The reasonable investor of 2014 is not the same as the reasonable investor of 1973. In the past 40 years the world has changed. Megatrends like climate change, resource constraints, and population growth affect the ability of corporations to create financial value. However, investors don’t have information to determine how companies are adapting to this new reality.
This is a challenge ripe for good design.
Design is an intentional approach to problem-solving that foregrounds user needs. Less is more. Form follows function. In this situation, investors need comparable environmental, social, and governance (ESG) data in an accessible format. SASB standards—designed for the disclosure of material ESG issues in mandatory SEC filings such as the Form 10-K—cater to this need.
SASB serves investors by elevating the ESG information most relevant to decision-making. SASB’s Sustainable Industry Classification System (SICS) groups industries with similar sustainability impacts, which helps investors see under- or over-exposure to certain types of non-financial risks and opportunities depending on sector allocation. SASB standards help investors compare sustainability performance within an industry.
Design plays a calculated role in SASB standards, especially in terms of considering the needs of the end users. The standards identify the minimum set of ESG issues likely to be material, which keeps them cost-effective for companies. The metrics are comparable and largely quantitative, which helps investors benchmark performance, and they’re made available in the Form 10-K, an accessible format for investors.
The SEC is also designing ways to serve the changing needs of investors. In their Draft Strategic Plan for 2014-2018, the SEC acknowledges they’re operating in an increasingly complex and globally interconnected securities market. One of their strategic goals—to “facilitate access to the information investors need to make informed investment decisions”—highlights understanding evolving information needs and providing high-quality disclosure.
In addition to the Strategic Plan, the SEC is designing ways to surface the information that truly matters. The SEC’s disclosure reform efforts focuses on protect investors from information overload. They’re recommending a comprehensive approach that considers the appropriateness of disclosure requirements, as well as how the information is presented and delivered. Further, the SEC underscores the need for disclosure requirements that are flexible and adaptive to changing circumstances, cost effective, and supportive of investor confidence in the relevance of public company information. SASB’s work supports these objectives.
While SASB and the SEC are striving to accommodate the modern investor, they’re also striving to meet the needs of companies. SASB standards help companies comply with existing regulation. While Regulation S-K requires publicly-listed companies to disclose material information in the Form 10-K, companies lack the accounting infrastructure to disclose non-financial material information. Furthermore, the SEC’s Draft Strategic Plan discusses “promot[ing] capital markets that operate in a fair, efficient, transparent, and competitive manner, fostering capital formation and useful innovation.” SASB standards —which are designed to create a race to the top for corporations on the sustainability issues most likely to impact value creation—support this objective. Making sustainability data transparent to, and actionable by, investors will incentivize companies to compete and improve performance on material sustainability factors.
In the words of SEC Chair Mary Jo White, “One of the most meaningful powers we that we have to wield on behalf of investors is our authority to require companies to tell investors about the things that matter to them.”
The things that matter to investors are changing. Through design, we can help the capital markets evolve to serve these needs. Both SASB and the SEC are designing solutions to improve the quality and usefulness of disclosure. SASB’s accounting standards help investors discern which companies are better positioned to create value in a resource constrained world. They build a new wing on an existing structure in a modern context.