1st in Series: The Software / IT Services Industry – GRI & SASB Standards In Focus – Perspectives on Alignments & Differences

SERIES INTRODUCTION 
GRI & SASB In Focus – Perspectives on Alignments & Differences

Notes from the G&A Institute Team on the series of commentaries by members of the G&A Sustainability Report Analyst Interns…

With the recent publication of the much-anticipated “Report on US Sustainable, Responsible and Impact Investing Trends 2018” issued by US SIF showing that ESG has really hit the capital markets’ mainstream — with $1-in-$4 in the US (by professional investment managers now incorporating ESG).  And, with the recent petition urging mandatory ESG reporting — submitted to the Securities & Exchange Commission by institutional investors  — he need to develop a more standardized framework for corporate ESG reporting is more pressing than ever before.

A recent discussion paper — “Investor Agenda For Corporate ESG Reporting” — with inputs from the CFA Institute, ICGN, PRI, CERES, GSIA, GIIN, and the UNEP-FI — further highlights this issue.

Among other things, the discussion paper emphasizes the need for participants of the Corporate Reporting Dialogue (participants include reporting standard setters – GRI, SASB, CDP, IIRC,CDSB, ISO, FASB, and IFRS) to deliver on their promise to work together to develop a more unified agenda on ESG reporting.

As part of our company’s role as the GRI Data Partner in the USA, UK and Republic of Ireland, G&A Institute’s Sustainability Report Analyst-Interns analyze thousands of sustainability reports each year and contribute the information to the GRI’s Sustainability Disclosure Database. This is the largest publicly-accessible sustainability disclosure database in the world (with now over 50,000 sustainability reports included, dating back to the start of the GRI).

Many of the corporate reports the G&A analysts process use the GRI Standards — and a number have now started to implement aspects of the SASB Standards as well in their disclosure and reporting process, depending on their sector and industry categories.

In their ongoing work, G&A’s Sustainability Report Analyst-Interns have been comparing the two standards for disclosure in specific industries as they carefully examine the corporate reports, and consider two standards’ alignment, similarities and differences.

In this series G&A’s Sustainability Report Analyst-Interns share their own perspectives as they have analyzed reports and noticed similarities and differences.

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We begin our series of shared perspectives with the perspectives of Minalee Busi, looking at the Software and IT Services Industry.

Comments by Minalee Busi – G&A Sustainability Report Analyst-Intern

Discussion regarding sustainability reporting is usually more focused in context of resource intensive industries, and the Software and IT Services sector is often left out.

With sustainability being a major factor in competitive advantage and investor decision-making, Software and IT Services companies need to re-think their sustainability reporting strategies, if they are not already at that point.

SASB identifies a limited number of material issues for the industry for corporate reporting, such as:
• environmental footprint of hardware infrastructure,
• data privacy and freedom of expression,
• data security,
• recruiting and managing a diverse skilled workforce, and
• managing systematic risks from technology disruptions.

Environmental Disclosures

The disclosure suggestions set forth by both the SASB and GRI Standards are in fact quite comparable, and in alignment with each other for some topics.

For example, both standards suggest companies to report on the energy consumed (both renewable and non-renewable) — but with different reporting boundaries.

SASB suggests reporting consumption within the organization — and the GRI Standards ask to additionally include consumption outside of the company.

However, GRI Standards also include disclosures in terms of energy reduction due to conservation and efficiency initiatives — which SASB disclosures do not include.

Similarly, though both the disclosure frameworks require information about water withdrawal and consumption, GRI also expects detailed reporting on water discharge into different water bodies, with information such as whether water was treated before discharge and whether they follow international standards on discharge limits.

The GRI Standards also include disclosure on recycling — which although not very comprehensive, is completely non-existent in the SASB sector disclosure.

Given the increasing e-waste generated by the IT industry, both GRI and SASB could consider including more detailed disclosures in this area for addressing material risks companies face.

Addressing Data Security/Privacy

In terms of data security, both standards include suggestions of disclosures related to data breaches and the number of users affected. But since SASB disclosures are designed to be industry-specific standards, more detailed reporting requirements in terms of data privacy and freedom of speech are found in SASB — including information on secondary usage of user data and monetary losses as a result of legal proceedings associated with user privacy.

Other such additional detailed areas of sector-/industry-specific disclosures by SASB which are not specified in the GRI standards are topics under managing systematic risks — such as performance issues, downtime and service disruptions due to technological impediments; and, activity metrics related to data storage, processing capacity and cloud-computing.

Disclosures with respect to monetary losses due to legal proceedings around intellectual property protection and competitive behaviour can also be found in the SASB Standards.  These disclosures can be loosely be aligned with the GRI disclosures under non-compliance with laws in the socio-economic arena.

S/Social Reporting

With respect to the “S” (social domain) of corporate ESG reporting, both of the standards suggest reporting on employee diversity, with GRI focusing on categories such as age, gender and minority representation and SASB additionally suggesting reporting on data related to the percentage of employees who are (1) foreign nationals and (2) located offshore.

Interestingly, although SASB disclosures are industry specific standards and the IT industry is mainly dependent on human and intellectual capital, there is no specific suggestion of reporting on training and education of employees.

GRI Standards appear to be filling this gap with suggestions of detailed disclosures on average training hours, upskilling and transition assistance programs and information related to employee performance reviews.

Sustainability Reporting Criteria

The GRI Standards have extensive sustainability reporting criteria, of which a major portion of the disclosures fall under the “General Disclosures” — which include materiality, measurement approaches, consistency and comparability of reporting, external assurance, supply chain information, sustainability strategies, and ethics and integrity. This to me is seemingly more transparent as compared to the SASB Standards.

Another such area is stakeholder engagement, which exists in the SASB Standards only in the form of percentage of employee engagement.

The category of Discussion and Analysis under SASB Standards does require reporting on strategic planning about each of the material topics identified, which can be mapped to the Management Approach (DMA) disclosures recommended under each material Topic-specific disclosure area of the GRI Standards.

Alignment – and Gaps

With the above overview, the SASB disclosures and GRI Standards can be seen in alignment with respect to some material topics while having some gaps in others.

However, since both the standards are developed to address the needs different stakeholders – with GRI aiming a broader set of stakeholders and the SASB majorly targeting mainstream U.S. investors — they should not be seen by report preparers as being in competition with each other.

I believe that the efforts of the CDP and important sustainability reporting standards-setters such as GRI and SASB will certainly be welcomed by companies and other stakeholders now struggling to keep up, but the question remains if such collaborations can ultimately lead to the desired standardised sustainability reporting framework that many investors actively seek.

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Note:  This commentary is part of a series sharing the perspectives of G&A Institute’s Analyst-Interns as they examine literally thousands of corporate sustainability / responsibility reports.  Click the links below to read the other posts in the series:

Will We See Mandated Corporate Reporting on ESG / Sustainability Issues in the USA?

by Hank Boerner – Chairman – G&A Institute

Maybe…U.S. Companies Will Be Required…or Strongly Advised… to Disclose ESG Data & Related Business Information

Big changes in mandated US corporate disclosure and reporting on ESG factors may be just over the horizon — perhaps later this year? Or perhaps not…

Sustainable & responsible investing advocates have long called for greater disclosure on environmental and social issues that affect corporate financial performance (near and long-term). Their sustained campaigning may soon result in dramatic changes in the information investors and stakeholders will have available from mandated corporate filings.

We are in countdown mode — in mid-April the Securities & Exchange Commission (SEC), the agency that regulates many parts of the capital market operations and especially corporate disclosure and reporting for investors issued a Concept Release with a call for public comments.

Among the issues In focus are potential adjustments, expansions and updating of mandated corporate financial reporting. One of these involves corporate ESG disclosure. The issue of “materiality” is weaved throughout the release.

Among the many considerations put forth by SEC: expanding corporate disclosure requirements for corporate financial and business information to include ESG factors, and to further define “materiality.” Especially the materiality of ESG factors.

The comment period is open for you to weigh in with your opinion on corporate ESG disclosure and reporting rules — or at least strong SEC guidance on the matter.

SEC has been conducting a “Disclosure Effectiveness Initiative,” which includes looking at corporate disclosure and reporting requirements, as well as the forms of presentation and methods of delivery of corporate information made available to investors. (Such as corporate web site content, which most feel needs to be updated as to SEC guidance.)

The umbrella regulatory framework — “Regulation S-K” — has been the dominant approach for corporate reporting since 1977 has been the principal repository (in SEC lingo) for filing corporate financial and business information (such as the familiar 10-K, 10-Q, 8-K, etc.).

Investors Want More Corporate ESG Information

For a number of years now, investment community players have urged SEC to look at mandating or offering strong guidance to public company managements to expand disclosure and reporting to substantially address what some opponents conveniently call “non-financial,” or “intangible” information. An expanding base of investors feel just the opposite — ESG information is quite tangible and has definite financial implications and results for the investor. The key question is but how to do this?

Reforming and Updating Reg S-K

In December 2013 when the JOBS Act (“Jumpstart Our Business Startups”) was passed by Congress, SEC was charged with issuing a report [to Congress] on the state of corporate disclosure rules. The goal of the initiative is to improve corporate disclosure and shareholders’ access to that information.

The Spring 2016 Concept Release is part of that effort. The SEC wants to “comprehensively review” and “facilitate” timely, material disclosure by registrants and improve distribution of that information to investors. Initially, the focus is on Reg S-K requirements. Future efforts will focus on disclosure related to disclosure of compensation and governance information in proxy statements.

Asset managers utilizing ESG analytics and portfolio management tools cheered the SEC move. In the very long Concept Release – Business and Financial Disclosure Required by Regulation S-K, at 341 pages — there is an important section devoted to “public policy and sustainability” topics. (Pages 204-215).

ESG / Sustainability in Focus For Review and Action

In the Concept Release  SEC states: In seeking public input on sustainability and public policy disclosures (such as related to climate change) we recognize that some registrants (public companies) have not considered this information material.

Some observers continue to share this view.

The Concept Release poses these questions as part of the consideration of balancing those views with those of proponents of greater disclosure including ESG information:

• Are there specific public policy issues important to informed voting and investment decisions?

• If the SEC adopted rules for sustainability and public policy disclosure, how could the rules result in meaningful disclosures (for investors)?

• Would line items about sustainability or public policy issues cause registrations to disclose information that is not material to investors?

• There is already sustainability and ESG information available outside of Commission (S-K) filings — why do some companies publish sustainability, citizenship, CSR reports…and is the information sufficient to address investor needs? What are the advantages and disadvantages of these types of reports (such as being available on corporate web sites)?

• What challenges would corporate reporters face if ESG / sustaianbility / public policy reporting were mandated — what would the additional costs be? (Federal rule making agencies must balance cost-benefit.)

• Third party organizations — such as GRI and SASB for U.S. company reporting — offer frameworks for this type of reporting. If ESG reporting is mandated, should existing standards or frameworks be considered? Which standards?

The Commission has received numerous comments about the inadequacy of current disclosure regarding climate change matters. And so the Concept Release asks: Are existing disclosure requirements adequate to elicit the information that would permit investors to evaluate material climate change risk? Why — or why not? What additional disclosure requirements– or SEC guidance — would be appropriate?

Influential Voices Added to the Debate

The subject of expanded disclosure of corporate ESG, sustainability, responsibility, citizenship, and related information has a number of voices weighing in. Among those organizations contributing information and commentary to the SEC are these: GRI; SASB; Ceres; IEHN; ICCR; PRI; CFA Institute; PWC; E&Y; ISS; IIRC; BlackRock Institute; Bloomberg; World Federation of Exchanges; US SIF.

The overwhelming view on record now with SEC is that investor consideration of ESG matters is important and that change is needed in the existing corporate reporting and disclosure requirements. You can add your voice to the debate.

For Your Action:

I urge your reading of the Concept Release, particularly the pages 204 through 215, to get a better understanding of what is being considered, especially as proposed by proponents; and, I encourage you to weigh in during the open public comment period with your views.

You can help to ensure the SEC commissioners, staff and related stakeholders understand the issues involved in expanding corporate disclosure on ESG matters and how to change the rules — or offer strong SEC guidance. Let the SEC know that ESG information is needed to help investors better understand the risks and opportunities inherent in the ESG profiles of companies they do or might invest in.

SEC rules or strong guidance on ESG disclosure would be a huge step forward in advancing sustainability and ESG consideration by mainstream capital market players.

Information sources:

The SEC release was on 13 April 2016; this means the comment period is open for 90 days, to mid-July.

Helpful Background For You

Back in 1975 as the public focus on environmental matters continued to increase (all kinds of federal “E” laws were being passed, such as the Clean Air Act and Clean Water Act), stakeholders asked SEC to address the disclosure aspects of corporate environmental matters.

The initial proposal was deemed to have exceeded the commission’s statutory authority.

In 1974 the ERISA legislation had been passed by Congress, and pension funds, foundations and other fiduciaries were dramatically changing the makeup of the investor community, dwarfing the influence of one once-dominant individual investor. After ERISA and the easing of “prudent man” guidelines for fiduciaries, institutional investors rapidly expanded their asset holdings to include many more corporate equities.

And the institutions were increasingly focused on the “E,” “S” and :”G” aspects of corporate operations — and the real or potential influence of ESG performance on the financials. Over time, asset owners began to view the company’s ESG factors as a proxy for (effective or not) management.

While the 1975 draft requirements for companies to expand “E” and “S” information was eventually shelved by SEC, over the years there was a steady series of advances in accounting rules that did address especially “E” and some “S” matters.

FAS 5 issued by FASB in March 1975 addressed the “Accounting for Contingency” costs of corporate environmental liability FASB Interpretation FIN 14 regarding FAS 5 a year later (September 1976) addressed interpretations of “reasonable estimations of losses.” SEC Staff Bulletins helped to move the needle in the direction of what sustainable & responsible investors were demanding. Passage of Sarbanes-Oxley statutes in July 2002 with emphasis on greater transparency moved the needle some more.

But there was always a lag in the regulatory structure that enables SEC to keep up with the changes in investment expectations that public companies would be more forthcoming with ESG data and other information. And there was of course organized corporate opposition.

(SEC must derive its authority from landmark 1933 and 1934 legislation, expansions and updates in 1940, 2002, 2010 legislation, and so on. Rules must reflect what is intended in the statutes passed by Congress and signed into law by the President. And opponents of proposals can leverage what is/is not in the laws to push back on SEC proposals.)

There is an informative CFO magazine article on the subject of corporate environmental disclosure, published September 9, 2004, after the Enron collapse, two years after Sarbanes-Oxley became the law of the land, and 15+ years after the SEC focused on environmental disclosure enhancements. Author Marie Leone set out to answer the question, “are companies being forthright about their environmental liabilities?” Check out “The Greening of GAAP” at: http://ww2.cfo.com/accounting-tax/2004/09/the-greening-of-gaap/

And we add this important aspect to corporate ESG disclosure: Beginning in 1990 and in the years that followed, the G1 through G4 frameworks provided to corporate reporters by the Global Reporting Initiative (GRI) helped to address the investor-side demand for more ESG information and the corporate side challenge of providing material information related to their ESG strategies, programs, actions and achievements.

The G&A Institute team sees the significant progress made by public companies in the volume of data and narratives related to corporate ESG performance and achievements in the 1,500 and more reports that we analyze each year as the exclusive data partner for The GRI in the United States, United Kingdom, and The Republic of Ireland.

We have come a very long way since the 1970s and the SEC Concept Release provides a very comprehensive foundation for dialogue and action — soon!

Please remember to take action and leave your comments here:
http://www.sec.gov/rules/concept.shtml

Tune In to the Corporate Reporting Dialogue — An Initiative That Will Impact Investors, Corporate Reporters and Stakeholders

by Hank Boerner, Chairman – G&A Institute

Tune in to the [just launched] Corporate Reporting Dialogue – whether you are an investor, or company manager, or stakeholder with interest in corporate disclosure and structured sustainability / responsibility reporting.

This important dialogue was formally begun in June at the annual International Corporate Governance Network (ICGN) conference – the effort is spreadheaded by the International Integrated Reporting Council (ICCR).

The “dialogue” is organized to include the group of prominent independent organizations that exert varying degrees of influence on (among other things) the valuation and reputation of the world’s public and private companies … by inviting, mandating, suggesting and in various ways requesting that corporate managers look to their framework or standard or approach for their ESG disclosure and reporting.

Compliance with some of the standards of the organizations that gathered are in some cases mandatory (FASB, IASB for periodic or immediate public company financial disclosure & reporting); others are voluntary for the most part (the GRI, now the most widely used for global corporate and institutional sustainability reporting); some are voluntary logically leaning toward becoming the industry norm and perhaps at some point, mandatory (SASB for corporate sustainability reporting in the USA); some have created a global norm that public companies ignore at their risk (CDP for water, carbon and supply chain disclosure).

Gathering in Amsterdam, the Netherlands, the alphabet soup of leading ESG framework purveyors and standards setters came together to talk about important topics: (1) the coming of integrated reporting (for disclosure related to financial and ESG performance and more), (2) improving the quality and consistency or comparability of the various standards and reporting frameworks that corporations are using or adopting for their reporting, and (3) these (as described) and other approaches that asset owners and manager are using to make portfolio decisions.

“More certainty” for corporates and investors is one of the worthy objectives being debated.  More certainty in sustainability reporting…greater coherence among frameworks and standards…and the subsequent investor analysis and use of same?  All users of the standards, frameworks, related requirements, and analytical approaches will cheer that worthy goal on.

The organizations now collaborating under the umbrella of the Corporate Reporting Dialogue include:

  • The Global Reporting Initiative (GRI, the most widely used framework for sustainability reporting);
  • CDP (formerly known as the Carbon Disclosure Project);
  • the USA’s financial accounting standards FASB, authorized by the Congress to set accounting and financial reporting standards;
  • the counterpart international body, IASB for global (non-USA) accounting standards;
  • the very influential International Organization for Standardization (ISO – you know them for ISO 9001 etc.);
  • Climate Disclosure Standards Board (CDSB);
  • International Integrated Reporting Council (IIRC, the initiator of the dialogue);
  • International Public Sector Accounting Standards Board (IPSASB);
  • the relative newcomer and increasingly influential player, based in the USA, the Sustainable Accounting Standards Board (SASB, which is now in the process of generating sustainability reporting standards for various sectors and industries).

Connectivity is Key:  The collaborating organizations are aiming to develop practical ways to align the direction, content and development of the various reporting frameworks, standards, etc. The initial deliverable is going to be a document highlighting the “connectivity” of the various frameworks and standards….and the relevance to the coming of integrated reporting.

In the announcement, the IIRC organizers said that “…in an interconnected world, isolated change is insufficient to reflect the complexities of modern business and investment decisions…the CRD is a collaboration to promote greater cohesion and efficiency, rebalancing reporting in favor of the reader, helping to reestablish the connection between a business and its principal stakeholders…”

Note:  Chair of the CRD is Mrs. Hugette Labelle, Chair of Transparency International and board member of IIRC.

In announcing the initiative, Paul Druckman, IIRC CEO stated: “The purpose of the CRD is to strengthen cooperation, coordination and alignment between key organizations with Integrated Reporting as the umbrella. The need for this is continuously articulated in my discussions with companies, investors, regulators and other stakeholders across the world.

“At the creation of the IIRC we set out to be a catalyst for an evolution in corporate reporting – the formation of the CRD is at the heart of this, and is a significant step towards achieving our goal.”

Tune in and follow the new CRD — whether you are an investor, or corporate manager, or other stakeholder — this conversation will affect the future of corporate sustainability disclosure and reporting.

Information at:  http://www.theiirc.org/2014/06/17/corporate-reporting-dialogue-launched-responding-to-calls-for-alignment-in-corporate-reporting/