Speaking the same language on sustainability

SASB released a report last year showing that many companies are doing the bare minimum in terms of revealing their exposure to risk and other effects of sustainability-related issues. Is that from a lack of information, or a desire to avoid revealing uncomfortable truths?

I think it’s more nuanced than that. Many companies do put a lot of data in sustainability reports. We are focused on the idea that if there are ESG issues material to financial performance – and therefore of interest to investors – then that information should be included in companies’ disclosures to investors. In the US, that’s the Form 10K and the annual report.

So in our research for the report we looked at Form 10Ks and concluded that companies are often mentioning the SASB topics in their SEC filings, but they’re using boilerplate language to describe them. We believe there should be more detailed and metrics-based information on material ESG issues in those core financial filings.

Your standards cover 79 industries. What do you see as the value of having standardized disclosures within an industry, and does it risk generating boilerplate reporting?

We focus on industries because the issues material to business performance vary by industry. ESG disclosure today can often be very much one size fits all, with companies reporting the same type of information regardless of industry. We’re not advocating for that – we very much believe the most relevant information regarding business performance is specific to industries.

So the question becomes whether there are differences between companies that would make it difficult to standardize information even within an industry – and there’s no doubt that’s possible. We’re very clear that SASB standards are guidance for companies and the final decision about what issues are material and therefore should be disclosed rests with the firms. [This gives them] flexibility to acknowledge that there may be something different in their business model that distinguishes them from others in the industry.

We’re not saying it’s a tick-the-box exercise where every SASB issue must be disclosed. We are trying to give investors and companies at least a starting point for assessing which issues are most likely to be material.

Are there trends in terms of interest in SASB standards?

Yes. Two of our earliest adopters are in real estate [Kilroy Realty Corporation and Host Hotels & Resorts], then JetBlue did its own SASB report and NRG Energy included the SASB information in its sustainability report. There are some industries where ESG disclosures are easier, for lack of a better word, because [companies are] more mature in terms of thinking about these issues and the issues are more quantifiable. Energy and water use, which are big issues in real estate, tend to be relatively easy to quantify and disclose. It makes sense that [real estate companies] are some of the early adopters.

Then there are other industries where the issues and metrics are much more difficult. A good example is data privacy: it’s clear that data privacy could be a material topic in many industries, such as financial services, but the metric you use to calculate that is more complicated than the metric to measure energy usage.

I think what we’re going to see is that those industries where measuring some of these topics is more mature will turn out to be the earlier adopters. There will be other industries where it is going to take time for a consensus to emerge as to what the best metrics are.

Does SASB reach out to individual companies to discuss the development of standards?

We want both issuer and investor input into the development of our standards. We issue all our standards for public comment and have just finished a consultation period on our [preliminary] standards.

We are now going through the feedback before we release them for public comment again in the fall. That public comment period will remain open for 90 days covering September, October and November.

Several big institutional investors have been increasing the size of their governance teams and their focus on ESG issues. Where are their key interests?

Climate’s at the top of the list but behind that I’m sensing increased interest in human capital. The Human Capital Management Coalition [HCMC] recently filed a rulemaking petition with the SEC, asking [the regulator] to be more active in requiring greater disclosure about human capital. HCMC lays out nine specific categories of human capital management.

The way we think about this is in terms of whether there are human capital issues that are likely to be material to financial performance. Take health and safety, for instance: in a lot of heavy-duty manufacturing industries or extractive industries such as mining, health and safety can be a material issue. In, say, the tech industry, where intellectual human capital is very important, we would have something [in our standards] about recruitment and retention.

Would that include taking into account government policies on immigration, such as limits on the number of work visas granted to non-US citizens?

We would frame it in terms of risks and opportunities so in that case we would have a topic of, say, attraction and retention of a diverse, skilled workforce and [would ask]: what’s the composition of your workforce and do you rely on a high percentage of foreign technical workers? If so, we would look in the discussion and analysis for how that risk is being managed. That’s where curbs on immigration would come in.

Are there any other emerging risks people are paying attention to?

Water. We analyzed the comment letters on the SEC’s concept release last year on disclosure effectiveness, in which it asked for input on sustainability disclosure, and there was a fairly significant investor response. Three of the biggest topics were climate, human capital and water.

How do US and non-US companies compare on ESG-related disclosure?

[According to our research,] the [Form] 20F filers – those not based in the US – have higher-quality and more detailed disclosure than the 10K filers. That’s because there’s a longer history of sustainability reporting and communicating about these issues with investors [in Europe]. Many of the large European pension funds have been very active in asking for this information for a long time, so it’s a more evolved ecosystem. Those companies then bring that history and culture when they prepare their 20F filings. The question is, what does it take to bring US companies to that level?

Are you seeing a change in attitude among US companies?

I feel awareness is increasing among corporate issuers that this is an issue mainstream investors are interested in. There used to be widespread awareness that there was interest among certain investors – such as faith-based investors – in ESG, but it was perceived as a relatively small subset of investors. I think there is a growing awareness that a wide variety of large institutional investors care about disclosure and management of material ESG issues.

Can governance professionals encourage boards to take these issues seriously?

Yes, absolutely. In fact, I would encourage governance professionals to take a leadership role on this. Because they manage the boards and are often managing that interface between boards and the shareholders, they could really play a leadership role in educating organizations on what shareholders are asking about [and] why they care. That to me is an important missing link right now: building awareness among the governance community and boards about why investors want this information – and what they do with it.

This article originally appeared in the Corporate Secretary special edition on shareholder engagement. Click here to view the full issue.