Mobilizing Capital Markets to Impact…
Himani Phadke

Himani Phadke Research Director, Sustainability Accounting Standards Board

August 15, 2016

Mobilizing Capital Markets to Impact Sustainability Challenges

Himani Phadke

Himani Phadke Research Director, Sustainability Accounting Standards Board

August 15, 2016

City BuildingsIn today’s world, sustainability issues impact the financial success of companies. Take the 2013 Target data breach, which cost the company an estimated $146 million and a 16 percent drop in earnings. Or the 2010 Deepwater Horizon oil spill, which cost BP $61.6 billion in pre-tax expenses and millions more in tarnished public trust. Sustainability issues can also create innovation opportunities. About $2.5 billion of DuPont’s 2013 revenue was generated from sales of products that help customers improve energy efficiency and/or reduce greenhouse gas emissions.

In order for investors to assess which companies are best managing sustainability risks and opportunities—and direct capital to the leaders—they need good information. Due to a lack of standards, however, corporate disclosure on sustainability issues is inconsistent. While some companies disclose sustainability information in Securities and Exchange Commission (SEC) filings, many publish standalone sustainability reports, which are not an effective format for investors.

The U.S. financial accounting system, which requires transparent disclosure of material information to investors, has helped make our markets the most efficient, liquid, and resilient in the world. However, this system was developed in a time when a company’s ability to create value was constrained largely by the ability to access financial capital. A new, standardized language is needed to articulate the sustainability risks and opportunities facing companies.

The Sustainability Accounting Standards Board (SASB) is an independent non-profit organization that was created to fill this need. SASB issues sustainability accounting standards that help public companies disclose material, decision-useful information to investors. The standards are designed for disclosure in mandatory filings to the SEC, such as the Form 10K and 20-F, alongside financial information. Provisional standards are available for 79 industries.

SASB develops standards at the industry level because not all sustainability issues matter to all industries. For example, energy management is important to oil and gas companies. Food safety matters to restaurants. Counterfeit drugs matter to pharmaceuticals. In identifying which issues are material to which industries, SASB adheres to the definition of materiality as defined by the U.S. Supreme Court. As such, SASB standards can help companies comply with existing regulation (Regulation S-K) to disclose material information in the Form 10-K.

“Firms with good performance on materials sustainability issues significantly outperform firms with poor performance on these issues, suggesting that investments in sustainability issues are shareholder-value enhancing”

Focusing on material sustainability issues benefits both companies and investors. Research presented in the working paper Corporate Sustainability: First Evidence on Materiality, by Mozaffar Khan, George Serafiem, and Aaron Yoon found that “firms with good performance on materials sustainability issues significantly outperform firms with poor performance on these issues, suggesting that investments in sustainability issues are shareholder-value enhancing”.

The Rockefeller Foundation supports SASB via its Revalue Ecosystems portfolio, which aims to correct the failure of economic models to account for the value of ecosystems and to find effective ways to integrate natural ecosystems into our economic and social systems. SASB’s work is particularly aligned with the Revalue Ecosystems’ objective to internalize ecosystem value in capital markets and financial instruments, and to influence the cost of capital. SASB standards identify the environmental issues—including those directly related to ecosystems—most likely to be material for each of 79 industries. The standards will enable more accurate valuation of environmental, social, and governance (ESG) risks, which will drive corporations to improve performance and allow investors to drive capital towards improved sustainability outcomes.

“These dynamics will drive change by rewarding companies that perform well against the standards and fostering competition amongst companies to better manage sustainability issues.”

SASB is working to create a world in which all public companies disclose material sustainability information in a standardized way, and investors can compare performance. Society will benefit from the improved ESG performance of companies, as driven by investors’ ability to drive capital to the most sustainable outcomes; as well as from an efficient capital market that more accurately prices company value. These dynamics will drive change by rewarding companies that perform well against the standards and fostering competition amongst companies to better manage sustainability issues.

The markets increasingly acknowledge the need for better sustainability disclosure. In response to the demand, the SEC—as described in a recent concept release on disclosure reform—is looking at how sustainability disclosure may need to evolve in order to meet investor needs. Read SASB’s key messages document to learn more. This is an exciting window of opportunity to advocate for sustainability information to be embedded into the fabric of the markets, and thus harness the power of capital to improve sustainability performance.