Remarks at the C. Warren Neel Corporate Governance Center
Presented by Dr. Jean Rogers
January 27, 2017
Thank you for the kind introduction. It is an honor to be here at the University of Tennessee and
particularly at the Neel Center, which has advanced the public discourse on corporate
governance.
My name is Dr. Jean Rogers, and I founded an organization called the Sustainability Accounting
Standards Board, or SASB. Today I will do my best to explain how our work is relevant to what
you are studying, the nexus of corporate governance and public policy.
Let’s start here: a great transfer of power is upon us. Over the next 40 years, Millennials in
North America—your generation—will inherit $30 trillion in wealth.1 (Perhaps you had no idea
your parents are so rich.) Not surprisingly, the values of Millennials will affect their—your—
investment decisions. 87 percent of Millennials believe that “the success of a business should
be measured in terms of more than just its financial performance.”2
But it’s not just about a change in values—it’s also about a change in value. Today’s
mainstream investors realize that sustainability performance influences a company’s ability to
generate long-term value. In a 2015 CFA Institute survey, 73 percent of institutional investors
indicated that they take environmental, social and governance—also known as ESG—issues
into account in their investment analysis and decisions, to help manage investment risks.3 And,
more than one out of every $5 under professional management in the United States is invested
based on sustainable investing strategies—this is an increase of 33% from just two years ago.4
But here’s the problem—although today’s investors want to invest with sustainability
performance in mind, they find it difficult to do so, because they lack comparable data on how
companies are managing sustainability risks and opportunities. Without the data needed to
invest with conviction, investors may choose to invest their capital outside of public equities.
One might call this a failure of policy. The SEC’s mission is to protect investors; maintain fair,
orderly, and efficient markets; and facilitate capital formation. Yet, mainstream and millennial
investors who want to factor sustainability performance into investment decisions generally don’t
have the information they need. SASB can support the SEC in fulfilling its mission, and meeting
its policy goals, by helping provide investors with the information needed to make decisions.
The way SASB is accomplishing this goal is through standards.
Today, I’m here to convince you that the markets can’t function efficiently without sustainability
accounting standards. To do that, I’m going to explore three topics.
Accenture, The ‘Greater’ Wealth Transfer (2015).
Deloitte, The Deloitte Millennial Survey (2016).
3 CFA Institute, ENVIRONMENTAL, SOCIAL AND GOVERNANCE SURVEY, p. 5 (June 2015),
https://www.cfainstitute.org/Survey/esg_survey_report.pdf . Survey studied 1,325 institutional investors. Id. at 3.
4 US SIF, 2016 REPORT ON US SUSTAINABLE, RESPONSIBLE AND IMPACT INVESTING TRENDS,
http://www.ussif.org/files/SIF_Trends_16_Executive_Summary(1).pdf .
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First, I’ll discuss how the markets operated—in a state of dysfunction—before the existence of
financial accounting standards.
Second, I’ll discuss how the markets operate now—once again in a state of dysfunction—in the
absence of sustainability accounting standards.
And third, I’ll tell you about how sustainability accounting standards can support public policy
goals.
First, let’s talk about the world before modern day financial accounting standards.
Accounting standards are part of the infrastructure that lies beneath the surface of our financial
markets. Whereas double-entry bookkeeping is more than 400 years old, accounting standards
are much more recent. In the U.S., they did not exist until after the creation of the Securities and
Exchange Commission (SEC) in the 1930s, and they did not reach their current level of
independence and integrity until the establishment of the Financial Accounting Standards Board
(FASB) in 1973—just over 40 years ago.
Let’s travel back to the Wall Street crash of 1929. As you know, the crash accelerated the Great
Depression, sinking America into an unprecedented period of economic upheaval,
unemployment, and declining income. In the wake of “Black Tuesday,” the Senate Committee
on Banking and Currency uncovered evidence of many unethical and risky financial practices
that contributed to this devastating outcome. One such practice was that many bankers and
companies had been offering securities for sale using false or misleading information.5
Trust is the bedrock upon which trade is built. Investors need to be able to trust that corporate
financial disclosures are complete and reliable. With investor confidence waning in the
aftermath of the stock market crash, Congress passed the Securities Act of 1933 and the
Securities Exchange Act of 1934, which led to the formation of the SEC, to address exactly this
need. But while this legislation had investor protection as its primary objective—obviously, a
noble aim—in my opinion the method it proposed to achieve this goal is far more interesting.
This method is directly shaped by the intellectual influence of Supreme Court Justice Louis
Brandeis.
In 1914, 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.” Brandeis was not calling for unlimited transparency. Rather,
he targeted disclosure of the information needed to make informed decisions. Indeed, in
addition to being a champion of appropriate transparency, Brandeis was also a strong advocate
for privacy, authoring a seminal Harvard Law Review article with Justice Warren on “The Right
to Privacy.” He understood that a fine line separates what can be private from what must be
public. In the context of corporate disclosures, this line is materiality. I’ll come back to that idea
later in my speech.
In an address to Congress, President Franklin Delano Roosevelt explained that the so-called
“Truth in Securities Act” would achieve investor protection through “full publicity and
5 Senate Banking and Currency Committee, Stock Exchange Practices (“Fletcher Report”), S. Rep. No. 73-1455, (1934).
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information,” and “that essentially no important element attending the issue [of a security] shall
be concealed from the buying public.”6 In other words, the Act would foster trust through
transparency—a system of oversight that would protect investors by promoting full disclosure of
the information necessary to make informed investment decisions.
FDR argued that the law “adds to the ancient rule of caveat emptor”—which is to say, “let the
buyer beware”—by supplementing it with the obligation of the seller to disclose “the whole
truth.”7 In other words, once they are supplied with the necessary information, buyers—in this
case, investors—are still free to make poor decisions. This idea is important to note. This
method does not establish performance standards. It does not tell investors what good
performance looks like, or what bad performance looks like. It leaves these judgments to the
investor—allowing her to make her own decisions based on her own circumstances and
investment strategy. This approach relies on getting good information into the hands of
investors, and letting them decide for themselves.
While the SEC served to greatly stabilize the market, accounting processes and systemic
structuring posed serious challenges. In the 60s, it was not uncommon for companies to select
the accounting firm that would allow them the most favorable accounting, because no standard
accounting practices were required. Such challenges were detailed in 1972 in “Establishing
Financial Accounting Standards”— also known as the “Wheat Committee Report.”8 The report
revealed an accounting standard-setting regime that was dominated by the major accounting
firms and operating in a non-transparent process that caused many to question whether the
resulting standards had been established in an independent and unbiased way that served the
interests of the capital markets.
The Financial Accounting Standards Board (FASB) was formed in 1973 to set financial accounting
standards, now known as US GAAP. The benefits of accounting standards are numerous.
Accounting standards 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. It is often said that accounting is “the language of business,” and if we were to
extend that metaphor we could say that accounting standards are the grammar and punctuation
that give this language its ability to communicate with clarity, precision, and meaning.
Today, because of financial accounting standards, we can quickly and easily scan financial
statements and determine which of two companies is doing a better job of generating revenue
or managing cash flow. In an instant, we can type in a ticker and get P/E ratios, ROA, profit,
loss, and other data for a company and its peers. Indeed, we take financial accounting
standards for granted. Our capital markets would not be as deep and liquid as they are today
without them. In the words of former U.S. Deputy Treasury Secretary Lawrence Summers, “If
one were writing a history of the American capital market, it is a fair bet that the single most
important innovation shaping that market was the idea of generally accepted accounting
principles.”
6 Address to Congress by Franklin D. Roosevelt, reprinted in Michael F. Parrino, Truth in Securities, p. 23. Queensland Publishing Company (1968).
7 Franklin D. Roosevelt, My Own Story: From Private and Public Papers, p. 165. Transaction Publishers; Reprint edition (June 1, 2011).
8 The Wheat Committee Report was led by SEC Commissioner Francis Wheat.
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Standards are also the means by which regulators can enforce policy. FASB standards enabled
the SEC to better enforce regulation stemming from the Acts of 1933 and 1934. Next, we’ll talk
about another scenario in which the development of new standards can support public policy
goals.
Second, I want to discuss the current dysfunction in the marketplace, and why we need
sustainability accounting standards.
Sustainability issues are business issues. You read about them in front-page news every day.
Let me read you some recent headlines:
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Takata Airbag Kills 11th Person in U.S. as Recall Continues
Chipotle Customers Haven't Forgotten the Chain's Food Safety Crisis
Valeant avoids double-digit price hikes with 9.9 percent increases
SEC Probes Exxon Over Accounting for Climate Change
Massachusetts Sues ITT Tech for Misleading and Harassing Students
From product safety to data privacy, and drug affordability, and climate risk, sustainability issues
increasingly impact the financial condition and operating performance of companies or entire
industries. As such, this information is increasingly material to investment decisions. Since
1933, the SEC has required the disclosure of material information to investors. According to a
later U.S. Supreme Court decision, material information is what a reasonable investor would
consider important in the total mix of information.9 The Court’s definition has a singular and
unwavering focus on the “reasonable investor’s” decision to buy, sell, or hold a security.
“Materiality” is an enduring and fundamental concept that acts as a filter in sorting out what
information is likely to affect a company’s performance and outlook. The concept of materiality
has and will continue to withstand the test of time. The determination of materiality and
disclosure obligations for a given company is the responsibility of the corporation, consistent
with the Supreme Court’s explanation that the determination of materiality is an “inherently factspecific finding.”10
As some sustainability information is material, and thus disclosure is compelled under the SEC’s
Regulation S-K, some have suggested creating line item requirements for sustainability issues.
However, line-item requirements are not appropriate in this case. Sustainability issues are likely
not material for all companies; when they are material, they manifest in unique ways and thus
require industry-specific metrics. Requiring line items would result in a corporate disclosure
burden and a large volume of information that is immaterial to investors. Furthermore, how
would the SEC select issues for which it would seek to promulgate line-item disclosure
requirements? Is child labor more important than climate risk? Is product safety more important
than human trafficking? There are hundreds of potential social and environmental issues, and
judgment regarding their importance to investors is treacherous without a reliable basis for
conclusion.
In a speech last year, SEC Commissioner Michael Piwowar made this point: “It is not sufficient
that information merely be useful. Nor is it sufficient that only some investors might find a bit of
the information to be important. Rather…the question of materiality ‘is universally agreed as an
9
TSC Industries v. Northway, Inc., 426 U.S. 438 (1976).
Matrixx Initiatives, Inc. v. Sircusano, 131 S.Ct. 1309 (2011).
10
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objective one, involving the significance of an omitted or misrepresented fact to a reasonable
investor.’ Thus, materiality is an objective legal standard, not a subjective political one.”11
If line items are not appropriate for sustainability disclosure, what is? Securities law already
provides us with the answer: if an issue is likely to materially affect the financial condition or
operating performance of a company, then disclosure to investors is already compelled under
Regulation S-K. Certain sustainability issues are material in their own right, and are therefore
required to be disclosed under the existing law. No new regulation is needed. What’s missing is
a market standard that will enable companies to disclose sustainability information in a way
that’s decision-useful to investors.
While sustainability disclosure exists, both inside the mandatory filings as well as outside, it is
not always material (as defined under U.S. securities laws) or decision-useful. It is not
comparable, complete, or reliable. Most importantly, it has a significant positive bias. A 2015
PwC study found that 82 percent of investors said they are dissatisfied with how risks and
opportunities are quantified; 79 percent of the investors polled said they are dissatisfied with the
comparability of sustainability reporting between companies in the same industry.12
Because investors consider this information material to investment decisions, they do attempt to
obtain it. The four principal means by which investors currently obtain this information—the
Form 10-K, standalone sustainability reports, questionnaires, and shareholder resolutions—are
all fraught with problems. I will focus on sustainability disclosure in the Form 10-K, as this is the
appropriate channel for investors to get decision-useful information.
Item 303 of Regulation S-K requires that companies describe known trends, events, and
uncertainties that are reasonably likely to have material impacts on their financial condition or
operating performance in the MD&A section of Form 10-K or 20-F. Companies must also
disclose significant risks. Because of these requirements, companies often address
sustainability matters in SEC filings. When companies address these issues in their Form 10-K
or 20-F, it is a clear indication that they consider the risk to be material and the information to be
relevant to investors.
Based on an analysis of 2016 filings with the SEC, companies are overwhelmingly
acknowledging the existence of—or the potential for—material impacts related to sustainability
issues. Recent research by SASB shows that 69 percent of companies are already addressing
at least three-quarters of the key sustainability topics we identified in their industry, and 38
percent are already providing disclosure on all the key topics.13
This development is incredibly encouraging. But, in its current state, it is also problematic. As it
turns out, more than half of sustainability-related disclosures in SEC filings use boilerplate
language,14 which is nearly useless to investors. This is when a company says something like:
“Statement at Open Meeting on Regulation S-K Concept Release,” Commissioner Michael Piwowar, 2016.
Available at: https://www.sec.gov/news/statement/piwowar-statement-041316.html
11
12
PwC, SUSTAINABILITY DISCLOSURES: IS YOUR COMPANY MEETING INVESTOR EXPECTATIONS, (July 2015),
http://www.pwc.com/us/en/cfodirect/publications/in-the-loop/sustainability-disclosure-guidance-sasb.html.
13
Sustainability Accounting Standards Board, The State of Disclosure 2016 (Dec. 1, 2016).
14
Ibid.
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The illegal distribution and sale by third parties of counterfeit versions of our products or
stolen products could have a negative impact on our reputation and business. Third
parties may illegally distribute and sell counterfeit versions of our products, which do not
meet our rigorous manufacturing and testing standards. A patient who receives a
counterfeit drug may be at risk for a number of dangerous health consequences.
As an investor, I am not sure how I am supposed make decisions based on that statement. Two
quick points: First, this is not a fringe issue—the global market for counterfeit drugs has reached
$431 billion15 and presents a significant health and safety risk to consumers with an estimated
100,000 annual deaths.16 Second, this is an actual disclosure from an actual 10-K filing.17 And,
again, this is the type of language that is being used to address sustainability issues in more
than half of all disclosures. Many companies are taking a minimally compliant approach to
sustainability disclosure.
Intuitively, we can understand how this type of disclosure is not helpful for investors. But what
we may not realize is that it also hurts companies. Companies sometimes view boiler plate
disclosures as “free insurance”. However, studies show that analysts may overcompensate for
risks that are identified but not quantified by placing a risk premium on the cost of capital. This
dampens the value of future cash flows and makes a company appear less valuable.
Meanwhile, less than 24 percent of existing sustainability disclosure in SEC filings contain
quantitative metrics. To go back to the counterfeit drugs example, here’s another actual
disclosure:18
In 2015, we extended our end-to-end supply chain serialization programme, Fingerprint,
across 86 packaging lines in more than 18 manufacturing sites. The programme applies
unique serial ‘fingerprints’ on products and logs them into a government-managed
database, which they can be verified against at any point in the supply chain.
Now that’s considerably more useful, isn’t it? It still leaves open some questions, but at least it
provides some sense of what the company is doing to address the issue. But, again,
approaches like this one are found in less than a quarter of disclosures, meaning more than
three quarters of the time, investors are left largely, or almost entirely, in the dark. Even in cases
like this one, where metrics are being used, they are non-standardized, and therefore lack
comparability across industry peers, hampering their usefulness to decision makers.
Let’s look at another example, this time instances of water management disclosure made by two
companies in the alcoholic beverages industry, one using boilerplate and one using metrics,
Here’s example one, from the 10-K of Molson Coors:
Climate change and water availability may negatively affect our business and financial
results. … Clean water is a limited resource in many parts of the world and climate
change may increase water scarcity and cause a deterioration of water quality in areas
Gena, Somra. “Deadly fake Viagra: Online pharmacies suspected of selling counterfeit drugs,” CNN (Aug. 31, 2015).
Miller, Henry. “Fake and Flawed Medicines Threaten Us All,” Forbes (July 25, 2012).
17
Bristol-Myers Squibb Company, Form 10-K for FY ending Dec. 31, 2015.
18
GlaxoSmithKline PLC, Form 20-F for FY ending Dec. 31, 2015.
15
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where we maintain brewing operations. The competition for water among domestic,
agricultural and manufacturing users is increasing in some of our brewing
communities. … The above risk, if realized, could result in a material adverse effect on
our business and financial results.19
Now compare that with example two, from the 10-K of Diageo:
Overall this year, Diageo has delivered improved performance across all water and other
environmental target areas versus the prior year, and progressed towards meeting 2015
goals. We reduced absolute water use by 9% or 2,268,000 cubic metres while water
efficiency improved by 2.4% compared to the prior year. In water-stressed locations, we
have reduced water wasted by 12%, an important contribution towards our target of a
50% reduction versus the company’s 2007 baseline.20
Diageo’s disclosure, which uses metrics, is certainly preferable to that of Molson Coors, which
uses boilerplate. However, it’s important to note that unless Diageo’s peers start disclosing
water management using comparable metrics, investors still can’t tell if Diageo’s performance is
good, bad, or normal. This emphasizes the need for comparable metrics and full datasets, so
investors can compare performance within an industry.
Because investors aren’t getting the information they need from SEC filings, they often turn to
other sources, such as voluntary sustainability reports. These reports are designed to serve a
large swath of stakeholders—from customers and suppliers to employees and activists. As
such, they lack focus on the sustainability issues that are of most interest to investors, namely
those that are likely to have material impacts on a company’s financial condition or operating
performance. In the words of the Supreme Court, this serves to “bury shareholders in an
avalanche of trivial information—a result that is hardly conducive to informed decision
making.”21 Even more concerning, however, is the positive bias of these reports. A 2013 study
of highly rated (GRI A and A+)22 sustainability reports revealed that 90 percent of known
negative events were not reported by the company.23 This phenomenon is sometimes referred
to as “greenwashing.”
Investors also seek information via surveys, questionnaires, and shareholder resolutions.
In fact, 67 percent of proposals in 2016 addressed environmental, social, and governance
factors, up from 40 percent in 2011.24 And that number may only continue to grow: 75 percent of
global institutional investors have indicated that they will likely sponsor or co-sponsor
shareholder proposals to obtain information related to the management of sustainability
issues.25 Finally, to top it off, both asset owners and managers have stepped up their direct
engagement efforts with portfolio companies to discuss sustainability-related issues, creating
the potential for selective disclosure that may raise red flags with regulators.26
19
Molson Coors, Form 10-K filed 12-Feb-15
Diageo, Form 20-F filed 12-Aug-14
21
TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976).
22
See discussion infra, p. 20.
23
Olivier Boiral, Sustainability Reports as Simulacra? A Counter-Account of A and A+ GRI Reports, ACCOUNTING, AUDITING &
ACCOUNTABILITY JOURNAL, Vol. 26, No. 7, p. 1036–71 (2013), http://www.emeraldinsight.com/doi/pdfplus/10.1108/AAAJ-04-201200998.
24
Heidi Welsh and Michael Passoff, Helping Shareholders Vote Their Values, Proxy Preview, p. 5, As You Sow (Feb. 17, 2016) –
figure includes proposals focused on diversity, human rights and labor, environment, and sustainability.
25
PwC, Sustainability Goes Mainstream (May 2014).
26
BlackRock and Ceres, 21st Century Engagement, p. 38 (May 28, 2015).
20
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What I’ve just described is a portrait of the market in dysfunction. It’s a world with companies
reporting as they please. Data that often lacks reliability and neutrality. Investors sending
questionnaires to obtain basic information. No easy way for investors to compare performance
on factors that affect the risk and return profile of a company. This disorder not only hurts
companies and investors, it threatens the strength of our capital markets.
The SEC has acknowledged the significance of sustainability disclosure. In April 2016, the SEC
issued a concept release on Regulation S-K, inviting feedback on a range of issues related to
disclosure, including how sustainability disclosure must evolve to meet the needs of today’s
markets. The SEC hadn’t examined sustainability disclosure in detail since the mid-1970s, when
questions involving environmental disclosures received considerable attention from the
Commission and the federal courts. At that time, the SEC rejected calls for increased
requirements for such disclosures because of, among other things, a lack of sufficient investor
interest. The percentage of holdings of “ethical investors” was estimated at “two thirds of one
percent” of all U.S. stock and bond holdings. Hence, the Commission determined, these
disclosures were of interest to only “an insignificant percentage” of investors.
Today, however, we live in a different world. Although just 3% of last year’s concept release
discussed sustainability, 66% of the non-form letters discussed sustainability disclosure, and
85% of sustainability-related letters called for improved disclosure of sustainability factors in
SEC filings. While we are uncertain how the SEC will continue to address disclosure
effectiveness under its incoming leadership, investor demand for better sustainability
information is undeniable.
Just as FASB was formed in 1973 to set financial accounting standards, today we need
accounting standards for sustainability factors such as energy consumption, fair labor practices,
data security and supply chain management. The absence of a market standard for these types
of disclosures has made it difficult for issuers to comply with, and for the Commission to
enforce, the disclosure requirements of Regulation S-K. Once again, we need the application of
standards in order to improve the effectiveness of policy.
Which brings me to my last topic: how can sustainability accounting standards support
public policy goals?
So, what is the path forward? How do we help our financial markets evolve to serve the needs
of today’s investors? How do we mobilize the power of those markets—to the tune of tens of
trillions of dollars—to address the world’s most pressing problems in a way that is mutually
beneficial? How do we reimagine our market infrastructure to create a future state that is more
efficient, mature, stable, resilient, and participatory?
In a speech made in 2015, SEC Commissioner Kara Stein also raised this question: “Where
should accounting be in the 21st century, a century in which technology and globalization are
transforming the way the entire world does business? In a highly interconnected, digital world,
can we reimagine accounting so that we minimize differences and maximize global investment
and access to capital?” she asked.27
27 Kara Stein, “International Cooperation in a New Data-Driven World,” 2015. Available at: https://www.sec.gov/news/speech/2015-spch032615kms.html
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First, I will tell you how SASB is working toward this goal. Then I will conclude by discussing
some of the things you can do.
SASB is an independent 501c3 nonprofit based in San Francisco. Our mission is to develop and
disseminate sustainability accounting standards that help public corporations disclose material,
decision-useful information to investors in a way that is cost-effective. We accomplish this
mission through a rigorous process that includes evidence-based research, broad, balanced
stakeholder participation, public transparency, and independent oversight.28 We specifically
develop our standards so that they are aligned with U.S. securities laws and can be used in
mandatory SEC filings.
We operate under the assumption that companies and investors already understand the
importance of sustainability factors, but they need a way to make them actionable. They do not
need more sustainability information; they need better sustainability information. Basically, they
need to be able to understand how to address macroeconomic issues at a microeconomic level.
An industry-specific approach to sustainability accounting is essential: because these issues
manifest themselves differently from one industry to the next. Take climate change as an
example. Just seven out of 79 industries (the number of industries in SASB’s industry
classification system, which is called SICS) account for 85 percent of the Scope 1 carbon
emissions from public equities.29 The remaining 72 industries are certainly impacted by climate
risk, but not because of the threat of a societal or regulatory response to their carbon emissions.
For apparel companies, what is important is the ability to source cotton, a crop that is vulnerable
to shifting weather patterns.30 For commercial banks, it is their financed emissions: loans to oil
and gas companies, industrials, utilities, and other industries whose own risk exposures could
threaten their ability to repay or refinance.31 For automakers, it is progress on developing
alternative-fuel vehicles to respond to shifting consumer demand patterns.32
The ability to tease out the unique sustainability profile of each sector and industry is made
possible by the legal concept of materiality. Materiality enables SASB to bring sustainability
risks and opportunities into sharper focus for companies and their investors. By surfacing the
sustainability issues that are likely to have material impacts on companies in an industry, SASB
identifies and standardizes disclosure on the subset of sustainability topics that drive
performance and are likely to be considered by the “reasonable investor.” Prior to SASB,
conversations about environmental, social, and governance issues were about just that: issues.
But analysts cover industries, not issues. Regulators group filings by industry, not by issue. So,
SASB’s industry-specific approach ensures the resulting disclosure can be used by the markets.
Using this approach, SASB maintains sustainability accounting standards for 79 industries in 10
sectors. Our goal is to raise the signal-to-noise ratio for decision makers, and we are beginning
to see evidence that we are succeeding.
28
Sustainability Accounting Standards Board, Rules of Procedure (January 2017).
Sustainability Accounting Standards Board, Climate Risk Technical Bulletin (October 2016).
30
Sustainability Accounting Standards Board, Apparel, Accessories & Footwear Industry Research Brief (Sept. 23, 2015).
31
Sustainability Accounting Standards Board, Commercial Banks Industry Research Brief (Feb. 25, 2014).
32
Sustainability Accounting Standards Board, Automobiles Industry Research Brief (Sept. 24, 2014).
29
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I have already mentioned the fact that 69 percent of top companies are already reporting on at
least three-quarters of the sustainability topics included in their industry’s SASB standard, and
38 percent are providing disclosure on every SASB topic.33 This is a clear indication that
companies acknowledge that the majority of the sustainability factors identified in SASB
standards are currently having—or are reasonably expected to have—material impacts on their
business.
Independent academic research has offered further validation that our approach is effective.
Research from Harvard Business School found that companies that perform well on material
sustainability factors, evaluated based on SASB criteria, enjoy enhanced market returns (six
percent annualized alpha) over firms that perform poorly on material factors.34
While all of this is good news—not just for the SASB, but also for investors, companies, and the
markets as a whole—plenty of work remains to be done. Although the business and investing
communities have come to recognize the importance of sustainability issues, they are only just
beginning to understand how existing market mechanisms provide an effective means for
managing these factors.
Fortunately, everyone in this room can help make move the markets forward.
For example, those of you focused on law know that our securities regime eschews bright-line
rules in favor of a principles-based approach that can be applied to any material information,
including sustainability information. These concepts, like materiality, and regulations, like the
Securities Acts, have stood the test of time and their lack of rigidity provides for the disclosure of
material sustainability information without resorting to unneccesary line-item disclosure
requirements, which might undermine market forces in the interest of advocacy.
Those of you studying business understand that an integrated, strategic approach to
sustainability—one focused on exploiting opportunities to create differentiated value rather than
cutting costs and managing compliance—is more likely to create and sustain competitive
advantage over the long term. You’ve probably read Michael Porter’s treatises on strategy, and
have come to recognize that the interests of business and society are not mutually exclusive.35
And all of you, with your focus on governance and public policy, know very well how boards of
directors, and particularly the audit committee, can help improve a company’s strategic focus on
the most crucial sustainability issues, improve its reporting on those issues by encouraging the
use of standardized accounting metrics, and improve the quality of reported data by monitoring
the control environment and engaging an external assurance provider.
In the absence of sustainability accounting standards, we face a situation of unknown and
unpriced risk. We can’t value what we don’t understand. Markets can’t respond without
adequate information. Our markets and society deserve better than that.
33
Sustainability Accounting Standards Board, The State of Disclosure 2016 (Dec. 1, 2016).
Mozaffar Khan, George Serafeim and Aaron Yoon, “Corporate Sustainability: First Evidence on Materiality,” The Accounting
Review, Harvard Business School (March 9, 2015).
35
Porter, Michael E. and Kramer, Mark R., “Creating Shared Value,” Harvard Business Review (January/February 2011).
34
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In the words of former SEC Chair Mary Schapiro, who is also Vice Chair of the SASB Board:
“Transparent markets more efficiently distribute capital. Fair markets bring investors and their
capital into the game.”
To attract the capital of the millennial investors—as well as the growing body of mainstream
investors who acknowledge the financial impact of sustainability performance—we must provide
investors with the information they need to make informed decisions in today’s world.
Sustainability accounting standards are the means to accomplish this goal. Through standards,
we can modernize disclosure while protecting investors and facilitating efficient functioning of
the markets and formation of capital. Through standards, we can ensure companies measure
and manage the most critical sustainability issues of our time, creating a race to the top to
improve performance. Through standards, we can help policy goals be met.
In today’s rapidly changing world, businesses face a unique set of challenges that call for a new
type of accounting and for a new set of standards to ensure the resulting disclosure is useful.
While we are uncertain how these issues will play out over the coming years in terms of
regulation or policy, we can achieve a great deal with a market standard, which will benefit
investors, companies, the capital markets, and society. It’s time to account for all the types of
capital—financial, social, and environmental—that are critical to corporate success, now and in
the future. The expertise and interest in this room represents a great opportunity to move this
conversation forward from good intentions to markets that work efficiently and reward
sustainable outcomes. In the words of Abraham Lincoln, “the best way to predict the future is to
create it.”
Thank you very much.
---Now I’d like to lead into some discussion questions:
 Is the formation of sustainability accounting standards today perfectly analogous to the
formation of financial accounting standards in 1973? How are these situations different?
 What are the biggest challenges of integrating sustainability accounting standards into
the capital markets? What are the biggest opportunities?
 Another trend affecting rulemaking is the diversity of investors in the market. From retail
to large institutional, active to passive, growth to value, today’s investors are more
diverse—in sophistication, methodology, and motive—than ever before. This richly
populated continuum of investors creates challenges for securities regulation. How is a
regulator to set policy in the face of fragmented investor interests?


Standards are not a silver bullet. What other conditions are needed for standards to
fulfill their potential? (enforcement, investor recourse – 10b-5 suits, proposals)
In your opinion, what are the most important policy goals sustainability accounting
standards can serve to advance?
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