On November 7, 2018 in a ceremony at the London Stock Exchange the Sustainability Accounting Standards Board (SASB) announced that on October 16, 2018 its standards had been approved by its Standards Board. This announcement capped a seven-year effort to establish measurement and reporting standards for material (i.e., important for long-term value creation) environment, social, and governance (ESG) issues analogous to what exists for financial accounting standards set by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB). For background on how SASB set its standards and how these ESG issues are related to 13 financial value drivers, please see a previous post of mine: “Understanding The Financial Industry Of Industry-Specific Material ESG Issues.”

SASB has now identified 91 companies that used their standards for their 2019 ESG reporting, although on close inspection only 89 of them (72% U.S., 8% EU, and 20% Other) have really done so. Although this number may seem small, it is not surprising given that the standards were only codified in late 2018. In the paper “A Preliminary Analysis of SASB Reporting: Disclosure Topics, Financial Relevance, and the Financial Intensity of ESG Materiality” Cristiano Busco, Costanza Consolandi, Elena Sofra, and I analyze the quality of these reports. A fair question that is always raised about a new set of reporting standards is whether they are practical to implement. If not, there is little value in them no matter how well intended. If so, it means that those doing the reporting, in this case companies, and those using the information based on these standards, in this case investors, will benefit from them.

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We were pleased to find that these early adopters of SASB’s standards were implementing them to a high degree of quality. We measured this in a very simple way by calculating the ratio of the number of disclosure topics in the company’s report for which at least one accounting metric was given to the total number of disclosure topics. We called this the Disclosure Topic Compliance Index (DTCI). For example, if there are six material ESG issues in an industry and the company reports on three of them it would have a DTCI of 0.5. The 89 companies we studied covered all of SASB’s 11 sectors and 37 of its 77 industries.

As shown in Table 1, three sectors (Food and Beverage [four companies], Consumer Goods [10 companies], and Services [five companies]) had a DTCI of around 0.9. Transportation (seven companies), Health Care (one company), and Infrastructure (21 companies) were between 0.80 and 0.87; Technology and Communications (eight companies), Financials (11 companies), and Extractives and Mineral Processing (one company) are between 0.6 and 0.7. The lowest are Resource Transformation (six companies at 0.46) and Renewable Resources and Alternative Energy (one company at 0.13). Of course, caution must be taken with these results on both the high and low end because the number of companies in this sample is small. However, the facts that the average score is 0.70 and that 52  companies out of 89 (58.4%) score 0.75 or higher  is strong support that SASB’s recommended standards are sensible and doable.

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