“The new SASB standards allow us—for the first time—to identify and measure exposure to climate risk across companies and industries. Climate change affects all markets and presents risks that investors can no longer ignore. The standards help them understand their exposure while also directing capital to the strongest performing companies.” — Michael Bloomberg, Chairman of the Sustainability Accounting Standards Board

Markets depend on standards. Weights and measures were some of the first examples. Standards make it possible for companies to do business with each other and for consumers to buy products that will meet their expectations. The Internet, one of the biggest markets in the world, depends on standards. When standards don’t exist, markets don’t develop to their full potential. And as anybody who travels and has to worry about how to recharge their phone and computer in different countries — or tries to convert pounds to kilos and feet to meters — knows only too well, the absence of standards creates inefficiencies.

Though most people are familiar with accounting standards, most non-accountants probably don’t think this is a particularly interesting subject. I’m not a practicing accountant, but I find accounting standards a fascinating and important topic. Here’s why: We wouldn’t have the deep and liquid capital markets we have today without accounting standards for measuring and reporting on financial performance. These markets have created enormous wealth, albeit too unevenly distributed, that have benefited billions of people. Thanks to accounting standards, investors can compare the financial performance of companies when deciding where to invest their money. Accounting standards quite simply make “apples-to-apples” comparisons possible.

What the world needs now, in addition to love true love, is accounting standards for measuring so-called “nonfinancial performance,” i.e., how well a company is performing on the environmental, social, and governance (ESG) issues that are important to investors. For without these standards, we won’t have the capital markets we need today to create a sustainable society for future generations. Climate change risk is one obvious example of a nonfinancial issue that affects most industries, affecting 93% of U.S. market cap. So are product alignment and safety (80%), and resource scarcity and intensity (75%).

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