SASB Standards – A framework for financial materiality in Annual Reports
Aug 24, 2022
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Regardless of the size of your organization and the industry you operate in, integrating ESG factors into corporate decision-making exhibits prudence and good risk management. The ESG issues a company faces have the potential to cause reputational and financial damage.
Research has found companies that experienced high to severe ESG incidents lost 6% of their market capitalization on average. Consumer staples and utilities are at the greatest risk of declining market value from ESG-related controversies (Source: Understanding ESG Incidents: Key Lessons for Investors). A potentially disastrous ESG controversy took place in 2015 when pharmaceutical company Valeant, once the most valuable on the Toronto Stock Exchange, lost 90% of its market value amid accounting and pricing scandals (Source: Potential ESG Risks in the US Healthcare Industry). Another example could be large volumes of sensitive data generated by technology companies poses a data privacy risk – a social issue, which is crucial for software companies. By compromising sensitive information, a company can damage its reputation, which in turn can lower investments by shareholders, thus negatively impacting their financials. Similarly, soft drink manufacturers face risks due to water shortage – an environmental issue critical to beverage manufacturers. Lack of water availability can impact the operations of a beverage plant, which can lower its net sales and profitability.
This goes further to imply that companies that implement effective ESG practices are less likely to face harmful controversies and are better prepared to respond to such incidents.
To be good corporate citizens, companies are implementing ESG programs and reporting their ESG disclosures to various stakeholders using various ESG frameworks. The Sustainability Accounting Standards Board (SASB) develops standards for companies to disclose the ESG risks that can impact their financial performance.
What is SASB?
The Sustainability Accounting Standards Board (SASB) develops ESG standards for companies to disclose their financial material sustainability information. The standards are available for 77 industries and outline the industry-specific ESG issues that impact the financial performance of companies.
Initially, the SASB was established as an NGO in 2011 to assist companies in their sustainability disclosures. However, increased complexity in reporting ESG materiality risks led to the merger of SASB and the International Integrated Reporting Council (IIRC) into the Value Reporting Foundation (VRF) in June 2021. The integration was aimed at simplifying corporate sustainability disclosures by offering a consolidated set of resources for companies.
The SASB recommendations focus on the type of ESG information to be disclosed and provide flexibility for the companies to decide the best method of representation and how to share it –whether through an Annual Report, CSR Report, Sustainability Report, or other reporting systems.
Companies including Goldman Sachs, JP Morgan Adobe, Nike, Accenture, Infosys, Wix.com Ltd., and others use SASB standards to disclose their ESG metrics. A complete list of companies using SASB standards can be found here.
Effective on 1st August 2022, the VRF was again consolidated into the IFRS Foundation. The IFRS foundation established the new International Sustainability Standards Board (ISSB) to increase clarity with a comprehensive reporting system. Moving ahead, the ISSB will oversee SASB and add to the latter’s existing framework to provide a unified global framework for ESG-related financial disclosures.
Key features of SASB standards
Provides sustainability-focused financially material information – ESG issues that have financial impacts on the company
Offers industry-based standards as ESG issues vary across industries
Provides information that aids in decision making
Offers cost-effective standards for easy use by companies
Standards developed are mirrored based on the financial accounting standards and are based on extensive market research and feedback from companies, investors, and other market participants
Difference between other SASB and other standards
While Global Reporting Initiative (GRI) standards also offer ESG frameworks for companies, it caters to a wider audience compared to SASB – which is mainly investor focussed. The Task Force on Climate-related Financial Disclosures (TCFD) focuses on climate change risks impacting a company; however, SASB standards concentrate on industry-specific ESG risks of a company.
Both TCFD and SASB help in reporting materiality issues. However, the key differentiator is SASB’s method of a materiality assessment. With industry-specific assessment, each type of business can choose relevant recommendations to report 26 different ESG metrics.
As ESG reporting is gaining momentum, companies need to adopt a suitable ESG framework and incorporate ESG-related risks in their existing reporting process.
If you would like to discuss your corporate reporting requirement, reach out to Report Yak and we would be happy to write a game-changing report!