By Jason Bramwell
In an effort to provide US public companies with a standardized framework for reporting the material environmental, social, and governance (ESG) issues that affect their industries, the Sustainability Accounting Standards Board (SASB) on July 31 unveiled its first set of provisional sustainability accounting standards that focus on the health care sector.
The San Francisco-based 501(c)3 not-for-profit organization is planning on developing standards for more than eighty industries in ten sectors over the next two years. The SASB is accredited to set standards by the American National Standards Institute (ANSI).
In the coming months, the SASB will release provisional sustainability accounting standards for the financials and technology and communications sectors. Standards for the nonrenewables sector are in the early stages of development.
The SASB standards will be used by public companies for disclosing material sustainability issues that benefit investors and the public. Under federal Regulation S-K, corporations are required to report all material issues in mandatory filings to the US Securities and Exchange Commission (SEC), such as forms 10-K and 20-F.
"A lot of the information that is out there on sustainability issues is not decision useful. Investors and analysts cover industries, not issues", Jean Rogers, PhD, SASB founder and executive director, told AccountingWEB. "By providing the sustainability issues to them industry by industry, we will make the information decision useful."
Former SEC Commissioner Aulana Peters said the SASB standards support the SEC's mission to protect investors and maintain effective markets.
"In today's world, where intangible assets comprise a significant portion of S&P market value, investors need industry-specific data on nonfinancial factors that are important to risk mitigation and long-term value creation", she said in a written statement. "SASB's sustainability accounting standards for the health care sector will yield useful and comparable information that supports the resilience of our capital markets."
Rogers said the sustainability accounting standards enable comparison of peer performance and benchmarking within an industry, with companies competing and improving performance on ESG issues that matter most to them and to investors driving capital to the most sustainable outcomes.
"By establishing standards for reporting industry-focused metrics on material, nonfinancial information, SASB helps provide investors with a more complete view of a company's risks and opportunities", said Robert Herz, former chairman of the Financial Accounting Standards Board (FASB).
Putting the Process in Place
Formed in July 2011 to advance the work started by the Harvard University Initiative for Responsible Investment on developing methods for looking at materiality in industries, the SASB focuses on sustainability issues at the industry level so they can be measured, managed, and disclosed.
"The SASB was started as a way to move the work of the Initiative for Responsible Investment forward, based on interest in having a good set of metrics for every industry", said Rogers, who collaborated with Harvard University on its initiative for several years prior to forming the SASB. "The kind of information that investors need is changing due to the world itself changing. Mega-trends like climate change, resource constraints, and population growth really do affect the ability of corporations to create financial value.
"We're setting standards and providing information to investors so they can benchmark, act with confidence, and discern which companies they're going to outperform in a world with more regulations, different cost structures, finite resources, and new opportunities presented by these global standards", she continued.
The process for developing a set of standards for the health care sector started in October 2012. Why health care? The industry includes public companies that hold more than $800 billion in market capitalization and investment firms with more than $952 billion in assets under management.
The health care industry also represents 18 percent of US gross domestic product, is the second-largest user of energy of any sector, and generates 8 percent of US greenhouse gas emissions, according to the SASB.
"It was important for us to lead with a sector that has a broad, full range of nonfinancial ESG issues", Rogers said. "What may be surprising to some people is that the health care industry is very significant in terms of its environmental impacts. Most people may think of it as having significant social impacts."
The SASB standards development process includes:
- Research supported by Bloomberg technology, data, and analytical tools;
- Balanced, multi-stakeholder industry working groups;
- A ninety-day public comment period; and
- Review by an independent standards council comprised of experts in standards development, securities law, environmental law, metrics, and accounting.
More than 130 individuals participated in the health care working group, representing health care organizations and public companies, such as Cleveland Clinic, Kaiser Permanente, Baxter, Johnson & Johnson, Merck, and Pfizer Inc. Investors and analysts from such firms as AllianceBernstein LP, Breckinridge Capital Advisors Inc., Calvert Investment Inc., and UBS Securities also helped develop the health care standards. The group also included representatives from accounting and professional services firms Crowe Horwath, Deloitte, EY, and PwC.
According to the ANSI, SASB working groups must maintain a balance of one-third corporate representatives, one-third investors, and one-third other stakeholders, such as academics, accountants, auditors, consultants, policymakers, and regulators.
"We've had more than 650 participants go through our working groups for the next two sectors for which we are developing standards", Rogers said.
Leveling the Playing Field
The sustainability accounting standards are available for the following six industries within the health care sector:
- Medical supplies and equipment
- Health care delivery
- Health care distributors
- Managed care
Rogers said the standards address several other issues that fall under ESG, which are likely to be material for companies in these industries. Some of those issues include:
- Resource management
- Pharmaceutical water contamination
- Drug safety and side effects
- Ethical marketing
- Affordability and fair pricing
- Managed care price performance
- Safety of clinical trial participants
"For example, in biotechnology and pharmaceuticals, we look at environmental issues, such as resource management in manufacturing facilities, characteristics of energy and water use, and carbon emissions", she said. "But we also look at things like counterfeit drugs and safety of clinical trials, which are examples of the government and social issues that are relevant to those two industries.
"Those factors are different from what we would find in health care delivery, which would be more about quality of care, patient satisfaction, patient privacy, use of electronic health records, and facilities designed for wellness", Rogers continued. "What we are doing is taking those broad categories and interpreting what would make that information meaningful to an investor. How would an investor want to benchmark peers on those issues within an industry?"
Rogers said the SASB hopes to level the playing field in terms of nonfinancial reporting of sustainability issues.
"Companies and investors are responding in the sense that these issues are highly material, that it will give them a cost-effective way to disclose performance, and that it eases reporting fatigue", she concluded. "Every day, companies feel the burden by spending too much time reporting on things that investors and analysts never ask about. The important message is this is not additional reporting; it is bringing clarity to a subset of reporting that is highly material."