fundamentals of sustainability...
TRANSCRIPT
TM
FUNDAMENTALS OF SUSTAINABILITY ACCOUNTING LEVEL I STUDY GUIDE
Part I : The Need for Sustainability Accounting StandardsPart II : Understanding SASB StandardsPart III : Using SASB Standards
CONTENTSLearning Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Part I: The Need for Sustainability Accounting Standards
1 . Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2. A Growing Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2 .1 . Changing Valuations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2 .2 . Sustainability Issues Are Business Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2 .3 . Existing, Evolving, and Emerging Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2 .4 . Increasing Investor Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
4 .1 . Early Statements on Generally Accepted Accounting Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
4 .2 . Historical Cost Accounting and the Rise of the APB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
4 .3 . Decision-Usefulness Enters the Lexicon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
4 .4 . The Founding of the FASB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
4 .5 . The FASB’s Conceptual Framework Project . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
5. Materiality: The Guiding Principle of Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
5 .1 . Foundational Cases: TSC v. Northway and Basic v. Levinson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
5 .2 . The SEC’s and FASB’s Views of Materiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
5 .3 . The NRDC’s Rule-Making Petition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
6. SEC Disclosure Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
6 .1 . Periodic Filing Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
6 .2 . Regulation S-K Requirements for Form 10-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
6 .3 . MD&A Section Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
6 .4 . The SEC’s Climate Change Guidance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
6 .5 . Consequences of Inadequate Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
6 .6 . The Sarbanes-Oxley Act and Controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
6 .7 . The SEC’s Disclosure Effectiveness Initiative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
7. Sustainability Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
7 .1 . Pointing the Way Forward: the AICPA, the FASB, and the CFA Institute . . . . . . . . . . . . . . . . . . . . . . . . . . 50
7 .2 . What Is Sustainability Accounting? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
7 .3 . External Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
7 .4 . Internal Decision-Making . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
7 .5 . Current Initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
8. The State of Sustainability Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
8 .1 . Voluntary Sustainability Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
8 .2 . Disclosure Overload . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
8 .3 . Securities Law, Not Semantics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
8 .4 . Sustainability Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
8 .5 . Benefits of Improved Sustainability Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Part II: Understanding SASB Standards
9. The Importance of Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
9 .1 . Financial and Non-Financial Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
9 .2 . State of Sustainability Disclosure in SEC Filings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
10. Introduction to SASB Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
10 .1 . U .S . Capital Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
10 .2 . Likely to Be Material . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
10 .3 . Decision-Useful . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
10 .4 . Cost-Effective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
10 .5 . Industry-Specific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
11. Identifying Industry-level Disclosure Topics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
11 .1 . The Reasonable Investor Revisited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
11 .2 . Evidence-Based Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
11 .3 . Stakeholder Consensus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
11 .4 . Evolving with the Marketplace . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
12. Components of a Standard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
12 .1 . Disclosure Guidance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
12 .2 . Disclosure Topics and Accounting Metrics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
12 .3 . Technical Bulletins and Interpretations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
13. Emerging Themes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
13 .1 . Climate Change: Ubiquitous but Differentiated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
13 .2 . It’s Not Just Climate Change Alone . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
13 .3 . Unique Sector Sustainability Profiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
Part III: Using SASB Standards
14. Corporate Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
14 .1 . Considerations for Corporate Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
14 .2 . Collecting Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
14 .3 . Managing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
14 .4 . Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
15. Investor Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131
15 .1 . Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131
15 .2 . Portfolio Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133
15 .3 . Industry Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134
15 .4 . Company-Level Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135
15 .5 . Active Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140
Prepare for the Exam . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141
Appendix I – SASB Provisional Disclosure Topics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
Appendix II – Resources for Enhanced Understanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150
CONTENTSLearning Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Part I: The Need for Sustainability Accounting Standards
1 . Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2. A Growing Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2 .1 . Changing Valuations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2 .2 . Sustainability Issues Are Business Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2 .3 . Existing, Evolving, and Emerging Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2 .4 . Increasing Investor Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
4 .1 . Early Statements on Generally Accepted Accounting Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
4 .2 . Historical Cost Accounting and the Rise of the APB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
4 .3 . Decision-Usefulness Enters the Lexicon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
4 .4 . The Founding of the FASB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
4 .5 . The FASB’s Conceptual Framework Project . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
5. Materiality: The Guiding Principle of Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
5 .1 . Foundational Cases: TSC v. Northway and Basic v. Levinson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
5 .2 . The SEC’s and FASB’s Views of Materiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
5 .3 . The NRDC’s Rule-Making Petition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
6. SEC Disclosure Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
6 .1 . Periodic Filing Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
6 .2 . Regulation S-K Requirements for Form 10-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
6 .3 . MD&A Section Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
6 .4 . The SEC’s Climate Change Guidance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
6 .5 . Consequences of Inadequate Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
6 .6 . The Sarbanes-Oxley Act and Controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
6 .7 . The SEC’s Disclosure Effectiveness Initiative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
7. Sustainability Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
7 .1 . Pointing the Way Forward: the AICPA, the FASB, and the CFA Institute . . . . . . . . . . . . . . . . . . . . . . . . . . 50
7 .2 . What Is Sustainability Accounting? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
7 .3 . External Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
7 .4 . Internal Decision-Making . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
7 .5 . Current Initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
8. The State of Sustainability Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
8 .1 . Voluntary Sustainability Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
8 .2 . Disclosure Overload . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
8 .3 . Securities Law, Not Semantics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
8 .4 . Sustainability Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
8 .5 . Benefits of Improved Sustainability Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Part II: Understanding SASB Standards
9. The Importance of Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
9 .1 . Financial and Non-Financial Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
9 .2 . State of Sustainability Disclosure in SEC Filings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
10. Introduction to SASB Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
10 .1 . U .S . Capital Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
10 .2 . Likely to Be Material . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
10 .3 . Decision-Useful . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
10 .4 . Cost-Effective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
10 .5 . Industry-Specific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
11. Identifying Industry-level Disclosure Topics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
11 .1 . The Reasonable Investor Revisited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
11 .2 . Evidence-Based Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
11 .3 . Stakeholder Consensus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
11 .4 . Evolving with the Marketplace . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
12. Components of a Standard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
12 .1 . Disclosure Guidance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
12 .2 . Disclosure Topics and Accounting Metrics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
12 .3 . Technical Bulletins and Interpretations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
13. Emerging Themes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
13 .1 . Climate Change: Ubiquitous but Differentiated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
13 .2 . It’s Not Just Climate Change Alone . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
13 .3 . Unique Sector Sustainability Profiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
Part III: Using SASB Standards
14. Corporate Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
14 .1 . Considerations for Corporate Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
14 .2 . Collecting Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
14 .3 . Managing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
14 .4 . Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
15. Investor Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131
15 .1 . Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131
15 .2 . Portfolio Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133
15 .3 . Industry Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134
15 .4 . Company-Level Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135
15 .5 . Active Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140
Prepare for the Exam . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141
Appendix I – SASB Provisional Disclosure Topics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
Appendix II – Resources for Enhanced Understanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150
LEARNING OBJECTIVES
A GROWING DEMAND
HISTORICAL AND LEGAL BASIS
THE ROLE OF ACCOUNTING
MATERIALITY: THE GUIDING PRINCIPLE OF DISCLOSURE
SEC DISCLOSURE REQUIREMENTS
SUSTAINABILITY ACCOUNTING
THE STATE OF SUSTAINABILITY DISCLOSURE
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) .
Explain the purpose and role of requiring public companies to disclose material information in SEC filings .
Explain the current state of financial accounting (codified, standard, decision-useful) given the history and efforts of the FASB .
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 .
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 the MD&A section was added to the 10-K and why it is an appropriate place for the disclosure of sustainability information .
Describe the trends driving demand for the disclosure of sustainability information .
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) .
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 .
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 implications of making statements about “materiality” outside of SEC filings .
Describe the trends driving demand for the disclosure of sustainability information .
THE IMPORTANCE OF STANDARDS
INTRODUCTION TO SASB STANDARDS
IDENTIFYING INDUSTRY-LEVEL DISCLOSURE TOPICS
COMPONENTS OF A STANDARD
EMERGING THEMES
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 .
Describe the current state of disclosure of sustainability topics in the 10-K .
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 .
Distinguish SASB’s approach (sustainability accounting) from other approaches to sustainability tracking and reporting .
Distinguish SICSTM sectors based on their distinct sustainability profiles .
Explain the organization of SICSTM and the implications of a sustainability-based industry classification .
Distinguish SASB’s approach (sustainability accounting) from other approaches to sustainability tracking and reporting .
Explain the organization of SICSTM and the implications of a sustainability-based industry classification .
Explain the evidence basis that supports the identification of SASB disclosure topics .
Explain the stakeholder consensus that supports the identification of SASB disclosure topics .
Distinguish SASB’s approach (sustainability accounting) from other approaches to sustainability tracking and reporting .
Discuss the Supreme Court definition of materiality and the implications of this definition .
LEARNING OBJECTIVES
A GROWING DEMAND
HISTORICAL AND LEGAL BASIS
THE ROLE OF ACCOUNTING
MATERIALITY: THE GUIDING PRINCIPLE OF DISCLOSURE
SEC DISCLOSURE REQUIREMENTS
SUSTAINABILITY ACCOUNTING
THE STATE OF SUSTAINABILITY DISCLOSURE
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) .
Explain the purpose and role of requiring public companies to disclose material information in SEC filings .
Explain the current state of financial accounting (codified, standard, decision-useful) given the history and efforts of the FASB .
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 .
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 the MD&A section was added to the 10-K and why it is an appropriate place for the disclosure of sustainability information .
Describe the trends driving demand for the disclosure of sustainability information .
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) .
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 .
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 implications of making statements about “materiality” outside of SEC filings .
Describe the trends driving demand for the disclosure of sustainability information .
THE IMPORTANCE OF STANDARDS
INTRODUCTION TO SASB STANDARDS
IDENTIFYING INDUSTRY-LEVEL DISCLOSURE TOPICS
COMPONENTS OF A STANDARD
EMERGING THEMES
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 .
Describe the current state of disclosure of sustainability topics in the 10-K .
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 .
Distinguish SASB’s approach (sustainability accounting) from other approaches to sustainability tracking and reporting .
Distinguish SICSTM sectors based on their distinct sustainability profiles .
Explain the organization of SICSTM and the implications of a sustainability-based industry classification .
Distinguish SASB’s approach (sustainability accounting) from other approaches to sustainability tracking and reporting .
Explain the organization of SICSTM and the implications of a sustainability-based industry classification .
Explain the evidence basis that supports the identification of SASB disclosure topics .
Explain the stakeholder consensus that supports the identification of SASB disclosure topics .
Distinguish SASB’s approach (sustainability accounting) from other approaches to sustainability tracking and reporting .
Discuss the Supreme Court definition of materiality and the implications of this definition .
LEARNING OBJECTIVES CONTINUED
CORPORATE USE
INVESTOR 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 the 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) .
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) .
Discuss the utility of SASB standards in investment decisions (e .g ., portfolio allocation, risk/return profile) .
Explain the organization of SICSTM and the implications of a sustainability-based industry classification .
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) .
9COPYRIGHT. ALL RIGHTS RESERVED © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD8
SASB FSA LEVEL I STUDY GUIDE
EXECUTIVE SUMMARY
In 2013, more than 9,000 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 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 .
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 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
9COPYRIGHT. ALL RIGHTS RESERVED © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD8
SASB FSA LEVEL I STUDY GUIDE
EXECUTIVE SUMMARY
In 2013, more than 9,000 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 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 .
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 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
13COPYRIGHT. ALL RIGHTS RESERVED © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
12
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
1 Ocean Tomo, “Components of S&P 500 Market Value” (2010), accessed Feb . 20, 2015 .
2A GROWING DEMAND
PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS
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 this
evolution . 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 .
Both groups have come to the shared realization that financial returns 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 2010,
the number was 80 percent .1 When market valuations are increasingly based on
intangibles, such as intellectual capital, customer relationships, brand value, and
13COPYRIGHT. ALL RIGHTS RESERVED © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
12
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
1 Ocean Tomo, “Components of S&P 500 Market Value” (2010), accessed Feb . 20, 2015 .
2A GROWING DEMAND
PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS
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 this
evolution . 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 .
Both groups have come to the shared realization that financial returns 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 2010,
the number was 80 percent .1 When market valuations are increasingly based on
intangibles, such as intellectual capital, customer relationships, brand value, and
COPYRIGHT. ALL RIGHTS RESERVED 1514 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS
2 FASB Business Reporting Research Project, “Improving Business Reporting: Insights into Enhancing Voluntary Disclosures,” January 29, 2001 .
other “soft” assets that create shareholder
value in a knowledge-driven economy,
traditional financial statements tell only a
part of the story .
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 FASB2 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 .
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
90%
70%
80%
60%
50%
40%
30%
20%
10%
0%
100%
1975 1985 1995 2005 2010
Tangible Assets Intangible Assets
3 OECD, “Corporate Reporting of Intangible Assets: A Progress Report”, April, 2012 .4 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 .
5 Khan, Mozaffar, George Serafeim, and Aaron Yoon . “Corporate Sustainability: First Evidence on Materiality .” Harvard Business School Working Paper, March 2015 .
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 .3
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 .4
Although research tends to support
the idea that sustainability management
and business outcomes are linked, the
evidence suggests only correlation, not
necessarily causation, and the connection
has been somewhat weak . Most studies,
however, have considered a broad set of
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 accounting
and risk-adjusted market returns (see table at right) than those focused on immaterial
sustainability factors .5
Meanwhile, corporate executives have reached their own consensus on the matter .
According to a 2011 McKinsey survey (The Business of Sustainability), 76 percent of
6.01%
-2.90% 0.60%
1.96%
HIGH
LOW
HIGHLOW
Stock Returns (in annualized alpha) by Type of Sustainability Performance
Perf
orm
ance
on
M
ATE
RIA
L fa
ctor
s
Performance on IMMATERIAL factors
COPYRIGHT. ALL RIGHTS RESERVED 1514 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS
2 FASB Business Reporting Research Project, “Improving Business Reporting: Insights into Enhancing Voluntary Disclosures,” January 29, 2001 .
other “soft” assets that create shareholder
value in a knowledge-driven economy,
traditional financial statements tell only a
part of the story .
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 FASB2 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 .
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
90%
70%
80%
60%
50%
40%
30%
20%
10%
0%
100%
1975 1985 1995 2005 2010
Tangible Assets Intangible Assets
3 OECD, “Corporate Reporting of Intangible Assets: A Progress Report”, April, 2012 .4 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 .
5 Khan, Mozaffar, George Serafeim, and Aaron Yoon . “Corporate Sustainability: First Evidence on Materiality .” Harvard Business School Working Paper, March 2015 .
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 .3
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 .4
Although research tends to support
the idea that sustainability management
and business outcomes are linked, the
evidence suggests only correlation, not
necessarily causation, and the connection
has been somewhat weak . Most studies,
however, have considered a broad set of
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 accounting
and risk-adjusted market returns (see table at right) than those focused on immaterial
sustainability factors .5
Meanwhile, corporate executives have reached their own consensus on the matter .
According to a 2011 McKinsey survey (The Business of Sustainability), 76 percent of
6.01%
-2.90% 0.60%
1.96%
HIGH
LOW
HIGHLOW
Stock Returns (in annualized alpha) by Type of Sustainability Performance
Perf
orm
ance
on
M
ATE
RIA
L fa
ctor
s
Performance on IMMATERIAL factors
COPYRIGHT. ALL RIGHTS RESERVED 1716 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
7 Ceres, “Investors push SEC to require stronger climate risk disclosure by fossil fuel companies,” April 17, 2015 .
PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS
6 SEC, “Commission Guidance Regarding Disclosure Related to Climate Change,” Release Nos . 33-9106; 34-61469; FR-82, February 2, 2010 . (hereafter, “2010 Release”)
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 .6 The SEC also launched a Disclosure Effectiveness Initiative in 2013 with the
goal of improving the quality of disclosures . However, it remains to be seen whether the
Commission’s reform will explicitly address sustainability .
At the same time, a growing number of stock exchanges is pushing for standards
related to responsible investment and sustainability issues . Many 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-supported Principles for Responsible
Investment (UNPRI) Sustainable Stock Exchange 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 .
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 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, 2014), such investments represent nearly 18 percent of the $36 .8 trillion in total assets
under management, an increase of 76 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 wrote 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 .7
COPYRIGHT. ALL RIGHTS RESERVED 1716 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
7 Ceres, “Investors push SEC to require stronger climate risk disclosure by fossil fuel companies,” April 17, 2015 .
PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS
6 SEC, “Commission Guidance Regarding Disclosure Related to Climate Change,” Release Nos . 33-9106; 34-61469; FR-82, February 2, 2010 . (hereafter, “2010 Release”)
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 .6 The SEC also launched a Disclosure Effectiveness Initiative in 2013 with the
goal of improving the quality of disclosures . However, it remains to be seen whether the
Commission’s reform will explicitly address sustainability .
At the same time, a growing number of stock exchanges is pushing for standards
related to responsible investment and sustainability issues . Many 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-supported Principles for Responsible
Investment (UNPRI) Sustainable Stock Exchange 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 .
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 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, 2014), such investments represent nearly 18 percent of the $36 .8 trillion in total assets
under management, an increase of 76 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 wrote 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 .7
COPYRIGHT. ALL RIGHTS RESERVED 1918 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS
8 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 .
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 .8
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 .
In recent years, some companies, including General Electric, Citigroup, and
McDonald’s, have ended their practice of providing earnings guidance . According to
a 2009 report by Deloitte and the Financial Executives Research Foundation (Earnings Guidance: The Current State of Play), these companies believe that such guidance
detracts from sustaining a long-term strategy . However, there remains significant
demand for this information from Wall Street .
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
“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
10 Cohen, H . Rodgin and Glen T . Schleyer, “Shareholder vs . Director Control over Social Policy Matters: Conflicting Trends in Corporate Governance,” Notre Dame Journal of Law, Ethics & Public Policy 26, no . 81 (2012) .
9 Johnson, Keith . “Introduction to Institutional Investor Fiduciary Duties,” The International Institute for Sustainable Development, February, 2014, p . 8 .
definitions and legal interpretations of fiduciary duty exist, a common misconception is
that it legally compels asset managers to solely maximize financial returns .
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 .”
The largest institutional investors own such significant amounts of assets that some
have adopted a “universal owner” approach: They consider not only the investors’
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 .”9 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 1994 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 Unproductive 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 investors request this information directly from the
company, and 50 percent sponsor or cosponsor a shareholder proposal . Indeed, 55
percent of the shareholder resolutions filed during 2014’s proxy season were related to
sustainability, up from 45 percent in 2013 . The SEC has also recently refined its view
on shareholder proposals to make it increasingly difficult for companies to exclude
proposals that deal with climate change or sustainability .10 Although studies show that
firms are more likely to address social or environmental concerns when they (or other
firms in their industry) have been targeted by a shareholder proposal, it is nevertheless
an expensive and unproductive means for getting investors the information they need .
COPYRIGHT. ALL RIGHTS RESERVED 1918 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS
8 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 .
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 .8
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 .
In recent years, some companies, including General Electric, Citigroup, and
McDonald’s, have ended their practice of providing earnings guidance . According to
a 2009 report by Deloitte and the Financial Executives Research Foundation (Earnings Guidance: The Current State of Play), these companies believe that such guidance
detracts from sustaining a long-term strategy . However, there remains significant
demand for this information from Wall Street .
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
“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
10 Cohen, H . Rodgin and Glen T . Schleyer, “Shareholder vs . Director Control over Social Policy Matters: Conflicting Trends in Corporate Governance,” Notre Dame Journal of Law, Ethics & Public Policy 26, no . 81 (2012) .
9 Johnson, Keith . “Introduction to Institutional Investor Fiduciary Duties,” The International Institute for Sustainable Development, February, 2014, p . 8 .
definitions and legal interpretations of fiduciary duty exist, a common misconception is
that it legally compels asset managers to solely maximize financial returns .
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 .”
The largest institutional investors own such significant amounts of assets that some
have adopted a “universal owner” approach: They consider not only the investors’
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 .”9 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 1994 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 Unproductive 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 investors request this information directly from the
company, and 50 percent sponsor or cosponsor a shareholder proposal . Indeed, 55
percent of the shareholder resolutions filed during 2014’s proxy season were related to
sustainability, up from 45 percent in 2013 . The SEC has also recently refined its view
on shareholder proposals to make it increasingly difficult for companies to exclude
proposals that deal with climate change or sustainability .10 Although studies show that
firms are more likely to address social or environmental concerns when they (or other
firms in their industry) have been targeted by a shareholder proposal, it is nevertheless
an expensive and unproductive means for getting investors the information they need .
21COPYRIGHT. ALL RIGHTS RESERVED 20 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
Lacking that information, long-term investors at times opt for divestment . Recently,
Stanford University divested its $18 .7 billion endowment fund from coal mining
companies . In another 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 for
investment decisions (e .g ., reduced ratio of net assets to enterprise value,
increased risks and opportunities) .
√ 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 managers
and other trustees?
? Questions to consider
11 Senate Banking and Currency Committee, Stock Exchange Practices (the “Fletcher Report”), S . Rep . No . 73-1455, (1934) .
HISTORICAL AND LEGAL BASIS
Clearly the demand for information on corporate sustainability performance is
growing rapidly . However, the disclosure of material sustainability information to
investors is not yet common practice 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 .11
3PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS
Learning Objectives Covered in This Section
Explain the purpose and role of requiring public companies to disclose material
information in SEC filings .
21COPYRIGHT. ALL RIGHTS RESERVED 20 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
Lacking that information, long-term investors at times opt for divestment . Recently,
Stanford University divested its $18 .7 billion endowment fund from coal mining
companies . In another 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 for
investment decisions (e .g ., reduced ratio of net assets to enterprise value,
increased risks and opportunities) .
√ 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 managers
and other trustees?
? Questions to consider
11 Senate Banking and Currency Committee, Stock Exchange Practices (the “Fletcher Report”), S . Rep . No . 73-1455, (1934) .
HISTORICAL AND LEGAL BASIS
Clearly the demand for information on corporate sustainability performance is
growing rapidly . However, the disclosure of material sustainability information to
investors is not yet common practice 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 .11
3PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS
Learning Objectives Covered in This Section
Explain the purpose and role of requiring public companies to disclose material
information in SEC filings .
COPYRIGHT. ALL RIGHTS RESERVED 2322
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© 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
(1999), p . 1217 . 14Williams, p . 1216 . 15Frankfurter, Felix “The Federal Securities Act: II,” Fortune, Vol . 7, No . 2 (August 1933): 53 . 16Id . at 55 .
12Brandeis, Louis D . Other People’s Money and How the Bankers Use It, 1967 edition . Harper Torchbooks, 1914, pg . 62 .13Berle, 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 Harvard L . Rev . 1197,
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 .12
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 .13 They also
believed that disclosure would advance the ability of the capital markets to efficiently
price securities .14
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 .”15 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 .
The Securities Act is strong insofar as it is potent; it is weak insofar as
21Williams, pp . 1233-34 . 22Steinberg, Marc I . Corporate Internal Affairs: A Corporate and Securities Law Perspective, p . 29 . Praeger (1983) .23Sec . Ex . Act Rel . 15,384, 16 SEC Dock . 348, 350 . (1978) .
1777 Cong . Rec, pp . 2918 (1933) . 18Address to Congress by Franklin D . Roosevelt, reprinted in Michael F . Parrino, Truth in Securities, p . 23 . Queensland Publishing Company (1968) . 19SEC v . Ralston Purina Co ., 3467 US 119, 124 (1953) .20Id .
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 .16
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 possess 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 .17
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 .”18
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 .”19 Roosevelt argued that the law “adds
to the ancient rule of caveat emptor, the further rule ‘let the buyer beware .’”20 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 .21
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 .”22 In proposing corporate
governance regulations in 1978, the SEC acknowledged the positive effects of
disclosure on corporate behavior .23
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
COPYRIGHT. ALL RIGHTS RESERVED 2322
SASB FSA LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS
© 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
(1999), p . 1217 . 14Williams, p . 1216 . 15Frankfurter, Felix “The Federal Securities Act: II,” Fortune, Vol . 7, No . 2 (August 1933): 53 . 16Id . at 55 .
12Brandeis, Louis D . Other People’s Money and How the Bankers Use It, 1967 edition . Harper Torchbooks, 1914, pg . 62 .13Berle, 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 Harvard L . Rev . 1197,
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 .12
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 .13 They also
believed that disclosure would advance the ability of the capital markets to efficiently
price securities .14
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 .”15 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 .
The Securities Act is strong insofar as it is potent; it is weak insofar as
21Williams, pp . 1233-34 . 22Steinberg, Marc I . Corporate Internal Affairs: A Corporate and Securities Law Perspective, p . 29 . Praeger (1983) .23Sec . Ex . Act Rel . 15,384, 16 SEC Dock . 348, 350 . (1978) .
1777 Cong . Rec, pp . 2918 (1933) . 18Address to Congress by Franklin D . Roosevelt, reprinted in Michael F . Parrino, Truth in Securities, p . 23 . Queensland Publishing Company (1968) . 19SEC v . Ralston Purina Co ., 3467 US 119, 124 (1953) .20Id .
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 .16
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 possess 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 .17
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 .”18
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 .”19 Roosevelt argued that the law “adds
to the ancient rule of caveat emptor, the further rule ‘let the buyer beware .’”20 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 .21
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 .”22 In proposing corporate
governance regulations in 1978, the SEC acknowledged the positive effects of
disclosure on corporate behavior .23
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
COPYRIGHT. ALL RIGHTS RESERVED 2524 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
Maintains Market Integrity, and Facilitates Capital Formation .” Accessed July 20, 2014 .
PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS
24 S . Rep . No . 73-793, p . 10 .25 House of Representatives Report No . 73-1383, p . 11 . 26 Williams, p . 1244 .
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 .”24
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 Form 10-K, 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,”25 where “publicity” means the
disclosure of accurate, complete financial information on an ongoing basis .26
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 .
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 .
27 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,
Corporate disclosure filings are reviewed for whether they meet the requirements for
disclosure . The SEC 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 .27
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 towards 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 .
SECTION REVIEW
In this section, the following Learning Objectives were covered:
• 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?
? Questions to consider
COPYRIGHT. ALL RIGHTS RESERVED 2524 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
Maintains Market Integrity, and Facilitates Capital Formation .” Accessed July 20, 2014 .
PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS
24 S . Rep . No . 73-793, p . 10 .25 House of Representatives Report No . 73-1383, p . 11 . 26 Williams, p . 1244 .
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 .”24
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 Form 10-K, 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,”25 where “publicity” means the
disclosure of accurate, complete financial information on an ongoing basis .26
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 .
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 .
27 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,
Corporate disclosure filings are reviewed for whether they meet the requirements for
disclosure . The SEC 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 .27
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 towards 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 .
SECTION REVIEW
In this section, the following Learning Objectives were covered:
• 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?
? Questions to consider
COPYRIGHT. ALL RIGHTS RESERVED 2726
PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS
COPYRIGHT . ALL RIGHTS RESERVED © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
29 Zeff 2005, p . 2028 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”)
SASB FSA LEVEL I STUDY GUIDE
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 .28 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 .”29 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 .
4THE ROLE OF ACCOUNTING
Learning Objectives Covered in This Section
Explain the current state of financial accounting (codified, standard, decision-
useful) given the history and efforts of the FASB .
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
COPYRIGHT. ALL RIGHTS RESERVED 2726
PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS
COPYRIGHT . ALL RIGHTS RESERVED © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
29 Zeff 2005, p . 2028 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”)
SASB FSA LEVEL I STUDY GUIDE
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 .28 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 .”29 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 .
4THE ROLE OF ACCOUNTING
Learning Objectives Covered in This Section
Explain the current state of financial accounting (codified, standard, decision-
useful) given the history and efforts of the FASB .
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
COPYRIGHT. ALL RIGHTS RESERVED 2928 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS
32 Staubus, George J ., The Decision Usefulness Theory of Accounting: A Limited History, 1961, p . 11 .33 Zeff, Stephen A ., “The Objectives of Financial Reporting: A Historical Survey and Analysis,” January 1, 2013, Accounting and Business Research . Accessed August 17, 2014 .
30 American Accounting Association . “A Statement of Basic Accounting Theory,” Evanston, IL: AAA, 1996: p . 1 .31 Robert Sterling . “A Statement of Basic Accounting Theory: A Review Article,” Journal of Accounting Research, vol . 5, no . 1, pp . 95-112 .
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 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 .”30
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 .31
Therefore, “the purpose of accounting is to provide information which will be of
assistance in making economic decisions .”32 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 .”33
4 .4 . The Founding of FASB
During the late 1960s and early 1970s, dissatisfaction grew over the APB’s inability
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 .34 In 1970, the APB affirmed the decision-usefulness objective 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 effectiveness in fulfilling its stewardship and other managerial responsibilities .35
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
36 Zeff 1999, p . 101 .37American Institute of Certified Public Accountants, “Objectives of Financial Statements” (Trueblood Committee report), 1973, p . 54 .38 Ibid ., p . 55 .39 FASB, Statement of Financial Accounting Concepts No . 1, 1978, paragraph 34 .
34 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”)35 Accounting Principles Board . “Basic Concepts and Accounting Principles Underlying Financial Statements of Business Enterprises,” 1970, Chapter 4 .
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 .36 The committee pointed to pollution as an example of “enterprise
activities which require sacrifices from those who do not benefit .”37 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 .”38
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 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 busi-
ness enterprises . In it, the FASB identified the primary purpose of financial reporting as
“provid[ing] information to help present and potential investors and creditors and other
users in making rational investment, credit, and similar decisions .”39
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 informa-
tion for users of financial reporting in making decisions .
• The two most important characteristics were identified as “relevance” and
COPYRIGHT. ALL RIGHTS RESERVED 2928 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS
32 Staubus, George J ., The Decision Usefulness Theory of Accounting: A Limited History, 1961, p . 11 .33 Zeff, Stephen A ., “The Objectives of Financial Reporting: A Historical Survey and Analysis,” January 1, 2013, Accounting and Business Research . Accessed August 17, 2014 .
30 American Accounting Association . “A Statement of Basic Accounting Theory,” Evanston, IL: AAA, 1996: p . 1 .31 Robert Sterling . “A Statement of Basic Accounting Theory: A Review Article,” Journal of Accounting Research, vol . 5, no . 1, pp . 95-112 .
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 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 .”30
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 .31
Therefore, “the purpose of accounting is to provide information which will be of
assistance in making economic decisions .”32 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 .”33
4 .4 . The Founding of FASB
During the late 1960s and early 1970s, dissatisfaction grew over the APB’s inability
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 .34 In 1970, the APB affirmed the decision-usefulness objective 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 effectiveness in fulfilling its stewardship and other managerial responsibilities .35
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
36 Zeff 1999, p . 101 .37American Institute of Certified Public Accountants, “Objectives of Financial Statements” (Trueblood Committee report), 1973, p . 54 .38 Ibid ., p . 55 .39 FASB, Statement of Financial Accounting Concepts No . 1, 1978, paragraph 34 .
34 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”)35 Accounting Principles Board . “Basic Concepts and Accounting Principles Underlying Financial Statements of Business Enterprises,” 1970, Chapter 4 .
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 .36 The committee pointed to pollution as an example of “enterprise
activities which require sacrifices from those who do not benefit .”37 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 .”38
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 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 busi-
ness enterprises . In it, the FASB identified the primary purpose of financial reporting as
“provid[ing] information to help present and potential investors and creditors and other
users in making rational investment, credit, and similar decisions .”39
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 informa-
tion for users of financial reporting in making decisions .
• The two most important characteristics were identified as “relevance” and
COPYRIGHT. ALL RIGHTS RESERVED 3130 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS
41 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 .
40 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 .
“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 co mparability, 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 .40
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 .41
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 characteristics of useful financial infor-
mation . The new characteristics are:
• Relevance, which explicitly recognizes the importance of materiality; and
• 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 .42
42 FASB, Statement of Financial Accounting Concepts No . 8, 2010, pp . 16-18
SECTION REVIEW
In this section, the following Learning Objectives were covered:
• Explain the current state of financial accounting (codified, standard, 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?
? Questions to consider
COPYRIGHT. ALL RIGHTS RESERVED 3130 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS
41 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 .
40 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 .
“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 co mparability, 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 .40
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 .41
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 characteristics of useful financial infor-
mation . The new characteristics are:
• Relevance, which explicitly recognizes the importance of materiality; and
• 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 .42
42 FASB, Statement of Financial Accounting Concepts No . 8, 2010, pp . 16-18
SECTION REVIEW
In this section, the following Learning Objectives were covered:
• Explain the current state of financial accounting (codified, standard, 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?
? Questions to consider
COPYRIGHT. ALL RIGHTS RESERVED 33© 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD32
PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS
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 . publicly
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’s 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
SASB FSA LEVEL I STUDY GUIDE
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 .
43 TSC v . Northway, 426 US 439 (1976)44 TSC, 426 US at 449 .
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 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 .43
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 .44
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.45 (emphasis added)
COPYRIGHT. ALL RIGHTS RESERVED 33© 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD32
PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS
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 . publicly
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’s 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
SASB FSA LEVEL I STUDY GUIDE
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 .
43 TSC v . Northway, 426 US 439 (1976)44 TSC, 426 US at 449 .
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 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 .43
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 .44
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.45 (emphasis added)
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48 Basic v . Levinson, 485 US 224 (1988) .4915 U .S .C . § 78j; 17 C .F .R . 240 .10b-5 .
45 TSC, 426 US at 449 .46 TSC, 438 US at 448-449 .47 TSC, 438 US at 450 .
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 .46 The Supreme Court
emphasized that materiality is a question of law applied to the specific facts of a case .47
The Supreme Court addressed materiality again 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 .48
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 .49 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 .50 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 .
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
54 FASB, Statement of Financial Accounting Concepts No . 2, Qualitative Characteristics of Accounting Information, 131 (1980) .55 FASB, Statement of Financial Accounting Concepts No . 8, Qualitative Characteristics of Useful Accounting Information, 17 (2010) .
50 Basic, 485 US at 238-241 . 51 Reese v . Malone, No . 12-35260 (9th Cir . Feb . 13, 2014), at 19 .52 Basic, 485 US at 231-232 .53 17 C .F .R . Part 11, SEC Staff Accounting Bulletin No . 99 – Materiality (August 11, 1999) .
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 .52
5 .2 . The SEC’s and FASB’s Views of Materiality
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 .53 Similarly, the FASB has stated
that materiality cannot be captured by a formula54 and that quantitative thresholds
should not be used to make materiality determinations .55 Financial rules of thumb and
formulas cannot, by definition, capture material information that investors are interested
in . The bulletin states that companies should 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 .56 Once this decision becomes final, the FASB’s standard of
materiality will presumably align with the Supreme Court’s standard .
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SASB FSA LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS
48 Basic v . Levinson, 485 US 224 (1988) .4915 U .S .C . § 78j; 17 C .F .R . 240 .10b-5 .
45 TSC, 426 US at 449 .46 TSC, 438 US at 448-449 .47 TSC, 438 US at 450 .
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 .46 The Supreme Court
emphasized that materiality is a question of law applied to the specific facts of a case .47
The Supreme Court addressed materiality again 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 .48
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 .49 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 .50 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 .
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
54 FASB, Statement of Financial Accounting Concepts No . 2, Qualitative Characteristics of Accounting Information, 131 (1980) .55 FASB, Statement of Financial Accounting Concepts No . 8, Qualitative Characteristics of Useful Accounting Information, 17 (2010) .
50 Basic, 485 US at 238-241 . 51 Reese v . Malone, No . 12-35260 (9th Cir . Feb . 13, 2014), at 19 .52 Basic, 485 US at 231-232 .53 17 C .F .R . Part 11, SEC Staff Accounting Bulletin No . 99 – Materiality (August 11, 1999) .
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 .52
5 .2 . The SEC’s and FASB’s Views of Materiality
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 .53 Similarly, the FASB has stated
that materiality cannot be captured by a formula54 and that quantitative thresholds
should not be used to make materiality determinations .55 Financial rules of thumb and
formulas cannot, by definition, capture material information that investors are interested
in . The bulletin states that companies should 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 .56 Once this decision becomes final, the FASB’s standard of
materiality will presumably align with the Supreme Court’s standard .
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SASB FSA LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS
Stephen . “Is Puffery Material to Investors? Maybe We Should Ask Them,” 10 U . Ap . J . Bus . & Emp . L . 339, 344-348 (2008) .58 Padfield, 2008, p . 346, 365 .59 See NRDC v . SEC, 389 F .Supp . 689, 693-694 (D .D .C . 1974) .
56 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 Feb . 20, 2015 .57 Lin, Tom C .W . “The New Investor,” 60 UCLA L . Rev . 678, 694-695 (2013); Padfield,
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 .57 As a result, the definition of the reasonable investor is not
settled, though the definition is intended to be objective .58
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 .59
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 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 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 .60
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
63 Ibid ., p . 1265 .64 Ibid ., p . 1266 . 65 Commission Conclusions, Securities Act Release No . 5627, at 85,723-24 .66 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 .
60 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 (Oct . 14, 1975) .61 Commission Conclusions, Securities Act Release No . 5627, at 85, 713 .62 Williams, 1999, p . 1272-1273 .
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 .61 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 .62
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 .63 In 1992,
it expanded disclosure of executive compensation in response to public outcry over
compensation levels .64
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 .65 This last point is debatable because, according to the 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) .66
SECTION REVIEW
In this section, the following Learning Objectives were covered:
• 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 .
COPYRIGHT. ALL RIGHTS RESERVED 3736 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS
Stephen . “Is Puffery Material to Investors? Maybe We Should Ask Them,” 10 U . Ap . J . Bus . & Emp . L . 339, 344-348 (2008) .58 Padfield, 2008, p . 346, 365 .59 See NRDC v . SEC, 389 F .Supp . 689, 693-694 (D .D .C . 1974) .
56 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 Feb . 20, 2015 .57 Lin, Tom C .W . “The New Investor,” 60 UCLA L . Rev . 678, 694-695 (2013); Padfield,
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 .57 As a result, the definition of the reasonable investor is not
settled, though the definition is intended to be objective .58
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 .59
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 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 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 .60
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
63 Ibid ., p . 1265 .64 Ibid ., p . 1266 . 65 Commission Conclusions, Securities Act Release No . 5627, at 85,723-24 .66 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 .
60 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 (Oct . 14, 1975) .61 Commission Conclusions, Securities Act Release No . 5627, at 85, 713 .62 Williams, 1999, p . 1272-1273 .
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 .61 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 .62
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 .63 In 1992,
it expanded disclosure of executive compensation in response to public outcry over
compensation levels .64
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 .65 This last point is debatable because, according to the 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) .66
SECTION REVIEW
In this section, the following Learning Objectives were covered:
• 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 .
39COPYRIGHT. ALL RIGHTS RESERVED 38 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
√ 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 materiality?
? Questions to consider
67 17 C .F .R . Part 210 .68 17 C .F .R . Part 229 .
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,67 while Regulation S-K governs a wide range of information,
including nonfinancial information, in Forms S-1, 10-K, 10-Q, and 8-K .68
6SEC DISCLOSURE REQUIREMENTS
PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS
Learning Objectives Covered in This Section
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 the MD&A section was added to the 10-K and why it is an
appropriate place for the disclosure of sustainability information .
Describe the trends driving demand for the disclosure of sustainability
information .
39COPYRIGHT. ALL RIGHTS RESERVED 38 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
√ 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 materiality?
? Questions to consider
67 17 C .F .R . Part 210 .68 17 C .F .R . Part 229 .
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,67 while Regulation S-K governs a wide range of information,
including nonfinancial information, in Forms S-1, 10-K, 10-Q, and 8-K .68
6SEC DISCLOSURE REQUIREMENTS
PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS
Learning Objectives Covered in This Section
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 the MD&A section was added to the 10-K and why it is an
appropriate place for the disclosure of sustainability information .
Describe the trends driving demand for the disclosure of sustainability
information .
COPYRIGHT. ALL RIGHTS RESERVED 4140 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
• Form 10-Q quarterly reports: Form 10-Q includes unaudited financial
statements and gives a continuing view of the company’s financial condition
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, include 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 .
70 Regulation S-K, 17 C .F .R . 229 .303 .71 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”)
69 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”)
PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS
6 .3 . MD&A Section Disclosure
One promising place in Form 10-K to disclose sustainability information is Item 303 of
Regulation S-K, Management’s Discussion & Analysis of Financial Condition and Results
of Operations (“MD&A”) . Introduced in 1968, the 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 .69 This last requirement
provides the nexus between material sustainability information and the MD&A .
The SEC’s Interpretive Releases on the 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 .”70
The 1989 Interpretative Release explains the important distinction between required
disclosure and voluntary forward-looking information to be included in the 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.71 (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 .
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SASB FSA LEVEL I STUDY GUIDE
• Form 10-Q quarterly reports: Form 10-Q includes unaudited financial
statements and gives a continuing view of the company’s financial condition
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, include 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 .
70 Regulation S-K, 17 C .F .R . 229 .303 .71 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”)
69 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”)
PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS
6 .3 . MD&A Section Disclosure
One promising place in Form 10-K to disclose sustainability information is Item 303 of
Regulation S-K, Management’s Discussion & Analysis of Financial Condition and Results
of Operations (“MD&A”) . Introduced in 1968, the 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 .69 This last requirement
provides the nexus between material sustainability information and the MD&A .
The SEC’s Interpretive Releases on the 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 .”70
The 1989 Interpretative Release explains the important distinction between required
disclosure and voluntary forward-looking information to be included in the 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.71 (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 .
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SASB FSA LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS
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 .”73 Exchange Act, § 21E; Securities Act, § 27A .74 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 .
72 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/
(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 registrant’s
financial condition or results of operations is not reasonably likely to occur .72
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) .73 These safe harbors apply both to the required disclosures on known trends
and uncertainties, as well as to voluntary forward-looking disclosures in the MD&A .74
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 .75 The cautionary statements should be specific to the company and not
boilerplate .76
The Commission’s 2003 interpretive release reminds issuers of three main goals of
MD&A disclosure:77
• 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 the
MD&A:78
• Focus on material information: Companies should focus on material
information and eliminate immaterial information that does not promote
Company Disclosures, Securities and Exchange Commission,” Release Nos .33-8350; 34-48960; FR-72, December 29, 2003 (hereafter “2003 Release”) .78 2003 Release .79 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] .
7515 U .S .C . § 78u-5(c)(1)(A)(i) .76 See Slayton v . Am . Express Co ., 604 F .3d 758, 2010 WL 1960019 (2d Cir . May 18, 2010) .77 SEC, “Interpretation: Commission Guidance Regarding Management’s Discussion and Analysis of Financial Condition and Results of Operations; Certain Investment
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 .79
• 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 .
• 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 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 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,
COPYRIGHT. ALL RIGHTS RESERVED 4342 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS
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 .”73 Exchange Act, § 21E; Securities Act, § 27A .74 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 .
72 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/
(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 registrant’s
financial condition or results of operations is not reasonably likely to occur .72
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) .73 These safe harbors apply both to the required disclosures on known trends
and uncertainties, as well as to voluntary forward-looking disclosures in the MD&A .74
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 .75 The cautionary statements should be specific to the company and not
boilerplate .76
The Commission’s 2003 interpretive release reminds issuers of three main goals of
MD&A disclosure:77
• 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 the
MD&A:78
• Focus on material information: Companies should focus on material
information and eliminate immaterial information that does not promote
Company Disclosures, Securities and Exchange Commission,” Release Nos .33-8350; 34-48960; FR-72, December 29, 2003 (hereafter “2003 Release”) .78 2003 Release .79 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] .
7515 U .S .C . § 78u-5(c)(1)(A)(i) .76 See Slayton v . Am . Express Co ., 604 F .3d 758, 2010 WL 1960019 (2d Cir . May 18, 2010) .77 SEC, “Interpretation: Commission Guidance Regarding Management’s Discussion and Analysis of Financial Condition and Results of Operations; Certain Investment
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 .79
• 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 .
• 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 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 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,
COPYRIGHT. ALL RIGHTS RESERVED 4544 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS
example, Howard v . Everex Systems, Inc ., 228 F .3d 1057 (9th Cir . 2000) (a corporate officer who signs a 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) .85 No . 84 Employer-Teamster Joint Council Pension Trust Fund v . Am . W . Holding Corp ., 320 F .3d 920 (9th Cir . 2003) . The plaintiffs brought suit against America West and its officers and directors,
80 2010 Release, p . 23 .81 2010 Release, p . 11 (internal citation omitted) .82 2010 Release, pp . 17-18 (internal citation omitted) .83 Exchange Act, §§ 18 .84 Exchange Act, § 10(b) (15 U .S .C . § 78j) and Exchange Act Rule 10b-5 (17 CFR 240 .10b-5) . See, for
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;
the full economic effect of the settlement agreement with the FAA became known . (The number of FAA violations is a metric for the Airline industry in the SASB Transportation sector standards .)85 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 .
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
• 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 the MD&A . A
company should apply the same “reasonable likelihood” test to the four climate changes
issues that it does to the rest of the 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 .”80
When doubts about materiality arise, the company should lean towards 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 .’”81
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 .”82 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 .
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 .83 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 .84 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 .85 In a Rule 10b-5 suit alleging
that certain boilerplate disclosures about environmental compliance were materially
COPYRIGHT. ALL RIGHTS RESERVED 4544 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS
example, Howard v . Everex Systems, Inc ., 228 F .3d 1057 (9th Cir . 2000) (a corporate officer who signs a 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) .85 No . 84 Employer-Teamster Joint Council Pension Trust Fund v . Am . W . Holding Corp ., 320 F .3d 920 (9th Cir . 2003) . The plaintiffs brought suit against America West and its officers and directors,
80 2010 Release, p . 23 .81 2010 Release, p . 11 (internal citation omitted) .82 2010 Release, pp . 17-18 (internal citation omitted) .83 Exchange Act, §§ 18 .84 Exchange Act, § 10(b) (15 U .S .C . § 78j) and Exchange Act Rule 10b-5 (17 CFR 240 .10b-5) . See, for
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;
the full economic effect of the settlement agreement with the FAA became known . (The number of FAA violations is a metric for the Airline industry in the SASB Transportation sector standards .)85 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 .
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
• 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 the MD&A . A
company should apply the same “reasonable likelihood” test to the four climate changes
issues that it does to the rest of the 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 .”80
When doubts about materiality arise, the company should lean towards 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 .’”81
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 .”82 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 .
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 .83 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 .84 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 .85 In a Rule 10b-5 suit alleging
that certain boilerplate disclosures about environmental compliance were materially
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SASB FSA LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS
© 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
87 Sarbanes-Oxley Act, §§ 302 and 906 .88 Sarbanes-Oxley Act, § 302; Exchange Act, Rules 13-14(a) and 15d-14(a) .89 2010 Release, p . 19 n . 62 .
86 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 .
misleading, the Central District of California denied defendants’ motion to dismiss .86
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
The Sarbanes-Oxley Act of 2002 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 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 .87
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 .88 “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 .
92 Disclosure Effectiveness Report, pg . 96 .90 SEC, “Report on Review of Disclosure Requirements in Regulation S-K,” December, 2013, pp . 41-42 (hereafter “Disclosure Effectiveness Report”) .91 Higgins, Keith, “Disclosure Effectiveness: Remarks Before the American Bar Association Business Law Section Spring Meeting,” SEC .gov, April 11, 2014 .
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 .”89
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 .
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 the MD&A, it said, is to elicit meaningful,
company-specific disclosure .90
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 .91
COPYRIGHT. ALL RIGHTS RESERVED 4746
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© 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
87 Sarbanes-Oxley Act, §§ 302 and 906 .88 Sarbanes-Oxley Act, § 302; Exchange Act, Rules 13-14(a) and 15d-14(a) .89 2010 Release, p . 19 n . 62 .
86 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 .
misleading, the Central District of California denied defendants’ motion to dismiss .86
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
The Sarbanes-Oxley Act of 2002 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 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 .87
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 .88 “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 .
92 Disclosure Effectiveness Report, pg . 96 .90 SEC, “Report on Review of Disclosure Requirements in Regulation S-K,” December, 2013, pp . 41-42 (hereafter “Disclosure Effectiveness Report”) .91 Higgins, Keith, “Disclosure Effectiveness: Remarks Before the American Bar Association Business Law Section Spring Meeting,” SEC .gov, April 11, 2014 .
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 .”89
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 .
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 the MD&A, it said, is to elicit meaningful,
company-specific disclosure .90
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 .91
49COPYRIGHT. ALL RIGHTS RESERVED 48 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
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 .92
SECTION REVIEW
In this section, the following Learning Objectives were covered:
• 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 the MD&A section was added to the 10-K and why it is an
appropriate place for the disclosure of sustainability information .
• Describe the trends driving demand for the disclosure of sustainability information .
√ Given requirements to disclose known trends, events, and uncertainties in the
MD&A section of Form 10-K, what are the implications for sustainability
disclosures?
√ 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?
? Questions to consider
93 AICPA, “Accounting for the Sustainability Cycle: How the Accounting Profession Can Add Value to Sustainability-Oriented Activities,” October 2013 .
As non-financial value drivers continue to grow in significance, accountants have
grappled with the question of how to effectively measure, manage, and report
information that can often be 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 .”93
PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS
7SUSTAINABILITY ACCOUNTING
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) .
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 .
49COPYRIGHT. ALL RIGHTS RESERVED 48 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
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 .92
SECTION REVIEW
In this section, the following Learning Objectives were covered:
• 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 the MD&A section was added to the 10-K and why it is an
appropriate place for the disclosure of sustainability information .
• Describe the trends driving demand for the disclosure of sustainability information .
√ Given requirements to disclose known trends, events, and uncertainties in the
MD&A section of Form 10-K, what are the implications for sustainability
disclosures?
√ 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?
? Questions to consider
93 AICPA, “Accounting for the Sustainability Cycle: How the Accounting Profession Can Add Value to Sustainability-Oriented Activities,” October 2013 .
As non-financial value drivers continue to grow in significance, accountants have
grappled with the question of how to effectively measure, manage, and report
information that can often be 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 .”93
PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS
7SUSTAINABILITY ACCOUNTING
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) .
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 .
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SASB FSA LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS
94 AICPA, Jenkins Committee Report, 1994, p . 54 .95 Ibid ., p . 4 .
7 .1 . Pointing the Way Forward: the AICPA, the FASB, AICPA, 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 .”94 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 .95
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 that influence a company’s success,
its strategy for managing those factors, and the metrics for measuring management of
those success factors .
96 AICPA .org, accessed Nov . 24, 2014 . 97 Institute of Management Accountants, “The Evolution of Accountability,” 2008 . 98 SASB, Conceptual Framework, October 2013 .
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 . None of the three organizations offered guidelines for how to account for
non-financial information, but they identified similar purposes for financial and non-
financial information, even if they have different scopes .
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 .”
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 .”96
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 .”97
SASB’s Conceptual Framework defines sustainability accounting as the measurement
of a company’s management of various forms of non-financial capital that impact the
company’s ability to create sustained, long-term value .98 This includes 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 .
COPYRIGHT. ALL RIGHTS RESERVED 5150 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS
94 AICPA, Jenkins Committee Report, 1994, p . 54 .95 Ibid ., p . 4 .
7 .1 . Pointing the Way Forward: the AICPA, the FASB, AICPA, 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 .”94 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 .95
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 that influence a company’s success,
its strategy for managing those factors, and the metrics for measuring management of
those success factors .
96 AICPA .org, accessed Nov . 24, 2014 . 97 Institute of Management Accountants, “The Evolution of Accountability,” 2008 . 98 SASB, Conceptual Framework, October 2013 .
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 . None of the three organizations offered guidelines for how to account for
non-financial information, but they identified similar purposes for financial and non-
financial information, even if they have different scopes .
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 .”
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 .”96
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 .”97
SASB’s Conceptual Framework defines sustainability accounting as the measurement
of a company’s management of various forms of non-financial capital that impact the
company’s ability to create sustained, long-term value .98 This includes 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 .
COPYRIGHT. ALL RIGHTS RESERVED 5352 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS
103 American Accounting Association, “Recommendations on Disclosure of Nonfinancial Performance Measures,” 2002 (hereafter “Recommendations on Disclosure”) . 104 UN PRI, “Integrated Analysis: How investors are addressing environmental, social and governance factors in fundamental equity valuation .” February 2013 . 105 American Accounting Association’s Financial Accounting Standards Committee
99 PricewaterhouseCoopers, “Sustainability Goes Mainstream,” May 2014 . 100 FASB, Statement of Financial Accounting Concepts No . 8, 2010, p . 2101 Ibid ., p . 2102 Jenkins, Edmund . “The FASB’s Role in Serving the Public: A Response to the Enron Collapse,” p . 2 .
7 .3 . External Reporting
Financial accountants have traditionally 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 .99 Financial accounting, on the other hand, focuses primarily on
the needs of investors . 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 .100 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 .101,102 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 .103 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 .104
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 .105 Sustainability factors, particularly a company’s future plans,
opportunities, risks, and uncertainties, can add context and perspective to financial
reports .106 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 .107
Moreover, since financial accounting has not developed techniques and standards to fully
capture the difference between market value and book value,108 sustainability accounting
can help account for that uncaptured value .
“Comments to the FASB on Nonfinancial Performance Measures,” April 2002, pp . 1-6106 “Recommendations on Disclosure,” p . 360 .107 AICPA Special Committee on Financial Reporting, “Meeting the Information Needs of Investors and Creditors,” 1991 .
108 Institute of Management Accountants, “The Evolution of Accountability,” 2008, p . 11 .
7 .4 . Internal Decision-Making
The 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 them . 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 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 .
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SASB FSA LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS
103 American Accounting Association, “Recommendations on Disclosure of Nonfinancial Performance Measures,” 2002 (hereafter “Recommendations on Disclosure”) . 104 UN PRI, “Integrated Analysis: How investors are addressing environmental, social and governance factors in fundamental equity valuation .” February 2013 . 105 American Accounting Association’s Financial Accounting Standards Committee
99 PricewaterhouseCoopers, “Sustainability Goes Mainstream,” May 2014 . 100 FASB, Statement of Financial Accounting Concepts No . 8, 2010, p . 2101 Ibid ., p . 2102 Jenkins, Edmund . “The FASB’s Role in Serving the Public: A Response to the Enron Collapse,” p . 2 .
7 .3 . External Reporting
Financial accountants have traditionally 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 .99 Financial accounting, on the other hand, focuses primarily on
the needs of investors . 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 .100 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 .101,102 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 .103 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 .104
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 .105 Sustainability factors, particularly a company’s future plans,
opportunities, risks, and uncertainties, can add context and perspective to financial
reports .106 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 .107
Moreover, since financial accounting has not developed techniques and standards to fully
capture the difference between market value and book value,108 sustainability accounting
can help account for that uncaptured value .
“Comments to the FASB on Nonfinancial Performance Measures,” April 2002, pp . 1-6106 “Recommendations on Disclosure,” p . 360 .107 AICPA Special Committee on Financial Reporting, “Meeting the Information Needs of Investors and Creditors,” 1991 .
108 Institute of Management Accountants, “The Evolution of Accountability,” 2008, p . 11 .
7 .4 . Internal Decision-Making
The 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 them . 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 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 .
COPYRIGHT. ALL RIGHTS RESERVED 5554 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS
112 CDP website, “About Us .” Accessed November 2, 2014 .113 CDSB, “Climate Change Reporting Framework—Edition 1 .1,” October 2012 .
109 GRI, “G4 Sustainability Reporting Guidelines” 110 Ibid .111 IIRC website . Accessed February 20, 2015 .
7 .5 . Current Initiatives
One of the more prominent organizations for sustainability reporting is the Global
Reporting Initiative (“GRI”) . GRI offers 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 .109 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 .110 The GRI G4 framework is not specific to a given country, industry, or
sector, though it does include more specific 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 .”111 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 mitigate
SASB GRI IIRC CDSB UN Global Compact
Subject Sustainability Sustainability Non-financial & financial
Climate change
Non-financial
Type of guidance Standards Guidelines Framework Framework Principles
Scale U .S . Global Global Global Global
Scope Industry-specific General General General General
Target Audience Investors All stakeholders Investors Investors All stakeholders
Initiatives Related to Sustainability Reporting
114 United Nations website, “Overview of the UN Global Compact .” Accessed November 2, 2014 .
risks in their investment portfolios based on those topics .112 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 .113
The UN Global Compact is a participant-based policy initiative, including businesses
and other participants, such as academics, public sector organizations, and cities .114
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 .
Finally, SASB is an independent nonprofit organization that develops sustainability
accounting standards to help U .S . publicly listed companies disclose material 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 .
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 for
investment decisions (e .g ., reduced ratio of net assets to enterprise value,
increased risks and opportunities) .
• 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 .
COPYRIGHT. ALL RIGHTS RESERVED 5554 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS
112 CDP website, “About Us .” Accessed November 2, 2014 .113 CDSB, “Climate Change Reporting Framework—Edition 1 .1,” October 2012 .
109 GRI, “G4 Sustainability Reporting Guidelines” 110 Ibid .111 IIRC website . Accessed February 20, 2015 .
7 .5 . Current Initiatives
One of the more prominent organizations for sustainability reporting is the Global
Reporting Initiative (“GRI”) . GRI offers 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 .109 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 .110 The GRI G4 framework is not specific to a given country, industry, or
sector, though it does include more specific 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 .”111 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 mitigate
SASB GRI IIRC CDSB UN Global Compact
Subject Sustainability Sustainability Non-financial & financial
Climate change
Non-financial
Type of guidance Standards Guidelines Framework Framework Principles
Scale U .S . Global Global Global Global
Scope Industry-specific General General General General
Target Audience Investors All stakeholders Investors Investors All stakeholders
Initiatives Related to Sustainability Reporting
114 United Nations website, “Overview of the UN Global Compact .” Accessed November 2, 2014 .
risks in their investment portfolios based on those topics .112 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 .113
The UN Global Compact is a participant-based policy initiative, including businesses
and other participants, such as academics, public sector organizations, and cities .114
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 .
Finally, SASB is an independent nonprofit organization that develops sustainability
accounting standards to help U .S . publicly listed companies disclose material 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 .
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 for
investment decisions (e .g ., reduced ratio of net assets to enterprise value,
increased risks and opportunities) .
• 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 .
57COPYRIGHT. ALL RIGHTS RESERVED 56 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
√ 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?
? Questions to consider
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 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
8 THE STATE OF SUSTAINABILITY DISCLOSURE
PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS
Learning Objectives Covered in This Section
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 implications of making statements about materiality outside of SEC
filings .
Describe the trends driving demand for the disclosure of sustainability
information .
57COPYRIGHT. ALL RIGHTS RESERVED 56 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
√ 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?
? Questions to consider
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 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
8 THE STATE OF SUSTAINABILITY DISCLOSURE
PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS
Learning Objectives Covered in This Section
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 implications of making statements about materiality outside of SEC
filings .
Describe the trends driving demand for the disclosure of sustainability
information .
COPYRIGHT. ALL RIGHTS RESERVED 5958
119 Basic v . Levinson, 485 U .S . 224 (1988) .
PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS
© 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
and Facilitates Capital Formation,” 2014 .118AccountAbility, “Redefining Materiality II: Why it Matters, Who’s Involved, and What It Means for Corporate Leaders and Boards,” 2013 .
115 UN PRI website . Accessed August 14, 2014 .116 EY, “Tomorrow’s investment rules,” 2014 .117 US Chamber of Commerce, Center for Capital Market Competitiveness, “Corporate Disclosure Effectiveness: Ensuring a Balanced System that Informs and Protects Investors
SASB FSA LEVEL I STUDY GUIDE
sustainability . Indeed, 71 percent of the top 100 companies in 41 countries now report
on sustainability factors,115 95 percent of the largest 250 companies in the world now
produce a sustainability report,116 and, according to the Corporate Register, the largest
repository for CSR/sustainability reports, there are more than 60,000 reports from more
than 11,000 companies .
It is not enough to simply report sustainability information . The information needs
to be in a place that is convenient to investors and in a format that is useful for them .
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 .
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 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 .”117 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 is 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 .”118
8 .3 . Securities Law, Not Semantics
To complicate matters, many companies are using different definitions of
“materiality” in their sustainability reports and SEC filings . 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 what can trigger legal
liability in Rule 10b-5 lawsuits .119
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
DEFINITION : GRI DEFINES MATERIALITY
Proprietary definitions of materiality, such as that used by GRI, broaden the concept to capture information that is often irrelevant to investors and may create legal liabilities for issuers . 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.
COPYRIGHT. ALL RIGHTS RESERVED 5958
119 Basic v . Levinson, 485 U .S . 224 (1988) .
PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS
© 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
and Facilitates Capital Formation,” 2014 .118AccountAbility, “Redefining Materiality II: Why it Matters, Who’s Involved, and What It Means for Corporate Leaders and Boards,” 2013 .
115 UN PRI website . Accessed August 14, 2014 .116 EY, “Tomorrow’s investment rules,” 2014 .117 US Chamber of Commerce, Center for Capital Market Competitiveness, “Corporate Disclosure Effectiveness: Ensuring a Balanced System that Informs and Protects Investors
SASB FSA LEVEL I STUDY GUIDE
sustainability . Indeed, 71 percent of the top 100 companies in 41 countries now report
on sustainability factors,115 95 percent of the largest 250 companies in the world now
produce a sustainability report,116 and, according to the Corporate Register, the largest
repository for CSR/sustainability reports, there are more than 60,000 reports from more
than 11,000 companies .
It is not enough to simply report sustainability information . The information needs
to be in a place that is convenient to investors and in a format that is useful for them .
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 .
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 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 .”117 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 is 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 .”118
8 .3 . Securities Law, Not Semantics
To complicate matters, many companies are using different definitions of
“materiality” in their sustainability reports and SEC filings . 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 what can trigger legal
liability in Rule 10b-5 lawsuits .119
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
DEFINITION : GRI DEFINES MATERIALITY
Proprietary definitions of materiality, such as that used by GRI, broaden the concept to capture information that is often irrelevant to investors and may create legal liabilities for issuers . 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.
COPYRIGHT. ALL RIGHTS RESERVED 6160
SASB FSA LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS
© 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
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 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 the Dow Jones Sustainability
Index, GIIRS, FTSE4Good, and EIRIS) rate companies across a full range of sustainability
issues . Others (including CDP, GMI, and DJSI World Index), 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
123 UNEP Finance Initiative, “Sustainability Management and Reporting,” December 2006 . 124 Chatham House, “The Future of Sustainability Reporting,” January 2012 .125 Climate Disclosure Standards Board, “Benefits of CDSB’s Work,” 2013 .
120 Ibid .
121 COSO, “Demystifying Sustainability Risk,” May 2013 .122 EY and Boston College Center for Corporate Citizenship, “Value of Sustainability Reporting,” 2013 .
spectrum, depending on the ratings system .120 This only adds to the confusion and lack
of clarity about the potential value of material sustainability information .
8 .5 . Benefits of Improved Sustainability Disclosure
Despite the absence of decision-useful standards, some of the benefits of
sustainability disclosure have begun to emerge in the academic and professional
literature .
For companies:121, 122, 123
• 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:124, 125
• 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 explores how SASB standards are
designed to help achieve this goal .
“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
COPYRIGHT. ALL RIGHTS RESERVED 6160
SASB FSA LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY ACCOUNTING STANDARDS
© 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
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 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 the Dow Jones Sustainability
Index, GIIRS, FTSE4Good, and EIRIS) rate companies across a full range of sustainability
issues . Others (including CDP, GMI, and DJSI World Index), 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
123 UNEP Finance Initiative, “Sustainability Management and Reporting,” December 2006 . 124 Chatham House, “The Future of Sustainability Reporting,” January 2012 .125 Climate Disclosure Standards Board, “Benefits of CDSB’s Work,” 2013 .
120 Ibid .
121 COSO, “Demystifying Sustainability Risk,” May 2013 .122 EY and Boston College Center for Corporate Citizenship, “Value of Sustainability Reporting,” 2013 .
spectrum, depending on the ratings system .120 This only adds to the confusion and lack
of clarity about the potential value of material sustainability information .
8 .5 . Benefits of Improved Sustainability Disclosure
Despite the absence of decision-useful standards, some of the benefits of
sustainability disclosure have begun to emerge in the academic and professional
literature .
For companies:121, 122, 123
• 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:124, 125
• 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 explores how SASB standards are
designed to help achieve this goal .
“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
62 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
SECTION REVIEW
In this section, the following Learning Objectives were covered:
• 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 implications of making statements about “materiality” outside of SEC
filings .
• Describe the trends driving demand for the disclosure of sustainability
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?
? Questions to consider
UNDERSTANDING SASB STANDARDS
PART II
COPYRIGHT. ALL RIGHTS RESERVED 67© 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD66
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 information regarding more than two-thirds of SASB
disclosure topics is already being disclosed, but rarely in a decision-useful way . The
actionable value of a statement tends to increase as it becomes more specific . However,
more than a third of all disclosures on sustainability topics contain boilerplate language:
broad, nonspecific wording that does not describe the realities of the registrant’s
Resource Transformation Sector (50 companies)
Services Sector (93 Companies)
Transportation Sector (63 Companies)
Non-Renewable Resources Sector (81 companies)
Technology & Communications Sector (59 companies)
Financials Sector (63 companies)
Health Care Sector (58 companies)
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
No disclosure Boilerplate Industry-specific Metrics
Current State of Sustainability Disclosure
PART II: UNDERSTANDING SASB STANDARDS
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 .
SASB FSA LEVEL I STUDY GUIDE
9THE IMPORTANCE OF STANDARDS
Learning Objectives Covered in This Section
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 .
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
Source : SASB
COPYRIGHT. ALL RIGHTS RESERVED 67© 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD66
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 information regarding more than two-thirds of SASB
disclosure topics is already being disclosed, but rarely in a decision-useful way . The
actionable value of a statement tends to increase as it becomes more specific . However,
more than a third of all disclosures on sustainability topics contain boilerplate language:
broad, nonspecific wording that does not describe the realities of the registrant’s
Resource Transformation Sector (50 companies)
Services Sector (93 Companies)
Transportation Sector (63 Companies)
Non-Renewable Resources Sector (81 companies)
Technology & Communications Sector (59 companies)
Financials Sector (63 companies)
Health Care Sector (58 companies)
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
No disclosure Boilerplate Industry-specific Metrics
Current State of Sustainability Disclosure
PART II: UNDERSTANDING SASB STANDARDS
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 .
SASB FSA LEVEL I STUDY GUIDE
9THE IMPORTANCE OF STANDARDS
Learning Objectives Covered in This Section
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 .
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
Source : SASB
COPYRIGHT. ALL RIGHTS RESERVED 6968 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
particular operating context . Rather, it could apply to multiple companies and/or a
variety of industries . Meanwhile, only about 10 percent of issuers disclose sustainability
information using 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 .
Boilerplate Industry-specific Metrics
“We compete against the major U .S . airlines and other businesses for labor in many highly skilled positions . If we are unable to hire, train and retain qualified employ-ees at a reasonable cost, (…) we may be unable to grow or sustain our business .”
“As more pilots in the industry ap-proach mandatory retirement age, the U .S . airline industry may be affected by a pilot shortage (…) . We may be required to increase wages and/or benefits in order to attract and retain qualified person-nel or risk considerable employee turnover .”
“We seek to minimize the impact of GHG emissions from our oper-ations through reductions in our fuel consumption (…) . We have reduced the fuel needs of our air-craft fleet through the retirement and replacement of certain ele-ments of our fleet and with newer, more fuel efficient aircraft .”
“Based on projected fuel consumption in 2014, a one dollar change in the price of a barrel of crude oil would change the Company’s annual fuel expense by approximately $94 million .”
PILOT RECRUITMENT & INCLUSION
ENVIRONMENTAL FOOTPRINT OF FUEL USE
PART II: UNDERSTANDING SASB STANDARDS
SECTION REVIEW
In this section, the following Learning Objectives were covered:
• 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 .
• 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 Non-Renewable Resources sector?
The percentage of metrics-based disclosures?
? Questions to consider
COPYRIGHT. ALL RIGHTS RESERVED 6968 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
particular operating context . Rather, it could apply to multiple companies and/or a
variety of industries . Meanwhile, only about 10 percent of issuers disclose sustainability
information using 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 .
Boilerplate Industry-specific Metrics
“We compete against the major U .S . airlines and other businesses for labor in many highly skilled positions . If we are unable to hire, train and retain qualified employ-ees at a reasonable cost, (…) we may be unable to grow or sustain our business .”
“As more pilots in the industry ap-proach mandatory retirement age, the U .S . airline industry may be affected by a pilot shortage (…) . We may be required to increase wages and/or benefits in order to attract and retain qualified person-nel or risk considerable employee turnover .”
“We seek to minimize the impact of GHG emissions from our oper-ations through reductions in our fuel consumption (…) . We have reduced the fuel needs of our air-craft fleet through the retirement and replacement of certain ele-ments of our fleet and with newer, more fuel efficient aircraft .”
“Based on projected fuel consumption in 2014, a one dollar change in the price of a barrel of crude oil would change the Company’s annual fuel expense by approximately $94 million .”
PILOT RECRUITMENT & INCLUSION
ENVIRONMENTAL FOOTPRINT OF FUEL USE
PART II: UNDERSTANDING SASB STANDARDS
SECTION REVIEW
In this section, the following Learning Objectives were covered:
• 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 .
• 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 Non-Renewable Resources sector?
The percentage of metrics-based disclosures?
? Questions to consider
COPYRIGHT. ALL RIGHTS RESERVED 71© 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD70
SASB FSA LEVEL I STUDY GUIDE
To address the market need for standardized disclosure of material sustainability
information, SASB began developing sustainability accounting standards in 2012
and will issue standards for more than 80 industries in 10 sectors through 2016 .
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 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
10 INTRODUCTION TO SASB STANDARDS
Learning Objectives Covered in This Section
Distinguish SASB’s approach (sustainability accounting) from other approaches
to sustainability tracking and reporting .
Explain the organization of SICSTM and the implications of a sustainability-based
industry classification .
PART II: UNDERSTANDING SASB STANDARDS
information in MD&A section of Form 10-K (or 20-F) . SASB standards follow the U .S .
Supreme Court’s definition of material information, which has a singular and unwavering
focus on the reasonable investor’s decision to buy, sell, or hold a security .
10 .2 . Likely to Be Material
With SASB’s standards development process guided by the U .S . Supreme Court
definition of materiality (a high threshold), and with its industries organized by SICS™
(discussed below), the disclosure topics that emerge are likely to constitute material
information for most companies in an industry . 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 relevant, reliable, and comparable . Relevance encompasses timeliness and
predictive value, while reliable disclosures are verifiable and provide a faithful and neutral
representation of what they purport to describe .
SASB standards are designed to meet all of these criteria by helping issuers to
regularly report accurate, objective, and verifiable 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 .
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 13 metrics per industry,
80 percent of which are quantitative .) Furthermore, when selecting or developing
COPYRIGHT. ALL RIGHTS RESERVED 71© 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD70
SASB FSA LEVEL I STUDY GUIDE
To address the market need for standardized disclosure of material sustainability
information, SASB began developing sustainability accounting standards in 2012
and will issue standards for more than 80 industries in 10 sectors through 2016 .
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 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
10 INTRODUCTION TO SASB STANDARDS
Learning Objectives Covered in This Section
Distinguish SASB’s approach (sustainability accounting) from other approaches
to sustainability tracking and reporting .
Explain the organization of SICSTM and the implications of a sustainability-based
industry classification .
PART II: UNDERSTANDING SASB STANDARDS
information in MD&A section of Form 10-K (or 20-F) . SASB standards follow the U .S .
Supreme Court’s definition of material information, which has a singular and unwavering
focus on the reasonable investor’s decision to buy, sell, or hold a security .
10 .2 . Likely to Be Material
With SASB’s standards development process guided by the U .S . Supreme Court
definition of materiality (a high threshold), and with its industries organized by SICS™
(discussed below), the disclosure topics that emerge are likely to constitute material
information for most companies in an industry . 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 relevant, reliable, and comparable . Relevance encompasses timeliness and
predictive value, while reliable disclosures are verifiable and provide a faithful and neutral
representation of what they purport to describe .
SASB standards are designed to meet all of these criteria by helping issuers to
regularly report accurate, objective, and verifiable 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 .
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 13 metrics per industry,
80 percent of which are quantitative .) Furthermore, when selecting or developing
COPYRIGHT. ALL RIGHTS RESERVED 7372 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
126 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 .
SASB FSA LEVEL I STUDY GUIDE
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™
Traditional industry classification systems such as GICS®, NAICS, and SIC use financial
concepts—mainly business models, financial drivers, and source 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 in terms of shared sustainability
challenges and opportunities . In order to group industries based on their sustainability
impacts, SASB developed the Sustainable Industry Classification System™ (SICS™) .
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 .
PART II: UNDERSTANDING SASB STANDARDS
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 .126 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 .
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
In this section, the following Learning Objectives were covered:
• Distinguish SASB’s approach (sustainability accounting) from other approaches to
sustainability tracking and reporting .
• 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 commonalties that unite companies within a SICS™ industry?
? Questions to consider
COPYRIGHT. ALL RIGHTS RESERVED 7372 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
126 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 .
SASB FSA LEVEL I STUDY GUIDE
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™
Traditional industry classification systems such as GICS®, NAICS, and SIC use financial
concepts—mainly business models, financial drivers, and source 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 in terms of shared sustainability
challenges and opportunities . In order to group industries based on their sustainability
impacts, SASB developed the Sustainable Industry Classification System™ (SICS™) .
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 .
PART II: UNDERSTANDING SASB STANDARDS
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 .126 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 .
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
In this section, the following Learning Objectives were covered:
• Distinguish SASB’s approach (sustainability accounting) from other approaches to
sustainability tracking and reporting .
• 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 commonalties that unite companies within a SICS™ industry?
? Questions to consider
COPYRIGHT. ALL RIGHTS RESERVED 75© 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD74
127 USA v . Sayre (2011)
SASB FSA LEVEL I STUDY GUIDE
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 .
11 .1 . The Reasonable Investor Revisited
As mentioned in Part I, the Court’s definition of materiality is fundamentally
linked to the reasonable investor . The notion of the reasonable investor evolves over
time, based on the “ordinary experience and understanding” of society’s citizens .127
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
11IDENTIFYING INDUSTRY- LEVEL DISCLOSURE TOPICS
Learning Objectives Covered in This Section
Explain the evidence basis that supports the identification of SASB disclosure
topics .
Explain the stakeholder consensus that supports the identification of SASB
disclosure topics .
Distinguish SASB’s approach (sustainability accounting) from other approaches
to sustainability tracking and reporting .
Discuss the Supreme Court definition of materiality and the implications of this
definition .
PART II: UNDERSTANDING SASB STANDARDS
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 (see Page 76) 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 .
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 .
COPYRIGHT. ALL RIGHTS RESERVED 75© 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD74
127 USA v . Sayre (2011)
SASB FSA LEVEL I STUDY GUIDE
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 .
11 .1 . The Reasonable Investor Revisited
As mentioned in Part I, the Court’s definition of materiality is fundamentally
linked to the reasonable investor . The notion of the reasonable investor evolves over
time, based on the “ordinary experience and understanding” of society’s citizens .127
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
11IDENTIFYING INDUSTRY- LEVEL DISCLOSURE TOPICS
Learning Objectives Covered in This Section
Explain the evidence basis that supports the identification of SASB disclosure
topics .
Explain the stakeholder consensus that supports the identification of SASB
disclosure topics .
Distinguish SASB’s approach (sustainability accounting) from other approaches
to sustainability tracking and reporting .
Discuss the Supreme Court definition of materiality and the implications of this
definition .
PART II: UNDERSTANDING SASB STANDARDS
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 (see Page 76) 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 .
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 .
COPYRIGHT. ALL RIGHTS RESERVED 7776 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
DIMENSIONS GENERAL TOPIC
Environment
Greenhouse gas emissions
Air quality
Energy management
Fuel management
Water and wastewater management
Waste and hazardous materials management
Biodiversity impacts
Social Capital
Human rights and community relations
Access and affordability
Customer welfare
Data security and customer privacy
Fair disclosure and labeling
Fair marketing and advertising
Human Capital
Labor relations
Fair labor practices
Employee health, safety and wellbeing
Diversity and inclusion
Compensation and benefits
Recruitment, development, and retention
Business Model & Innovation
Lifecycle impacts of products and services
Environmental and social impacts on core assets and operations
Product packaging
Product quality and safety
Leadership & Governance
Systemic risk management
Accident and safety management
Business ethics and transparency of payments
Competitive behavior
Regulatory capture and political influence
Materials sourcing
Supply chain management
SASB’s Five Sustainability Dimensions
128 Lydenberg, Steve, Jean Rogers, David Wood, “From Transparency to Performance,” Harvard University, Initiative for Responsible Investment, 2010, p . 22
PART II: UNDERSTANDING SASB STANDARDS
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:
Form 10-Ks, 20-Fs, and other SEC filings; legal news and litigation reports; shareholder
resolutions; corporate sustainability/CSR reports; industry and academic research reports;
media reports; innovation-related news; sell-side research; investor call transcripts;
third-party case studies; and SEC comment letters . 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 .128 Based on research
by 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 competitiveness
4 . Stakeholder concerns and social trends
5 . Opportunities for innovation
COPYRIGHT. ALL RIGHTS RESERVED 7776 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
DIMENSIONS GENERAL TOPIC
Environment
Greenhouse gas emissions
Air quality
Energy management
Fuel management
Water and wastewater management
Waste and hazardous materials management
Biodiversity impacts
Social Capital
Human rights and community relations
Access and affordability
Customer welfare
Data security and customer privacy
Fair disclosure and labeling
Fair marketing and advertising
Human Capital
Labor relations
Fair labor practices
Employee health, safety and wellbeing
Diversity and inclusion
Compensation and benefits
Recruitment, development, and retention
Business Model & Innovation
Lifecycle impacts of products and services
Environmental and social impacts on core assets and operations
Product packaging
Product quality and safety
Leadership & Governance
Systemic risk management
Accident and safety management
Business ethics and transparency of payments
Competitive behavior
Regulatory capture and political influence
Materials sourcing
Supply chain management
SASB’s Five Sustainability Dimensions
128 Lydenberg, Steve, Jean Rogers, David Wood, “From Transparency to Performance,” Harvard University, Initiative for Responsible Investment, 2010, p . 22
PART II: UNDERSTANDING SASB STANDARDS
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:
Form 10-Ks, 20-Fs, and other SEC filings; legal news and litigation reports; shareholder
resolutions; corporate sustainability/CSR reports; industry and academic research reports;
media reports; innovation-related news; sell-side research; investor call transcripts;
third-party case studies; and SEC comment letters . 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 .128 Based on research
by 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 competitiveness
4 . Stakeholder concerns and social trends
5 . Opportunities for innovation
COPYRIGHT. ALL RIGHTS RESERVED 7978 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
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 .
• 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 test 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 topics, the greater the relevance of the legal and
To consider
The five-factor test suggests questions that 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?
60 .129 Monsma, Olson, p . 149130 Lydenberg, Steve . “On Materiality and Sustainability: The Value of Disclosure in the Capital Markets .” Harvard University, Initiative for Responsible Investment, 2012, p .
PART II: UNDERSTANDING SASB STANDARDS
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 .129
• Factor 3: Industry norms and competitiveness Issue. This factor evaluates
the current and best practices by industry firms in addressing or disclosing
information on the topic . To apply this test 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: 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 .130 Stakeholder concerns can be
material for investors when they affect brand reputation (intangible value), license
to operate (future cash flows, assets and liabilities), and/or may result in legal
challenges .
• Factor 5: Opportunities for innovation. This factor evaluates the potential for
competitive advantage from innovation of new products and services, or from the
COPYRIGHT. ALL RIGHTS RESERVED 7978 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
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 .
• 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 test 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 topics, the greater the relevance of the legal and
To consider
The five-factor test suggests questions that 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?
60 .129 Monsma, Olson, p . 149130 Lydenberg, Steve . “On Materiality and Sustainability: The Value of Disclosure in the Capital Markets .” Harvard University, Initiative for Responsible Investment, 2012, p .
PART II: UNDERSTANDING SASB STANDARDS
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 .129
• Factor 3: Industry norms and competitiveness Issue. This factor evaluates
the current and best practices by industry firms in addressing or disclosing
information on the topic . To apply this test 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: 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 .130 Stakeholder concerns can be
material for investors when they affect brand reputation (intangible value), license
to operate (future cash flows, assets and liabilities), and/or may result in legal
challenges .
• Factor 5: Opportunities for innovation. This factor evaluates the potential for
competitive advantage from innovation of new products and services, or from the
COPYRIGHT. ALL RIGHTS RESERVED 8180 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
131On Materiality and Sustainability . p . 60
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
DIMENSIONS GENERAL TOPIC
Environment
Greenhouse gas emissions
Air quality
Energy management
Fuel management
Water and wastewater managementWaste and hazardous materials management
Biodiversity 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
Keywords
Five Dimensions
132 Monsma, Olson, p . 182133 Meese, Alan J ., “The Team Production Theory of Corporate Law: A Critical Assessment,” William and Mary Law Review 43, no . 4 (2002): 1693 .
PART II: UNDERSTANDING SASB STANDARDS
customers) . The latter is an innovation opportunity likely to be material to a
reasonable investor .131
This data-driven test, which is more objective and defensible 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 .
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 .132 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 .133
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 Revenue
• Market size
• 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 profile
• Industry divestment risk
COPYRIGHT. ALL RIGHTS RESERVED 8180 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
131On Materiality and Sustainability . p . 60
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
DIMENSIONS GENERAL TOPIC
Environment
Greenhouse gas emissions
Air quality
Energy management
Fuel management
Water and wastewater managementWaste and hazardous materials management
Biodiversity 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
Keywords
Five Dimensions
132 Monsma, Olson, p . 182133 Meese, Alan J ., “The Team Production Theory of Corporate Law: A Critical Assessment,” William and Mary Law Review 43, no . 4 (2002): 1693 .
PART II: UNDERSTANDING SASB STANDARDS
customers) . The latter is an innovation opportunity likely to be material to a
reasonable investor .131
This data-driven test, which is more objective and defensible 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 .
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 .132 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 .133
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 Revenue
• Market size
• 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 profile
• Industry divestment risk
COPYRIGHT. ALL RIGHTS RESERVED82 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
which therefore may be easily plugged
into a range of financial analysis tools and
calculations . These include:
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 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 .
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 .
83
134 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 .
PART II: UNDERSTANDING SASB STANDARDS
• 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
will want decision-useful information, issuers will have cost-benefit questions, and other
market participants—from asset managers and analysts to accountants and attorneys—
will 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 independent oversight .
11 .3 .1 . Industry Expertise
For each of the 80-plus SICS™ industries, SASB convenes an Industry Working
Group to provide feedback on the disclosure topics and accounting metrics identified
in the initial research phase . The Industry Working Group is composed of balanced
representation from corporate professionals, investors, and intermediaries (such
as accountants, lawyers, consultants, and NGO representatives) . These individuals
participate in a specific industry based on their background and expertise .134
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
decision-useful way, or how it conforms to securities law .
This stakeholder input helps translate the topics and metrics that SASB proposes
into more refined versions that will enable both 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 provides additional
evidence, but also clarifies whether, and how, SASB’s proposed disclosure topics can
best be captured in a sustainability accounting standard .
The participants are surveyed to offer feedback on the likely materiality of proposed
disclosure topics for the industry . The Industry Working Group feedback, which is
COPYRIGHT. ALL RIGHTS RESERVED82 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
which therefore may be easily plugged
into a range of financial analysis tools and
calculations . These include:
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 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 .
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 .
83
134 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 .
PART II: UNDERSTANDING SASB STANDARDS
• 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
will want decision-useful information, issuers will have cost-benefit questions, and other
market participants—from asset managers and analysts to accountants and attorneys—
will 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 independent oversight .
11 .3 .1 . Industry Expertise
For each of the 80-plus SICS™ industries, SASB convenes an Industry Working
Group to provide feedback on the disclosure topics and accounting metrics identified
in the initial research phase . The Industry Working Group is composed of balanced
representation from corporate professionals, investors, and intermediaries (such
as accountants, lawyers, consultants, and NGO representatives) . These individuals
participate in a specific industry based on their background and expertise .134
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
decision-useful way, or how it conforms to securities law .
This stakeholder input helps translate the topics and metrics that SASB proposes
into more refined versions that will enable both 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 provides additional
evidence, but also clarifies whether, and how, SASB’s proposed disclosure topics can
best be captured in a sustainability accounting standard .
The participants are surveyed to offer feedback on the likely materiality of proposed
disclosure topics for the industry . The Industry Working Group feedback, which is
COPYRIGHT. ALL RIGHTS RESERVED 8584 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
collected via survey, is then incorporated
into an Exposure Draft of the standard . The
SASB Standards Council (described below)
then reviews the standard, disclosure items,
accounting metrics, and the outcome
of Industry Working Groups to ensure
consistency, completeness, and accuracy .
11 .3 .2 . Independent Oversight
The SASB Standards Council is an
independent oversight body composed of
volunteer experts in standards development,
securities law, environmental law, metrics,
and accounting . The Standards Council
reviews SASB’s process for each sector
to ensure that it is transparent, based on
evidence and multi-stakeholder feedback,
and consistent from sector to sector .
The Standards Council strives to represent the various investor types within the U .S .
capital market system . The independent perspectives of the council’s members serves
to strengthen the standards development process and keep it aligned with American
National Standards Institute (ANSI) best practices .
Additionally, to help with the evaluation of the metrics for the provisional standards,
SASB consults with the Committee on Metrics Quality, a subcommittee of the Standards
Council . The committee’s purpose is to help ensure that SASB fulfills 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 is composed of
sell-side analysts and asset managers .
11 .3 .3 . Public Comment Period
Once SASB has revised the initial disclosure topics and related metrics based on
Industry Working Group feedback, and its process and outcomes have been reviewed by
the Standards Council, SASB makes an Exposure Draft 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:
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?
PART II: UNDERSTANDING SASB STANDARDS
• 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 are evolving quickly . Therefore, SASB
standards are not set in stone once they’re 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 .
11 .4 .1 . Provisional Standards Release
At the conclusion of the public comment period, SASB incorporates feedback
received into the standard . The Provisional Sustainability Accounting Standard is then
published and available to the public .
SASB standards are considered provisional for at least one year after their initial
release . During this time, SASB welcomes additional feedback from the public . Investors
and companies can use the provisional standards; being provisional does not impair
their usability . At the end of the provisional period, SASB will release an update to the
standards and remove the provisional label .
11 .4 .2 . Reviewing Provisional Standards
SASB will review each provisional standard following the release of provisional
standards for every sector . The Rules of Procedure for this review process will be
published for public comment prior to any provisional standards being reviewed . Each
provisional standard will be reviewed and subsequently refined as necessary based on
additional input for the disclosure topics and accounting metrics .
During the review process, SASB will engage with key stakeholders through multiple
COPYRIGHT. ALL RIGHTS RESERVED 8584 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
collected via survey, is then incorporated
into an Exposure Draft of the standard . The
SASB Standards Council (described below)
then reviews the standard, disclosure items,
accounting metrics, and the outcome
of Industry Working Groups to ensure
consistency, completeness, and accuracy .
11 .3 .2 . Independent Oversight
The SASB Standards Council is an
independent oversight body composed of
volunteer experts in standards development,
securities law, environmental law, metrics,
and accounting . The Standards Council
reviews SASB’s process for each sector
to ensure that it is transparent, based on
evidence and multi-stakeholder feedback,
and consistent from sector to sector .
The Standards Council strives to represent the various investor types within the U .S .
capital market system . The independent perspectives of the council’s members serves
to strengthen the standards development process and keep it aligned with American
National Standards Institute (ANSI) best practices .
Additionally, to help with the evaluation of the metrics for the provisional standards,
SASB consults with the Committee on Metrics Quality, a subcommittee of the Standards
Council . The committee’s purpose is to help ensure that SASB fulfills 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 is composed of
sell-side analysts and asset managers .
11 .3 .3 . Public Comment Period
Once SASB has revised the initial disclosure topics and related metrics based on
Industry Working Group feedback, and its process and outcomes have been reviewed by
the Standards Council, SASB makes an Exposure Draft 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:
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?
PART II: UNDERSTANDING SASB STANDARDS
• 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 are evolving quickly . Therefore, SASB
standards are not set in stone once they’re 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 .
11 .4 .1 . Provisional Standards Release
At the conclusion of the public comment period, SASB incorporates feedback
received into the standard . The Provisional Sustainability Accounting Standard is then
published and available to the public .
SASB standards are considered provisional for at least one year after their initial
release . During this time, SASB welcomes additional feedback from the public . Investors
and companies can use the provisional standards; being provisional does not impair
their usability . At the end of the provisional period, SASB will release an update to the
standards and remove the provisional label .
11 .4 .2 . Reviewing Provisional Standards
SASB will review each provisional standard following the release of provisional
standards for every sector . The Rules of Procedure for this review process will be
published for public comment prior to any provisional standards being reviewed . Each
provisional standard will be reviewed and subsequently refined as necessary based on
additional input for the disclosure topics and accounting metrics .
During the review process, SASB will engage with key stakeholders through multiple
87COPYRIGHT. ALL RIGHTS RESERVED 86 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
channels, to generate broad stakeholder awareness and to solicit deep technical input .
Board governance structures will oversee the review process, ensuring both 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 . Some topics will be removed
and added . Changes will be subject to the same level of rigor—based on evidence and
input from relevant stakeholders—as the development of the standards . Before updating
any standards, SASB will consider the impact that changes will have on the reporting
organizations and their ability to provide year-to-year comparisons .
SECTION REVIEW
In this section, the following Learning Objectives were covered:
• Explain the evidence basis that supports the identification of SASB disclosure
topics .
• Explain the stakeholder consensus that supports the identification of SASB
disclosure topics .
• Distinguish SASB’s approach (sustainability accounting) from other approaches to
sustainability tracking and reporting .
• 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?
? Questions to consider
12 COMPONENTS OF A STANDARD
SASB builds rigor into its standards development process to ensure quality
outcomes . The final product, a provisional SASB standard, must help registrants
disclose material sustainability information to investors in a decision-useful way .
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
PART II: UNDERSTANDING SASB STANDARDS
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 .
Distinguish SASB’s approach (sustainability accounting) from other approaches
to sustainability tracking and reporting .
87COPYRIGHT. ALL RIGHTS RESERVED 86 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
channels, to generate broad stakeholder awareness and to solicit deep technical input .
Board governance structures will oversee the review process, ensuring both 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 . Some topics will be removed
and added . Changes will be subject to the same level of rigor—based on evidence and
input from relevant stakeholders—as the development of the standards . Before updating
any standards, SASB will consider the impact that changes will have on the reporting
organizations and their ability to provide year-to-year comparisons .
SECTION REVIEW
In this section, the following Learning Objectives were covered:
• Explain the evidence basis that supports the identification of SASB disclosure
topics .
• Explain the stakeholder consensus that supports the identification of SASB
disclosure topics .
• Distinguish SASB’s approach (sustainability accounting) from other approaches to
sustainability tracking and reporting .
• 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?
? Questions to consider
12 COMPONENTS OF A STANDARD
SASB builds rigor into its standards development process to ensure quality
outcomes . The final product, a provisional SASB standard, must help registrants
disclose material sustainability information to investors in a decision-useful way .
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
PART II: UNDERSTANDING SASB STANDARDS
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 .
Distinguish SASB’s approach (sustainability accounting) from other approaches
to sustainability tracking and reporting .
COPYRIGHT. ALL RIGHTS RESERVED 8988 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
the scope of disclosure and the format of
reporting, reporting activity metrics for
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
PART II: UNDERSTANDING SASB STANDARDS
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, GHG emissions is a disclosure topic in a number of Oil & Gas
industries, which is one element of the broad issue of climate change . (see table .)
Six fundamental principles help guide SASB’s determination of topics for disclosure,
aimed at balancing the needs of the various user groups:
• Appliable to investors: SASB includes disclosure topics in its standards if,
and only if, the evidence base indicates the topic is likely to constitute material
information across constituencies .
• Pertinent and relevant across an industry: SASB only includes disclosure
topics that present robust evidence for being systemic and/or endemic to 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
Sustainability Dimension Environment
Sustainability Issue Climate change
Disclosure Topic Greenhouse gas (GHG) emissions
Accounting Metric Gross global Scope 1 emissions, percentage covered under a regulatory program, percentage by hydrocarbon resource
Technical Protocol The registrant shall disclose gross global Scope 1 greenhouse gas emissions to the atmosphere of the six GHG covered under the Kyoto Protocol: carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride .
COPYRIGHT. ALL RIGHTS RESERVED 8988 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
the scope of disclosure and the format of
reporting, reporting activity metrics for
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
PART II: UNDERSTANDING SASB STANDARDS
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, GHG emissions is a disclosure topic in a number of Oil & Gas
industries, which is one element of the broad issue of climate change . (see table .)
Six fundamental principles help guide SASB’s determination of topics for disclosure,
aimed at balancing the needs of the various user groups:
• Appliable to investors: SASB includes disclosure topics in its standards if,
and only if, the evidence base indicates the topic is likely to constitute material
information across constituencies .
• Pertinent and relevant across an industry: SASB only includes disclosure
topics that present robust evidence for being systemic and/or endemic to 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
Sustainability Dimension Environment
Sustainability Issue Climate change
Disclosure Topic Greenhouse gas (GHG) emissions
Accounting Metric Gross global Scope 1 emissions, percentage covered under a regulatory program, percentage by hydrocarbon resource
Technical Protocol The registrant shall disclose gross global Scope 1 greenhouse gas emissions to the atmosphere of the six GHG covered under the Kyoto Protocol: carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride .
COPYRIGHT. ALL RIGHTS RESERVED 9190 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
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 .
• Focused on driving value creation: In addition to using evidence to determine
whether a disclosure topic is likely to constitute material information, SASB uses
research and Industry Working Group findings to ensure each topic is linked with
long-term value creation, valuation, and/or risk mitigation . 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 value creation, and was therefore not included in
the standard .
• Expected to bring benefits that exceed the costs: The costs a SASB
standard imposes, compared with possible alternatives, are likely to be justified
in relation to the overall expected benefits . For example, one of the disclosure
topics for the Automobiles industry is Fuel Economy and Use-Phase Emissions .
An accounting metric could have been defined based on a single fuel economy
standard, such as miles per gallon . However, not all regions use this fuel economy
measurement; some use kilometers per liter . Therefore, such a metric would place
an unnecessary burden on companies that operate in multiple regions and would
not be cost-effective . Instead, SASB developed an accounting metric called “Sales-
weighted average passenger fleet fuel economy, consumption, or emissions, by
region,” which allows companies to efficiently provide complete, comparable
information .
• Actionable by companies: SASB standards contain only disclosure topics
that are within the control or influence of companies and industries . 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 tracks, however, so the topic was included as a Watch List topic in
the Rail Transportation industry .
PART II: UNDERSTANDING SASB STANDARDS
• Reflective of the views of stakeholders: SASB actively solicits input and
carefully weighs all stakeholder views . 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 solicits input during its 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 and Provisional standards 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 .
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 .
• Relevant: The proposed metric adequately describes performance related to the
disclosure topic, or is a proxy for performance .
• Useful: The metric will provide decision-useful information to companies and
investors .
• Applicable: The metric is applicable to most companies in the industry .
• Cost-effective: The data are already collected by most companies, or can be
collected in a timely manner and at a reasonable cost .
• Comparable: The data allow for peer-to-peer benchmarking within the industry .
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SASB FSA LEVEL I STUDY GUIDE
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 .
• Focused on driving value creation: In addition to using evidence to determine
whether a disclosure topic is likely to constitute material information, SASB uses
research and Industry Working Group findings to ensure each topic is linked with
long-term value creation, valuation, and/or risk mitigation . 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 value creation, and was therefore not included in
the standard .
• Expected to bring benefits that exceed the costs: The costs a SASB
standard imposes, compared with possible alternatives, are likely to be justified
in relation to the overall expected benefits . For example, one of the disclosure
topics for the Automobiles industry is Fuel Economy and Use-Phase Emissions .
An accounting metric could have been defined based on a single fuel economy
standard, such as miles per gallon . However, not all regions use this fuel economy
measurement; some use kilometers per liter . Therefore, such a metric would place
an unnecessary burden on companies that operate in multiple regions and would
not be cost-effective . Instead, SASB developed an accounting metric called “Sales-
weighted average passenger fleet fuel economy, consumption, or emissions, by
region,” which allows companies to efficiently provide complete, comparable
information .
• Actionable by companies: SASB standards contain only disclosure topics
that are within the control or influence of companies and industries . 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 tracks, however, so the topic was included as a Watch List topic in
the Rail Transportation industry .
PART II: UNDERSTANDING SASB STANDARDS
• Reflective of the views of stakeholders: SASB actively solicits input and
carefully weighs all stakeholder views . 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 solicits input during its 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 and Provisional standards 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 .
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 .
• Relevant: The proposed metric adequately describes performance related to the
disclosure topic, or is a proxy for performance .
• Useful: The metric will provide decision-useful information to companies and
investors .
• Applicable: The metric is applicable to most companies in the industry .
• Cost-effective: The data are already collected by most companies, or can be
collected in a timely manner and at a reasonable cost .
• Comparable: The data allow for peer-to-peer benchmarking within the industry .
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SASB FSA LEVEL I STUDY GUIDE
In other words, the data indicates
a spread of performance or
differentiation among companies .
The data should not be the same, or
similar, for every company .
• Complete: Individually, or as a
set, the metrics provide enough
information to understand and
interpret performance associated
with the disclosure topic .
• Directional: The metric provides
clarity about whether an increase
or decrease in the numerical value
signals improved or worsened
performance . Not every topic will
need to directional . For instance, a
topic such as “employee diversity”
does not need to, and cannot,
always be increasing .
• Neutral: The data must report performance as faithfully as possible, emphasizing
objective measurement rather than value judgments (see sidebar .)
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 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 for the Chemicals industry, and it is associated with
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 .
PART II: UNDERSTANDING SASB STANDARDS
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
In some cases, qualitative metrics
are the best way to provide decision-
useful sustainability information to the
reasonable investor . Clear explanations of
these metrics are possible within the MD&A section of Form 10-K, where SASB’s metrics
are disclosed .
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
security 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
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 covered under a regulatory program, percentage by hydrocarbon reserve .” One of the technical protocol instructions indicates which greenhouse gases should be measured for emissions quantity: methane, nitrous oxide, perfluorocarbons, hydrofluorocarbons, and sulfur hexafluoride . 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) .
COPYRIGHT. ALL RIGHTS RESERVED 9392 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
In other words, the data indicates
a spread of performance or
differentiation among companies .
The data should not be the same, or
similar, for every company .
• Complete: Individually, or as a
set, the metrics provide enough
information to understand and
interpret performance associated
with the disclosure topic .
• Directional: The metric provides
clarity about whether an increase
or decrease in the numerical value
signals improved or worsened
performance . Not every topic will
need to directional . For instance, a
topic such as “employee diversity”
does not need to, and cannot,
always be increasing .
• Neutral: The data must report performance as faithfully as possible, emphasizing
objective measurement rather than value judgments (see sidebar .)
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 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 for the Chemicals industry, and it is associated with
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 .
PART II: UNDERSTANDING SASB STANDARDS
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
In some cases, qualitative metrics
are the best way to provide decision-
useful sustainability information to the
reasonable investor . Clear explanations of
these metrics are possible within the MD&A section of Form 10-K, where SASB’s metrics
are disclosed .
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
security 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
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 covered under a regulatory program, percentage by hydrocarbon reserve .” One of the technical protocol instructions indicates which greenhouse gases should be measured for emissions quantity: methane, nitrous oxide, perfluorocarbons, hydrofluorocarbons, and sulfur hexafluoride . 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) .
95COPYRIGHT. ALL RIGHTS RESERVED 94 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
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 .
12 .3 . Technical Bulletins and Interpretations
SASB will issue technical bulletins as needed to address questions or current subjects
that fall outside the standards-setting process . For example, technical bulletins will be
issued in response to issues or questions raised by stakeholders with regard to the use
of standards . While intended to provide additional guidance or clarification, they will not
impact the fundamental substance of SASB’s sustainability accounting standards .
Additionally, SASB will periodically issue documents called “interpretations” to
address questions related to sustainability standards that remain after the standard’s
development . SASB will consider issuing an interpretation if there is sufficient interest in
an unresolved issue for an industry where a final standard has already been issued .
SECTION REVIEW
In this section, the following Learning Objectives were covered:
• 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 .
• Distinguish SASB’s approach (sustainability accounting) from other approaches to
sustainability tracking and reporting .
√ 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?
? Questions to consider
135 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 .
13 EMERGING THEMES
Through its research and standards development process, SASB is revealing
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, through the first nine sectors for which SASB is issuing standards,
issues related to climate change are likely to be material in 57 out of 65 industries .
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 . 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 .135
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
PART II: UNDERSTANDING SASB STANDARDS
Learning Objectives Covered in This Section
Distinguish SICSTM sectors based on their distinct sustainability profiles .
Explain the organization of SICSTM and the implications of a sustainability-based
industry classification .
95COPYRIGHT. ALL RIGHTS RESERVED 94 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
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 .
12 .3 . Technical Bulletins and Interpretations
SASB will issue technical bulletins as needed to address questions or current subjects
that fall outside the standards-setting process . For example, technical bulletins will be
issued in response to issues or questions raised by stakeholders with regard to the use
of standards . While intended to provide additional guidance or clarification, they will not
impact the fundamental substance of SASB’s sustainability accounting standards .
Additionally, SASB will periodically issue documents called “interpretations” to
address questions related to sustainability standards that remain after the standard’s
development . SASB will consider issuing an interpretation if there is sufficient interest in
an unresolved issue for an industry where a final standard has already been issued .
SECTION REVIEW
In this section, the following Learning Objectives were covered:
• 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 .
• Distinguish SASB’s approach (sustainability accounting) from other approaches to
sustainability tracking and reporting .
√ 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?
? Questions to consider
135 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 .
13 EMERGING THEMES
Through its research and standards development process, SASB is revealing
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, through the first nine sectors for which SASB is issuing standards,
issues related to climate change are likely to be material in 57 out of 65 industries .
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 . 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 .135
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
PART II: UNDERSTANDING SASB STANDARDS
Learning Objectives Covered in This Section
Distinguish SICSTM sectors based on their distinct sustainability profiles .
Explain the organization of SICSTM and the implications of a sustainability-based
industry classification .
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SASB FSA LEVEL I STUDY GUIDE
© 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
137 Carbon Tracker Initiative, “Unburnable Carbon 2013: Wasted capital and stranded assets,” 2013 .
136 Urgewald, GroundWork, Earthlife Africa Johannesburg and BankTrack, “Bankrolling Climate Change: A Look into the Portfolios of the World’s Largest Banks,” December 2011 .
their financed emissions . Nevertheless, a recent study found that in the six-year period
following 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 .136 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 .137
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 .
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:
• Scope 2 emissions and energy management: 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 .
• 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 of the
sources) . For example, in the Automobiles industry, SASB focuses on use-phase
emissions rather than those generated during production . In banking, it focuses
on financed emissions rather than emissions from branches . In manufacturing,
it focuses on the link in the value chain where the impact is the largest—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 .
PART II: UNDERSTANDING SASB STANDARDS
Commodities .” Bloomberg News, February 6, 2013 . 142 Joint Center for Housing Studies of Harvard University, “The State of the Nation’s Housing,” 2008 . 143 Brennan, Morgan, “The Foreclosure Crisis Isn’t Over Just Yet,” Forbes, December 1, 2012 . 144 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 .
138 Anis, Khurrum, “Stopping Fake Drugs From Pakistan Is Too Late for Victims,” Bloomberg, May 17, 2012 . 139 Miller, Henry, “Fake And Flawed Medicines Threaten Us All,” Forbes, July 25, 2012 . 140 United States Fire Administration, Residential Building Electric Fires, March 2008, p . 1 .141 Fedorinova, Yuliya and Marina Sysoyeva . “Carmakers Use Aluminum Over Steel in Boost for Rio:
13 .2 . It’s Not Just Climate Change Alone
Although climate change may have the most extensive reach, other important
sustainability trends have also emerged in SASB’s standards development process,
revealing issues that cut across disparate industries:
• Product Alignment and Safety: Responsible product stewardship means
strategically addressing a $431 billion counterfeit drug market in the
pharmaceutical 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 .138,139 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 .140 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 and electronic equipment industry that fail
to proactively manage these risks can lose market share while facing increases in
legal costs and cost of capital .
• 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 .141 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 .142 These practices increased the risk of default and led to an estimated
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© 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
137 Carbon Tracker Initiative, “Unburnable Carbon 2013: Wasted capital and stranded assets,” 2013 .
136 Urgewald, GroundWork, Earthlife Africa Johannesburg and BankTrack, “Bankrolling Climate Change: A Look into the Portfolios of the World’s Largest Banks,” December 2011 .
their financed emissions . Nevertheless, a recent study found that in the six-year period
following 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 .136 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 .137
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 .
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:
• Scope 2 emissions and energy management: 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 .
• 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 of the
sources) . For example, in the Automobiles industry, SASB focuses on use-phase
emissions rather than those generated during production . In banking, it focuses
on financed emissions rather than emissions from branches . In manufacturing,
it focuses on the link in the value chain where the impact is the largest—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 .
PART II: UNDERSTANDING SASB STANDARDS
Commodities .” Bloomberg News, February 6, 2013 . 142 Joint Center for Housing Studies of Harvard University, “The State of the Nation’s Housing,” 2008 . 143 Brennan, Morgan, “The Foreclosure Crisis Isn’t Over Just Yet,” Forbes, December 1, 2012 . 144 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 .
138 Anis, Khurrum, “Stopping Fake Drugs From Pakistan Is Too Late for Victims,” Bloomberg, May 17, 2012 . 139 Miller, Henry, “Fake And Flawed Medicines Threaten Us All,” Forbes, July 25, 2012 . 140 United States Fire Administration, Residential Building Electric Fires, March 2008, p . 1 .141 Fedorinova, Yuliya and Marina Sysoyeva . “Carmakers Use Aluminum Over Steel in Boost for Rio:
13 .2 . It’s Not Just Climate Change Alone
Although climate change may have the most extensive reach, other important
sustainability trends have also emerged in SASB’s standards development process,
revealing issues that cut across disparate industries:
• Product Alignment and Safety: Responsible product stewardship means
strategically addressing a $431 billion counterfeit drug market in the
pharmaceutical 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 .138,139 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 .140 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 and electronic equipment industry that fail
to proactively manage these risks can lose market share while facing increases in
legal costs and cost of capital .
• 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 .141 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 .142 These practices increased the risk of default and led to an estimated
COPYRIGHT. ALL RIGHTS RESERVED 9998 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
four million foreclosures between 2007
and 2012 .143 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 .144 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 information regarding more than two-thirds of its
disclosure topics is already being disclosed—but rarely in a decision-useful way . In fact,
SASB research indicates that more than one-third of these disclosures contain boilerplate
language, while only about 15 percent use metrics
Meaningful—not boilerplate—disclosures on sustainability topics enable investors
to more efficiently allocate capital . For example, by breaking down climate change 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 .
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 .
PART II: UNDERSTANDING SASB STANDARDS
How to read the table:The table below depicts the 30 general sustainability topics 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 the 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 .”
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 Non-Renewable Resources 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 Non-Renewable Resources, 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 Pharmaceuticals industry (Health Care), it will be related to drug safety and side effects, 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 .
EXAMPLES OF QUESTIONS FOR THE EXAM
• How does the Health Care
sector differ from Non-Renewable
Resources?
• What do Health Care and
Services share in common?
• In which sectors are Environmental
impacts most prominent? What
about Human Capital? Business
Model and Innovation?
COPYRIGHT. ALL RIGHTS RESERVED 9998 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
four million foreclosures between 2007
and 2012 .143 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 .144 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 information regarding more than two-thirds of its
disclosure topics is already being disclosed—but rarely in a decision-useful way . In fact,
SASB research indicates that more than one-third of these disclosures contain boilerplate
language, while only about 15 percent use metrics
Meaningful—not boilerplate—disclosures on sustainability topics enable investors
to more efficiently allocate capital . For example, by breaking down climate change 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 .
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 .
PART II: UNDERSTANDING SASB STANDARDS
How to read the table:The table below depicts the 30 general sustainability topics 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 the 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 .”
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 Non-Renewable Resources 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 Non-Renewable Resources, 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 Pharmaceuticals industry (Health Care), it will be related to drug safety and side effects, 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 .
EXAMPLES OF QUESTIONS FOR THE EXAM
• How does the Health Care
sector differ from Non-Renewable
Resources?
• What do Health Care and
Services share in common?
• In which sectors are Environmental
impacts most prominent? What
about Human Capital? Business
Model and Innovation?
COPYRIGHT. ALL RIGHTS RESERVED 101100 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
HC FN TC NRR TR SVC
Systemic risk management • • •Accident and safety management • • •Business ethics and transparency of payments • • • • •Competitive behavior • • • • •Regulatory capture and political influence • •Materials sourcing • • • •Supply chain management • • • • •
Leadership & Governance
High Prevalence Medium Prevalence Low Prevalence
PART II: UNDERSTANDING SASB STANDARDS
HC FN TC NRR TR SVC
Human rights and community relations • •Access and affordability • •Customer welfare • • • • •Data security and customer privacy • • •Fair disclosure and advertising • •Fair marketing and advertising • • •
Social Capital
HC FN TC NRR TR SVC
Labor relations • • •Fair labor practices • • •Employee health, safety and wellbeing • • • • •Diversity and inclusion • • •Compensation and benefits • •Recruitment, development and retention • • • •
Human Capital
HC FN TC NRR TR SVC
Lifecycle impacts of products and services • • • • • •Environmental, social impacts on core assets
and operations• • • •
Product packaging • •Product quality and safety • • •
Business Model & Innovation
HC FN TC NRR TR SVC
GHG emissions • • • •Air quality • • •Energy management • • • • •Fuel management • • • •Water and wastewater management • • • •Waste and hazardous materials management • • • • •Biodiversity impacts • • •
Environment
SECTION REVIEW
In this section, the following Learning Objectives were covered:
• Distinguish SICSTM sectors based on their distinct sustainability profiles .
• Explain the organization of SICSTM and the implications of a sustainability-based
industry classification .
Sector abbreviations:
HC: Health Care FN: Financials TC: Technology and Communications
NRR: Non-Renewable Resources TR: Transportation SVC: Services
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SASB FSA LEVEL I STUDY GUIDE
HC FN TC NRR TR SVC
Systemic risk management • • •Accident and safety management • • •Business ethics and transparency of payments • • • • •Competitive behavior • • • • •Regulatory capture and political influence • •Materials sourcing • • • •Supply chain management • • • • •
Leadership & Governance
High Prevalence Medium Prevalence Low Prevalence
PART II: UNDERSTANDING SASB STANDARDS
HC FN TC NRR TR SVC
Human rights and community relations • •Access and affordability • •Customer welfare • • • • •Data security and customer privacy • • •Fair disclosure and advertising • •Fair marketing and advertising • • •
Social Capital
HC FN TC NRR TR SVC
Labor relations • • •Fair labor practices • • •Employee health, safety and wellbeing • • • • •Diversity and inclusion • • •Compensation and benefits • •Recruitment, development and retention • • • •
Human Capital
HC FN TC NRR TR SVC
Lifecycle impacts of products and services • • • • • •Environmental, social impacts on core assets
and operations• • • •
Product packaging • •Product quality and safety • • •
Business Model & Innovation
HC FN TC NRR TR SVC
GHG emissions • • • •Air quality • • •Energy management • • • • •Fuel management • • • •Water and wastewater management • • • •Waste and hazardous materials management • • • • •Biodiversity impacts • • •
Environment
SECTION REVIEW
In this section, the following Learning Objectives were covered:
• Distinguish SICSTM sectors based on their distinct sustainability profiles .
• Explain the organization of SICSTM and the implications of a sustainability-based
industry classification .
Sector abbreviations:
HC: Health Care FN: Financials TC: Technology and Communications
NRR: Non-Renewable Resources TR: Transportation SVC: Services
102 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
√ 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?
? Questions to consider
USING SASB STANDARDS
PART III
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SASB 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 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 .
PART III: USING SASB STANDARDS
14 CORPORATE USE
Learning Objectives Covered in This Section
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 the 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) .
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) .
107COPYRIGHT. ALL RIGHTS RESERVED 106 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB 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 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 .
PART III: USING SASB STANDARDS
14 CORPORATE USE
Learning Objectives Covered in This Section
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 the 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) .
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) .
COPYRIGHT. ALL RIGHTS RESERVED 109108 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
146 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 .
145 Craig, Pamela J ., Bruno Berthon, Steven Culp, and Donniel Schulman, “The Chief Executive Officer’s Perspective,” Accenture, p . 8 .
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 .145
Collaborative companies can adapt faster, innovate more, and engage more completely
PART III: USING SASB STANDARDS
with the marketplace to understand and respond to customer needs and competitive
pressures .146
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 generally includes the following positions (or
their equivalents): CEO, CFO, legal counsel, chief audit executive and internal audit team,
independent assurance provider, board 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 .
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
COPYRIGHT. ALL RIGHTS RESERVED 109108 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
146 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 .
145 Craig, Pamela J ., Bruno Berthon, Steven Culp, and Donniel Schulman, “The Chief Executive Officer’s Perspective,” Accenture, p . 8 .
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 .145
Collaborative companies can adapt faster, innovate more, and engage more completely
PART III: USING SASB STANDARDS
with the marketplace to understand and respond to customer needs and competitive
pressures .146
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 generally includes the following positions (or
their equivalents): CEO, CFO, legal counsel, chief audit executive and internal audit team,
independent assurance provider, board 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 .
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
COPYRIGHT. ALL RIGHTS RESERVED 111110 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
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 to ensure appropriate controls are in place, that the
PART III: USING SASB STANDARDS
Although not comprehensive, the table details how certain business roles are typically
involved in the collection, management, and/or disclosure of sustainability information .
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 .
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 the 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
COPYRIGHT. ALL RIGHTS RESERVED 111110 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
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 to ensure appropriate controls are in place, that the
PART III: USING SASB STANDARDS
Although not comprehensive, the table details how certain business roles are typically
involved in the collection, management, and/or disclosure of sustainability information .
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 .
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 the 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
COPYRIGHT. ALL RIGHTS RESERVED 113112 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
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
PART III: USING SASB STANDARDS
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 .
COPYRIGHT. ALL RIGHTS RESERVED 113112 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
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
PART III: USING SASB STANDARDS
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 .
COPYRIGHT. ALL RIGHTS RESERVED 115114 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
147 Committee of Sponsoring Organizations of the Treadway Commission, “Internal Control—Integrated Framework,” Executive Summary, May 2013 .148 Sarbanes-Oxley 404149 SEC, “Commission Guidance Regarding Disclosure Related to Climate Change; Final Rule,” February 2010 .
150 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 .
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 .147
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 .c 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 .148 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) .
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 .
Sustainability disclosures in SEC filings are subject to the same SOX certifications
PART III: USING SASB STANDARDS
regarding disclosure controls and procedures and the accuracy and completeness of
the information that apply to financial reporting .149 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
updated 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 .150 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
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 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
COPYRIGHT. ALL RIGHTS RESERVED 115114 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
147 Committee of Sponsoring Organizations of the Treadway Commission, “Internal Control—Integrated Framework,” Executive Summary, May 2013 .148 Sarbanes-Oxley 404149 SEC, “Commission Guidance Regarding Disclosure Related to Climate Change; Final Rule,” February 2010 .
150 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 .
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 .147
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 .c 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 .148 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) .
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 .
Sustainability disclosures in SEC filings are subject to the same SOX certifications
PART III: USING SASB STANDARDS
regarding disclosure controls and procedures and the accuracy and completeness of
the information that apply to financial reporting .149 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
updated 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 .150 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
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 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
COPYRIGHT. ALL RIGHTS RESERVED 117116 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
151 Pant, Prashant, “Business Intelligence (BI): How to build successful BI strategy,” Deloitte, 2009 .
creating shareholder value over the long run .
14 .3 .1 . Creating a Sustainable Business Strategy
A sustainability strategy is a company’s ad hoc 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-
Identify metricsDevelop
knowledge from data
Craft strategy based on findings
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 .
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 .151
The most relevant sustainability metrics for strategists are those most closely linked to
Business Review, January 20, 2014 . Accessed September 11, 2014 .155 Ibid .156 “American Express Company (AXP): Enterprise Growth Emerges In 2013 Helping AXP To Grow Market Share .” 157 American Express website, “Who We Are .” Accessed September 11, 2014 .
15 2Khan, et al . 153 iStockAnalyst website, “American Express Company (AXP): Enterprise Growth Emerges In 2013 Helping AXP To Grow Market Share,” August 14, 2013 . Accessed September 11, 2014 . 154 McGinn, Dan, “How an American Express Executive Drives Growth,” Harvard
PART III: USING SASB STANDARDS
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 . 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 .152 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 standards in 2013 and many corporations have not had
time to implement the standards and report performance data based on the SASB
metrics . 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 .
Consumer Finance company American Express capitalized on an opportunity to
create value related to one of SASB’s metrics—revenue from credit and debit products
targeting unbanked or underbanked segments . Unbanked or underbanked consumers
live in households without a checking or savings account, or live in households that
have those accounts but regularly use alternative financial services such as payday loans,
non-bank check-cashing services, or pawnshops . In 2011, American Express launched
its innovative Bluebird product—a prepaid debit card targeting the unbanked or
underbanked .
The Bluebird product contributed to 26 percent revenue growth between the first
half of 2012 and the first half of 2013,153,154 with more than 1 million total accounts
totaling more than $1 billion in card value . More than 85 percent of the customers
were new customers for American Express, and half were in the key under-35 age
demographic .155 . Not only did Bluebird generate new revenue, but also other American
Express customers have a higher impression of the American Express brand as a result
of Bluebird .156 Bluebird’s success is due in part to its coherent fit with American Express’s
business strategy, and its alignment with one of the company’s key values: to make a
COPYRIGHT. ALL RIGHTS RESERVED 117116 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
151 Pant, Prashant, “Business Intelligence (BI): How to build successful BI strategy,” Deloitte, 2009 .
creating shareholder value over the long run .
14 .3 .1 . Creating a Sustainable Business Strategy
A sustainability strategy is a company’s ad hoc 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-
Identify metricsDevelop
knowledge from data
Craft strategy based on findings
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 .
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 .151
The most relevant sustainability metrics for strategists are those most closely linked to
Business Review, January 20, 2014 . Accessed September 11, 2014 .155 Ibid .156 “American Express Company (AXP): Enterprise Growth Emerges In 2013 Helping AXP To Grow Market Share .” 157 American Express website, “Who We Are .” Accessed September 11, 2014 .
15 2Khan, et al . 153 iStockAnalyst website, “American Express Company (AXP): Enterprise Growth Emerges In 2013 Helping AXP To Grow Market Share,” August 14, 2013 . Accessed September 11, 2014 . 154 McGinn, Dan, “How an American Express Executive Drives Growth,” Harvard
PART III: USING SASB STANDARDS
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 . 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 .152 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 standards in 2013 and many corporations have not had
time to implement the standards and report performance data based on the SASB
metrics . 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 .
Consumer Finance company American Express capitalized on an opportunity to
create value related to one of SASB’s metrics—revenue from credit and debit products
targeting unbanked or underbanked segments . Unbanked or underbanked consumers
live in households without a checking or savings account, or live in households that
have those accounts but regularly use alternative financial services such as payday loans,
non-bank check-cashing services, or pawnshops . In 2011, American Express launched
its innovative Bluebird product—a prepaid debit card targeting the unbanked or
underbanked .
The Bluebird product contributed to 26 percent revenue growth between the first
half of 2012 and the first half of 2013,153,154 with more than 1 million total accounts
totaling more than $1 billion in card value . More than 85 percent of the customers
were new customers for American Express, and half were in the key under-35 age
demographic .155 . Not only did Bluebird generate new revenue, but also other American
Express customers have a higher impression of the American Express brand as a result
of Bluebird .156 Bluebird’s success is due in part to its coherent fit with American Express’s
business strategy, and its alignment with one of the company’s key values: to make a
COPYRIGHT. ALL RIGHTS RESERVED 119118 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
for sustainability can benefit the bottom line,” 2014 .161 Casazza 162 Bonini, Swartz 163 Goh, Eugene, Knut Haanaes, David Kiron, Nina Kruschwitz, Martin Reeves, “The Innovation Bottom Line,” MIT Sloan Management Review, Winter 2013 .
158 Chartered Institute of Management Accountants, “Accounting for climate change: How management accountants can help organisations mitigate and adapt to climate change,” February, 2010 .159 Casazza, Carol, “Oversight of Corporate Sustainability Activities,” NACD, 2014 . 160 Bonini, Sheila and Steven Swartz, “McKinsey Profits with purpose: How organizing
positive difference in its customers’ lives .157 Although the SASB metric didn’t exist when
American Express launched Bluebird, it serves as an example of how SASB metrics’
inherent connection to industry 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 .158,159 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 American
Express example above, SASB’s Financial Inclusion disclosure topic is correlated with two
value drivers—new markets and market share .
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) .160,161
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 .162 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,”163 have been identified in research and analysis by thought
leaders 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 .164
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
PART III: USING SASB STANDARDS
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 .
14 .4 . Reporting
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,
Imperatives for Corporate CEOs,” 2011 . 168 Grocery Manufacturers Association/Food Products Association and Deloitte, “Sustainability: Balancing Opportunity and Risk in the Consumer Products Industry,” 2007 .169 Esty and Lubin, “Sustainability Imperative .”
164 Esty, Daniel C . and David A . Lubin, “The Sustainability Imperative,” Harvard Business Review, May 2010 . 165 Kiron, et al, “The Innovation Bottom Line .”166 Esty, Daniel C . and David A . Lubin, “Bridging the Sustainability Gap,” 2014 .167 Accenture and CECP, “Business at its Best: Driving Sustainable Value Creation: Five
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, GEhas emerged as a differentiated energy and environmental solutions provider .
COPYRIGHT. ALL RIGHTS RESERVED 119118 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
for sustainability can benefit the bottom line,” 2014 .161 Casazza 162 Bonini, Swartz 163 Goh, Eugene, Knut Haanaes, David Kiron, Nina Kruschwitz, Martin Reeves, “The Innovation Bottom Line,” MIT Sloan Management Review, Winter 2013 .
158 Chartered Institute of Management Accountants, “Accounting for climate change: How management accountants can help organisations mitigate and adapt to climate change,” February, 2010 .159 Casazza, Carol, “Oversight of Corporate Sustainability Activities,” NACD, 2014 . 160 Bonini, Sheila and Steven Swartz, “McKinsey Profits with purpose: How organizing
positive difference in its customers’ lives .157 Although the SASB metric didn’t exist when
American Express launched Bluebird, it serves as an example of how SASB metrics’
inherent connection to industry 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 .158,159 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 American
Express example above, SASB’s Financial Inclusion disclosure topic is correlated with two
value drivers—new markets and market share .
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) .160,161
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 .162 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,”163 have been identified in research and analysis by thought
leaders 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 .164
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
PART III: USING SASB STANDARDS
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 .
14 .4 . Reporting
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,
Imperatives for Corporate CEOs,” 2011 . 168 Grocery Manufacturers Association/Food Products Association and Deloitte, “Sustainability: Balancing Opportunity and Risk in the Consumer Products Industry,” 2007 .169 Esty and Lubin, “Sustainability Imperative .”
164 Esty, Daniel C . and David A . Lubin, “The Sustainability Imperative,” Harvard Business Review, May 2010 . 165 Kiron, et al, “The Innovation Bottom Line .”166 Esty, Daniel C . and David A . Lubin, “Bridging the Sustainability Gap,” 2014 .167 Accenture and CECP, “Business at its Best: Driving Sustainable Value Creation: Five
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, GEhas emerged as a differentiated energy and environmental solutions provider .
COPYRIGHT. ALL RIGHTS RESERVED 121120 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
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 clearer . The committee often meets
at least at least once each quarter, usually as the quarterly/annual financial statements
are starting to be prepared . 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 .
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
• Disclosure committee meets to evaluate disclosure controls 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
lengthy 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
PART III: USING SASB STANDARDS
MATERIALITY ASSESSMENT
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 whether legislation or policy may be enacted that would impact the organization’s ability to create value in the short-, medium-, or long-term—or drive the organization to take action on the topic .
• Industry norms and competitiveness: Consider the completeness of current disclosures by evaluating the practices of industry peers .
• Shareholder 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 .
COPYRIGHT. ALL RIGHTS RESERVED 121120 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
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 clearer . The committee often meets
at least at least once each quarter, usually as the quarterly/annual financial statements
are starting to be prepared . 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 .
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
• Disclosure committee meets to evaluate disclosure controls 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
lengthy 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
PART III: USING SASB STANDARDS
MATERIALITY ASSESSMENT
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 whether legislation or policy may be enacted that would impact the organization’s ability to create value in the short-, medium-, or long-term—or drive the organization to take action on the topic .
• Industry norms and competitiveness: Consider the completeness of current disclosures by evaluating the practices of industry peers .
• Shareholder 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 .
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SASB FSA LEVEL I STUDY GUIDE
173 SEC FR-72, Commission Guidance Regarding Management’s Discussion and Analysis of Financial Condition and Results of Operations (December 2003)
170 Ibid . (§ 229 .101) .171 Ibid . (§ 229 .103) .172 Ibid . (§229 .503(c)) .
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 .
Specific parts of the disclosure process will be more relevant to sustainability reporting
than others, as identified in the chart at right .
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 the 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 the MD&A, SASB disclosures may also be warranted within a
company’s description of business,170 legal proceedings171 and risk factors .172 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 .173 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
PART III: USING SASB STANDARDS
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)
• Income statement
• Balance sheet
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 accurals, 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
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SASB FSA LEVEL I STUDY GUIDE
173 SEC FR-72, Commission Guidance Regarding Management’s Discussion and Analysis of Financial Condition and Results of Operations (December 2003)
170 Ibid . (§ 229 .101) .171 Ibid . (§ 229 .103) .172 Ibid . (§229 .503(c)) .
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 .
Specific parts of the disclosure process will be more relevant to sustainability reporting
than others, as identified in the chart at right .
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 the 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 the MD&A, SASB disclosures may also be warranted within a
company’s description of business,170 legal proceedings171 and risk factors .172 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 .173 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
PART III: USING SASB STANDARDS
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)
• Income statement
• Balance sheet
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 accurals, 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
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SASB FSA LEVEL I STUDY GUIDE
174 C .F .R . § 229 .303 (Item 303)(a)(3)(ii) . 175 Ibid .
176 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”] .
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 .”174
Item 303 states that the 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 .”175 (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:
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 operations176
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
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 Interpretative Guidance 33-8350 MD&A; 17 CFR Parts 211, 231 and 241 – Commission Guidance Regarding Disclosures Related to Climate Change
179 See Item 101 of Regulation S-K; and Form 20-F, Item 4 .B .177 SEC FR-72, Commission Guidance Regarding Management’s Discussion and Analysis of Financial Condition and Results of Operations, December, 2003 .178 Section 21E of the Securities Exchange Act of 1934, 15 U .S .C . § 78u-5 .
PART III: USING SASB STANDARDS
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 .
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 .177
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:178
(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 .’”179
In determining whether to include disclosure, registrants should consider the impact on
each of their reportable segments .
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 .
PART 229 Regulation S-K; 2003 Interpretative Guidance 33-8350 MD&A; 17 CFR Parts 211, 231 and 241 – Commission Guidance Regarding Disclosures Related to Climate Change
COPYRIGHT. ALL RIGHTS RESERVED 125124 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
174 C .F .R . § 229 .303 (Item 303)(a)(3)(ii) . 175 Ibid .
176 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”] .
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 .”174
Item 303 states that the 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 .”175 (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:
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 operations176
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
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 Interpretative Guidance 33-8350 MD&A; 17 CFR Parts 211, 231 and 241 – Commission Guidance Regarding Disclosures Related to Climate Change
179 See Item 101 of Regulation S-K; and Form 20-F, Item 4 .B .177 SEC FR-72, Commission Guidance Regarding Management’s Discussion and Analysis of Financial Condition and Results of Operations, December, 2003 .178 Section 21E of the Securities Exchange Act of 1934, 15 U .S .C . § 78u-5 .
PART III: USING SASB STANDARDS
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 .
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 .177
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:178
(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 .’”179
In determining whether to include disclosure, registrants should consider the impact on
each of their reportable segments .
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 .
PART 229 Regulation S-K; 2003 Interpretative Guidance 33-8350 MD&A; 17 CFR Parts 211, 231 and 241 – Commission Guidance Regarding Disclosures Related to Climate Change
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© 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
181 See Item 503(c) of Regulation S-K; and Form 20-F, Item 3 .D .180 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”) .
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 .180
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 .181
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
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 .”
FOR CONTEXT: PURPOSE OF LEGAL PROCEEDINGS
Summarize any material pending legal actions to which the company is a party .
PART 229 Regulation S-K; 2003 Interpretative Guidance 33-8350 MD&A; 17 CFR Parts 211, 231 and 241 – Commission Guidance Regarding Disclosures Related to Climate Change
182 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 .
183“Cyber Disclosure .”
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 . Registrants should not present
risks that could apply to any issuer or any offering and should avoid generic risk factor
disclosure .182 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 .183
14 .4 .2 .5 . Assurance
SASB standards are designed
for the disclosure of material
sustainability information in the
MD&A section of Form 10-K, but the
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)
PART III: USING SASB STANDARDS
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 .
COPYRIGHT. ALL RIGHTS RESERVED 127126
SASB FSA LEVEL I STUDY GUIDE
© 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
181 See Item 503(c) of Regulation S-K; and Form 20-F, Item 3 .D .180 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”) .
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 .180
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 .181
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
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 .”
FOR CONTEXT: PURPOSE OF LEGAL PROCEEDINGS
Summarize any material pending legal actions to which the company is a party .
PART 229 Regulation S-K; 2003 Interpretative Guidance 33-8350 MD&A; 17 CFR Parts 211, 231 and 241 – Commission Guidance Regarding Disclosures Related to Climate Change
182 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 .
183“Cyber Disclosure .”
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 . Registrants should not present
risks that could apply to any issuer or any offering and should avoid generic risk factor
disclosure .182 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 .183
14 .4 .2 .5 . Assurance
SASB standards are designed
for the disclosure of material
sustainability information in the
MD&A section of Form 10-K, but the
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)
PART III: USING SASB STANDARDS
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 .
COPYRIGHT. ALL RIGHTS RESERVED 129128 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
185 PCAOB Rules Section 1 .186 AT101 .
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 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 .184 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 .185 They then may
issue an opinion on the conclusion of the assurance procedures .186
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 .
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 .
187 AT101 .08
PART III: USING SASB STANDARDS
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 .187
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 . Nevertheless, it is not yet a common practice
in the U .S . . According to GRI (Trends in External Assurance of Sustainability Reports,
2014), 16 percent of U .S . companies that published a sustainability report based on
GRI guidelines in 2013 included some level of assurance, up from 10 percent in 2011 .
Recognizing this trend, the AICPA has established a sustainability-related task force, but
not all providers of external assurance have adopted a common assurance standard for
sustainability data .
The AICPA’s AT Section 101 standard, which serves as an interim PCAOB standard,
is frequently used for attest engagements over sustainability information . It applies to
attestation engagements executed by a certified public accountant over a determined
subject matter . While this standard serves a broad range of subject matters, it could be
applied to the review of disclosed sustainability information, in the MD&A or elsewhere .
AT Section 101 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 101 .
The International Federation of Accountants (IFAC) has also issued a standard for
assurance engagements—the International Standard on Assurance Engagements (ISAE)
DEFINITION: SUITABLE CRITERIA
Criteria are the standards or benchmarks used to measure and present the subject matter and 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 objectivity, measurability, etc .), as defined by the standard .
Source: AT Section 101 . PCAOB . .24
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SASB FSA LEVEL I STUDY GUIDE
185 PCAOB Rules Section 1 .186 AT101 .
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 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 .184 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 .185 They then may
issue an opinion on the conclusion of the assurance procedures .186
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 .
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 .
187 AT101 .08
PART III: USING SASB STANDARDS
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 .187
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 . Nevertheless, it is not yet a common practice
in the U .S . . According to GRI (Trends in External Assurance of Sustainability Reports,
2014), 16 percent of U .S . companies that published a sustainability report based on
GRI guidelines in 2013 included some level of assurance, up from 10 percent in 2011 .
Recognizing this trend, the AICPA has established a sustainability-related task force, but
not all providers of external assurance have adopted a common assurance standard for
sustainability data .
The AICPA’s AT Section 101 standard, which serves as an interim PCAOB standard,
is frequently used for attest engagements over sustainability information . It applies to
attestation engagements executed by a certified public accountant over a determined
subject matter . While this standard serves a broad range of subject matters, it could be
applied to the review of disclosed sustainability information, in the MD&A or elsewhere .
AT Section 101 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 101 .
The International Federation of Accountants (IFAC) has also issued a standard for
assurance engagements—the International Standard on Assurance Engagements (ISAE)
DEFINITION: SUITABLE CRITERIA
Criteria are the standards or benchmarks used to measure and present the subject matter and 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 objectivity, measurability, etc .), as defined by the standard .
Source: AT Section 101 . PCAOB . .24
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SASB FSA LEVEL I STUDY GUIDE
3000—but that standard is more commonly used outside the U .S .; AT 101 is more
commonly used within the U .S . .
SECTION REVIEW
In this section, the following Learning Objectives were covered:
• 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 the 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) .
• 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) .
√ When it comes to collecting, managing, and reporting material sustainability
information, why do companies need to involve more than just the sustainability
team?
√ What should companies begin doing in order to better understand their
performance on the sustainability topics likely to be material in their industry?
? Questions to consider
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
15 INVESTOR USE
PART III: USING SASB STANDARDS
Learning Objectives Covered in This Section
Discuss the utility of SASB standards in investment decisions (e .g ., portfolio
allocation, risk/return profile) .
Explain the organization of SICSTM and the implications of a sustainability-based
industry classification .
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) .
131COPYRIGHT. ALL RIGHTS RESERVED 130 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
3000—but that standard is more commonly used outside the U .S .; AT 101 is more
commonly used within the U .S . .
SECTION REVIEW
In this section, the following Learning Objectives were covered:
• 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 the 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) .
• 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) .
√ When it comes to collecting, managing, and reporting material sustainability
information, why do companies need to involve more than just the sustainability
team?
√ What should companies begin doing in order to better understand their
performance on the sustainability topics likely to be material in their industry?
? Questions to consider
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
15 INVESTOR USE
PART III: USING SASB STANDARDS
Learning Objectives Covered in This Section
Discuss the utility of SASB standards in investment decisions (e .g ., portfolio
allocation, risk/return profile) .
Explain the organization of SICSTM and the implications of a sustainability-based
industry classification .
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) .
COPYRIGHT. ALL RIGHTS RESERVED 133132 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
188 U .S . Trust, “Insights on Wealth and Worth,” June 20, 2014 .189EY, “Tomorrow’s Investment Rules,” 2014 .
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 .
• 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 .188
• 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 .189 Meanwhile, SASB standards
allow analysts to shift from time-intensive data
gathering to what they do best: rigorous data analysis .
The various uses of SASB standards—and the data they yield—reflect the continuum
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?
190Fidelity, Equity Sectors: Essential Building Blocks for Portfolio Construction, June 2013 .
PART III: USING SASB STANDARDS
• 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 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 .190 This is because such an approach
yields better predictive ability and lower correlation . By adapting traditional industry
classification systems to reflect the unique sustainability profiles of sectors and industries,
SASB’s SICS™ provides the building blocks for a more precise portfolio construction
that takes into account the impact of sustainability on the risk/return and correlation of
industries and sectors .
Whether or not investors employ an active sector-allocation method or use industry
factors to better understand the risk/return characteristics of a portfolio selected on
other premises (such as growth rate or cap size), SASB standards can enhance their
understanding of how different sustainability issues impact different sectors in a
portfolio . 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
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 .
COPYRIGHT. ALL RIGHTS RESERVED 133132 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
188 U .S . Trust, “Insights on Wealth and Worth,” June 20, 2014 .189EY, “Tomorrow’s Investment Rules,” 2014 .
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 .
• 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 .188
• 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 .189 Meanwhile, SASB standards
allow analysts to shift from time-intensive data
gathering to what they do best: rigorous data analysis .
The various uses of SASB standards—and the data they yield—reflect the continuum
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?
190Fidelity, Equity Sectors: Essential Building Blocks for Portfolio Construction, June 2013 .
PART III: USING SASB STANDARDS
• 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 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 .190 This is because such an approach
yields better predictive ability and lower correlation . By adapting traditional industry
classification systems to reflect the unique sustainability profiles of sectors and industries,
SASB’s SICS™ provides the building blocks for a more precise portfolio construction
that takes into account the impact of sustainability on the risk/return and correlation of
industries and sectors .
Whether or not investors employ an active sector-allocation method or use industry
factors to better understand the risk/return characteristics of a portfolio selected on
other premises (such as growth rate or cap size), SASB standards can enhance their
understanding of how different sustainability issues impact different sectors in a
portfolio . 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
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 .
COPYRIGHT. ALL RIGHTS RESERVED 135134 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
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 can 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 does 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 .
191 United Nations, Principles for Responsible Investment, “Integrated Analysis: How investors are addressing environmental, social and governance factors in fundamental equity valuation,” February, 2013 .
PART III: USING SASB STANDARDS
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 .191
Industry Drivers and Valuation Methods
SASB Topics Sustainability 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 plan
Valuation Methods
• Enterprise value /EBITDAPO for incumbents
• Discounted cash flow and revenue-based ratio for new entrants or new markets
Environmental
• Fuel economy and use-phase emissions
• Materials efficiency and recycling
• Materials sourcing
Social
• Product safety
• Labor relations
Revenue growth: Product mix alignment to demand for smaller, energy-efficient and low-emission vehicles . Impacts of switching away from large vehicles (more profitable) . Operating costs and CAPEX: Materials scarcity can lead to higher costs and R&D and CAPEX for substitution . Sourcing, materials used, and production efficiency can mitigate impact at the firm level .
Option value/scenario analysis: Large investment (R&D, CAPEX) in alternative powertrains (EV, fuel cell, hybrid) with uncertain outcome .
Automobile Industry
COPYRIGHT. ALL RIGHTS RESERVED 135134 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
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 can 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 does 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 .
191 United Nations, Principles for Responsible Investment, “Integrated Analysis: How investors are addressing environmental, social and governance factors in fundamental equity valuation,” February, 2013 .
PART III: USING SASB STANDARDS
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 .191
Industry Drivers and Valuation Methods
SASB Topics Sustainability 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 plan
Valuation Methods
• Enterprise value /EBITDAPO for incumbents
• Discounted cash flow and revenue-based ratio for new entrants or new markets
Environmental
• Fuel economy and use-phase emissions
• Materials efficiency and recycling
• Materials sourcing
Social
• Product safety
• Labor relations
Revenue growth: Product mix alignment to demand for smaller, energy-efficient and low-emission vehicles . Impacts of switching away from large vehicles (more profitable) . Operating costs and CAPEX: Materials scarcity can lead to higher costs and R&D and CAPEX for substitution . Sourcing, materials used, and production efficiency can mitigate impact at the firm level .
Option value/scenario analysis: Large investment (R&D, CAPEX) in alternative powertrains (EV, fuel cell, hybrid) with uncertain outcome .
Automobile Industry
COPYRIGHT. ALL RIGHTS RESERVED 137136 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
193 CFA Institute, Centre for Financial Market Integrity, “Environmental, Social, and Governance Factors at Listed Companies: A Manual for Investors,” 2008 .194 PwC, “Do Investors Care about Sustainability?” March 2012 . Goldman Sachs website, “GS Sustain .” Accessed August 14, 2014 .
192 United Nations, Principles for Responsible Investment, “Integrated Analysis: How investors are addressing environmental, social and governance factors in fundamental equity valuation,” February, 2013 .
Analysts also identify and consider operating risks as part of traditional financial
analysis . Sustainability factors can negatively affect a company’s operations 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 .192
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 .193 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 .194
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 . 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 .195
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
PART III: USING SASB STANDARDS
195 SASB, Construction Materials Industry Research Brief, June 2014 .
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 following chart outlines how SASB’s metrics are designed to facilitate financial
analysis, based on the types of financial impacts that emerge from the evidence
FINANCIAL DRIVER
REVENUE COST ASSETS AND LIABILITIES
COST OF CAPITAL
Type of Financial Impact
Demand for products and services
Intangiable 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 capitalsN/A
Examples (Industry)
Product safety (Automobiles)
Counterfeit drugs (Pharmaceuticals)
Environmental footprint of hardware infrastructure (Internet Media & Services)
Reserves valuation & capital expenditures (Oil & Gas - Exploration & Production)
Management of legal & regulatory environment (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
COPYRIGHT. ALL RIGHTS RESERVED 137136 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
193 CFA Institute, Centre for Financial Market Integrity, “Environmental, Social, and Governance Factors at Listed Companies: A Manual for Investors,” 2008 .194 PwC, “Do Investors Care about Sustainability?” March 2012 . Goldman Sachs website, “GS Sustain .” Accessed August 14, 2014 .
192 United Nations, Principles for Responsible Investment, “Integrated Analysis: How investors are addressing environmental, social and governance factors in fundamental equity valuation,” February, 2013 .
Analysts also identify and consider operating risks as part of traditional financial
analysis . Sustainability factors can negatively affect a company’s operations 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 .192
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 .193 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 .194
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 . 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 .195
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
PART III: USING SASB STANDARDS
195 SASB, Construction Materials Industry Research Brief, June 2014 .
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 following chart outlines how SASB’s metrics are designed to facilitate financial
analysis, based on the types of financial impacts that emerge from the evidence
FINANCIAL DRIVER
REVENUE COST ASSETS AND LIABILITIES
COST OF CAPITAL
Type of Financial Impact
Demand for products and services
Intangiable 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 capitalsN/A
Examples (Industry)
Product safety (Automobiles)
Counterfeit drugs (Pharmaceuticals)
Environmental footprint of hardware infrastructure (Internet Media & Services)
Reserves valuation & capital expenditures (Oil & Gas - Exploration & Production)
Management of legal & regulatory environment (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
COPYRIGHT. ALL RIGHTS RESERVED 139138 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
196 Harvard Management Company website, “Investing for the Long Term: Integrating ESG Factors,” accessed April 27, 2015 .
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 .
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 $36 .4 billion, began to encourage the energy
sector companies with which it engages to incorporate SASB standards into their public
filings .196
SECTION REVIEW
In this section, the following Learning Objectives were covered:
• Discuss the utility of SASB standards in investment decisions (e .g . portfolio
allocation, risk/return profile) .
• Explain the organization of SICSTM and the implications of a sustainability-based
industry classification .
• 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) .
√ 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 different
groups of investors, such as pension funds and other asset owners, asset
managers, and high-net-worth individuals?
PART III: USING SASB STANDARDS
? Questions to consider
COPYRIGHT. ALL RIGHTS RESERVED 139138 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
196 Harvard Management Company website, “Investing for the Long Term: Integrating ESG Factors,” accessed April 27, 2015 .
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 .
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 $36 .4 billion, began to encourage the energy
sector companies with which it engages to incorporate SASB standards into their public
filings .196
SECTION REVIEW
In this section, the following Learning Objectives were covered:
• Discuss the utility of SASB standards in investment decisions (e .g . portfolio
allocation, risk/return profile) .
• Explain the organization of SICSTM and the implications of a sustainability-based
industry classification .
• 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) .
√ 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 different
groups of investors, such as pension funds and other asset owners, asset
managers, and high-net-worth individuals?
PART III: USING SASB STANDARDS
? Questions to consider
141COPYRIGHT. ALL RIGHTS RESERVED © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
140
As you have learned, the emergence of sustainability accounting is part of a
natural evolution of the capital markets . Sustainability information may be material,
as defined by the U .S . Supreme Court, and can be disclosed in statutory filings
under existing regulation .
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 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 .
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 .
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 .
141COPYRIGHT. ALL RIGHTS RESERVED © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
140
As you have learned, the emergence of sustainability accounting is part of a
natural evolution of the capital markets . Sustainability information may be material,
as defined by the U .S . Supreme Court, and can be disclosed in statutory filings
under existing regulation .
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 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 .
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 .
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 .
COPYRIGHT. ALL RIGHTS RESERVED 143© 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
142
The tables below provide the disclosure topics for each of the industries for which SASB has
issued provisional sustainability accounting standards as of February 2015 .
APPENDIX I – SASB PROVISIONAL DISCLOSURE TOPICS
Draft Disclosure TopicsHealth Care
Environment Social Capital Human Capital Business Model & Innovation
Leadership & Governance
Man
aged
Car
eH
ealt
h C
are
Dis
trib
uti
on
Hea
lth
Car
e D
eliv
ery
Med
ical
Eq
uip
men
t an
d
Sup
plie
s
Bio
tech
no
log
y an
d
Phar
mac
euti
cals • Energy, water &
waste efficiency• Safety of clinical
trial participants• Access to
medicines• Counterfeit drugs• Ethical marketing
• Employee recruitment, development & retention
• Employee health & safety
• Affordability and fair pricing
• Drug safety and side effects
• Corruption & bribery• Manufacturing &
supply chain quality management
• Corruption & bribery• Manufacturing &
supply chain quality management
• Fraud & unnecessary procedures
• Pricing & billing transparency
• Corruption & bribery
• Plan performance• Pricing & billing
transparency
• Product design & lifecycle management
• Product design & lifecycle management
• Improved outcomes
• Employee recruitment, development & retention
• Fraud & unnecessary procedures
• Pricing & billing transparency
• Product safety• Affordability & fair
pricing• Ethical marketing
• Quality of care & patient satisfication
• Access for low-income patients
• Patient privacy and electronic health records
• Product safety• Counterfeit drugs
• Access to coverage• Customer privacy
& technology standards
• Energy, water & waste efficiency
• Energy, water & waste efficiency
• Climate change impacts on human health
• Fuel efficiency
• Climate change impacts on human health
Health Care
FinancialsEnvironment Social Capital Human Capital Business Model &
InnovationLeadership & Governance
Mo
rtg
age
Fin
ance
Exch
ang
eIn
sura
nce
Co
nsu
mer
Fi
nan
ceA
sset
M
anag
emen
tIn
vest
men
t B
anki
ng
Co
mm
erci
al
Ban
kin
g
• Environmental risk to mortgaged properties
• Environmental risk to mortgaged properties
• Financial inclusion and capacity building
• Customer privacy and data security
• Employee inclusion• Employee incentives
and risk-taking
• Employee inclusion• Employee incentives
and risk-taking
• Integration of environmental, social, and governance risk factors in credit risk analysis
• Integration of environmental, social, and governance risk factors in services and lending
• Integration of environmental, social, and governance risk factors in investment management and advisory
• Integration of environmental, social, and governance risk factors in investment management
• Policies designed to incentivize responsible behavior
• Transparent information and fair advice for customers
• Financial inclusion• Transparent
information and fair advice for customers
• Responsible lending and debt prevention
• Customer privacy and data security
• Transparent information and fair advice for customers
• Responsible lending and debt prevention
• Plan performance
• Managing business continuity and technology risks
• Managing conflicts of interest
• Management of the legal and regulatory environment
• Management of the legal and regulatory environment
• Systemic risk management
• Management of the legal and regulatory environment
• Systemic risk management
• Management of the legal and regulatory environment
• Systemic risk management
Financials
COPYRIGHT. ALL RIGHTS RESERVED 143© 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
142
The tables below provide the disclosure topics for each of the industries for which SASB has
issued provisional sustainability accounting standards as of February 2015 .
APPENDIX I – SASB PROVISIONAL DISCLOSURE TOPICS
Draft Disclosure TopicsHealth Care
Environment Social Capital Human Capital Business Model & Innovation
Leadership & Governance
Man
aged
Car
eH
ealt
h C
are
Dis
trib
uti
on
Hea
lth
Car
e D
eliv
ery
Med
ical
Eq
uip
men
t an
d
Sup
plie
s
Bio
tech
no
log
y an
d
Phar
mac
euti
cals • Energy, water &
waste efficiency• Safety of clinical
trial participants• Access to
medicines• Counterfeit drugs• Ethical marketing
• Employee recruitment, development & retention
• Employee health & safety
• Affordability and fair pricing
• Drug safety and side effects
• Corruption & bribery• Manufacturing &
supply chain quality management
• Corruption & bribery• Manufacturing &
supply chain quality management
• Fraud & unnecessary procedures
• Pricing & billing transparency
• Corruption & bribery
• Plan performance• Pricing & billing
transparency
• Product design & lifecycle management
• Product design & lifecycle management
• Improved outcomes
• Employee recruitment, development & retention
• Fraud & unnecessary procedures
• Pricing & billing transparency
• Product safety• Affordability & fair
pricing• Ethical marketing
• Quality of care & patient satisfication
• Access for low-income patients
• Patient privacy and electronic health records
• Product safety• Counterfeit drugs
• Access to coverage• Customer privacy
& technology standards
• Energy, water & waste efficiency
• Energy, water & waste efficiency
• Climate change impacts on human health
• Fuel efficiency
• Climate change impacts on human health
Health Care
FinancialsEnvironment Social Capital Human Capital Business Model &
InnovationLeadership & Governance
Mo
rtg
age
Fin
ance
Exch
ang
eIn
sura
nce
Co
nsu
mer
Fi
nan
ceA
sset
M
anag
emen
tIn
vest
men
t B
anki
ng
Co
mm
erci
al
Ban
kin
g
• Environmental risk to mortgaged properties
• Environmental risk to mortgaged properties
• Financial inclusion and capacity building
• Customer privacy and data security
• Employee inclusion• Employee incentives
and risk-taking
• Employee inclusion• Employee incentives
and risk-taking
• Integration of environmental, social, and governance risk factors in credit risk analysis
• Integration of environmental, social, and governance risk factors in services and lending
• Integration of environmental, social, and governance risk factors in investment management and advisory
• Integration of environmental, social, and governance risk factors in investment management
• Policies designed to incentivize responsible behavior
• Transparent information and fair advice for customers
• Financial inclusion• Transparent
information and fair advice for customers
• Responsible lending and debt prevention
• Customer privacy and data security
• Transparent information and fair advice for customers
• Responsible lending and debt prevention
• Plan performance
• Managing business continuity and technology risks
• Managing conflicts of interest
• Management of the legal and regulatory environment
• Management of the legal and regulatory environment
• Systemic risk management
• Management of the legal and regulatory environment
• Systemic risk management
• Management of the legal and regulatory environment
• Systemic risk management
Financials
COPYRIGHT. ALL RIGHTS RESERVED 145144 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
TECHEnvironment Social Capital Human Capital Business Model &
InnovationLeadership & Governance
Inte
rnet
Med
ia
& S
ervi
ces
Telc
om
mSo
ftw
are
&IT
Ser
vice
sSe
mic
on
du
cto
rsEM
S &
OD
MH
ard
war
e
• Water & waste management in manufacturing
• GHG emissions• Energy
management in manufacturing
• Water & waste management in manufacturing
• Environmental footprint of hardware infrastructure
• Environmental footprint of hardware infrastructure
• Environmental footprint of hardware infrastructure
• Fair labor practices
• Recruiting & managinga global, skilled workforce
• Employee health & safety
• Recruiting & managing a global, diverse skilled workforce
• Employee recruitment, inclusion, and performance
• Product lifecycle management
• Product lifecycle management
• Product lifecycle management
• Product security • Employee inclusion
• Data privacy & freedom of expression
• Data security
• Data privacy, advertising standards, and freedom of expression
• Data security
• Data privacy• Data security
• Product end-of-life management
• Managing systemic risks from technology disruptions
• Competitive behavior
• Intellectual property protection & competitive behavior
• Supply chain management & materials sourcing
• Intellectual property protection & competitive behavior
• Managing systemic risks from technology disruptions
• Intellectual property protection & competitive behavior
• Supply chain management & materials sourcing
• Supply chain management & materials sourcing
Technology & Communications Non-Renewable Resources
Non-renewEnvironment Social Capital Human Capital Business Model &
InnovationLeadership & Governance
Oil
& G
as -
Ser
vice
sC
oal
O
per
atio
ns
Iro
n &
Ste
el
Pro
du
cers
Met
als
& M
inin
gC
on
stru
ctio
n
Mat
eria
ls
Oil
& G
as -
R
efin
ing
&
Mar
keti
ng
Oil
& G
as -
M
idst
ream
Oil
& G
as -
Ex
lora
tio
n &
Pro
du
ctio
n • GHG emissions• Air Quality • Water Management• Biodiversity impacts
• GHG & other air emissions
• Ecological impacts
• GHG emissions• Air quality• Water management• Hazardous materials
management
• Emissions reduction services & fuels management
• Water management services
• Chemicals management• Ecological impact
management
• GHG emissions• Water management• Waste management• Biodiversity impacts
• GHG emissions• Air quality• Energy management• Water management• Waste management
• GHG emissions• Air quality• Energy management• Water management• Waste & hazardous
materials management• Biodiversity impacts
• GHG emissions• Air quality• Energy management• Water management• Waste management• Biodiversity impacts
• Workforce health, safety & wellbeing
• Labor relations
• Workforce health, safety & wellbeing
• Workforce health, safety & wellbeing
• Labor relations
• Workforce health, safety & wellbeing
• Product innovation
• Product specifications & clean fuel blends
• Community relations• Security, human rights
& rights of indigenous peoples
• Community relations & rights of Indigenous Peoples
• Community relations• Security, human
rights & rights of Indigenous Peoples
• Pricing integrity & transparency• Health, safety, & emergency
management• Management of the legal &
regulatory environment
• Business ethics & payments transparency
• Health, safety & emergency management
• Management of the legal & regulatory environment
• Reserves valuation & capital expenditures
• Supply chain management
• Business ethics & payments transparency
• Pricing integrity & transparency
• Competitive behavior• Operational safety, emergency
preparedness & response
• Business ethics & payments transparency
• Health, safety & emergency management
• Reserves valuation & capital expenditures
• Management of the legal & regulatory environment
• Contractor & supply chain management
COPYRIGHT. ALL RIGHTS RESERVED 145144 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
TECHEnvironment Social Capital Human Capital Business Model &
InnovationLeadership & Governance
Inte
rnet
Med
ia
& S
ervi
ces
Telc
om
mSo
ftw
are
&IT
Ser
vice
sSe
mic
on
du
cto
rsEM
S &
OD
MH
ard
war
e
• Water & waste management in manufacturing
• GHG emissions• Energy
management in manufacturing
• Water & waste management in manufacturing
• Environmental footprint of hardware infrastructure
• Environmental footprint of hardware infrastructure
• Environmental footprint of hardware infrastructure
• Fair labor practices
• Recruiting & managinga global, skilled workforce
• Employee health & safety
• Recruiting & managing a global, diverse skilled workforce
• Employee recruitment, inclusion, and performance
• Product lifecycle management
• Product lifecycle management
• Product lifecycle management
• Product security • Employee inclusion
• Data privacy & freedom of expression
• Data security
• Data privacy, advertising standards, and freedom of expression
• Data security
• Data privacy• Data security
• Product end-of-life management
• Managing systemic risks from technology disruptions
• Competitive behavior
• Intellectual property protection & competitive behavior
• Supply chain management & materials sourcing
• Intellectual property protection & competitive behavior
• Managing systemic risks from technology disruptions
• Intellectual property protection & competitive behavior
• Supply chain management & materials sourcing
• Supply chain management & materials sourcing
Technology & Communications Non-Renewable Resources
Non-renewEnvironment Social Capital Human Capital Business Model &
InnovationLeadership & Governance
Oil
& G
as -
Ser
vice
sC
oal
O
per
atio
ns
Iro
n &
Ste
el
Pro
du
cers
Met
als
& M
inin
gC
on
stru
ctio
n
Mat
eria
ls
Oil
& G
as -
R
efin
ing
&
Mar
keti
ng
Oil
& G
as -
M
idst
ream
Oil
& G
as -
Ex
lora
tio
n &
Pro
du
ctio
n • GHG emissions• Air Quality • Water Management• Biodiversity impacts
• GHG & other air emissions
• Ecological impacts
• GHG emissions• Air quality• Water management• Hazardous materials
management
• Emissions reduction services & fuels management
• Water management services
• Chemicals management• Ecological impact
management
• GHG emissions• Water management• Waste management• Biodiversity impacts
• GHG emissions• Air quality• Energy management• Water management• Waste management
• GHG emissions• Air quality• Energy management• Water management• Waste & hazardous
materials management• Biodiversity impacts
• GHG emissions• Air quality• Energy management• Water management• Waste management• Biodiversity impacts
• Workforce health, safety & wellbeing
• Labor relations
• Workforce health, safety & wellbeing
• Workforce health, safety & wellbeing
• Labor relations
• Workforce health, safety & wellbeing
• Product innovation
• Product specifications & clean fuel blends
• Community relations• Security, human rights
& rights of indigenous peoples
• Community relations & rights of Indigenous Peoples
• Community relations• Security, human
rights & rights of Indigenous Peoples
• Pricing integrity & transparency• Health, safety, & emergency
management• Management of the legal &
regulatory environment
• Business ethics & payments transparency
• Health, safety & emergency management
• Management of the legal & regulatory environment
• Reserves valuation & capital expenditures
• Supply chain management
• Business ethics & payments transparency
• Pricing integrity & transparency
• Competitive behavior• Operational safety, emergency
preparedness & response
• Business ethics & payments transparency
• Health, safety & emergency management
• Reserves valuation & capital expenditures
• Management of the legal & regulatory environment
• Contractor & supply chain management
COPYRIGHT. ALL RIGHTS RESERVED 147146 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
Non-Renewable Resources Continued
Non-renewEnvironment Social Capital Human Capital Business Model &
InnovationLeadership & Governance
Oil
& G
as -
Ser
vice
sC
oal
O
per
atio
ns
Iro
n &
Ste
el
Pro
du
cers
Met
als
& M
inin
gC
on
stru
ctio
n
Mat
eria
ls
Oil
& G
as -
R
efin
ing
&
Mar
keti
ng
Oil
& G
as -
M
idst
ream
Oil
& G
as -
Ex
lora
tio
n &
Pro
du
ctio
n • GHG emissions• Air Quality • Water Management• Biodiversity impacts
• GHG & other air emissions
• Ecological impacts
• GHG emissions• Air quality• Water management• Hazardous materials
management
• Emissions reduction services & fuels management
• Water management services
• Chemicals management• Ecological impact
management
• GHG emissions• Water management• Waste management• Biodiversity impacts
• GHG emissions• Air quality• Energy management• Water management• Waste management
• GHG emissions• Air quality• Energy management• Water management• Waste & hazardous
materials management• Biodiversity impacts
• GHG emissions• Air quality• Energy management• Water management• Waste management• Biodiversity impacts
• Workforce health, safety & wellbeing
• Labor relations
• Workforce health, safety & wellbeing
• Workforce health, safety & wellbeing
• Labor relations
• Workforce health, safety & wellbeing
• Product innovation
• Product specifications & clean fuel blends
• Community relations• Security, human rights
& rights of indigenous peoples
• Community relations & rights of Indigenous Peoples
• Community relations• Security, human
rights & rights of Indigenous Peoples
• Pricing integrity & transparency• Health, safety, & emergency
management• Management of the legal &
regulatory environment
• Business ethics & payments transparency
• Health, safety & emergency management
• Management of the legal & regulatory environment
• Reserves valuation & capital expenditures
• Supply chain management
• Business ethics & payments transparency
• Pricing integrity & transparency
• Competitive behavior• Operational safety, emergency
preparedness & response
• Business ethics & payments transparency
• Health, safety & emergency management
• Reserves valuation & capital expenditures
• Management of the legal & regulatory environment
• Contractor & supply chain management
Non-renewEnvironment Social Capital Human Capital Business Model &
InnovationLeadership & Governance
Oil
& G
as -
Ser
vice
sC
oal
O
per
atio
ns
Iro
n &
Ste
el
Pro
du
cers
Met
als
& M
inin
gC
on
stru
ctio
n
Mat
eria
ls
Oil
& G
as -
R
efin
ing
&
Mar
keti
ng
Oil
& G
as -
M
idst
ream
Oil
& G
as -
Ex
lora
tio
n &
Pro
du
ctio
n • GHG emissions• Air Quality • Water Management• Biodiversity impacts
• GHG & other air emissions
• Ecological impacts
• GHG emissions• Air quality• Water management• Hazardous materials
management
• Emissions reduction services & fuels management
• Water management services
• Chemicals management• Ecological impact
management
• GHG emissions• Water management• Waste management• Biodiversity impacts
• GHG emissions• Air quality• Energy management• Water management• Waste management
• GHG emissions• Air quality• Energy management• Water management• Waste & hazardous
materials management• Biodiversity impacts
• GHG emissions• Air quality• Energy management• Water management• Waste management• Biodiversity impacts
• Workforce health, safety & wellbeing
• Labor relations
• Workforce health, safety & wellbeing
• Workforce health, safety & wellbeing
• Labor relations
• Workforce health, safety & wellbeing
• Product innovation
• Product specifications & clean fuel blends
• Community relations• Security, human rights
& rights of indigenous peoples
• Community relations & rights of Indigenous Peoples
• Community relations• Security, human
rights & rights of Indigenous Peoples
• Pricing integrity & transparency• Health, safety, & emergency
management• Management of the legal &
regulatory environment
• Business ethics & payments transparency
• Health, safety & emergency management
• Management of the legal & regulatory environment
• Reserves valuation & capital expenditures
• Supply chain management
• Business ethics & payments transparency
• Pricing integrity & transparency
• Competitive behavior• Operational safety, emergency
preparedness & response
• Business ethics & payments transparency
• Health, safety & emergency management
• Reserves valuation & capital expenditures
• Management of the legal & regulatory environment
• Contractor & supply chain management
TransportationEnvironment Social Capital Human Capital Business Model &
InnovationLeadership & Governance
Air
Fre
igh
t &
Lo
gis
tics
Mar
ine
Tran
spo
rtat
ion
Rai
lTr
ansp
ort
atio
nR
oad
Air
lines
Car
Ren
tal &
Le
asin
gA
uto
Par
tsA
uto
mo
bile
s
• Energy management
• Materials efficiency & waste management
• Materials efficiency & recycling
• Environmental footprint of fuel use
• Environmental footprint of fuel use
• Environmental footprint of fuel use
• Ecological impacts
• Environmental footprint of fuel use
• Environmental footprint of fuel use
• Labor relations
• Fair labor practices
• Driver working conditions
• Fuel economy & use-phase emissions
• Product lifecycle management
• Fleet fuel economy & utilization
• Product safety
• Product safety
• Customer safety
• Labor relations
• Business ethics• Accidents & safety
management
• Competitive behavior
• Accidents & safety management
• Accidents & safety management
• Accidents & safety management
• Supply chain management
• Competitive behavior• Accidents & safety
management
• Competitive behavior
• Materials sourcing
• Materials sourcing
Transportation
COPYRIGHT. ALL RIGHTS RESERVED 147146 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
Non-Renewable Resources Continued
Non-renewEnvironment Social Capital Human Capital Business Model &
InnovationLeadership & Governance
Oil
& G
as -
Ser
vice
sC
oal
O
per
atio
ns
Iro
n &
Ste
el
Pro
du
cers
Met
als
& M
inin
gC
on
stru
ctio
n
Mat
eria
ls
Oil
& G
as -
R
efin
ing
&
Mar
keti
ng
Oil
& G
as -
M
idst
ream
Oil
& G
as -
Ex
lora
tio
n &
Pro
du
ctio
n • GHG emissions• Air Quality • Water Management• Biodiversity impacts
• GHG & other air emissions
• Ecological impacts
• GHG emissions• Air quality• Water management• Hazardous materials
management
• Emissions reduction services & fuels management
• Water management services
• Chemicals management• Ecological impact
management
• GHG emissions• Water management• Waste management• Biodiversity impacts
• GHG emissions• Air quality• Energy management• Water management• Waste management
• GHG emissions• Air quality• Energy management• Water management• Waste & hazardous
materials management• Biodiversity impacts
• GHG emissions• Air quality• Energy management• Water management• Waste management• Biodiversity impacts
• Workforce health, safety & wellbeing
• Labor relations
• Workforce health, safety & wellbeing
• Workforce health, safety & wellbeing
• Labor relations
• Workforce health, safety & wellbeing
• Product innovation
• Product specifications & clean fuel blends
• Community relations• Security, human rights
& rights of indigenous peoples
• Community relations & rights of Indigenous Peoples
• Community relations• Security, human
rights & rights of Indigenous Peoples
• Pricing integrity & transparency• Health, safety, & emergency
management• Management of the legal &
regulatory environment
• Business ethics & payments transparency
• Health, safety & emergency management
• Management of the legal & regulatory environment
• Reserves valuation & capital expenditures
• Supply chain management
• Business ethics & payments transparency
• Pricing integrity & transparency
• Competitive behavior• Operational safety, emergency
preparedness & response
• Business ethics & payments transparency
• Health, safety & emergency management
• Reserves valuation & capital expenditures
• Management of the legal & regulatory environment
• Contractor & supply chain management
Non-renewEnvironment Social Capital Human Capital Business Model &
InnovationLeadership & Governance
Oil
& G
as -
Ser
vice
sC
oal
O
per
atio
ns
Iro
n &
Ste
el
Pro
du
cers
Met
als
& M
inin
gC
on
stru
ctio
n
Mat
eria
ls
Oil
& G
as -
R
efin
ing
&
Mar
keti
ng
Oil
& G
as -
M
idst
ream
Oil
& G
as -
Ex
lora
tio
n &
Pro
du
ctio
n • GHG emissions• Air Quality • Water Management• Biodiversity impacts
• GHG & other air emissions
• Ecological impacts
• GHG emissions• Air quality• Water management• Hazardous materials
management
• Emissions reduction services & fuels management
• Water management services
• Chemicals management• Ecological impact
management
• GHG emissions• Water management• Waste management• Biodiversity impacts
• GHG emissions• Air quality• Energy management• Water management• Waste management
• GHG emissions• Air quality• Energy management• Water management• Waste & hazardous
materials management• Biodiversity impacts
• GHG emissions• Air quality• Energy management• Water management• Waste management• Biodiversity impacts
• Workforce health, safety & wellbeing
• Labor relations
• Workforce health, safety & wellbeing
• Workforce health, safety & wellbeing
• Labor relations
• Workforce health, safety & wellbeing
• Product innovation
• Product specifications & clean fuel blends
• Community relations• Security, human rights
& rights of indigenous peoples
• Community relations & rights of Indigenous Peoples
• Community relations• Security, human
rights & rights of Indigenous Peoples
• Pricing integrity & transparency• Health, safety, & emergency
management• Management of the legal &
regulatory environment
• Business ethics & payments transparency
• Health, safety & emergency management
• Management of the legal & regulatory environment
• Reserves valuation & capital expenditures
• Supply chain management
• Business ethics & payments transparency
• Pricing integrity & transparency
• Competitive behavior• Operational safety, emergency
preparedness & response
• Business ethics & payments transparency
• Health, safety & emergency management
• Reserves valuation & capital expenditures
• Management of the legal & regulatory environment
• Contractor & supply chain management
TransportationEnvironment Social Capital Human Capital Business Model &
InnovationLeadership & Governance
Air
Fre
igh
t &
Lo
gis
tics
Mar
ine
Tran
spo
rtat
ion
Rai
lTr
ansp
ort
atio
nR
oad
Air
lines
Car
Ren
tal &
Le
asin
gA
uto
Par
tsA
uto
mo
bile
s
• Energy management
• Materials efficiency & waste management
• Materials efficiency & recycling
• Environmental footprint of fuel use
• Environmental footprint of fuel use
• Environmental footprint of fuel use
• Ecological impacts
• Environmental footprint of fuel use
• Environmental footprint of fuel use
• Labor relations
• Fair labor practices
• Driver working conditions
• Fuel economy & use-phase emissions
• Product lifecycle management
• Fleet fuel economy & utilization
• Product safety
• Product safety
• Customer safety
• Labor relations
• Business ethics• Accidents & safety
management
• Competitive behavior
• Accidents & safety management
• Accidents & safety management
• Accidents & safety management
• Supply chain management
• Competitive behavior• Accidents & safety
management
• Competitive behavior
• Materials sourcing
• Materials sourcing
Transportation
COPYRIGHT. ALL RIGHTS RESERVED 149148 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
ServicesEnvironment Social Capital Human Capital Business Model &
InnovationLeadership & Governance
Cas
ino
s &
G
amb
ling
Res
tau
ran
tsLe
isu
re
Faci
litie
sC
ruis
e Li
nes
Ad
vert
isin
g
& M
arke
tin
g
Med
ia
Pro
du
ctio
n &
D
istr
ibu
tio
nC
able
&
Sate
llite
Ho
tels
&
Lod
gin
gPr
ofe
ssio
nal
Serv
ices
Edu
cati
on
• Energy & water management
• Ecosystem protection & climate adaptation
• Energy management
• Energy & water management
• Food & packaging waste management
• Energy management
• Fuel use & air emissions
• Discharge management & ecological impacts
• Infrastructure energy use & fleet fuel consumption
• Fair labor practices
• Smoke-free casinos
• Fair labor practices
• Fair labor practices
• Quality of education
• Marketing & recruiting practices
• Professional integrity
• Data security
• Responsible gaming
• Food safety• Nutritional content
• Customer & worker safety
• Shipboard health & safety management
• Advertising integrity
• Data privacy
• Journalistic integrity & sponsorship identification
• Media pluralism
• Data privacy• Data security
• Workforce diversity & engagement
• Workforce diversity & inclusion
• Supply chain management & food sourcing
• Accident management
• Intellectual property protection & media privacy
• Managing systemic risks from technology disruptions
• Competitive behavior & open internet
• Internal controls on money laundering
• Political spending
Services
ServicesEnvironment Social Capital Human Capital Business Model &
InnovationLeadership & Governance
Cas
ino
s &
G
amb
ling
Res
tau
ran
tsLe
isu
re
Faci
litie
sC
ruis
e Li
nes
Ad
vert
isin
g
& M
arke
tin
g
Med
ia
Pro
du
ctio
n &
D
istr
ibu
tio
nC
able
&
Sate
llite
Ho
tels
&
Lod
gin
gPr
ofe
ssio
nal
Serv
ices
Edu
cati
on
• Energy & water management
• Ecosystem protection & climate adaptation
• Energy management
• Energy & water management
• Food & packaging waste management
• Energy management
• Fuel use & air emissions
• Discharge management & ecological impacts
• Infrastructure energy use & fleet fuel consumption
• Fair labor practices
• Smoke-free casinos
• Fair labor practices
• Fair labor practices
• Quality of education
• Marketing & recruiting practices
• Professional integrity
• Data security
• Responsible gaming
• Food safety• Nutritional content
• Customer & worker safety
• Shipboard health & safety management
• Advertising integrity
• Data privacy
• Journalistic integrity & sponsorship identification
• Media pluralism
• Data privacy• Data security
• Workforce diversity & engagement
• Workforce diversity & inclusion
• Supply chain management & food sourcing
• Accident management
• Intellectual property protection & media privacy
• Managing systemic risks from technology disruptions
• Competitive behavior & open internet
• Internal controls on money laundering
• Political spending
ServicesEnvironment Social Capital Human Capital Business Model &
InnovationLeadership & Governance
Cas
ino
s &
G
amb
ling
Res
tau
ran
tsLe
isu
re
Faci
litie
sC
ruis
e Li
nes
Ad
vert
isin
g
& M
arke
tin
g
Med
ia
Pro
du
ctio
n &
D
istr
ibu
tio
nC
able
&
Sate
llite
Ho
tels
&
Lod
gin
gPr
ofe
ssio
nal
Serv
ices
Edu
cati
on
• Energy & water management
• Ecosystem protection & climate adaptation
• Energy management
• Energy & water management
• Food & packaging waste management
• Energy management
• Fuel use & air emissions
• Discharge management & ecological impacts
• Infrastructure energy use & fleet fuel consumption
• Fair labor practices
• Smoke-free casinos
• Fair labor practices
• Fair labor practices
• Quality of education
• Marketing & recruiting practices
• Professional integrity
• Data security
• Responsible gaming
• Food safety• Nutritional content
• Customer & worker safety
• Shipboard health & safety management
• Advertising integrity
• Data privacy
• Journalistic integrity & sponsorship identification
• Media pluralism
• Data privacy• Data security
• Workforce diversity & engagement
• Workforce diversity & inclusion
• Supply chain management & food sourcing
• Accident management
• Intellectual property protection & media privacy
• Managing systemic risks from technology disruptions
• Competitive behavior & open internet
• Internal controls on money laundering
• Political spending
Services continued
Resource TransformationRT
Environment Social Capital Human Capital Business Model & Innovation
Leadership & Governance
Elec
tric
al/
Elec
tro
nic
Eq
uip
men
t
Co
nta
iner
s &
Pa
ckag
ing
Aer
osp
ace
&
Def
ense
Ind
ust
rial
Ch
emic
als
• GHG emissions• Air quality• Energy &
feedstock management
• Water management
• Hazardous waste management
• Safety & environmental stewardship of chemicals & genetically modified organisms
• Product design for use-phase efficiency
• Political spending• Health, safety
& emergency management
• Materials sourcing
• Business ethics• Supply chain
management & materials sourcing
• Fuel economy & emissions in use-phase
• Remanufacturing design & services
• Fuel economy & emissions in use-phase
• Product lifecycle management & innovation for environmental efficiency
• Product lifecycle management
• Energy management
• Hazardous waste management
• Energy management
• Hazardous waste management
• GHG emissions• Air quality• Energy
management• Water
management• Waste
management
• Employee health & safety
• Energy management
• Data security• Product safety
• Product safety
• Product safety
• Business ethics & competitive behavior
• Materials sourcing
• Materials sourcing
COPYRIGHT. ALL RIGHTS RESERVED 149148 © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
ServicesEnvironment Social Capital Human Capital Business Model &
InnovationLeadership & Governance
Cas
ino
s &
G
amb
ling
Res
tau
ran
tsLe
isu
re
Faci
litie
sC
ruis
e Li
nes
Ad
vert
isin
g
& M
arke
tin
g
Med
ia
Pro
du
ctio
n &
D
istr
ibu
tio
nC
able
&
Sate
llite
Ho
tels
&
Lod
gin
gPr
ofe
ssio
nal
Serv
ices
Edu
cati
on
• Energy & water management
• Ecosystem protection & climate adaptation
• Energy management
• Energy & water management
• Food & packaging waste management
• Energy management
• Fuel use & air emissions
• Discharge management & ecological impacts
• Infrastructure energy use & fleet fuel consumption
• Fair labor practices
• Smoke-free casinos
• Fair labor practices
• Fair labor practices
• Quality of education
• Marketing & recruiting practices
• Professional integrity
• Data security
• Responsible gaming
• Food safety• Nutritional content
• Customer & worker safety
• Shipboard health & safety management
• Advertising integrity
• Data privacy
• Journalistic integrity & sponsorship identification
• Media pluralism
• Data privacy• Data security
• Workforce diversity & engagement
• Workforce diversity & inclusion
• Supply chain management & food sourcing
• Accident management
• Intellectual property protection & media privacy
• Managing systemic risks from technology disruptions
• Competitive behavior & open internet
• Internal controls on money laundering
• Political spending
Services
ServicesEnvironment Social Capital Human Capital Business Model &
InnovationLeadership & Governance
Cas
ino
s &
G
amb
ling
Res
tau
ran
tsLe
isu
re
Faci
litie
sC
ruis
e Li
nes
Ad
vert
isin
g
& M
arke
tin
g
Med
ia
Pro
du
ctio
n &
D
istr
ibu
tio
nC
able
&
Sate
llite
Ho
tels
&
Lod
gin
gPr
ofe
ssio
nal
Serv
ices
Edu
cati
on
• Energy & water management
• Ecosystem protection & climate adaptation
• Energy management
• Energy & water management
• Food & packaging waste management
• Energy management
• Fuel use & air emissions
• Discharge management & ecological impacts
• Infrastructure energy use & fleet fuel consumption
• Fair labor practices
• Smoke-free casinos
• Fair labor practices
• Fair labor practices
• Quality of education
• Marketing & recruiting practices
• Professional integrity
• Data security
• Responsible gaming
• Food safety• Nutritional content
• Customer & worker safety
• Shipboard health & safety management
• Advertising integrity
• Data privacy
• Journalistic integrity & sponsorship identification
• Media pluralism
• Data privacy• Data security
• Workforce diversity & engagement
• Workforce diversity & inclusion
• Supply chain management & food sourcing
• Accident management
• Intellectual property protection & media privacy
• Managing systemic risks from technology disruptions
• Competitive behavior & open internet
• Internal controls on money laundering
• Political spending
ServicesEnvironment Social Capital Human Capital Business Model &
InnovationLeadership & Governance
Cas
ino
s &
G
amb
ling
Res
tau
ran
tsLe
isu
re
Faci
litie
sC
ruis
e Li
nes
Ad
vert
isin
g
& M
arke
tin
g
Med
ia
Pro
du
ctio
n &
D
istr
ibu
tio
nC
able
&
Sate
llite
Ho
tels
&
Lod
gin
gPr
ofe
ssio
nal
Serv
ices
Edu
cati
on
• Energy & water management
• Ecosystem protection & climate adaptation
• Energy management
• Energy & water management
• Food & packaging waste management
• Energy management
• Fuel use & air emissions
• Discharge management & ecological impacts
• Infrastructure energy use & fleet fuel consumption
• Fair labor practices
• Smoke-free casinos
• Fair labor practices
• Fair labor practices
• Quality of education
• Marketing & recruiting practices
• Professional integrity
• Data security
• Responsible gaming
• Food safety• Nutritional content
• Customer & worker safety
• Shipboard health & safety management
• Advertising integrity
• Data privacy
• Journalistic integrity & sponsorship identification
• Media pluralism
• Data privacy• Data security
• Workforce diversity & engagement
• Workforce diversity & inclusion
• Supply chain management & food sourcing
• Accident management
• Intellectual property protection & media privacy
• Managing systemic risks from technology disruptions
• Competitive behavior & open internet
• Internal controls on money laundering
• Political spending
Services continued
Resource TransformationRT
Environment Social Capital Human Capital Business Model & Innovation
Leadership & Governance
Elec
tric
al/
Elec
tro
nic
Eq
uip
men
t
Co
nta
iner
s &
Pa
ckag
ing
Aer
osp
ace
&
Def
ense
Ind
ust
rial
Ch
emic
als
• GHG emissions• Air quality• Energy &
feedstock management
• Water management
• Hazardous waste management
• Safety & environmental stewardship of chemicals & genetically modified organisms
• Product design for use-phase efficiency
• Political spending• Health, safety
& emergency management
• Materials sourcing
• Business ethics• Supply chain
management & materials sourcing
• Fuel economy & emissions in use-phase
• Remanufacturing design & services
• Fuel economy & emissions in use-phase
• Product lifecycle management & innovation for environmental efficiency
• Product lifecycle management
• Energy management
• Hazardous waste management
• Energy management
• Hazardous waste management
• GHG emissions• Air quality• Energy
management• Water
management• Waste
management
• Employee health & safety
• Energy management
• Data security• Product safety
• Product safety
• Product safety
• Business ethics & competitive behavior
• Materials sourcing
• Materials sourcing
151COPYRIGHT. ALL RIGHTS RESERVED © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
150
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 .” Harvard Business School Working Paper, March 2015 .
• 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
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 the 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, October 2013 .
• 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
151COPYRIGHT. ALL RIGHTS RESERVED © 2015 SUSTAINABILITY ACCOUNTING STANDARDS BOARD
SASB FSA LEVEL I STUDY GUIDE
150
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 .” Harvard Business School Working Paper, March 2015 .
• 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
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 the 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, October 2013 .
• 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
Sustainability Accounting Standards Board
75 Broadway
Suite 202
San Francisco, CA 94111
415 830-9220
sasb .org
TM