Jeffery Smith, Partner, Crowell & Moring Katie Schmitz Eulitt, Director of Stakeholder Engagement, Sustainability Accounting Standards Board (SASB) As stakeholder interest and engagement in sustainability issues have increased, so has the level of noise and thus distraction, frustration and (occasionally) deception. Communicating sustainability is now in a crucial but difficult stage of its development. By developing industry-specific language and using signals and standards recognized by U.S. and global capital markets, can the Sustainability Accounting Standards Board (SASB) bring focus and clarity?

1. Materiality, Markets, and the Tower of Babel
The New Metrics of Sustainable Business 2013
Jeffery Smith, Crowell & Moring
Katie Schmitz Eulitt, Sustainability Accounting Standards Board (SASB)

2. The New Metrics of
Sustainable Business
Materiality, Markets and
the Tower of Babel
September 25, 2013

3. The Tower of Babel
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4. The First Answer
• Since 1934 the SEC has been empowered to prescribe the form and
content of financial statements filed by reporting companies and to
specify the methods to be followed in their preparation.
– Certification of all financial statements by independent public
accountants.
– The matters to be covered by the accountants’ opinion were specified.
– Standards of independence were formulated.
– Requirements for disclosure of the effects of changes in accounting
principles or practices were promulgated.
• The SEC elected not to preempt the field. The accounting
profession took the lead in developing financial accounting and
reporting standards. The SEC took the role of overseer to “criticize
and prod.”
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5. Confusion
“The accounting profession was subjected to a
barrage of criticism…for permitting the existence
of widely divergent alternative accounting
practices, all within the broad framework of
generally accepted accounting principles. It was
alleged that financial statements lacked
comparability as a result of these alternatives,
and that investors and other users of financial
statements were ... in danger of being misled.”
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6. The Answer @ 1972
• The Wheat Report
• An accounting standards board to articulate
basic accounting principles and be responsive
to multiple market demands and practices.
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7. Getting to SASB
• Voluntary sustainability/ESG/CSR reporting has
proliferated and matured.
– Over 60% of companies with revenues > $5 billion
publish sustainability reports.
– Over 9,000 on the Corporate Register.
– Almost 4,000 on the GRI database.
• Tensions between voluntary and SEC-driven
reporting – relating to both content and internal
responsibility – have become significant and
nuanced.
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8. Getting to SASB
• Institutional investor interest in ESG issues has grown
dramatically.
– PRI signatories represent $30 trillion under management.
– INCR has members with $10 trillion under management.
– There are over 600 funds for socially responsible investing.
– Over 40% of shareholder resolutions for Fortune 250 in
2012 involved social policy or sustainability issues.
• Intangible assets have become a dominant presence on
the balance sheets of reporting companies.
• Sarbanes-Oxley certification accentuates the need for
common metrics and language.
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9. Getting to SASB
• ESG-heavy, integrated disclosure frameworks, objectives
and templates have proliferated and matured.
– GRI
– CDP
– OECD multinational enterprise guidelines
– U.N. Global Compact
– Prince of Wales Project (A4S)
– International Integrated Reporting Council (IIRC)
– ISO 26000
• Exchange-specific listing requirements and/or sustainability
indexes have spread rapidly.
– Johannesburg; Shanghai; Thailand; Korea; Hong Kong; Toronto;
Deutsche Borse; INCR/NASDAQ Consultation Paper
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10. The New Tower of Babel
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IIRC
CDP
INCR
GRI
Industry Leaders
Trade Association Guidelines
NGOs
Exchange Listing
Requirements
A4S

11. SASB Methods and Objectives
• Multi-interest group involvement from major
market sectors – industry, investors, analysts
and NGOs.
• Transparency
• Unaffiliated with FASB
• ANSI accreditation
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12. • Industry working groups
(IWGs)
– 88 Industries
– 10 Sectors in 10 Quarters
• 3 phase standards
setting process –
preparation;
development;
refinement.
SASB Methods and Objectives
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13. SASB Methods and Objectives
• Feedback and comment loops.
• Metrics must be seen as:
– Relevant
– Useful
– Cost effective
– Comparable
– Auditable
by majorities within each working group.
• The presence of multiple interests in each IWG is intended
to create broad market perspective and stimulate debate.
• Surveys and formal comment period to finalize the nuts
and bolts.
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14. • SASB materiality map,
driven by data, 10K’s
and CSR reports and
informed by SEC
caselaw on materiality.
• Intended to create the
lowest common
denominator of
material issues for the
industry group.
SASB Methods and Objectives
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15. SASB Methods and Objectives
• KPIs create comparability between industry-
specific material issues, even if no company-
specific disclosure is required.
• Standards Council reviews KPIs before
finalization for big picture QA/QC.
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16. What Can SASB Accomplish?
• Front-end load the discussion about what matters and what is material.
• Keys explicitly to U.S. SEC materiality case law, grounding any disclosure in recognized
(and limiting) principles.
• Create:
– Language for benchmarking that is adaptable to multiple forums and market useful.
– A counterpoint for management’s topics, initiatives and achievement-centric narratives.
– A methodology to shrink or focus GRI, CDP and other voluntary reports.
– A predicate for integrated reporting.
• It may redefine the “reasonable investor” in the TSC v. Northway formulation:
– Substantial likelihood
– Disclosure would have been viewed (by)
– Reasonable investor
– As having significantly altered
– Total mix of information made available
• Quorum and path to consensus on basic metrics useful in multiple settings.
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17. How SASB Could Go Wrong
• IWG process runs out of steam or fail to maintain a quorum.
• IWGs miss or fail to reconcile issues.
• Process miscalibrates relevance or materiality.
• Material topics either misrepresent the sector or are so broad or so
narrow that they are useless to the market.
• The cumulative total of KPIs or material issues is too long or so non-
specific that they are meaningless.
• No landing place, context or host framework for results.
• Doing too much (creating multiple inflexible disclosure metrics) or too
little (failure to define the entire “capital flow” of a disclosure metric).
• Improper use of, or emphasis on, existing industry processes and metrics.
• Insufficient user uptake as a result of shortage of available bandwidth
among disclosure leaders.
• SEC resistance to or rejection of SASB’s process or conclusions. 17