Searching for the missing piece: SASB’s standards for industries in the financials sector

The latest release couldn’t be timelier given the heat on banks

SASB’s release of provisional sustainability accounting standards for Financials industries couldn’t be timelier, given recent heat on banks and the SEC related to climate change.

Earlier this month, the role of banks in financing companies that are heavy greenhouse gas (GHG) emitters has received growing attention. And, Ceres released a report on the SEC’s lack of enforcement on the climate change guidance the SEC issued in 2010.

Both situations involve demand for better climate change disclosure. But, the banks and the SEC aren’t necessarily to blame for the deficit. The problem is that there’s no standardized accounting infrastructure for the disclosure of material sustainability issues in mandatory SEC filings.

There are no standards for companies to follow or for the SEC to enforce. Hence, the SEC’s climate change guidance has led to a proliferation of boilerplate information.
This is the missing piece that SASB provides. Our industry-specific standards are designed for companies publicly-listed in the U.S. to disclose material sustainability issues in mandatory SEC filings in a comparable, standardized manner.

This is the type of disclosure that’s cost-effective for companies and decision-useful to investors.

Today SASB issued provisional standards for in seven industries in the Financials sector: Asset Management & Custody Activities, Commercial Banks, Consumer Finance, Insurance, Investment Banking & Brokerage, Mortgage Finance, and Security & Commodity Exchanges.

The standards address the environmental, social and governance (ESG) issues likely to be material for companies in a given industry. Examples of issues included are customer privacy and data security; integration of ESG factors in credit risk analysis, investment management and advisory; and responsible lending and debt prevention.As an ANSI-accredited standards setting organization, SASB uses a rigorous process that includes evidence-based research, balanced industry working groups, 90-day public comment periods, and review by an independent Standards Council.

The industry working groups for the Financials sector resulted in 302 survey responses from members representing publicly traded companies with more than $1.3 trillion market capital and investment firms with more than $5 trillion assets under management.

The list of working group members can be found here.

“Standards that are cost-effective for companies and decision-useful for investors”

Our utmost goal is to issue standards that are cost-effective for companies and decision-useful for investors. We do this by identifying the minimum set of material issues and recommending quantitative metrics whenever possible. As a result, on average there are only four sustainability issues in each industry and 79% of suggested accounting metrics for are quantitative for the Financials sector.

As for climate change, SASB addresses this issue in three ways. First, we identify the industries where climate change is material (either from an emissions or vulnerability perspective), so that portfolios can be addressed in terms of climate risk and assets allocated accordingly. Second, we identify industries where there are opportunities associated with climate change (via the Sustainable Industry Classification System, SICS). And third, we translate climate change into actionable, industry-specific metrics by which companies and investors can benchmark and gauge progress.

These actionable metrics differ by industry, even in the Financials sector. For example, for Commercial Banks relevant disclosure relates to total loans outstanding for carbon intensive industries, such as Energy, Oil & Gas, Materials, Industrials, and Utilities.

For Asset Management, it’s the potential for stranded assets, as measured by the embedded carbon content of proved hydrocarbon reserves in the assets under management. And for Investment Banks, it’s the deal size of advisory and underwriting transactions for companies in Energy, Oil & Gas, Materials, Industrials, and Utilities. These metrics get at potential value at risk from climate-related events, loss of license to operate, or regulation.

In response to mega-trends including climate change, resource constraints, and population growth, market demand for good sustainability data is growing.Investors need information to compare how companies are adapting to this new reality of constrained resources and increased regulation. SASB is answering this call.

By the end of 2014, we will have issued 45 sets of industry standards, and by the beginning of 2016 this number will rise to more than 80. Join us in the standards development process and help the capital markets evolve to meet the needs of today’s investors and society.

Dr. Jean Rogers is the Executive Director of SASB