U.S. public companies spend less time communicating with investors about ESG issues than their global peers. They also disclose less. U.S. investors, in turn, fall below the global average when incorporating ESG factors into their strategies, and have less influence over responsible business behavior. This aversion to transparency isn’t surprising, due to the treatment of “materiality” within U.S. securities law.
The Supreme Court grappled with the definition of materiality in 1976 and again in 1988, and determined that, for disclosure relevant to the trading of securities, materiality should be defined through the lens of what is important solely to investors. This restricts the concept to what would be considered in a decision to buy, sell or hold a stock, or to vote a proxy. This is known as “financial materiality.” The SEC has always considered specific ESG impacts to be financially material, but not to such a degree that it has required robust reporting on the subject. Until the SEC does, businesses are free to avoid disclosure of “immaterial” ESG impacts.
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Into this breach has stepped the Sustainability Accounting Standards Board (SASB). From its formation in 2011 until the publication of its standards in November 2018, SASB has had one mission: crafting and compiling sustainability standards that explicitly target financial materiality, based on the Supreme Court’s definition. Its standards are tailored to each of 77 industries in 11 sectors. They encourage companies to disclose information on a variety of topics, including greenhouse gas emissions, water usage, indigenous rights, diversity and labor relations.
To garner support for these standards and ensure that they reflect industry understandings of materiality, SASB created working groups of company representatives, industry experts and investors. They tied each standard to financial performance, and required overwhelming consensus for each to survive to publication.
SASB standards are voluntary, but because they are supported by investors, including some of the world’s largest, they may constitute an effective disclosure regime. Asset management behemoths like BlackRock, Vanguard and State Street have not only embraced, but also helped to create the SASB standards. All three firms, along with Capital Group, Nuveen/TIAA, and the investment management divisions of Goldman Sachs, Morgan Stanley and Bank of America Merrill Lynch are members of the SASB Investor Advisory Group (IAG).
IAG members subscribe to various statements, encouraging participation in ongoing standards development and suggesting that companies disclose material ESG information. As a group, the SASB IAG collectively manages between 20 and 25 percent of the U.S. stock market. That is a powerful degree of influence.
With IAG members pressing for transparency in sustainability disclosure, even a voluntary regime acquires teeth, however. As You Sow therefore has filed shareholder resolutions requesting SASB-compliant disclosure with Essex Property Trust on water usage, Fastenal about workplace diversity; Advance Auto Parts and CarMax on labor practices; and truck manufacturer PACCAR on critical materials disclosure. In response, PACCAR produced a report implementing its proposal, and Essex promised to explore it, underscoring the validity of this new framework.
