No longer can analysts use the excuse there is inadequate data for incorporating ESG into investment decisions.
The Sustainability Accounting Standards Board (SASB), a not-for-profit chaired by Michael Bloomberg with Mary Schapiro as vice chair, was formed to set market standards for disclosure of material sustainability information to investors. With “material” defined as likely to affect financial performance.
The organisation – founded by Jean Rogers and made financially viable through donors including Bloomberg Philanthropies; foundations such as Ford, Rockefeller, PwC and Deloitte – is predicated on a belief that ESG factors can impact company financial performance and drive long-term value. The fact there is a now a broader range of risks and resource constraints beyond just access to capital makes the use of standardised financial reporting to investors insufficient.
This means that a new, standardised language is needed to articulate the material, non-financial risks and opportunities facing companies that affect their long-term value creation.
Bloomberg has put its money where its mouth is and was the first company to use the voluntary SASB standards; and a number of investors, including CalSTRS are behind the initiative, with chief executive Jack Ehnes on the board.
“SASB will help forge the link between ESG and how to put it into practice,” Chris Ailman, chief investment officer of CalSTRS, says.
“Our board has said they want us to integrate ESG, and our managers are saying how do we do that? ESG is all about looking at not just the balance sheet, but also the footnotes. SASB is focused on that, it looks at what is material for each industry.
“It is really important to us that SASB has defined material as affecting financial performance, which is right down the centre of our fiduciary duty,” Ailman says.
“For over 10 years when we’ve hired managers, we grill them on whether they look at ESG. Ninety-seven per cent of our managers confirm they use ESG criteria, now the board wants us to prove it.”
Standardised comparable data a big improvement
Director of capital markets policy and outreach at SASB, Janine Guillot – formerly chief operating investment officer at CalPERS – says the standards can be used to incorporate data into investment strategies; for corporate engagement to improve sustainability issues; or at the total portfolio level. Standardised, comparable data will improve all of those tools and enable them to be more metric-focused.
“I’m so excited about SASB, it’s a tool for investors to integrate sustainability across the entire portfolio,” she says. “The standards are firmly focused on what will impact a company’s financial performance. Whatever type of investor you are, you will have the right access to comparable data on sustainability. We are a piece of market infrastructure.”
In a presentation to the CalPERS investment committee, Guillot said her view has moved from being a sceptic about whether ESG factors should be incorporated into decision-making, to seeing that they must be incorporated into investment decision-making for long term investors.
But this, says Guillot, is still aspirational because incorporating ESG into investment decision-making in a rigorous and scalable way requires data – data that’s reliable, relevant and comparable. That’s the gap that SASB aspires to close,” she says.
SASB was formed to set market standards for disclosure of sustainability information to investors, with a focus on identifying sustainability topics and metrics that are material, decision-useful and cost-effective for companies to provide.
It has now developed provisional sustainability accounting standards across 11 sectors and 79 industries, and is conducting industry consultation with companies and investors.
“This will enable companies to report comparable information so performance can be benchmarked. We hope companies will compete to improve performance on sustainability metrics, just like they do on financial metrics today,” Guillot says.
“Existing sustainability reporting is not standard and they don’t have industry-specific performance metrics. The SASB accounting standards are the first that allow comparison of peer performance and benchmarking within an industry,” she says.
Companies hit by ‘survey fatigue’
As an investor, Chris Ailman says he would like companies to report on a more consistent basis.
“Companies are dealing with survey fatigue: they are hit with surveys from lots of directions. SASB will provide consolidation and a consistent format, and then other groups can use it as a data feed. It means comparisons are now possible, and a financial analyst wants a quick financial analysis on who’s better or worse,” he says.
“ESG is such a broad topic it is begging for a definition, and we are 100 per cent behind it. We will integrate it into our process and work with investment managers on how they pick stocks.”
Guillot says within a corporate, the SASB standards should be incorporated into regular financial reporting and be the responsibility of the CFO. If these internal controls and frameworks exist then investors know it is reliable, and it also gives a framework for CEOs and boards to benchmark performance.
“Our vision is that companies will compete on sustainability information, like they do with financial information,” Guillot says.
“The standards will also allow investors to understand the sustainability risks they are exposed to given their asset allocation and ensure companies they invest in are sustainable.”
“Widespread adoption of these standards would give a common language for talking about sustainability performance. It would enable integration of ESG into investment decision-making with rigour and at scale. This would be a better outcome for society, and long term investors.”
As a sign of the momentum in the industry, the SEC’s has included a discussion around sustainability disclosure in its recent Regulation S-K concept release, looking for comment on modernising certain business and financial disclosure requirements.
It says: “We are interested in receiving feedback on the importance of sustainability and public policy matters to informed investment and voting decisions. In particular, we seek feedback on which, if any, sustainability and public policy disclosures are important to an understanding of a registrant’s business and financial condition and whether there are other considerations that make these disclosures important to investment and voting decisions. We also seek feedback on the potential challenges and costs associated with compiling and disclosing this information.”
It is asking for comment.