Interesting recent letter from the Sustainability Accounting Standards Board (SASB) and its message to the Financial Accounting Standards Board (FASB) on the relevance of aligning the definition of corporate disclosed materiality with the Supreme Court definition… Such alignment gives companies in the US the ability to report non-financial information to interested stakeholders including information related to ending global warming/climate change and the ability of the corporation to create value over the short, medium, and long term (sustainability of a corporation) for the public interest.
Today companies are voluntarily disclosing sustainability information and the US SEC is not taking or reviewing any of this data. Will this change as the definition of materiality changes and we move to providing strategies by which companies plan on being sustainable short, medium and long-term? Will auditors and financial professionals play a new role in preparing this data for disclosure including supply chain oversight related to child labor and human trafficking...
Today’s debate on disclosing non-financial information such as sustainability of a company hinges on the question of what is “material to a company” and what could be disclosed to stakeholders.
More on Materiality and SASB
U.S. Federal law requires publicly-listed companies to disclose material information, defined by the U.S. Supreme Court as information presenting “a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.” (TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976)). Both U.S. and global companies that trade on U.S. exchanges are subject to Federal disclosure requirements.
Today market value is a multiple of book value because it includes intellectual property, brand equity, customer relationships, patent libraries, and other intangible assets that are not efficiently captured by traditional financial statements—and which are significantly influenced by non-financial factors such as human and social capital, governance, and opportunities for innovation. An increasing share of the total value of investments is attributable to, or can be impaired by the mismanagement of, non-financial capitals.
SASB establishes sustainability accounting standards for use by U.S.-listed corporations in disclosing material sustainability information for the benefit of investors and the public. SASB standards are designed for disclosure in standard filings to the SEC, such as Form 10-K and 20-F.
SASB’s mission is a natural evolution in the history of corporate reporting. The Securities Act of 1933 and the Securities Exchange Act of 1934 led to the formation of the Securities and Exchange Commission (SEC), which Congress empowered to require and oversee corporate disclosure. This historic move, coupled with the creation of the Financial Accounting Standards Board (FASB) in 1973, led to establishing financial reporting standards and disclosure requirements aimed at protecting investors and the public. SASB continues the tradition of high-quality disclosure by extending accounting infrastructure to material sustainability factors. Sustainability accounting standards are intended as a complement to financial accounting standards, such that financial fundamentals and sustainability fundamentals can be evaluated side by side to provide a complete view of a corporation’s performance.
Professor Bob Eccles of Harvard view on corporate materiality:
Leading expert on financial reporting – Professor Bob Eccles of Harvard Business School believes that “contrary to common belief, a board’s duty is to the interests of the corporation itself rather than the particular audience of shareholders. While the board can choose to deem shareholders as the only significant audience, it does not have to do so. The board must decide which audiences are most significant for the ability of the corporation to create value over the short, medium, and long term. Then it can lay the foundation for improved corporate reporting.”
“Under the prevailing ideology of "shareholder primacy" most boards of directors believe that they are prevented from considering stakeholders other than shareholders in determining material issues and materiality for strategy and reporting. New research is showing that legal foundations exist for directors to indeed consider other stakeholders. To many boards, this is new thinking.”
Stay tuned - we will be hearing more from Professor Eccles on this topic.
As referenced before in previous blogs ... trillions of dollars will be needed from the capital markets to tackle sustainability issues facing the population of this planet - especially as we move from 4 billion to 7 billion people in the next 10-15 years. Demographics in the country is changing as well. Will this also be reported - nature and composition of the board, senior executives, management, HR policies. Energy usage and carbon footprint, IP value and reputation in the marketplace? Can corporate disclosure make a difference in providing incentives to the capital markets to address some of these issues affecting the marketplace in tackling these global issues? Innovation and technological changes will be necessary. Can disclosure enhancement increase the capital markets' ability to provide innovation and efficiently. Can companies become sustainable in this increasing complex world with informed and engaged stakeholders? Today very few companies are addressing this important issue and securities regulators and CFOs are focused on the issue of non-financial reporting. Stay tuned.