Question

The recent efforts of the Sustainability Accounting Standards Board highlight the potential for this enhancement to corporate reporting. Discuss how sustainability is being incorporated into corporate reporting today and some of the reasons for these changes? Provide examples for some of this reporting.

Answer 1

SASB’s mission is to develop and disseminate sustainability accounting standards that help public corporations disclose material, decision-useful information to the stakeholders.

Sustainability accounting reflects the management of a corporation’s environmental and social impacts arising from production of goods and services, as well as its management of the environmental and social capitals necessary to create long-term value. It also includes the impacts that sustainability challenges have on innovation, business models, and corporate governance and vice versa.

Market value typically differs from book value, in part, because traditional financial statements do not necessarily capture all of the factors that contribute to a company’s long-term ability to create value. Much of this “value gap” is attributable to, or can be significantly impaired by the management or mismanagement of, environmental, social, and human capitals as well as corporate governance. Therefore, corporate reporting must extend beyond financial statements to facilitate the measurement and reporting of sustainability information that will enhance a decision maker’s understanding of all material risks and opportunities. Like financial accounting, sustainability accounting has both confirmatory and predictive value, so it can be used to evaluate past performance and be used for future planning and decision support. Assessing the financial impact of sustainability issues is inherently limited by the absence of proper valuation techniques and/or adequate market pricing. While environmental, human, and social capitals can be understood conceptually as economic assets and liabilities, the lack of comparable data makes accounting for these sustainability factors challenging—a deficiency SASB standards are built to address. Therefore, the SASB’s approach to sustainability accounting consists of defining operational metrics on material, industry-specific sustainability topics likely to affect current or future financial value. Like financial accounting information, sustainability accounting information captures past and current performance, and can also be forward-looking to the extent that it helps management describe known trends, events, and uncertainties2 that may reveal an actual or potential impact on the financial condition or operating performance of a reporting entity. SASB metrics—both qualitative and quantitative— will thus be of interest to investors and creditors, thereby helping to communicate and to more completely represent company performance.