Archives For sustainability

Katie Schmitz Eulitt, SASB

By Katie Schmitz Eulitt, Director of Stakeholder Engagement, Sustainability Accounting Standards Board (SASB)

A recent ACCA report discussed how differing definitions of materiality affect the boundaries of materiality decisions made by companies. In light of this report, we wanted to offer SASB’s perspective on natural capital and materiality in the context of mandatory disclosure to the Securities & Exchange Commission (SEC).

SASB develops sustainability accounting standards for publicly-listed U.S. companies. The standards are designed for the disclosure of material sustainability issues in SEC filings. By the end of 2014, SASB will have issued standards for 45 industries. By early 2016, SASB standards for more than 80 industries in ten sectors will be available.

While FASB and US GAAP exist for the purpose of disclosing corporate performance through metrics focused on financial capital, SASB’s concern is with accounting for material non-financial issues, including environmental and social capitals that are not accurately priced. SASB is defining parameters that express a true and fair representation of performance on non-financial issues, for investors and analysts to use in evaluating companies. This picture includes attention to the management of critical capitals, vulnerability to depletion, and risks associated with mismanagement. SASB’s approach to sustainability accounting consists of determining standard disclosure and metrics to account for companies’ performance on material sustainability issues.

So, how will SASB standards change corporate performance? By helping companies to account for all forms of capital. Accounting for sustainability impacts means measuring, verifying, and reporting—in other words, being accountable for—the environmental, social, and governance (ESG) performance of an organization. Sustainability accounting standards are intended to complement financial accounting standards. The goal is for investors to be able to evaluate financial fundamentals and sustainability fundamentals side by side. With this information, investors can assess ESG risks and opportunities in an investment portfolio, and companies can improve performance on the ESG issues most relevant to their business success.

The impacts of business on society and the environment, as well as the impact of sustainability issues on business, are often headline news. The perfect storm of global population density, food and water security issues, and extreme weather events is not predicted to subside. Thus, companies need to better understand how these factors inhibit and/or enhance their ability to create value, for shareholders and society alike. SASB’s industry-specific guidelines help companies identify the ESG issues that are likely to be material to their business, and provide investors with the ability to compare company performance on these issues. SASB is using a rigorous method to develop standards that are tailored to each industry. By identifying the minimum set of material issues for every industry, SASB standards surface the information that truly matters. SASB standards are designed to be cost-effective for companies and decision-useful for investors.

Our standards abide by the U.S. Supreme Court’s definition of material information, defined as 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.” Regulation S-K requires corporations to disclose material information to investors in the Form 10-K. While FASB provides standards for the disclosure of material financial information, there are no standards for the disclosure of material non-financial information. SASB is emerging to fill this need.

We encourage everyone interested in materiality, natural capital, and the U.S. capital markets to participate in SASB’s standards development process. Sign up for industry working groups, participate in public comment periods, download and use our standards.

SustainabilityBy Gordon Hewitt, sustainability advisor, ACCA

The COP18 climate negotiations came to a close in Doha on 8 December, a day later than scheduled and following an all-night final negotiation session.

The two-week conference resulted in nations signing the Doha Climate Gateway. This outcome document makes modest progress in addressing the risks associated with climate change, with the main points including a continuation of the Kyoto Protocol, reiteration of commitments on long-term climate finance and the inclusion of ‘loss and damage’ in a conference outcome document for the first time. The conference also saw progress on the Durban Platform (ADP) towards an agreement covering all countries by 2015.

The Kyoto Protocol, which is currently the only binding agreement under which developed countries have committed to cut their greenhouse gas emissions, has been extended for a period of eight years from 1 January 2013. Whilst the continuation does maintain some degree of forward momentum, it will not result in a major reduction in emissions, as many developed countries have not signed up to the second commitment period. Countries that have signed up include the EU, Norway and Australia; whilst those who have not include the US, Japan, Canada and Russia.

As the Protocol only covers around 15 per cent of emissions, forging an agreement that encompasses a much greater proportion of emissions will be a key focus of future negotiations. A critical challenge will be the distinction between developed and developing countries, as the world has changed enormously since the UNFCCC was negotiated in 1992, yet the classification of countries has remained the same.

Developed countries have reiterated their commitment to scale up climate finance, mobilising US$100bn per year by 2020, but practical commitments were scarce and few nations made any pledges that cover the period between 2013–2020. A number of European countries, including the UK, Germany, France and Denmark announced concrete finance pledges for the period up to 2015, totalling approximately US$6bn. The lack of further finance commitments was seen as a major disappointment from developing countries.

Much of the negotiation focused on the inclusion of ‘loss and damage’ proposals within the outcome document. This term refers to the dispersion of funds to vulnerable communities for the loss and damage caused by climate change. A particular opponent of this term was the US, who did not want any language connoting legal liability to be included in the text, as this could result in unlimited amounts of litigation. Whilst no international mechanism on loss and damage was set up in Doha, the possibility of setting one up in the future has been included in the agreement, a point that will undoubtedly be a major focus of COP19 in Poland next year.

A common criticism of UNFCCC negotiations has been the decision making process, which relies upon consensus between all parties. This has allowed nations to veto and block policies that are against national interest and resulted in many stalled negotiations and missed opportunities over the years. In order to address this issue, Mexico and Papua New Guinea have proposed to introduce majority voting to the COP process. This was not discussed officially in Doha, but will likely be included on the agenda of COP19.

Whilst some progress was made at COP18, it is widely regarded that the commitments made by governments to date are failing to address the risks posed by climate change and if emission levels are not curtailed soon, we will experience a level of warming that will have widespread negative consequences. The next two years leading up to 2015 are critical if governments are going to reach an agreement that will limit warming to 2C – the commonly agreed limit to avoid dangerous climate change.

by James Bonner, independent sustainability consultant

Other posts in this series of blogs have introduced the concept of materiality, and furthermore discussed the notion that natural capital, the stock of resources and subsequent benefits we derive from the natural environment, can be considered in material economic and business issues.

However, as the TEEB (The Economics of Ecosystems and Biodiversity) study states: ‘the values of its [natural capital] myriad benefits are often overlooked or poorly understood. They are rarely taken into account through markets or in day-to-day decisions by business and citizens, nor reflected adequately in the accounts of society.’ As such, the onus on organisations to report on significant material issues, coupled with an increasing interest and pressure on businesses to disclose their impact and dependencies with regards to environmental concerns, are strong arguments to support the inclusion of natural capital issues in the corporate reporting of businesses in order to accurately reflect their corporate performance.

The following diagram depicts the interconnections between the constituent aspects of natural capital and business (as explained in more detail in a previous blogpost in this series), and infers that there are several areas where impacts and dependencies on natural capital could feasibly impact corporate value. As the highlighted area in the dashed box associates – a business entity’s consumption of raw materials (e.g. timber or pharmaceutical resources), or reliance on an operating environment which is stable and consistent (e.g. protected from flooding or benefits from natural pollination) are dependencies which stem from natural capital- and are necessary, to varying extents, for the financial revenues and on-going existence of many, if not all, businesses.  As stated in the TEEB quote above, many of these benefits are not fully understood, or reflected in accounting practices – and begs the question: if such impacts and dependencies are so fundamental to society/organisations, shouldn’t their material relevance be reflected in aspects of corporate valuation such as tangible and intangible asset values, share price, and judgments of going concern?

Furthermore, there are a number of reasoned arguments why it is actually within the interests of businesses to integrate natural capital into their valuation procedures. Companies that incorporate the externalities associated with their impacts and dependence on natural capital into their financial reporting may gain a truer and more accurate assessment of their assets and liabilities, be able to make better business decisions based on a clearer understanding of what their revenues and costs they are dependent on, and be more prepared to comply and inform external requirements (e.g. regulation, reporting requirements, taxes, etc.) in the area of natural capital (developments in this area will be discussed specifically in future blogposts).

The challenge for society, business, and the accounting sector is to utilise current, or develop new, valuation methods and techniques to reflect these natural capital issues – and to foster a clearer understanding and appreciation of the value and dependence business, the economy, and society has on the natural environment.

This blogpost intends to primarily support ACCA’s Accounting for the future session ‘Assets/Liability Valuation of Natural Capital’ on Tuesday 9 October by connecting the concept of natural capital with the corporate value of companies – an issue which will be discussed in greater detail, along with specific accounting standards which are most closely aligned with natural capital, and the implications of valuing companies from a natural capital perspective – in the session. Additionally, a number of other presentations during the conference relate to the themes covered in this blogpost:

8 October
11:30 – 12: 30 Is natural capital a material issue?

9 October
09:30 – 11:00 Assets/liability valuation of natural capital
16:00 – 17:00 Practical workshop: 6 capitals of integrated reporting – practical skills for accountants

10 October
12:30 – 13:30 Evolution of the annual report
16:00 – 17:00 Reporting developments around Rio +20

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WBCSD (World Business Council for Sustainable Development)
WBSCD is a group which brings together a range of forward thinking companies with a focus on a sustainable future for business, the economy and the environment. Its ‘Guide to Corporate Ecosystem Assessment’ tool is particularly relevant to issues around the valuation of natural capital for businesses.