How SASB’s new health care standards will change the signal to noise ratio

“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.” -Deputy Secretary of the Treasury, Lawrence Summers

The U.S. financial accounting system, which requires transparent disclosure of material issues to investors, makes our markets the most efficient and resilient in the world. However, mega-trends like climate change, resource constraints and population growth now affect the ability of corporations to create financial value. The capital markets need to evolve to reflect this new reality.

The Sustainability Accounting Standards Board (SASB) was launched in 2012 to provide sustainability accounting standards — for use by publicly listed corporations in the US — to disclose material sustainability issues for the benefit of investors and the public. SASB was born to help investors to discern which companies will outperform in a world with more regulations, different cost structures, finite resources and new opportunities presented by global sustainability challenges.
How? SASB supports investors through two primary means. First, the standards help investors identify risks and opportunities. SASB’s Sustainable Industry Classification System (SICS) groups industries with similar sustainability impacts. Our Materiality Map prioritizes the materiality of issues within and across industries. Together, SICS and the Materiality Map enable investors to see under- or over-exposure to certain types of ESG risks and opportunities depending on their sector allocation, and adjust their exposure accordingly.
Second, the standards help investors with comparison and benchmarking. The data that will result from 13,000 publicly traded companies reporting with SASB accounting metrics will enable investors to perform peer-to-peer comparisons on critical dimensions of ESG performance and establish industry benchmarks for material ESG factors.The availability of financial fundamentals alongside sustainability fundamentals provides the data needed to adjust valuations for certain assumptions, evaluate management quality and select stocks.
It’s time for clarity on what’s material. SASB research shows that up to 75 percent of what companies report on ESG factors is immaterial to investors. This finding mirrors the opinion of investors: according to a recent ACCA study, 92 percent of investors disagreed that current reporting is sufficiently comparable. And 92 percent of investors agreed that financial and non-financial information should be more integrated. It’s a call for benchmarkable data delivered via the channels in which investors are accustomed to receiving information.
Today SASB is answering that call. We are issuing our first set of provisional standards, for industries in the health care sector, to the public. Companies can begin using the standards to disclose material sustainability issues in the Form 10-K, 20-F and other required SEC filings. By using SASB standards, companies can comply with existing regulation that requires all material issues to be disclosed in the Form 10-K.

Our standards are available for six industries in the Health Care sector: biotechnology, pharmaceuticals, medical supplies & equipment, health care delivery, health care distributors and managed care. The standards address the environmental, social and governance (ESG) issues likely to be material for companies in these industries. Issues addressed include resource management, pharmaceutical water contamination, drug safety and side effects, ethical marketing, affordability and fair pricing, managed care price performance and safety of clinical trial participants.
The standards were developed via a rigorous, transparent and multi-stakeholder process. The working groups for the Health Care sector represented publicly traded companies with more than $800 billion market cap and investment firms with more than $952 billion in assets under management. The working groups—which yielded 127 survey responses—were comprised of 1/3 corporations, 1/3 investors, and 1/3 intermediaries.

Prior to the working groups, SASB scanned tens of thousands of industry-related documents—Forms 10-K, shareholder resolutions, CSR reports, media reports and SEC comment letters—to collect evidence of investor interest for 42 general sustainability issues. We examined sell side research, investor call transcripts, third party case studies, anecdotal evidence and news articles to collect evidence of financial impact. We looked at financial impact the same way an analyst would—does management or mismanagement of this issue have the ability to impact value creation? Lastly, we opened the standards for public comment and had our standards reviewed by an independent Standards Council comprised of experts in standards development, investment, securities law, environmental law, metrics and accounting.
Over the next two years SASB will develop standards for 80+ industries in 10 sectors—and we’re developing these standards with investors in mind.SASB standards are delivered in the same way as the other information the investing public relies on to make investment decisions.

They’re developed at the industry level because investors cover industries, not issues. And they’re designed to be cost-effective, useful, relevant, comparable and auditable. Our accounting standards are the first that truly enable investors to compare and benchmark performance on material sustainability issues at an industry level.
SASB’s provisional standards for the health care sector will help change the noise to signal ratio by sending clear market signals on the sustainability issues that are most material. More signal, less noise. That’s what the capital markets desperately need. And that’s what we are doing at SASB.

Dr. Jean Rogers is Founder and Executive Director of SASB