood test for assessing the materiality of events, trends or uncertainties, and compels MD&A disclosure if the Company cannot conclude:

191 Ibid . (§ 229 .101) .

192 Ibid . (§ 229 .103) .

193 Ibid . (§229 .503(c)) .

194 SEC FR-72, Commission Guidance Regarding Management’s Discussion and Analysis of Financial Condition and Results of Operations (December 2003) .

195 C .F .R . § 229 .303 (Item 303)(a)(3)(ii) .

196 Ibid .



Management Reporting Close the Books

Understand markets and trends

Establish data needs, determine who needs access, and build supporting IT

Determine reporting needs, create standard chart of accounts, manage account definitions, and standardize

accounting processes

Create management reports and confirm that results support strategy

Create master general ledger and supporting general ledgers

• Chart of accounts

• General ledger(s)

• Management reports

• Income statement

• Balance sheet

• Cash flow statement

Process Steps

Outputs

Consolidate reports and reconcile accounts

Journalize transactions, post to ledger accounts, and run trial balance

Search for errors and modify trial balance

Prepare financial statements

Distribute to business units and external analysts

Post prepayments and accruals, close revenue and expense accounts,

prepare income summary, post closing entries

External Reporting

Create team for external reporting, identify and source reporting

Write supporting narrative

Assemble information

Secure board committee approval

Release/Publish

• External reports (e .g ., 10-K)

• Analyst briefing materials

Relevant for Sustainability Accounting



1 . that the event, trend or

uncertainty is not reasonably likely to

occur or 2 . assuming the occurrence of

the known uncertainty, that it is not

reasonably likely to have a material

impact on the company’s financial

condition or results of operations197

SASB anticipates the disclosure of

sustainability matters to focus on the

following content elements:

• Executive overview: Although not required, the

SEC expects an informative

executive-level overview to

provide insight into material

opportunities, challenges, and

risks on which the company’s

executives are most focused for

both the short- and long-term,

as well as the actions they are taking to address them .

• Results of operations: The SEC requires disclosure of a known trend

or uncertainty that is reasonably likely to have a material effect on the

registrant’s financial condition or results of operations .

• Environmental and product liabilities: The SEC requires disclosure of

environmental liabilities for which the company has information that creates

a reasonable likelihood of a material effect on its financial condition or results

of operations . MD&A should discuss, to the extent material, historical and

anticipated environmental expenditures, including recurring costs associated

with managing hazardous substances and pollution in ongoing operations,

capital expenditures, mandated expenditures to remediate previously

contaminated sites, and other non-recurring expenses .

Many of the sustainability topics identified by SASB address trends that are

expected to occur over the medium- and long-term . Companies should consider the

trajectory of a relevant sustainability trend and the potential speed of those changes

relative to their own preparedness . The SEC also provides specific guidance for

considering the disclosure implications of forward-looking information .

197 The SEC has stated that the disclosure threshold of “reasonably likely” is lower than “more likely than not .” Commission Statement about Management’s Discussion and Analysis of Financial Condition and Results of Operations, Securities Act Release No . 33-8056, 2002 SEC LEXIS 148, January 22, 2002 (hereafter “2002 MD&A Statement”) .

FOR CONTEXT: PURPOSE OF MD&A

Provide insight into the organization’s financial condition, changes in financial condition, and results of operations . Specifically, satisfy three objectives to provide:• Narrative explanation of the financial statements that enables investors to see the company through the eyes of management; • Context within which financial information should be analyzed;• Quality of, and potential variability of, a company’s earnings and cash flow, so that investors can ascertain the likelihood that past performance is indicative of future performance.

PART 229 Regulation S-K; 2003 Interpretive Guidance 33-8350 MD&A; 17 CFR Parts 211, 231 and 241 – Commission Guidance Regarding Disclosures Related to Climate Change



In addressing prospective financial

condition and operating performance, the

SEC requires companies to disclose material,

forward-looking information regarding

known trends and uncertainties . The SEC

also encourages discussion of prospective

matters and forward-looking information in

circumstances where that information may

not be required—though not all forward-

looking information falls within the realm of

optional disclosure .198

The Private Securities Litigation Reform

Act (PSLRA), which was covered in Part I: The

Need for Sustainability Accounting, provides

the company with a safe harbor from liability for forward-looking statements that

are:199

(1) accompanied by meaningful cautionary statements, or

(2) immaterial, or

(3) unsupported by allegations that the statement was made with actual

knowledge that the statement was false or misleading .

The company therefore can enjoy the safe harbor’s protection through three

distinct paths .

14 .4 .2 .2 . Description of Business

Item 101 of Regulation S-K requires a company to provide a description of

its business and its subsidiaries . Item 101(c)(1)(xii) expressly requires disclosure

regarding certain costs of complying with

environmental laws .

If the risks or opportunities related

to a SASB topic materially affect “the

registrant’s products, services, relationships

with customers or suppliers, or competitive

conditions, the registrant should provide

disclosure in the registrant’s ‘Description

of Business .’”200 In determining whether to

include disclosure, registrants should consider

the impact on each of their reportable

segments .

198 SEC FR-72, Commission Guidance Regarding Management’s Discussion and Analysis of Financial Condition and Results of Operations, December 2003 .

199 Section 21E of the Securities Exchange Act of 1934, 15 U .S .C . § 78u-5 .

200 See Item 101 of Regulation S-K; and Form 20-F, Item 4 .B .

PURPOSE OF DESCRIPTION OF BUSINESS

Provide an overview of form of organization, principal products/services, major customers, and competitive conditions for reportable segments and key geographic areas . Describe any material effects that compliance with environmental laws may have on capital expenditures, earnings and competitive position .


FOR CONTEXT: ALSO IN ITEM 101

“Appropriate disclosure also shall be made as to the material effects that compliance with Federal, State and local provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, may have upon the capital expenditures, earnings and competitive position of the registrant and its subsidiaries .”



14 .4 .2 .3 . Legal Proceedings

Item 103 of Regulation S-K requires companies to describe briefly any material

pending or contemplated legal proceedings . It includes specific disclosure

requirements for administrative or judicial proceedings arising from laws and

regulations that target discharge of materials into the environment or that are

primarily for the purpose of protecting the environment . However, legal proceedings

involving other sustainability issues or

SASB topics may also be material .

If a registrant (or any of its subsidiaries)

is a party to a pending legal proceeding

that is material, the registrant may need

to disclose information regarding this

litigation in its “Legal Proceedings”

disclosure . Using cybersecurity as an

example, if a significant amount of

customer information is stolen, resulting

in material litigation, the registrant should disclose the name of the court in which

the proceedings are pending, the date instituted, the principal parties thereto,

a description of the factual basis alleged to underlie the litigation, and the relief

sought .201

14 .4 .2 .4 . Risk Factors

Item 503(c) of Regulation S-K requires filing companies to provide a discussion

of the most significant factors that make an investment in the registrant speculative

or risky, clearly stating the risk and specifying how a particular risk affects the

particular filing company . Registrants should disclose risks related to SASB topics if

they are among the most significant factors that make an investment in the company

speculative or risky .202

In determining whether risk factor disclosure is required, registrants are expected

to evaluate risks related to the SASB topic and take into account all available relevant

information, including prior events and their associated severity and frequency .

As part of this evaluation, registrants should consider the probability that events

will occur and the quantitative and qualitative magnitude of those risks, including

potential costs and other consequences . Registrants should also consider the

adequacy of preventative actions taken to reduce risks in the context of the industry

in which they operate .

Consistent with Regulation S-K Item 503(c) requirements for risk factor

disclosures, sustainability risk disclosure provided must adequately describe the

nature of the material risks and specify how each risk affects the registrant .

201 SEC, CF Disclosure Guidance: Topic No . 2, Division of Corporation Finance guidance regarding disclosure obligations relating to cybersecurity risks and cyber incidents, October 2011 (hereafter “Cyber Disclosure”) .

202 See Item 503(c) of Regulation S-K; and Form 20-F, Item 3 .D .

FOR CONTEXT: PURPOSE OF LEGAL PROCEEDINGS

Summarize any material pending legal actions to which the company is a party .




Registrants should not present risks

that could apply to any issuer or any

offering and should avoid generic

risk factor disclosure .203 Depending

on the registrant’s particular facts

and circumstances, and to the extent

material, appropriate disclosures may

include:

• Discussion of aspects of the registrant’s business or operations that give rise to

material sustainability risks and the potential costs and consequences;

• Description of related incidents experienced by the registrant that are

individually, or in the aggregate, material, including a description of the costs

and other consequences;

• Description of relevant insurance coverage;

• Description of occurrence (e .g ., specific cyberattack, extreme weather event)

and its known and potential costs and other consequences .

The disclosure should enable investors to appreciate the nature of the risks faced

by the particular registrant in a manner that would not compromise the registrant’s

security or competitiveness .204

14 .4 .2 .5 . Assurance

SASB standards are designed for the disclosure of material sustainability

information in MD&A section

of Form 10-K, but MD&A is not

required to be audited . Nevertheless,

some companies may elect to

seek external assurance of their

sustainability disclosures . “Assurance”

is defined as a review by external,

independent professional(s) to opine

on the credibility of the data . The

independent third-party assurance

provider applies established assurance

procedures in order to report an

opinion on its findings . The opinion

helps the user of the information

203 Item 503(c) of Regulation S-K instructs registrants to “not present risks that could apply to any issuer or any offering” and further, to “explain how the risk affects the issuer or the securities being offered .” Item 503(c) of Regulation S-K .

204 “Cyber Disclosure .”

PERSPECTIVE

Risk reporting is an opportunity to instill confidence in shareholders that the registrant and its board have insight into key threats to the achievement of strategic objectives and continued business operations .

DEFINITION: ASSURANCE VS. ATTESTATION

“Attestations” are defined by the PCAOB and can cover a range of non-financial subjects, including but not limited to sustainability . When sustainability assurance is conducted in accordance with a PCAOB attestation standard, the assurance engagement is the same as an attest engagement . However, sustainability assurance is sometimes provided by professionals who are not certified public accountants and/or by professionals who do not follow a PCAOB standard . In those instances, a sustainability assurance engagement is not an attest engagement .



make a decision about its

reliability .

Audits are likely the most

well-known assurance services

among public corporations and

the investment community . They

involve the examination of both

financial statements and internal

controls by independent certified

public accountants .205 When

a publicly listed corporation

presents its Form 10-K, it must

include the audit report of its

public accounting firm . If the

audit finds no evidence that the

financial statements and controls

are inaccurate, then there is a

high degree of confidence in the

reliability of the information due

to the rigor of the audit .

Attestations are another

type of assurance service . In

attestations, certified public

accountants provide an

examination or review over

the agreed-upon subject matter, which may include financial information or non-

financial information .206 They then may issue an opinion on the conclusion of the

assurance procedures .207

An attest engagement can be conducted at a comparable level of rigor as an

audit or at a less rigorous level, with a less detailed review . These differences result

in different assurance testing procedures and opinions . The most rigorous attestation

services, on par with audits, review the reported information, the source data, and

the organization’s internal controls for protecting the integrity of the source data .

The internal controls are reviewed to gauge how effectively they mitigate the risk

of misstated data . This level of rigor is called reasonable assurance . A less rigorous

attestation engagement—limited assurance, or a review—will be more limited in

scope, which can be associated with a lower degree of confidence that the reported

information is reliable .

205 PCAOB Rules Section 1.

206 PCAOB Rules Section 1 .

207 AT-C 105 .

FOR CLARITY: INDEPENDENCE

The AICPA and PCAOB Code of Professional Conduct (ET section 101 .01) requires that third-party assurance providers must not only act independently, but also appear independent . If the provider is in fact independent, but one or more factors suggest otherwise, the public may conclude that the assurance report is not credible, reliable, or trustworthy . The International Federation of Accountants (IFAC) explains that independence requires:

• Independence of Mind: The state of mind that permits the expression of a conclusion without being affected by influences that compromise professional judgment, allowing an individual to act with integrity, and to exercise objectivity and professional skepticism

• Independence in Appearance: The avoidance of facts and circumstances that are so significant that a reasonable and informed third party, having knowledge of all relevant information, including safeguards applied, would reasonably conclude a firm’s, or a member of the assurance team’s, integrity, objectivity or professional skepticism had been compromised .



The quality and trustworthiness

of the attestation depends on

the professional expertise of the

person or people performing the

service, their independence from

the reviewed organization, and their

adherence to professional standards .

The independent firm providing

the attestation services should also

establish policies and procedures

that safeguard the quality of the

attestation engagement, in order to

offer assurance that the attestation

provider’s personnel comply with the

attestation standard .208

In the U .S ., the Public Company Accounting Oversight Board (PCAOB) sets the

attestation and auditing standards for public companies . Although PCAOB audit

standards are limited to financial statements, the attestation standards can be

applied to a variety of subject matters, including sustainability data .

The rise in sustainability accounting and reporting, along with investors’ increased

consideration of sustainability data have prompted a corresponding focus on

assurance or attestation of sustainability information . In fact, in a 2015 survey by

the CFA Institute (ESG Survey), 69 percent of respondents thought sustainability

disclosures should be subject to independent, third party verification, such as by

a professional services firm . Nevertheless, it is not yet a common practice in the

U .S . Among S&P 500 companies, just 12 percent of sustainability reports included

third-party verification and assurance in 2014 .209 The scope of assurance can vary

considerably, covering only specific sections (e .g ., GHG emissions) or extending to

the content of the entire report . Research has indicated that only 30 percent of U .S .

assurance engagements covered the full sustainability report in 2013 .210

Although not all providers of external assurance have adopted a common

assurance standard for sustainability data, in July 2017, the AICPA issued

sustainability attestation guidance to assist CPAs with interpreting and applying its

attestation standards when performing examination (AT-C Section 205) or review

(AT-C Section 210) engagements on sustainability information .

The AICPA’s AT Section 101 standard, which was recently superseded by AT-C

105, was frequently used for attest engagements over sustainability information . It

applied to attestation engagements executed by a certified public accountant over

a determined subject matter . While this standard served a broad range of subject

208 AT-C 105 .06

209 The Conference Board, Sustainability Practices 2015, 2015 .

210 Global Reporting Initiative, Trends in External Assurance of Sustainability Reports, July 2014 .

DEFINITION: SUITABLE CRITERIA

Criteria are the benchmarks against which the practitioner evaluates the subject matter . For the purposes of an attestation engagement, suitable criteria are those criteria that meet certain characteristics (such as relevance, objectivity, measurability, and completeness), as defined by the standard . Suitable criteria are required for reasonably consistent measurement or evaluation of subject matter within the context of professional judgment .

Source: AT –C Section 105



matters, it could be applied to the review of disclosed sustainability information, in

MD&A or elsewhere .

The same is true of AT-C Section 105, which outlines the attributes required of

suitable criteria . The accounting metrics and related disclosure guidance in the SASB

sustainability accounting standards are intended to form the basis for suitable criteria,

as identified by many existing assurance standards, including AT-C 105 .

The International Federation of Accountants (IFAC) has also issued a standard for

assurance engagements—the International Standard on Assurance Engagements

(ISAE) 3000—but that standard is more commonly used outside the U .S .; the AICPA

standards are more commonly used within the U .S .



SECTION REVIEW


• Explain the cross-functional nature of preparing sustainability disclosures in

the 10-K .

• Explain the timeline and process for 10-K disclosure .

• Discuss the stages of 10-K preparation where sustainability information could

be incorporated .

• Discuss the role of SASB standards in helping companies develop strategies


performance .

• Explain the influences of internal controls and third-party assurance on the

data quality of sustainability information and disclosures .

• Explain why MD&A section was added to the 10-K and why it is an

appropriate place for the disclosure of sustainability information .

• Describe the special disclosure considerations for multinational and diversified

companies .

• Recognize key elements of Regulation S-K and other prominent legislation

and what is required for disclosure (e .g ., financial and nonfinancial information

that alters the total mix of information) .




implications) .


√ When it comes to collecting, managing, and reporting material sustainability

information, why do companies need to involve more than just the sustain-

ability team?

√ What should companies begin doing in order to better understand their per-

formance on the sustainability topics likely to be material in their industry?



139

15 .1 . Overview

A wide variety of individuals and organizations invest in securities, each with

their own unique strategies, risk tolerance, investment objectives, time horizon,

and available capital . All investors, however, share one characteristic: They value

information . The more opaque a company is about its operations and outcomes,

the more difficult it is for investors to evaluate the company’s stock . As a result,

these firms are usually seen as riskier investments .

Although traditional financial information remains valuable, investors and

analysts are increasingly looking beyond financial statements and seeking

out sustainability data to enhance their understanding of related risks and

opportunities .

For example:

• Many pension funds and institutional investors are interested in sustainable

investing from an alpha-generating and risk-reduction approach . Because

appropriate consideration of sustainability issues can help deliver superior

risk-adjusted returns to long-term investors, fiduciary duty requires asset

managers to consider relevant sustainability issues, related material

information, and their portfolio-level impacts .

15 INVESTOR USE


Discuss the utility of SASB standards in investment decisions (e .g ., portfolio

allocation, risk/return profile) .






PART III: USING SASB STANDARDS



• Many large, full-service brokerages have strategic, values-based investing

programs that are open-architecture and have clear goals for assets under

management, allowing investors to “do well while doing good .”

• Many high-net-worth individuals, endowments, and foundations are

interested in sustainable investing from a philosophical and mission-alignment

approach . A recent U .S . Trust study found that one-half (50 percent) of high-

net-worth investors, including 75 percent of Millennials and 63 percent of

wealthy women, say they consider the social and environmental impact of

the companies they invest in to be an important part of investment decision-

making .211

• Many types of investors want both alpha-generating/risk-reduction benefits

and mission alignment . A growing body of research has shown that investors

don’t need to choose between “value” and “values .”

By facilitating the disclosure of decision-useful information, SASB provides all

investor types with the ability to assess the long-term value-creation potential of a

company or industry based on how well it manages all forms of capital . The use of

accounting standards for sustainability data helps all types of investors achieve their

individual goals while improving overall market efficiency .

Furthermore, by standardizing sustainability disclosures, SASB raises the signal-

to-noise ratio, minimizing excessive or

boilerplate disclosures and enabling

apples-to-apples comparisons among firms

within an industry—the number-one need

identified by institutional investors in a recent

survey .212 Meanwhile, SASB standards allow

analysts to shift from time-intensive data

gathering to what they do best: rigorous

data analysis .

Indeed, a diverse range of investors has

already begun to use SASB standards to inform decision making . For example, UBS

Asset Management, which handles $670 billion in assets, uses SASB’s Materiality

Map as a guide for information gathering to augment traditional fundamental

analysis—such as a discounted cash flow model—which allows it to identify

equities that are both priced attractively today and poised to deliver returns over

the long-term . Breckenridge Capital Advisors, managing $25 billion in assets, takes

a similar approach, adding an extra layer of rigor to its fundamental analysis of

fixed-income securities, where investments have longer time horizons and investors

211 U .S . Trust, “Insights on Wealth and Worth,” June 20, 2014 .

212 EY, “Tomorrow’s Investment Rules,” 2014 .

DEFINITION: ALPHA

Alpha measures an investment’s performance compared to a benchmark, such as the S&P 500 . A high-alpha investment outperforms the benchmark .



have less appetite for risk .213 In addition to

these asset managers, many asset owners

are incorporating SASB resources into the

evaluation and monitoring of their external

managers, and private equity firms are

performing SASB-powered ESG analysis as

part of their due diligence .

The various uses of SASB standards—and

the data they yield—reflect the full spectrum

of investment activities, from top-down

allocation of assets in a portfolio to the

individual selection of securities . Specifically,

SASB standards can help investors and

analysts investigate such questions as:

• How do differentiated, industry-

specific sustainability impacts affect

a portfolio across all sectors? Which

sectors or industries are facing

sustainability headwinds?

• How do sustainability issues impact

the core value drivers in an industry-

level analysis?

• How do companies leverage

opportunities or mitigate impacts

related to material sustainability

issues? How can these issues and their

corresponding metrics be integrated

into firm-level analysis, either on

a comparative basis or in terms of

fundamental valuation?

15 .2 Portfolio Construction

Traditional methods of managing risk

in a portfolio based on diversifying assets

rely on assumptions of the risks, returns,

and correlations between asset classes .

Sustainability information provides a new

213 Sustainability Accounting Standards Board, ESG Integration Insights (Q4 2016) .

SASB INVESTOR ADVISORY GROUP

The SASB Investor Advisory Group (IAG) comprises leading asset owners and asset managers who recognize the need for consistent, comparable and reliable disclosure of material and decision-useful ESG information . Members include:

› APG (All Pensions Group)

› ATP › AXA Investment

Management › Bank of America Merrill

Lynch › BCI (British Columbia

Investment Management Corporation)

› BlackRock › Boston Trust Walden › Breckinridge Capital

Advisors › Brunel Pension

Partnership › Caisse de dépôt et

placement du Québec (CDPQ)

› CalPERS › CalSTRS › Calvert Research and

Management › Capital Group › CPP Investments › Domini Impact

Investments › Fidelity Investments › Franklin Templeton

Investments › Goldman Sachs Asset

Management › Harvard Management

Company › Hermes Investment

Management › Ivy Investment

Management Company

› LACERA › Legal & General

Investment Management America

› Morgan Stanley Investment Management

› Neuberger Berman › New York City

Retirement Systems › Nissay Asset

Management › Nordea Asset

Management › Norges Bank Investment

Management › Northern Trust Asset

Management › Ontario Teachers’

Pension Plan › Oregon State Treasury,

Investment Division › PGGM Investments › PIMCO › Putnam Investments › QMA (a PGIM company) › RBC › Schroders › State Street Global

Advisors › Sustainable Insight

Capital Management › UAW Retiree Medical

Benefits Trust › UBS Asset Management › ValueAct Capital › Vanguard › Walden Asset

Management › Wells Fargo Asset

Management › Wespath Investment

Management



perspective on sector allocation, where sectors could become more or less correlated

depending on sustainability risks and opportunities . Calculating a portfolio’s

diversification, overall expected return rate, and risk exposure, based on sector

exposure to material sustainability topics, is a potentially superior alternative to

meeting risk/return targets through diversification without compromising fiduciary

duty .

Furthermore, it has been argued that a sector-based diversification strategy for

risk management can still yield high portfolio returns . There is some initial evidence

corroborating this argument . State Street Global Advisors (The Rising Tide of Sector and Industry Investing, 2016) has suggested that “the use of sector and industry

strategies is clearly on the rise” due to four distinct advantages the approach has

over style-based (i .e ., value, blend, growth) investing:

1. Sectors are a key driver of risk: Beyond company-specific factors, industry

exposure has been the most influential driver of equity market returns,

accounting for 22 percent of gains for U .S . stocks over the past 20 years .214

2. Sectors exhibit differentiated correlations to the broader market: Average sector correlations to the S&P 500 Index range from 0 .60 (Utilities)

to 0 .92 (Industrials), whereas style correlations are 0 .98 (growth) and 0 .97

(value) . This diversity allows investors to manage risk and potentially improve

diversification through more precise and agile allocations .

3. Sectors produce a wider dispersion of returns: Between 2000 and

2015, the average yearly difference between large-cap growth and value

returns was 7 .8 percent versus 36 .1 percent between the best- and worst-

performing sectors . Thus, over- or underweighting certain sectors may offer

greater alpha-generating opportunities than style-based strategies .

4. Sectors are dependent on economic cycles: Sector performance varies

from year to year based on cyclical macroeconomic factors, which allows

investors to add the potential for alpha by harnessing these trends through

over- or underweighting .

The State Street survey found that 85 percent of investors have some exposure to

sector/industry-based investing, with more than a quarter indicating it was a major

part of their U .S . equity strategy . Whether they use the approach as part of their

core strategy or more tactically on the margins (i .e ., to enhance a portfolio selected

on other premises, such as growth rate or cap size), investors can benefit from better

understanding sustainability-related risks and opportunities at the industry or sector

level . By adapting traditional industry classification systems to reflect the unique

sustainability profiles of sectors and industries, SASB’s SICS™ provides the building

214 Fidelity, Equity Sectors: Essential Building Blocks for Portfolio Construction, June 2013 .



blocks for a potentially more precise portfolio construction that takes into account the

impact of sustainability on the risk/return and correlation of industries and sectors .

For example, SASB analysis shows that the impact of climate change is both

ubiquitous and differentiated, which means that it cannot be divested and it cannot

be tracked across a portfolio with a single measure like greenhouse gas emissions .

Instead, investors must understand the industry-specific impacts of climate change

on risk and return—and manage their allocations accordingly .

For instance, climate change is likely to increase costs for companies in the

Insurance industry because of increased claims related to extreme weather events,

which are intermittent and unpredictable . Meanwhile, companies in Oil & Gas

industries face reduced revenues because of climate change — related regulation

and shifts in global demand, which are fundamental and continuous . These

sustainability-related risks are separate from the systematic market risk inherent in

owning equities .

SASB standards provide granularity on industry-specific sustainability risks,

enabling investors to make better-informed asset allocations that could lead to

more manageable portfolio risk (i .e . lower volatility) and greater diversification

benefits (i .e . higher risk-adjusted return) over the long run . SASB standards and the

SASB Materiality Map™ help investors overlay sustainability factors on top of their

traditional investment framework .

15 .3 . Industry Analysis

Sell-side analysts work to understand sector dynamics and the constituent

companies with the goal of determining companies’ competitive advantage going

forward . As such, they are interested in information about how companies can

manage future operational and strategic sustainability risks and opportunities . Sell-side

analysts identify changes in market dynamics that will affect a company’s earnings

capacity and assess the impact of legal and regulatory changes in each market .

Analysts typically provide buy/sell recommendations and stock price targets based

on an investment thesis and value drivers that are specific to a particular industry .

These rely on specific valuation methods and models that can easily incorporate

SASB sustainability metrics .

SASB’s analysis of sustainability issues and related financial impacts can

complement or improve the typical research analysis framework . It can do so

through two mechanisms:

1 . Providing additional value drivers or risk factors; and

2 . Providing factors that impact existing value drivers, risk factors, and valuation

models .

An example of how SASB’s analysis can be plugged into traditional methods is

shown here for the automobile industry .



15 .4 . Company-Level Analysis

15 .4 .1 . Comparative Analysis

Investors and analysts routinely compare companies based on financial

fundamentals, such as price-to-earnings, enterprise multiple, and other key ratios .

The standardized data delivered to the capital markets in response to SASB standards

allow similar comparisons based on non-financial performance . With material

financial and sustainability information side-by-side, investors are empowered to

make more meaningful comparisons among companies .

Specifically, SASB standards help investors identify the firms that stand out

as sustainability leaders—or laggards—in their industry . Analysts use material

sustainability disclosures as an indicator of a company’s ability to respond to

emerging needs and demand trends . Analysts are using sustainability factors to

identify which companies are best at leveraging market opportunities and to analyze

the strength of their industry position .215

Analysts also identify and consider operating risks as part of traditional financial

analysis . Sustainability factors can negatively affect a company’s operations

215 United Nations, Principles for Responsible Investment, “Integrated Analysis: How Investors are Addressing Environmental, Social and Governance Factors in Fundamental Equity Valuation,” February 2013 .

Industry Drivers and Valuation Methods

ESG FactorsSustainability Impacts on

Value Drivers

Value Drivers

• Leverage; restructuring

• Global markets

• Product mix

Risk Factors

• Rising gas prices

• Demand for alternative energy

• Rising commodity prices

• Large unfunded pension plans

Valuation Methods

• Enterprise value /EBITDAPO for incumbents

• Discounted cash flow and revenue-based ratio for new entrants or new markets

• Product Safety

• Labor Practices

• Fuel Economy & Use-phase Emissions

• Materials Sourcing

• Materials Efficiency & Recycling

Revenue growth: Product mix alignment with demand for smaller, energy-efficient, and low-emission vehicles is a growth driver, with a corollary impact from switching away from larger, higher-margin vehicles .

Operating costs and CAPEX: Materials scarcity can lead to higher costs, R&D and CAPEX for substitution . Sourcing, materials used, and production efficiency can mitigate impact at the firm level .

Option value/scenario analysis: Risk profile is heightened by large investments (R&D, CAPEX) in alternative powertrains (EV/fuel cell hybrid) with uncertain outcomes .

Automobile Industry



to the extent that one or more product lines—or even entire operations—are

compromised, and, in some cases, are shut down . Forward-looking companies that

understand and act on the sustainability factors relevant to their operating activities

will better mitigate such operating risks than their less proactive peers .216

Sell-side research and broker reports are increasingly covering sustainability

issues in their company evaluations, and some reports even focus on sustainability

issues exclusively . Financial information providers such as Thomson Reuters, MSCI,

and Bloomberg are making it easier for analysts to compare corporate financial and

sustainability data . Bloomberg’s new ESG Valuation Tool enables users to apply a

financially based methodology to assess and evaluate the impact of environmental,

social, and governance factors on a company’s earnings before interest & tax (EBIT)

performance and share price .217 Goldman Sachs developed its GS Sustain framework

to guide the long-term investment strategy of its Global Investment Research

Division . One key criterion of the strategy is assessing the management quality of

companies with respect to sustainability issues .218

216 United Nations, Principles for Responsible Investment, “Integrated Analysis,” February, 2013 .

217 CFA Institute, Centre for Financial Market Integrity, “Environmental, Social, and Governance Factors at Listed Companies: A Manual for Investors,” 2008 .

218 PwC, “Do Investors Care about Sustainability?” March 2012 .Goldman Sachs website, “GS Sustain .” Accessed August 14, 2014 .



15 .4 .2 . Company Valuation

SASB standards—and the data they yield—can also be incorporated into the

fundamental analysis of specific firms and related discounted-cash-flow analyses .

For example, Bank of America Merrill Lynch has found sustainability metrics to

be valuable signaling tools, reliably indicating future volatility, earnings risk, price

declines and bankruptcies .219 By tracing each sustainability issue to its ultimate value

impact and helping to determine the likelihood and magnitude of those impacts,

investors and analysts can factor these issues into company valuations . More

predictable and/or quantifiable factors can be incorporated into earnings projections,

while less measurable factors can be reflected in a discount rate adjustment .

Unlike the majority of existing sustainability metrics, SASB’s are designed to

enable detailed financial analysis . Because SASB disclosure topics are determined

based on the likely materiality of their financial impacts, the associated metrics make

it easier to analyze how sustainability issues can affect an industry’s or a company’s

performance . For example, Product Innovation, which is a disclosure topic for the

Construction Materials industry, affects revenues through demand for products

and services . Among other evidence, SASB found credible estimates that the global

market for green construction materials is expected to grow from $116 billion in

2013 to more than $254 billion in 2020, more than half of current industry revenues

of $480 billion .220

One of the SASB metrics that measures performance on this topic is the

“percentage of products that can be used for credits in sustainability building design

and construction certifications .” Performance on this metric and related disclosures

can help an analyst assess a company’s positioning for a growing market in green

construction materials . The percentage of products that can meet the anticipated

market growth would factor into the financial analysis and growth projections for

companies in that industry .

The preceding chart outlines how SASB’s metrics are designed to facilitate

financial analysis, based on the types of financial impacts that emerge from the

evidence gathered during the standards-setting process .

SASB metrics are designed to enable analysis of the main type of financial

impacts identified for the topic they are associated with . Often, SASB topics can

lead to more than one type of financial impact . For example, hazardous waste can

potentially impact costs, liabilities, and cost of capital . Hazardous waste has a direct

and ongoing impact on costs for storage, treatment, and disposal . It can also be

associated with other costs, liabilities, and/or a higher cost of capital when unusually

high volumes of hazardous waste increase the risk of a leak or spill, which may lead

to fines, contingent liabilities, and an ultimately higher cost of capital .

219 Bank of America Merrill Lynch, “ESG: Good Companies Can Make Good Stocks,” Equity Strategy Focus Point (December 18, 2016) .

220 SASB, Construction Materials Industry Research Brief, June 2014 .



In assessing the magnitude of financial impacts and their effect on shareholder

value, analysts may conduct valuation analyses, such as discounted cash flow

modeling . For example, they may use available data related to performance on

a sustainability topic (or reasonable assumptions where sample sizes for the data

are too small to identify a range of performance and benchmark a company) and

incorporate such data into a typical valuation model for a company . Through this

FINANCIAL DRIVER

REVENUE COST ASSETS AND LIABILITIES

COST OF CAPITAL

Type of Financial Impact

Demand for products and services

Intangible assets and long-term growth

Operational efficiency/cost structure

Valuation of core assets or liabilities

Operational risks and cost of capital

Metric Type

Quantitative & qualitative measures of product features sought by customers or required by law

Quantitative & qualitative measures of factors/actions that drive reputation and brand value

Quantitative measure of:- operational efficiency- regulatory compliance

Quantitative measure of:factors that affect the valuation of assets and liabilities

Quantitative measure of risk (VaR) or number of incidents

Qualitative measure of risk management

Financial Analysis

Market share and revenue forecast for DCFGrowth in the context of price-based ratios (PE or PEG ratios)

Long-term revenue growth and terminal value in DCF Growth in the context of price-based ratios (PE or PEG ratios)

Current cost drivers and estimates of future costs for DCF Operational performance & cost structure for profitability ratios (e .g ., ROI)

Impacts on valuation methods for assets and liabilities

Impact on asset and liabilities for asset-based ratio (ROI, RRR, solvency)

Quantification of risk to forecasted profits and adjustment of cost of capitals

Examples (Industry)

Product safety (Automobiles)

Counterfeit drugs (Biotechnology & Pharmaceuticals)

Environmental footprint of hardware infrastructure (Internet Media & Services)

Reserves valuation & capital expenditures (Oil & Gas - Exploration & Production)

Business Ethics (Commercial Banks)

DCF = Discounted cash flowPE = Price-earnings (stock price/earnings per share)

PEG = Price-earnings to growth (PE/annual earnings per share growth)ROI = Return on investment

RRR = Required rate of return



integration, an analyst can evaluate the difference in impact on valuation, and

additionally, assesses the difference in valuation when considering scenarios of top-

and bottom-decile performers .

Assessing Impacts of ESG on Valuation of Hypothetical Company

The figure above illustrates one type of analysis used to assess impacts on

an individual company’s equity value . This analysis, taken from a hypothetical

company in the Electric Utilities & Power Generators industry, depicts the outputs

of ESG performance scenarios generated through a discounted cash flow model:

a fully integrated ESG scenario, which integrates median estimates of corporate

performance, as well as a High and a Low ESG performance scenario, each of which

assume best and worst case performance, respectively .

The model integrates three sustainability issues—GHG Emissions, Water Scarcity,

and Workforce Health & Safety . Such analyses are designed to incorporate actual

performance data when available, though the lack of adequate data (as well as

future performance projections) necessitates the depicted performance scenarios .

The financial impact of sustainability issues combined with insufficient performance

data leads to a range of uncertainty in market value . In this example, the market’s

range of uncertainty is $11/share (the difference between the high ESG performance

and low ESG performance scenarios) . One possible use of this range of uncertainty

would be to assess the potential upside of a company’s decision to address lagging

sustainability performance .

Assessing Impacts of ESG on Valuation

Current Value

ESG Impacts Fully Integrated Model

32.98

25

25

27

27

29

29

31

31

33

33

35

37

-2.59

-0.561.12 30.85

Current Value

Issue impacts future cash flows through:• Operating costs: Risk of carbon tax scenario & renewable energy purchases (-$1.19) • Capex requirements: upgrades to plant infrastructure (-$0.61) • One-time charges: Early plant retirements (-$0.33)

GHG Emissions Water Scarcity Risk

Increase Decrease Total

Workforce Health & Safety

Fully Integrated ESG

Company Stock Price

($ per share)

Fully Integrated

ESG

High ESG Performance

Low ESG Performance

Uncertainty of Value Impact

39

11.12

Illustrative



15 .5 . Active Ownership

It can be difficult for investors to divest themselves of sustainability risks, especially

those that affect nearly every industry in some way, such as climate change . As a

result, it’s often more productive for investors to engage with the management of

the corporations they hold in their portfolios to encourage progress toward improved

corporate responsibility and sustainability practices and policies .

Investors can use sustainability disclosures to understand how the companies

they hold manage sustainability risks . They can also see how other companies

manage these same risks and compare performance within industries . They can use

this information when preparing to engage with corporations about sustainability

performance .

In lieu of performance data, however, investors can still use SASB’s standards

and research briefs as a playbook for engaging companies on the issues that matter

and to encourage improved sustainability disclosure . In 2015 Harvard Management

Company, which manages an endowment valued at more than $35 billion,

requested that the energy sector companies it holds in its portfolio incorporate SASB

standards into their public filings . This information improves Harvard Management

Company’s ability to craft an informed investment strategy .221

SECTION REVIEW


• Discuss the utility of SASB standards in investment decisions (e .g . portfolio

allocation, risk/return profile) .







√ How does the evidence of financial impacts collected during the development

of a standard impact how an analyst or investor can conduct industry analyses

and company-level analyses?

√ How do disclosures based on SASB standards help meet the needs of differ-

ent groups of investors, such as pension funds and other asset owners, asset

managers, and high-net-worth individuals?

221 Harvard Management Company website, “Investing for the Long Term: Integrating ESG Factors .” Accessed April 27, 2015 .



150

As you have learned, the emergence of sustainability accounting is part of a

natural evolution of the capital markets . Sustainability factors can affect the financial

condition or operating performance of a company in the near, medium, or long

term, and sustainability information may therefore be material, as defined by the

U .S . Supreme Court . Under existing regulation, and using existing data collection,

management, and reporting processes, that information can be disclosed in statutory

filings alongside financial information .

However, sustainability issues are likely to have different material impacts in

different industries . Therefore, sustainability accounting standards must focus on

these key, industry-specific factors to:

• Cost-effectively empower corporate leadership to better manage performance

on the sustainability issues most likely to impact value creation .

• Improve the completeness of material information made available to investors

by enabling companies to disclose material sustainability data in a decision-

useful way .

By leveraging existing financial reporting infrastructure and processes,

sustainability accounting can be used to measure, manage, and report material

sustainability information to inform corporate decision-making as well as a variety of

mainstream investment analysis practices .

CONCLUSION



151

PREPARING FOR THE EXAM

The preceding pages represent the testable content for the Fundamentals of

Sustainability Accounting Level I exam . Exam questions have been written by a

group of Subject Matter Experts to assess mastery of the Learning Objectives listed

at the beginning of and throughout the document .

The best way to prepare for the exam is to ensure that you can fulfill each

Learning Objective . The Questions to Consider listed at the end of each section

are designed to probe key takeaways but they are not necessarily reflective of

exam questions . The Learning Objectives use verbs such as “Recognize” and

“Distinguish” to specify the extent to which you should feel comfortable with the

associated content .

For more information about the exam, including how to register, and what to

expect on test day, please download the Candidate Handbook available on the

Fundamentals of Sustainability Accounting website . A limited number of sample

exam questions—reflective of the types questions found on the exam—are also

available on the website and on the next page .

For additional sample questions and to test your mastery of the Learning

Objectives in an un-proctored environment, you can access an approved exam

preparation provider listed on the website .



152

1 Describe the trends driving demand for the disclosure of sustainability information .

2 Explain why sustainability information is increasingly important to investors for investment decisions (e .g ., reduced ratio of net assets to enterprise value, increased risks and opportunities) .

3 Discuss the challenges that investors face in integrating sustainability information into investment decisions (e .g ., information is available, but often its quality varies, it is not comparable, and/or it lacks obvious financial implications) .

4 Describe the current state of disclosure of sustainability topics in the 10-K .

5 Distinguish SASB’s approach (sustainability accounting) from other approaches to sustainability tracking and reporting .

6 Discuss the Supreme Court definition of materiality and the implications of this definition .

7 Recognize key elements of Regulation S-K and other prominent legislation and what is required for disclosure (i .e ., financial and nonfinancial information that alters the total mix of information) .

8 Discuss the utility of SASB standards in investment decisions (e .g . portfolio allocation, risk/return profile) .

9 Discuss the stages of 10-K preparation where sustainability information could be incorporated .

10 Discuss the role of SASB standards in helping companies develop strategies for long-term value creation, and benchmark and improve operational performance .

11 Explain the cross-functional nature of preparing sustainability disclosures in the 10-K .

12 Explain the timeline and process for 10-K disclosure .

13 Explain why the MD&A section was added to the 10-K and why it is an appropriate place for the disclosure of sustainability information .

14 Explain the influences of internal controls and third-party assurance on the data quality of sustainability information and disclosures .

15 Explain the purpose and role of requiring public companies to disclose material information in SEC filings .

16 Explain the current state of financial accounting (codified, standardized, decision-useful) given the history and efforts of the FASB .

17 Explain the organization of SICSTM and the implications of a sustainability-based industry classification .

18 Distinguish SICSTM sectors based on their distinct sustainability profiles .

19 Explain the evidence basis that supports the identification of SASB disclosure topics .

20 Describe the principles that guide the selection of SASB’s industry-specific topics for disclosure .

21 Describe the criteria that guide the selection of SASB’s accounting metrics .

22 Explain the stakeholder consensus that supports the identification of SASB disclosure topics .

23 Describe the components of a sustainability accounting standard and their purpose for supporting disclosure .

24 Discuss the implications of making statements about materiality outside of SEC filings .

25 Describe the special disclosure considerations for multinational and diversified companies .

LEARNING OBJECTIVES


SAMPLE QUESTIONSSASB® FSA™ LEVEL I STUDY GUIDE

1: B 2: B, C

FSA LEVEL I SAMPLE QUESTIONSThe following sample questions have been developed to mimic the style and rigor of the questions on the FSA Level I exam . As with the Level I exam, the correct answers are derived from the information contained in the Level I Study Guide .

1 An analyst wants to understand the connection between a company’s sustainability data and one of four financial drivers (revenue, cost, assets and liabilities, and cost of capital) that are relevant to a discounted cash flow (DCF) analysis. Choose the pairing that correctly matches a data type with its relevance to a DCF analysis.

A . Data about factors that drive brand value : impacts on valuation methods for assets and liabilities

B . Data about regulatory compliance : operational performance and cost structure

C . Data about product features required by law : cost structure for profitability ratios (e .g . ROI)

D . Data about the number of safety incidents : revenue growth in the context of price-based ratios (e .g . PE or PEG ratios)

2 Which two statements, if true, provide the best evidence that Labor Practices is not likely to be a topic that warrants disclosure for most companies in the Oil & Gas – Services industry? (Choose two)

A . “Labor Practices is a frequent topic in media coverage of the industry and shareholder resolutions in the industry but it is not important to our customers or our board of directors .”

B . “The industry is not unionized and strikes are a rare occurrence within the industry . Workers are generally extremely well paid and labor practices are healthy for the most part .”

C . “There are instances where labor practices is material in a specific set of circumstances—such as in Gabon in 2013—but it is not material across the industry .”

D . “Surveyed customers and suppliers indicated that cost containment strategies warranted disclosure except where it concerned what they viewed as a non-issue—labor practices—even though labor costs account for the 3rd greatest share of costs .”



3 Which is the best description of the findings from a 2001 report from the Financial Accounting Standard Board’s (FASB) Business Reporting Research Project?

A . Non-financial information is useful to investors, and metrics for management of non-financial success factors are likely to become increasingly important

B . Non-financial information is not being disclosed by leading companies but would likely be useful to a wide range of investors

C . Non-financial information is interesting to socially responsible investors but it is not a good predictor of future core earnings, cash flows, or future financial condition

D . Non-financial information is required to satisfy mandatory disclosure requirements in certain industries

4 Completeness is an important concept in disclosures of material information. For a company in an industry where workplace safety is likely to be material, if a company with 0 fatalities but 1,000 near-misses only discloses the number of fatal accidents, then investors are missing the complete picture. In the Automobile industry, information about the safety of a company’s car models is likely to be material. Which three metrics, when taken together, are most likely to represent a complete disclosure? (Choose three)

A . Percent of customers injured by other motorists in the previous year

B . Number of safety-related defect complaints

C . Number of vehicles recalled

D . Number of suppliers satisfying third-party factory safety standards

E . Percentage of retired union employees diagnosed with chronic illnesses originating from the workplace

F . Percentage of vehicles with 5-star safety rating

5 Which sector has the lowest prevalence of SASB disclosure topics that are associated with the environment?

A . Health Care

B . Technology and Communications

C . Services

D . Transportation

3: A 4: B, C, F 5: B



6 What are two elements of the 10-K preparation process that are most relevant for integrating SASB information? (Choose two)

A . Translating sustainability performance into monetary values and incorporating the results into financial statements

B . Updating the controller’s questionnaire to gather needed information about the magnitude and probability of events related to sustainability topics

C . Distributing the results of the “Stakeholder Material Aspects Survey” to business units and the external auditor

D . Identifying the material sustainability information, including that which may not be specifically required, necessary to ensure disclosures are not misleading

7 Why can sector-based diversification, including diversification based on SASB’s Sustainable Industry Classification System (SICSTM), assist with equity portfolio construction?

A . All sector classification systems equally facilitate diversification based on both sustainability risks and sustainability-based opportunities for alpha

B . Sector-based diversification improves the ability to integrate sustainability performance into portfolio risk/return calculations

C . Investors can achieve higher risk-adjusted returns due to the consistently lower correlation between sectors compared to correlation between factors in the “style box” classification

D . There’s evidence that sector exposure has historically been the most influential driver of stock returns, with the exception of information specific to the company issuing the stock

8 Companies that file documents with the Securities and Exchange Commission (SEC) are required to have disclosure controls and procedures, which encompass non-financial information considered for disclosure. What are three elements of disclosure controls and procedures? (Select three)

A . Information is communicated to management

B . Information is free from error

C . Information is timely

D . Information subject to the controls is mandated for reporting

E . Information gives the CFO comfort over her/his filing certification

6: B, D 7: D 8: A, C, E



9 When considering information related to climate change for disclosure in Securities and Exchange Commission (SEC) filings, companies have been instructed to apply the “reasonable likelihood” test. The two elements of the “reasonable likelihood” test are a reasonable likelihood that: (choose two)

A . The company’s past earnings and cash flow is not necessarily indicative of future performance

B . The known trend, demand, commitment, event, or uncertainty will occur

C . The occurrence will have a material effect on the registrant’s financial condition or results of operations

D . The information, if omitted, would have assumed significance in the deliberations of a reasonable investor

10 In the context of the U.S. Supreme Court definition of “materiality,” what is an accurate characterization of the “total mix” of information?

A . As shareholders, investors are entitled to the total mix of information about the performance of the company

B . As a rule, disclosing more information to investors would significantly alter the total mix of available information than disclosing less, more select information

C . A company is expected to disclose information that represents a total mix of performance, both positive and negative

D . A small or statistically insignificant fact can impact the total mix of information available to the market

11 Which statement accurately characterizes the relationship between sustainability information (including environmental, social, and governance information) and diversification for risk/return assessments?

A . In industries such as the Software and IT Services industry, companies with more diverse employee demographics and Board composition can mitigate the risk of negative media coverage

B . Industry classifications based on sustainability characteristics can impact the risk correlation between sectors

C . In industries subject to intense competition, such as Household and Personal Products industry, the companies with diversified product portfolios mitigate the risk of bankruptcy

D . Industry diversification is independent of sustainability opportunities and risks, which are unique to a company and its strategy

9: B, C 10: D 11: B



12 The Securities and Exchange Commission (SEC) guidance for the focus and content of the Management’s Discussion & Analysis (MD&A) of every company’s Form 10-K or 20-F includes which four elements? (Choose four)

A . Companies should eliminate immaterial information that does not promote understanding of the financial condition or results of operations

B . Companies should avoid discussing causes of trends that impact the company’s operating performance but that are outside the company’s control

C . Companies should describe requests from the company’s largest shareholders to adjust governance policies and/or dividend payment policies

D . Companies should identify known events, and uncertainties reasonably likely to impact financial condition, including forward-looking information

E . Companies should not only disclose information adhering to MD&A requirements, but also an analysis that is responsive to those requirements

F . Companies should present key performance indicators that management uses if they would be material to investors

13 Corporate disclosures serve which two of the following purposes in capital markets? (Choose two.)

A . Allow investors to assess risks and opportunities related to their investments

B . Demand additional regulation for corporations

C . Aid in valuation for financial analysts

D . Enable non-governmental organizations to draw investor attention to key sustainability issues

14 Companies can use SASB standards to guide their disclosures in the Management’s Discussion and Analysis (MD&A) section of Form 10-K because:

A . SASB’s “safe harbor” rule for forward-looking statements applies to MD&A section .

B . MD&A section was added to identify sustainability issues that cannot be quantified .

C . SASB standards align with MD&A goal of giving investors context within which financial information should be analyzed .

D . MD&A section is intended to focus solely on quantitative data used by management to run the business .

12: A, D, E, F 13: A, C 14: C



15 Which two of these characteristics would require a software company based in California to face a special disclosure situation based on the SASB standards? (Choose two.)

A . The company’s revenues exceeded $1 billion for the first time

B . The company generated more than 50% of its revenue in European countries

C . The company generates a significant amount of its consolidated revenue from its aerospace business

D . The company elects three new directors over the course of a year

15: B, C


SAMPLE QUESTION EXPLANATIONSSASB® FSA™ LEVEL I STUDY GUIDE

Explanations

Below are explanations for the sample questions provided above .

1: This question evaluates Learning Objective 25.

A . This is incorrect because brand value is associated with intangible assets and long-term revenue

growth, not assets and liabilities .

B . This is CORRECT . See Section 15 .4 .2 for more details .

C . This is incorrect because product features required by law are associated with market share and

revenue forecast in a DCF analysis, not cost structure .

D . This is incorrect because the number of safety incidents is associated with operations risks and cost

of capital adjustments, not revenue growth .


A . The principles for determining SASB’s disclosure topics are: applicable to investors, pertinent and

relevant across an industry, focused on driving value creation, expected to bring benefits that exceed

the costs, actionable by companies, and reflective of the views of stakeholders . This is incorrect

because the comment minimizes the frequency of Labor Practices in shareholder relations, which

is an indication that the topic is applicable to investors . Therefore, the statement is not the best

evidence that Labor Relations is not likely to warrant disclosure .

B . This is CORRECT because the comment indicates that Labor Practices is not a significant issue

(“The industry is not unionized and strikes are a rare occurrence”) so the costs for disclosure would

outweigh the benefits . See Section 12 .2 .1 for more details .

C . This is CORRECT because the comment indicates that Labor Practices is not pertinent and relevant

across the industry . See Section 12 .2 .1 for more details .

D . This is incorrect because the statement minimizes the value creation impact of Labor Practices (“labor

costs account for the 3rd greatest share of costs”) . A topic would be excluded from a SASB standard

if there was minimal evidence of financial impact, not the other way around .




A . This is CORRECT because the report identified that some non-financial information was useful to

investors and that the importance was likely to increase . See Section 7 .1 for more details .

B . This is incorrect because there’s no information in the 2001 report (or in the report summary

provided in the FSA Level I study guide) that suggests this . In fact, it says that leading companies

were voluntarily disclosing non-financial information .

C . This is incorrect because there’s no information in the 2001 report (or in the report summary

provided in the FSA Level I study guide) that suggests this .

D . This is incorrect because there’s no information in the 2001 report (or in the report summary

provided in the FSA Level I study guide) that suggests this . In fact, the report clearly identifies that

the information is voluntarily reported .

4. This question evaluates Learning Objective 13.

A . Completeness is described as provide enough information to understand and interpret performance

associated with the disclosure topic . Data about customers being injured by other motorists does

not reflect the safety of the company’s car models except in an indirect way if you assume that

the percent of customers injured might be lower if the company’s car models were safer . That

assumption is not justified given the information available in the question and the study guide, and

there are three other data that are clearly correct so this answer is incorrect .

B . This is CORRECT because data about safety-related defect complaints provides some information to

understand a company’s performance on car safety . See Section 12 .2 .2 for more details .

C . This is CORRECT because the vehicle recalls provides some information to understand a company’s

performance on car safety . See Section 12 .2 .2 for more details .

D . This is incorrect because suppliers are separate entities in different industries so different disclosure

topics and accounting metrics apply . Also, the safety of suppliers’ factories doesn’t determine the

safety of the car . For example, a company can use safe parts supplied by suppliers to build an unsafe

car .

E . This is incorrect because the chronic illness of employees is associated with a different disclosure

topic (Employee Health & Safety) and is unrelated to the safety of the company’s car models .

F . This is CORRECT because vehicles with 5-star safety ratings provides some information to understand

a company’s performance on car safety . See Section 12 .2 .2 for more details .


A . This is incorrect because the Health Care sector has a high prevalence of SASB disclosure topics

associated with the environment .

B . This is CORRECT because the Technology and Communications sector has a medium prevalence of

SASB disclosure topics associated with the environment while the other three sectors have a high

prevalence . See Section 13 .3 for more details .

C . This is incorrect because the Services sector has a high prevalence of SASB disclosure topics


D . This is incorrect because the Transportation Sector has a high prevalence of SASB disclosure topics





A . This is incorrect because sustainability performance cannot always be translated into monetary value

on financial statements . See Section 7 .2 for more details .

B . This is CORRECT because the controller’s questionnaire is listed as an example for how to include

sustainability information in the 10-K preparation process . See Section 14 .4 .1 .3 for more details .

C . This is incorrect because a stakeholder survey does not represent a determination of materiality that

is consistent with financial reporting .

D . This is CORRECT because the Exchange Act Rule 12b-20 explains that information which may not be

specifically required in a line-item disclosure may be necessary to ensure other required disclosures

are not misleading . See Section 6 .3 for more details .


A . This is incorrect because not all sector classification systems equally facilitate diversification based on

sustainability risks and sustainability-based opportunities .

B . This is incorrect because sustainability issues tend to materialize on the industry level and

diversification by sectors will not necessarily improve the ability to integrate sustainability

performance from the industry level .

C . This is incorrect because there is not always consistently lower correlation between sectors compared

to correction between factors in the “style box” classification . While there is some research

suggesting that correlation between sectors is lower than correlation between “style box” factors (as

surfaced in Section 15 .2) the research is not definitive and more work is needed .

D . This is CORRECT because Fidelity research indicated that industry exposure accounted for 22% of

gains for U .S . stocks over the past 20 years . See Section 15 .2 for more details .


A . This is CORRECT because disclosure controls and procedures are designed to ensure that the

information disclosed under the Exchange Act is appropriately accumulated and communicated to

the issuer’s management . See Section 6 .6 for more details .

B . This is incorrect because the disclosure controls and procedures are intended to provide reasonable

assurance over the information, not guarantee that the information is free from error (which would

be an unreasonable and perhaps impossible expectation) .

C . This is CORRECT because effective disclosure controls and procedures are intended to enable timely

decisions . See Section 6 .6 for more details

D . This is incorrect because the 2010 SEC interpretive release indicates that issuers should consider

whether they have sufficient disclosure controls and procedures to process all relevant information

for potential disclosure, even if the information is not required to be disclosed, so it follows that

information subject to controls is not necessarily mandated for reporting .

E . This is CORRECT because Sarbanes-Oxley requires the CFO to certify the accuracy of the content of

their organization’s disclosures and disclosure controls and procedures are intended to give the CFO

comfort to provide that certification . See Section 6 .6 for more details .




A . This is incorrect because indicating that a company’s past earnings and cash flow are not necessarily

indicative of future performance is an element of what should be incorporated in MD&A which has

different criteria than the reasonable likelihood test .

B . This is CORRECT . See Section 6 .3 for more details .

C . This is CORRECT . See Section 6 .3 for more details .

D . This is incorrect because the guidance that a small fact can impact the total mix of information is an

element of the determination of a material fact comes from the TSC v . Northway court ruling, which

is not part of the reasonable likelihood test .


A . This is incorrect because the “total mix” concept does not imply that investors are entitled to the

total mix of information available about a company . The “total mix” refers to determining whether

a specific fact about a company would impact the existing “total mix” of information available to

the investor (and it should be clear that investors don’t have access to all information about the

performance of a company) .

B . This is incorrect because, as the study guide explains, “simply adding content to the ‘total mix’ does

not necessarily ‘significantly alter’ it .”

C . This is incorrect because, although positive and negative information is expected to be disclosed, that

is not the best characterization of the total mix of information among the four options .

D . This is CORRECT because “total mix” isn’t intended to explain what information investors are

due, it’s intended as the gauge by which a fact is determined as material . Material information is

determined by assessing whether it impacts the total mix of information, and even a seemingly

small or statistically insignificant fact can impact that mix . In other words, a company is expected to

take the total mix of information available and then when determining if other information about

the company is material, does the omission of that information affect the reasonable investor’s

decisions? So the total mix concept doesn’t describe what the total mix is, it describes how to

determine if other information is material and even a small fact can be, which is why this is the best

characterization of the “total mix” concept of the four options available .” See Section 11 .1 for more

details .


A . This is incorrect because diversification for risk/return assessments refers to the risk exposure for a

given portfolio, not the risk of negative events in a specific industry based on employee or board

diversity .

B . This is CORRECT because the sustainability characteristics of SICSTM industries mean that the sectors

could be less correlated than sectors in traditional industry classification systems . See Section 15 .2

for more details .

C . This is incorrect because diversification for risk/return assessments refers to the risk exposure for a

given portfolio, not the risk of negative events in a specific industry based on diversified product



offerings .

D . This is incorrect because SASB’s research has identified that different industries are exposed to

different sustainability opportunities and risks and can therefore be diversified based on their distinct

exposure profiles .


A . This is CORRECT because the SEC’s guidance for MD&A is: focus on material information, include

key performance indicators, disclose known trends and uncertainties that are reasonably likely, and

analyze the information that is disclosed . See Section 6 .3 for more details .

B . This is incorrect because even if a trend is outside of the company’s control, any known trends,

events, and uncertainties that are reasonably likely to have material effects should be disclosed .

C . This is incorrect because it’s not in the SEC guidance .

D . This is CORRECT . See Section 6 .3 for more details .

E . This is CORRECT . See Section 6 .3 for more details .

F . This is CORRECT . See Section 6 .3 for more details .


A . This is CORRECT because as Justice Frankfurter explained: “[T]he information which must be

furnished in the registration statement is intended to reveal facts essential to a fair judgment upon

the security offered .” See Section 3 .2 for more details .

B . This is incorrect because the purpose of disclosure is not to inform additional regulation based on the

disclosed information, but to provide investors information necessary for informed decision-making .

C . This is CORRECT because one the purposes of periodic public reporting after the initial public

offering (IPO) is intended to enable the markets to properly value securities . See Section 3 .2 for more

details .

D . This is incorrect because the study guide never explains or suggests that disclosure is sought for

the purposes of non-governmental organizations or for the purpose of drawing attention to

sustainability information specifically .


A . This is incorrect because even though the safe harbor rule applies to MD&A, this rule is provided by

the PSLRA, not SASB . See Section 6 .3 for more details .

B . This is incorrect because MD&A was not added specifically for sustainability information, but for

insight into an organization’s financial condition, results of operations, and management’s view of

known trends and uncertainties that are reasonably likely to have a material effect on results of

operations and financial condition . See Section 6 .3 for more details .

C . This is CORRECT because by identifying sustainability topics that are reasonably likely to impact the

financial performance of companies in an industry, the information companies disclose align closely

with the purpose of MD&A . See Section 14 .4 .2 .1 for more details .

D . This is incorrect because MD&A is not used solely for quantitative data, in fact, it is primarily used

for qualitative information, hence “discussion” and “analysis” in the title of MD&A (Management’s



Discussion & Analysis) .


A . This is incorrect because it is not identified as a trigger for special disclosure in the context of SASB

standards .

B . This is CORRECT because Section 14 .1 .2 outlines how multinational SEC registrations may have

special considerations around certain SASB disclosure topics and/or accounting metrics .

C . This is CORRECT because registrants who generate significant revenue from multiple industries are

recommended to consider sustainability topics that SASB has identified for those industries and

disclose the associated SASB accounting metrics where relevant . See Section 14 .1 .2 for more details .

D . This is incorrect because it is not identified as a trigger for special disclosure in the context of SASB

standards .



165

The tables below provide the disclosure topics for each of the industries for which SASB has

issued sustainability accounting standards as of October 2018 .

APPENDIX I – SASB DISCLOSURE TOPICS

Disclosure TopicsConsumer Goods

Apparel, Accessories & Footwear

E-CommerceAppliance

ManufacturingHousehold &

Personal Products

Building Products & Furnishings

Toys &Sporting Goods

Multiline & Specialty Retailers

& Dist.

Envi

ronm

ent § Hardware

Infrastructure Energy & Water Management

§ Water Management

§ Energy Management in Manufacturing

§ Energy Management in Retail & Distribution

Soci

alC

apita

l

§ Management of Chemicals in Products

§ Data Privacy & AdvertisingStandards

§ Data Security

§ Product Safety

§ Product Environmental, Health & Safety Performance

§ Management of Chemicals in Products

§ Chemical & Safety Hazards of Products

§ Data Security

Hum

an

Cap

ital § Employee

Recruitment, Inclusion& Performance

§ Labor Practices

§ Workforce Diversity & Inclusion

B. M

odel

& In

nova

tion § Environmental

Impacts in the Supply Chain

§ Raw Material Sourcing

§ Labor Conditions inthe Supply Chain

§ Product Packaging & Distribution

§ Product Lifecycle EnvironmentalImpacts

§ Packaging Lifecycle Management

§ Environmental & Social Impacts of Palm Oil Supply Chain

§ Product Lifecycle EnvironmentalImpacts

§ Wood Supply Chain Management

§ Labor Conditions inthe Supply Chain

Lead

ersh

ip &

Gov

erna

nce § Product Sourcing,

Packaging & Marketing

7/26/19 © SASB8

Consumer Goods



Disclosure TopicsExtractives & Minerals Processing

7/26/19 © SASB7

Oil & Gas –Exploration &

Production

Oil & Gas –Midstream

Oil & Gas –Refining & Marketing

Oil & Gas –Services

Coal Operations

Iron & Steel Producers Metals & Mining Construction

Materials

Envi

ronm

ent

§ Greenhouse Gas Emissions

§ Air Quality

§ Water Management

§ Biodiversity Impacts


§ Air Quality

§ EcologicalImpacts


§ Air Quality

§ Water Management

§ Hazardous Materials Management

§ Emissions Reduction Services & Fuels Management

§ Water Management Services

§ Chemicals Management

§ Ecological Impact Management


§ Water Management

§ Waste Management



§ Air Quality

§ Energy Management

§ Water Management

§ Waste Management


§ Air Quality


§ Water Management

§ Waste & Hazardous Materials Management



§ Air Quality


§ Water Management

§ Waste Management


Soci

alC

apita

l

§ Security, Human Rights & Rights of Indigenous Peoples

§ Community Relations


§ Rights of IndigenousPeoples


§ Security, Human Rights & Rights of Indigenous Peoples

Hum

an

Cap

ital § Workforce Health &

Safety§ Workforce Health &

Safety§ Workforce Health &

Safety§ Labor Relations

§ Workforce Health & Safety


§ Labor Relations

§ Workforce Health &Safety


Busi

ness

Mod

el &

In

nova

tion

§ Product Specifications &Clean Fuel Blends

§ Product Innovation

Lead

ersh

ip &

Gov

erna

nce

§ Business Ethics &Transparency

§ Reserves Valuation & Capital Expenditures

§ Management of the Legal & RegulatoryEnvironment

§ Critical Incident Risk Management

§ Competitive Behavior

§ Operational Safety, Emergency Preparedness & Response

§ Pricing Integrity &Transparency

§ Management of the Legal & Regulatory Environment


§ Business Ethics &Payments Transparency



§ Reserves Valuation & Capital Expenditures

§ Supply Chain Management

§ Business Ethics &Payments Transparency

§ Pricing Integrity &Transparency



SASB® FSA™ LEVEL I STUDY GUIDEDisclosure Topics Financials

Commercial Banks

Investment Banking & Brokerage

Asset Management &

Custody Activities

Consumer Finance

Mortgage Finance

Security & Commodity Exchanges

Insurance

Envi

ronm

ent

Soci

al C

apita

l

§ Data Security

§ Financial Inclusion & Capacity Building

§ Transparent Information & Fair Advice for Customers

§ Data Security

§ Customer Privacy

§ Selling Practices

§ Lending Practices

§ Discriminatory Lending

§ Transparent Information & Fair Advice for Customers

Hum

an

Cap

ital

§ Employee Diversity & Inclusion


Busi

ness

Mod

el &

Inno

vatio

n

§ Incorporation of Environmental, Social & Governance Factors in Credit Analysis

§ Integration of Environmental, Social, & Governance Factors in Investment Banking & Brokerage Activities

§ Incorporation of Environmental, Social & Governance Factors in Investment Management & Advisory

§ Environmental Risk to Mortgaged Properties

§ Promoting Transparent & Efficient Capital Markets

§ Incorporation of Environmental, Social, & Governance Factors in Investment Management

§ Policies Designed to Incentivize Responsible Behavior

§ Environmental Risk Exposure

Lead

ersh

ip &

Gov

erna

nce

§ Business Ethics

§ Systemic Risk Management

§ Business Ethics

§ Professional Integrity


§ Employee Incentives & Risk Taking

§ Business Ethics


§ Managing Conflicts of Interest

§ Managing Business Continuity & Technology Risks


7/26/19 © SASB2

Financials



Food & Beverage

Disclosure TopicsFood & Beverage

Agricultural Products

Meat,Poultry, &

Dairy

Processed Foods

Non-Alcoholic Beverages

Alcoholic Beverages Tobacco Food Retailers

& Distributors Restaurants

Envi

ronm

ent



§ Water Management

§ GreenhouseGas Emissions


§ Water Management

§ Land Use & Ecological Impacts


§ Water Management

§ Fleet Fuel Management


§ Water Management


§ Water Management


§ Air Emissions from Refrigeration


§ Food Waste Management


§ Water Management

§ Food & PackagingWaste Management

Soci

alC

apita

l

§ Food Safety § Food Safety§ Antibiotic Use

In Animal Production

§ Food Safety§ Health &

Nutrition§ Product

Labeling & Marketing

§ Health & Nutrition

§ Product Labeling & Marketing

§ ResponsibleDrinking & Marketing

§ Public Health

§ Marketing Practices

§ Data Security§ Food Safety § Product Health &

Nutrition § Product Labeling

& Marketing

§ Food Safety§ Nutritional

Content

Hum

an

Cap

ital § Labor Practices § Labor Practices

Busi

ness

Mod

el &

Inno

vatio

n


§ Environmental & Social Impacts of Ingredient Supply Chains

§ Ingredient Sourcing§ GMO Management


§ Animal Care & Welfare

§ Environmental & Social Impacts of Animal Supply Chain

§ Animal & Feed Sourcing


§ Environmental& Social Impacts of Ingredient Supply Chain

§ Ingredient Sourcing


§ Environmental & Social Impacts of Ingredient Supply Chain



§ Environmental & Social Impacts of Ingredient Supply Chain


Lead

ersh

ip &

Gov

erna

nce § Management of

Environmental & Social Impacts in the Supply Chain

§ Supply Chain Management & Food Sourcing

7/26/19 © SASB11



Health Care

Disclosure Topics Health Care

7/26/19 © SASB1

Biotechnology & Pharmaceuticals Drug Retailers Medical Equipment

and Supplies Health Care Delivery Health Care Distributors Managed Care

Envi

ronm

ent § Energy Management

in Retail§ Energy Management

§ Waste Management


Soci

al C

apita

l

§ Safety of Clinical Trial Participants

§ Access to Medicines

§ Affordability & Pricing

§ Drug Safety

§ Counterfeit Drugs

§ Ethical Marketing

§ Data Security & Privacy

§ Drug Supply Chain Integrity

§ Management of Controlled Substances

§ Patient Health Outcomes

§ Affordability & Pricing

§ Product Safety

§ Ethical Marketing

§ Patient Privacy & Electronic Health Records

§ Access for Low-Income Patients

§ Quality of Care & Patient Satisfaction

§ Management of Controlled Substances

§ Pricing & Billing Transparency

§ Product Safety

§ Counterfeit Drugs

§ Customer Privacy & Technology Standards

§ Access to Coverage

§ Plan Performance

§ Improved Outcomes

Hum

an C

apita

l

§ Employee Recruitment, Development & Retention

§ Employee Health & Safety

§ Employee Recruitment, Development & Retention

Busi

ness

Mod

el &

In

nova

tion

§ Supply Chain Management

§ Product Design & Lifecycle Management

§ Supply ChainManagement

§ Climate Change Impacts on Human Health & Infrastructure

§ Product Lifecycle Management

§ Climate Change Impacts on Human Health

Lead

ersh

ip &

G

over

nanc

e

§ Business Ethics § Business Ethics § Fraud & UnnecessaryProcedures

§ Business Ethics



Disclosure TopicsInfrastructure

Electric Utilities & Power Generators

Gas Utilities &

Distributors

Water Utilities & Services

Waste Management

Engineering & Construction

ServicesHome Builders Real Estate Real Estate

Services

Envi

ronm

ent

• Greenhouse GasEmissions & Energy Resource Planning

• Air Quality

• Water Management

• Coal Ash Management

• Energy Management

• Distribution Network Efficiency

• Effluent Quality Management

• Greenhouse Gas Emissions

• Fleet Fuel Management

• Air Quality

• Management of Leachate & Hazardous Waste

• Environmental Impacts of Project Development

• Land Use & Ecological Impacts

• Energy Management

• WaterManagement

Soci

alC

apita

l

• Energy Affordability • Energy Affordability

• Water Affordability &Access

• Drinking Water Quality

• Structural Integrity& Safety

Hum

an

Cap

ital • Workforce Health &

Safety• Workforce Health

& Safety

• Labor Practices

• Workforce Health & Safety

• Workforce Health& Safety

Busi

ness

Mod

el

• End-Use Efficiency &Demand

• End-Use Efficiency

• End-Use Efficiency

• Water Supply Resilience

• Recycling &Resource Recovery

• Climate Impacts of Business Mix

• Lifecycle Impacts of Buildings & Infrastructure

• Design for Resource Efficiency

• Community Impacts of NewDevelopments

• Climate Change Adaptation

• Management of TenantSustainability Impacts

• Climate Change Adaptation

• SustainabilityServices

Lead

ersh

ip &

Gov

erna

nce

• Nuclear Safety &Emergency Management

• Grid Resiliency

• Integrity of Gas Delivery Infrastructure

• Network Resiliency & Impacts of Climate Change

• Business Ethics • Transparent Information &Management of Conflict of Interest

7/26/19 © SASB10

Infrastructure



Disclosure TopicsRenewable Resources & Alternative Energy

Biofuels Solar Technology & Project Developers

Wind Technology & Project Developers

Fuel Cells & IndustrialBatteries

ForestryManagement

Pulp & Paper Products

Envi

ronm

ent

§ Air Quality

§ Water Management inManufacturing

§ Energy Management inManufacturing

§ Water Management inManufacturing

§ Hazardous WasteManagement

§ Ecological Impacts of Project Development


§ EcosystemServices & Impacts


§ Air Quality


§ Water Management

Soci

alC

apita

l § Rights of Indigenous Peoples

Hum

an

Cap

ital


§ Workforce Health& Safety

Busi

ness

Mod

el&

Inno

vatio

n

§ Lifecycle Emissions Balance

§ Sourcing & EnvironmentalImpacts of Feedstock Production

§ Management of Energy Infrastructure Integration& Related Regulations

§ Product End-of-lifeManagement

§ Materials Sourcing

§ Ecological Impacts of Project Development


§ Materials Efficiency

§ Product Efficiency

§ Product End-of-Life Management


§ Climate ChangeAdaptation

Lead

ersh

ip &

Gov

erna

nce




7/26/19 © SASB9

Renewable Resources & Alternative Energy


SASB® FSA™ LEVEL I STUDY GUIDEDisclosure TopicsResource Transformation

7/26/19 © SASB5

Chemicals Aerospace & Defense Electrical & Electronic Equipment

Industrial Machinery & Goods

Containers & Packaging

Envi

ronm

ent





§ Energy Management § Greenhouse Gas Emissions

§ Air Quality


§ Water Management

§ Waste Management

Soci

alC

apita

l

§ Data Security

§ Product Safety

§ Product Safety § Product Safety

Hum

an

Cap

ital § Employee Health & Safety

Busi

ness

Mod

el &

In

nova

tion

§ Fuel Economy & Emissions in Use-phase


§ Product LifecycleManagement


§ Fuel Economy & Emissions in Use-phase


§ Remanufacturing Design& Services



Lead

ersh

ip &

Gov

erna

nce


§ Air Quality


§ Water Management

§ Hazardous Waste Management



§ Product Design for Use-phase Efficiency

§ Safety & Environmental Stewardship of Chemicals

§ Genetically Modified Organisms



§ Business Ethics § Business Ethics




Services

Disclosure TopicsServices

EducationProfessional &

Commercial Services

Hotels & Lodging Casinos & Gaming

LeisureFacilities

Advertising & Marketing

Media & Entertainment

Envi

ronm

ent


§ Water Management

§ Ecological Impacts



Soci

alC

apita

l

§ Data Security

§ Quality of Education& Gainful Employment

§ Marketing & Recruiting Practices

§ ProfessionalIntegrity

§ Data Security

§ ResponsibleGaming

§ Customer Safety § Data Privacy

§ AdvertisingIntegrity

§ Journalistic Integrity & Sponsorship Identification

§ Media Pluralism

Hum

an

Cap

ital § Workforce

Diversity & Engagement

§ Labor Practices § Smoke-freeCasinos

§ Workforce Safety § WorkforceDiversity & Inclusion

B. M

odel

&

Inno

vatio

n

§ Climate ChangeAdaptation

Lead

ersh

ip &

Gov

erna

nce § Internal Controls

on Money Laundering

7/26/19 © SASB6




Disclosure Topics Technology & Communications

Hardware EMS & ODM Semiconductors Software & IT Services Internet Media & Services

Telecommunications Services

Envi

ronm

ent

§ Water Management

§ Waste Management


§ Energy Management inManufacturing

§ Water Management

§ Waste Management

§ Environmental Footprint of HardwareInfrastructure

§ EnvironmentalFootprint of Hardware Infrastructure

§ EnvironmentalFootprint of Operations

Soci

al C

apita

l

§ Product Security § Data Privacy & Freedom of Expression

§ Data Security

§ Data Privacy, Advertising Standards & Freedom of Expression

§ Data Security

§ Data Privacy § Data Security

Hum

an C

apita

l


§ Labor Practices§ Labor Conditions

§ Employee Health& Safety

§ Recruiting &Managing a Global & SkilledWorkforce

§ Recruiting & Managing a Global, Diverse & Skilled Workforce

§ Employee Recruitment,Inclusion & Performance

Busi

ness

Mod

el &

Inno

vatio

n § Product LifecycleManagement



§ Product End-of-Life Management

Lead

ersh

ip &

Gov

erna

nce § Supply Chain

Management§ Materials

Sourcing


§ Materials Sourcing§ Intellectual

Property Protection & Competitive Behavior

§ Intellectual Property Protection & Competitive Behavior

§ Managing Systemic Risks from Technology Disruptions

§ Intellectual Property Protection& Competitive Behavior

§ Competitive Behavior & OpenInternet

§ Managing Systemic Risks from Technology Disruptions

7/26/19 © SASB3



Transportation

Disclosure TopicsTransportation

Automobiles Auto Parts Car Rental & Leasing Airlines Air Freight &

LogisticsMarine

TransportationRail

TransportationRoad

Transportation Cruise Lines

Envi

ronm

ent


§ Waste Management

§ GreenhouseGas Emissions


§ Air Quality


§ Air Quality

§ EcologicalImpacts


§ Air Quality


§ Air Quality


§ Air Quality

§ Discharge Management & Ecological Impacts

Soci

alC

apita

l § Product Safety

§ Product Safety § CustomerSafety

§ CustomerWelfare

§ Customer Health & Safety

Hum

an C

apita

l § Labor Practices

§ Labor Practices

§ Labor Practices




§ Driver WorkingConditions

§ Labor Practices


Busi

ness

Mod

el &

Inno

vatio

n

§ Fuel Economy & Use-phase Emissions


§ Materials Efficiency & Recycling

§ Design for FuelEfficiency


§ Materials Efficiency

§ Fleet Fuel Economy & Utilization


Lead

ersh

ip &

Gov

erna

nce

§ CompetitiveBehavior

§ Competitive Behavior

§ Accidents & Safety Management


§ Business Ethics


§ CompetitiveBehavior



§ Accident Management

7/26/19 © SASB4

KeyTopic removed

Topic added

Topic-level change

Metric-level change



176

To delve further into some of the key ideas raised in the FSA Level I study guide,

consider the following resources:

Khan, Mozaffar, George Serafeim, and Aaron Yoon . “Corporate Sustainability: First

Evidence on Materiality .” The Accounting Review 2016 91:6, 1697-1724 .

• This paper compares stock returns and accounting performance for 2,300

companies from 1993 to 2013 based on 109 MSCI data points, which are

separated into SASB topics and non-SASB topics .

Eccles, Robert, Ioannis Ioannou, and George Serafeim . “The Impact of a Culture of

Sustainability on Corporate Behavior and Performance .” Harvard Business School

Working Paper, May 2012 .

• This paper compares the organizational processes and outcomes of 90

High Sustainability firms, as defined by the presence of many voluntary

sustainability policies in 1993, and 90 Low Sustainability firms, as defined by

the presence of few or no sustainability policies .

Business Reporting Research Project . ”Improving Business Reporting: Insights into

Enhancing Voluntary Disclosurse .” Financial Accounting Standards Board (FASB),

2001 .

• This report presents examples of several leading companies providing

extensive voluntary disclosures, including non-financial disclosures, and

promotes the value of industry-based analysis and company-specific

disclosures of “critical success factors .”

APPENDIX II – RESOURCES FOR ENHANCED UNDERSTANDING

http://www.aaajournals.org/doi/abs/10.2308/accr-51383?code=aaan-site

http://www.aaajournals.org/doi/abs/10.2308/accr-51383?code=aaan-site

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1964011

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1964011

http://www.fasb.org/cs/BlobServer?blobkey=id&blobwhere=1175819611134&blobheader=application%2Fpdf&blobcol=urldata&blobtable=MungoBlobs

http://www.fasb.org/cs/BlobServer?blobkey=id&blobwhere=1175819611134&blobheader=application%2Fpdf&blobcol=urldata&blobtable=MungoBlobs



177

UN PRI, “Integrated Analysis: How investors are addressing environmental, social

and governance factors in fundamental equity valuation .” February 2013 .

• This report describes case studies of leading financial institutions integrating

ESG factors into fundamental equity analysis through five stages of analysis –

economic analysis, industry analysis, company strategy, financial reports, and

valuation tools .

SEC, “Interpretation: Commission Guidance Regarding Management’s Discussion

and Analysis of Financial Condition and Results of Operations; Certain Investment

Company Disclosures, Securities and Exchange Commission,” Release Nos .33-

8350; 34-48960; FR-72, December 29, 2003 .

• This interpretive release from the SEC outlines the Commission’s most recent

guidance that is intended to elicit more meaningful disclosure in MD&A

section of Form 10-K .

Monsma, David and Timothy Olson, “Muddling Through Counterfactual Materiality

and Divergent Disclosure: The Necessary Search for a Duty to Disclose Material

Non-Financial Information,” 26 Stanford Envtl .L . J . 137, 1988, p . 168-172 .

• This legal journal article discusses materiality, public corporations’ duties for

disclosure, and why the social and environmental management of those

corporations can be considered material information that they have a duty to

disclose .

SASB, Conceptual Framework, February 2017 .

• This document serves as a foundational document that guides SASB’s

standards development process and explains the concepts and definitions

relevant to SASB’s work

http://www.unpri.org/wp-content/uploads/Integrated_Analysis_2013.pdf

http://www.unpri.org/wp-content/uploads/Integrated_Analysis_2013.pdf

http://www.sec.gov/rules/interp/33-8350.htm#P28_5558



https://litigation-essentials.lexisnexis.com/webcd/app?action=DocumentDisplay&crawlid=1&srctype=smi&srcid=3B15&doctype=cite&docid=26+Stan.+Envtl.+L.J.+137&key=069c3f34780c31c7767bb7cd73af9864



http://www.sasb.org/wp-content/uploads/2013/10/SASB-Conceptual-Framework-Final-Formatted-10-22-13.pdf

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San Francisco, CA 94111

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