“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.
We take the mundane world of accounting standards, and the organizations that create and maintain them—primarily the U.S. Financial Accounting Standards Board and the International Accounting Standards Board—for granted. But this market infrastructure didn’t always exist. Whereas double-entry bookkeeping is over 400 years old, accounting standards are much more recent. In the U.S. they didn’t exist until after the creation of the Securities and Exchange Commission (SEC) in the early 1930s, one response of the government to the stock market crash of 1929 and the ensuing Great Depression.
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%).
The last two decades have seen a rise in genuine commitment by companies to sustainability and, more recently, by retail and institutional investors as well. These investors are realizing that how a company performs on a relatively small number of ESG issues will limit downside risk and create upside opportunities. These investors want to practice “ESG integration,” which means considering a company’s nonfinancial performance just as they do its financial performance. However, these same investors also rightly complain that a lack of good information hinders their ability to practice ESG integration. As the old saying goes, “Where there’s a will, there’s a way.”
In this situation the way is through standards. And thanks to the work of theSustainability Accounting Standards Board (SASB), a non-profit organization founded by CEO Jean Rogers five years ago, we now have standards for measuring and reporting on nonfinancial information. Commenting on why she decided to start SASB, Rogers said, “Material information is the right of every investor. In order to get a full picture of corporate performance, investors need to be able to type in a ticker and access sustainability fundamentals right alongside financial fundamentals.”
Dr. Bob Eccles