Assessing Your Readiness

Overview  •  Establishing a Foundation  •  Choosing the Right Tools for the Job  •  Deciding Where to Disclose  •  Understanding SASB Standards  •  Assessing Your Readiness  •  Developing Your Disclosures  •  Enabling Continuous Improvement

Investors, directors, and company management don’t just need to know which sustainability topics a company has prioritised for disclosure; they also need to know how effectively those issues are being managed. Therefore, for each disclosure topic identified in an industry standard, SASB selects or develops decision-useful accounting metrics to capture company performance on key aspects of the topic. Taken together, they characterise a company’s positioning with respect to business-critical sustainability issues and the potential for long-term value creation. Thus, like traditional financial accounting metrics, they can be used to evaluate past performance as well as to provide insight into future performance.

SASB Standards are designed to provide a cost-effective way for companies to disclose material, decision-useful sustainability information to investors. To help achieve this, a significant percentage of the metrics in SASB Standards are aligned with initiatives already in use. As part of its standard-setting process, SASB identifies and documents existing metrics and practices used to account for performance on each disclosure topic. When possible, SASB harmonizes its standards with existing metrics, definitions, frameworks, and management disclosure formats to minimise the corporate reporting burden. SASB Standards reference standards and metrics from over 200 organisations, including the World Health Organization (WHO), International Standards Organization (ISO), Organisation for Economic Co-operation and Development (OECD), IPIECA (formerly the International Petroleum Industry Environmental Conservation Association), United Nations Environmental Programme (UNEP), International Labour Organization (ILO), the Global Real Estate Sustainability Benchmark (GRESB), and more.

Companies should review the metrics and accompanying technical protocols associated with their selected SASB disclosure topics to familiarize themselves with not only the top-line metrics themselves, but the suggested methodologies for collection, calculation, compilation, and presentation. The technical protocols help ensure that the company—and its investors—can effectively compare performance to that of peer companies or to industry benchmarks.

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Because SASB standards address the sustainability topics most likely to be financially material to a business, many companies will find they already track the SASB metrics or similar information. Thus, for each selected disclosure topic, SASB recommends that a company consider how it is currently collecting or reporting relevant performance information.

• First, a company should assess whether and how it is currently reporting information relevant to each SASB topic in its existing reporting to investors or other stakeholders, including regulators. This will help the company identify opportunities to leverage SASB-aligned disclosure that is already in place. Companies are likely to find that they are already addressing many of the SASB topics in one or more reporting channels, allowing them to leverage existing functions, relationships, and processes to prepare their SASB disclosure and to ensure consistency across channels.
• Second, a company should evaluate whether and how it is currently collecting information relevant to each SASB topic for internal use, including internal management reporting. This will help the company identify existing data sets that, while not currently reported externally, may nevertheless support its external reporting objectives. Additionally, this process will help the company identify the internal subject matter experts who can best assess what may be needed to ensure data are aligned with the SASB Standard.

In performing this analysis, the company is likely to identify three categories of metrics:

1. those for which it is already collecting SASB-aligned data;
2. those for which it is collecting similar data; and
3. those for which it is collecting no data.

For existing, SASB-aligned metrics, a company may wish to ask the following questions:

✓   What processes are used to collect the data and who is accountable for data accuracy?

✓   How strong are internal controls over the data?

✓   Is the data subject to a governance process, such as oversight by a disclosure committee or a board committee

✓   Is the data assured by an independent third party?

If a company has not previously collected or reported information on its selected SASB topics, it should develop an understanding of the level of effort required to capture and disclose the suggested metrics. For each new metric identified, the company should work with its cross-functional team to explore the following questions:

✓   Which internal experts are best positioned to review the SASB metric and associated technical protocols to assess the company’s ability to collect the data?

✓   What is the most likely path for collecting the required information and the associated level of time, effort, and cost?

After considering these questions, the company should make a final decision as to which SASB metrics it plans to disclose. In some instances, the company may conclude that a suggested SASB metric does not apply and that it wishes to report an alternative metric. In these instances, SASB suggests that the reason for the modification be disclosed.

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Source: PwC, ESG Pulse (2016)

Optimal decision-making requires reliable information. The practice of disclosing sustainability information to investors is relatively new compared to the long history of company financial reporting. As a result, sustainability information has often been captured without the benefit of the processes, controls, and governance that are typically applied to the financial information companies disclose to investors.

SASB believes companies should apply a level of rigor to ensuring reliable data that is substantially similar to that used for traditional financial reporting. Such an approach may involve the application of internal control, the establishment of appropriate disclosure controls and procedures, and the engagement of independent, third-party assurance, among other activities.

Naturally, SASB recognises that companies may face challenges in collecting data, particularly during the first few years of using the standards. In such cases, SASB recommends that companies disclose any data limitations when reporting a metric. This and other considerations are addressed in SASB’s Standards Application Guidance, which supplements the 77 industry standards to ensure information is reported using appropriate boundaries, scope, formatting, and protocols that will help ensure data reliability. Please note: Entities using the SASB Standards as part of their implementation of ISSB Standards should consider the relevant ISSB application guidance.

An effective system of internal control is the foundation on which reliable reporting and informed decision-making rest. In using SASB metrics to monitor and disclose sustainability performance, a company should consider leveraging its existing internal control framework—typically used to support its financial reporting—and apply that framework to similarly support its internal and external sustainability reporting. The most widely used framework for establishing internal control is the Committee of Sponsoring Organisations of the Treadway Commission (COSO)’s Internal Control – Integrated Framework. The Framework is intended to help companies achieve their strategic, operations, reporting, and compliance objectives. Notably, it includes specific reference to non-financial reporting objectives, suggesting that sustainability reporting objectives could be integrated into a company’s existing internal control framework.

Internal control generally serves as a first line of defence for companies in safeguarding assets and preventing and detecting errors and fraud. COSO defines internal control as “a process, affected by an entity’s board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives relating to operations, reporting, and compliance.” The paper Leveraging the COSO Internal Control – Integrated Framework to Improve Confidence in Sustainability Performance Data explores how companies are practically applying controls to sustainability metrics like those included in the SASB Standards.

A company can benefit from setting specific strategic, operations, reporting, or compliance objectives related to SASB Standards. In this context, the company may wish to work with its internal audit and risk management teams to ensure an effective system of internal control can provide management with reasonable confidence that these objectives are met.

✓   Has the company established a strong internal control environment with robust processes, standards, and discipline around financially material sustainability information?

✓   Has the company incorporated SASB topics into its approach to risk management? Has it established specific objectives for managing the topics and reporting the data, and identified and assessed risks to achieving those objectives?

✓   What control activities—if any—has the company designed, implemented, and maintained at the entity level, the transaction level, or the information technology level to mitigate key ESG-related risks?

✓   Does the company have access to timely, relevant, and reliable information to help it assess the effectiveness of its sustainability reporting systems and processes?

✓   How does the company monitor the effectiveness of how it is managing SASB disclosure topics? How does it monitor the effectiveness of its related disclosures?

A company that chooses to disclose SASB information in mainstream financial reports may be required to design and maintain well-documented and thorough internal reporting processes, controls, and procedures for the information. However, regardless of where sustainability information is reported, a company is likely to benefit from such an approach, which is intended to ensure that information is collected and communicated to management in a way that facilitates effective oversight and timely decisions regarding required disclosure.

An organisation may wish to leverage its existing disclosure committee to establish formal disclosure controls and procedures for its SASB reporting as a way of answering the following questions.

✓   Which individual(s) or function(s) are responsible for preparing the information needed for each SASB disclosure topic?

✓   How do individuals or business units within the company collect the information to be disclosed? Does each SASB metric have a formal accounting policy that provides clear definitions and guidance for assumptions to ensure consistent data collection, analysis, and reporting across the organisation?

✓   How is the collected information communicated to those responsible for preparing the disclosures? Are these processes well documented, including key risks for misstatements and associated controls to prevent or detect misstatements?

✓   How is information reviewed and revised for publication? What external parties—such as outside counsel, an independent assurance provider, or other advisory partners—are involved?

✓   What is the timeline of all disclosure activities?

✓   What governance processes apply, or should be applied, to the disclosures? Should the SASB information be reviewed by a disclosure committee and/or a board committee?

Source:EY, “Non-Financial Performance May Influence Investors” (April 2017)

Through internal control, internal audit, agreed-upon procedures (AUP) engagements, and other measures, a company will be able to establish a reasonable level of internal confidence in the quality of its reported sustainability information. However, although independent third-party assurance of reported sustainability information is required in only a handful of jurisdictions (e.g., South Africa), many companies voluntarily elect to seek external assurance of their sustainability disclosures to assure investors that the information is reliable.

✓   What are the relevant laws and standards—if any—related to the assurance of sustainability disclosures?

✓   What steps might the company take with internal audit and/or third-party advisors to establish internal confidence in data quality before investing in an external assurance engagement?

✓   Have the company’s investors expressed an interest in obtaining assurance over all financially material sustainability information or only with respect to key data points?

✓   What level of assurance is appropriate in the context of the company’s sustainability reporting objectives—reasonable (exam) or limited (review)? How might the company’s selection of a disclosure channel influence this decision?

SASB’s Standards Application Guidance contains information that will be helpful to a reporting company as well as its assurance partner, should it elect to obtain independent, third-party verification. For example, reporting boundaries must be set—and criteria defined—at the metric level. Unless otherwise specified in the industry standard(s), SASB recommends:

• That a company disclose sustainability information for itself and for entities that are consolidated for financial reporting purposes as defined by accounting principles generally accepted in the jurisdiction of its financial reporting;
• That for consolidated entities, disclosures be made, and accounting metrics calculated, for the whole entity, regardless of the size of the minority interest; and
• That information from unconsolidated entities not be included in the computation of SASB accounting metrics. A company should disclose, however, information about unconsolidated entities to the extent that the company considers the information necessary for investors to understand the effect of sustainability factors on the company’s financial condition or operating performance (typically, this disclosure would be limited to risks and opportunities associated with these entities).

Please note: Entities using the SASB Standards as part of their implementation of ISSB Standards should consider the relevant ISSB application guidance.

Should a company elect to engage an assurance partner, the metrics and underlying technical protocols included in SASB Standards are designed to constitute the basis for suitable criteria in such an engagement. In the U.S., the American Institute of Certified Public Accountants (AICPA) has published Attestation Engagements on Sustainability Information (Including Greenhouse Gas Emissions Information), which provides detailed guidance for independent third parties on planning an attestation engagement on sustainability information, performing the engagement, and forming an opinion or conclusion and reporting on the engagement.

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