Sustainability Accounting Standards Board

The Sustainability Accounting Standards Board (SASB) is a 501(c)(3) nonprofit organization that developed standards to improve the disclosures required by the Securities and Exchange Commission (SEC), like Forms 10-K and 20-F. These sustainable accounting standards are focused on including environmental and social aspects to improve a company’s ability to create value over the long term (Sustainability Accounting Standards Board 2017a, 1-2). These standards are focused on ensuring reporting includes material aspects that will be useful for decision-makers and that are cost effective to report upon. This information is directly targeted for investors but is also useful for organizational managers making decisions as well.

A primary strength in these reporting standards is their focus on materiality that drives economic capital improvements. SASB utilizes the U.S. Supreme Courts definition of materiality where information is material if there is “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” (Sustainability Accounting Standards Board 2017a, 9). This focus on investors ensures that the information reported is tied to economic ramifications for an organization. The standards then ensure that metrics are utilized that are industry-specific and material. This allows investors to better compare companies, but also to forecast risk for those elements independently as well.

This focus on materiality for investors has its weaknesses though, which has the potential to still lead to environmental degradation. These standards require reporting of the risks and metrics involved with things that directly impact a company’s ability to create long-term value (Sustainability Accounting Standards Board 2017a, 5). While the intent is to include non-financial elements that impact finances in the longer term, it still does not comprehensively include externalities like pollution fully. For example, a multinational organization that is creating a product where they release pollution into a local river would not have to report on whether they added new equipment that increased pollution discharges if they were still within a regulatory permit allowance. Since their products are sold outside of the region, there would not be large risk from the local population not purchasing their products and because they are within their regulatory permit the risk to their social image would be minimal as well. Since there is no real risk to their business from increasing pollution from new processes, they would not be required by these standards to report those elements or metrics. This narrow focus on materiality for investors limits the effectiveness of incorporating more environmental externalities that are often overlooked in corporate decisions.

Overall, these standards are very well defined and useful for creating effective reports that help investors and organizational management make better decisions. However, with approximately half of companies reporting using boilerplate language and omitting important environmental aspects that are not necessarily required, these standards still have improvements to make to further the improvement of sustainability accounting (Sustainability Accounting Standards Board 2017b, 9). SASB is currently updating the conceptual framework that I hope will further address some of the weaknesses of boilerplate language use and omissions of important environmental externalities in the future to ensure these standards continue to be useful and effective for environmental management.

Author: Logan Callen

References

Sustainability Accounting Standards Board. 2017a. SASB Conceptual Framework. Retrieved from https://library.sasb.org/sasb-conceptual-framework-2/.

———. 2017b. The State of Disclosure: An analysis of the Effectiveness of Sustainability Disclosure in SEC Filings. Accessed October 14, 2020. https://library.sasb.org/state-disclosure-report-2017/.