SASB - FAS Level 1

Question 1

Describe the trends driving demand for the disclosure of sustainability information .

Answer 1

1) Changing valuations and increase in intangible balance sheets (therefore firm value are more sensitive to sustainablity issues) to ESG 2) Sustainability issues are business issues - 2015 study 90% of firms shoed a non-negative relation between sustainability criteria and corporate financial performance. Harvard - sustain invstments on material factors enjoyed signficantly higher accounting and risk-adjusted market returns than those focused on immaterial sustainability factors. 3) Existing, Evolving, Emerging Regulation -A growing list of countries has passed legislation or issued directives to increase reporting of sustainability information. in September 2014, the E .U . adopted an amendment to its general accounting directives . The amendment requires large, publicly listed companies to disclose in their management report relevant and material information on environmental and social matters, as well as those related to employees, human rights, anticorruption, bribery, and diversity . Although the reporting regime in the U .S . already requires the disclosure of material information (financial and otherwise) to investors as appropriate, the SEC has issued specific guidance on a handful of sustainability issues—most notably climate change in 2010 .8 The SEC also launched a Disclosure Effectiveness Initiative in 2013 with the goal of improving the quality of disclosures and issued a related Concept Release in April 2016, which indicated that sustainability information may be within the scope of its reform . At the same time, a growing number of stock exchanges are pushing for standards related to responsible investment and sustainability issues . Many exchanges, particularly in emerging markets, already require listed companies to make sustainability disclosures . Meanwhile, the World Federation of Exchanges (WFE) and its 60 member exchanges (including New York Stock Exchange – NYSE – and NASDAQ in the U .S .) have engaged the investment and regulatory community on the efficacy of sustainability disclosures as part of a broader commitment to creating transparency and fairness in the capital markets . 4) Increasing investor interest - 82 percent of global institutional investors surveyed by PwC in 2014 (Sustainability Goes Mainstream) had considered sustainability information in their investment decisions in the last 12 months . Response to short termism., Fiduciary duty,

Question 2

Explain why sustainability information is increasingly important to investors for investment decisions (e .g ., reduced ratio of net assets to enterprise value, increased risks and opportunities) .

Answer 2

1) Intangible asset increasing
2) Understanding broader risks and opportunities
3) UN report in 2015 - failing to consider long-term value drivers which include ESG issues in investments is a failure of fiduciary duty
4) the largest institutional investors own such large AUM many have adopted “Universal Owner” approach. Consider not only the portfolio level returns but also the opportunity to stimulate wider economic growth, which is also in the best interest of beneficiaries.

Question 3

Explain the purpose and role of requiring public companies to disclose material information in SEC filings.

Answer 3

1. Aftermath of stock market crash in 1929 - Fletcher report (senate committee on banking) - many securities being sold under false/misleading info
2. Disclosure as the basis for Acts
   
   1. Securities Act of 1933 - Regulates the sale of securites to investing public - Section 5(c_ companies “fully and truthfully disclose info in registration statement”
   2. Securites Exchange Act of 1934 - established the SEC (maintain fair, orderly and efficient markets and facilitate capital formation) - market manipulation, short sales, margin trading limits.
      
      1. Section 12 of the Exchange Act prohibits trading of securities on a U .S . stock exchange unless they are first registered,
      2. Section 13 of Ex Act periodic reporting: 10-K, 20-F, 40-F, 10-Q, 8-K - periodic reporting requirements to keep the information filed under Section 12 current . intended to promote “‘honest publicity’ so that the markets could operate properly to value securities,”where “publicity” means the disclosure of accurate, complete financial information on an ongoing basis .
      3. SEC division of corp finance (Corp Fin) has resp for corp disclosure
      4. SEC’s requirement for disclosure - a company issuing securities or whose securities are publicly traded must make available all info, whether positive or negative, that might be relevant to an investor’s decision to buy, sell or hold the security.

Question 4

Explain the current state of financial accounting (codified, standardized, decision-useful) given the history and efforts of the FASB .

Answer 4

1. 1966 - AAA issued a decision usefulness statement - accounting “the process of identifying, measuring and communicating economic info to permit informed judgements and decisions by users of the info”
2. 1971 Trueblood committee: economic and social goals are equially important - some businesses impose externalities
3. 1973 FASB became authoritative source of GAAP. FASB began to codify GAAP.
4. 1978 SFAC NO 1 - financial reporting = providing info to help present and potential investors and crediors and other users in making rational investment, credit and similar decisions
5. 1980 SFAC No 1 - Define characteristics of Decision Useful
   
   1. Relevance and reliability
   2. Neutral
   3. Comparability
   4. Materiality
   5. Benefits exceed cost of producing
6. 2010 SFAC No 8 replaced 1 &2. - relevance, faithful representation, comparable, verifiable, timely, understandable

Question 5

Discuss the Supreme Court definition of “materiality” and the implications of this definition .

Answer 5

Two Supreme Court cases, TSC v. Northway, 426 U .S . 439 (1976) and Basic v. Levinson, 485 U .S . 224 (1988), articulated the principle of materiality in the securities law context . TSC: There must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ”total mix” of information made available .52 The Court elaborated: It does not require proof of a substantial likelihood that disclosure of the omitted fact would have caused the reasonable investor to change his vote . What the standard does contemplate is a showing of a substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder.53 (emphasis added) Information does not have to have changed the shareholder’s decision to be material . The information needs only to be likely to be considered by the reasonable shareholder. Reasonable shareholder is not defined - it evolves over time.

• TSC - “info is material if there is a substantial likelihood that the omitted fact would have significantly altered the total mix of information available to the reasonable investor”

Question 6

Discuss the implications of making statements about materiality outside of SEC filings.

Answer 6

• Only use “material” to describe sustainability info inside SEC filings. - once shareholders begin to examine statemnts outside SEC filings, the risk of litigation regarding those statments increases. One solution is fo a compnay to explicity state sustainability report is releavent or interesting, but not material.
• Have legal review for any inconsistencies between sustainability report and SEC filings.
• Include material sustainability info in SEC filings - the inclusion in SEC filings can help fulfill SEC disclosure obligations

In Staff Accounting Bulletin No. 99—Materiality, the SEC states that companies should not use financial thresholds or rules of thumb to make ultimate materiality determinations . For example, the bulletin rejects the rule of thumb that a misstatement or omission of less than five percent is not material .60 Similarly, the FASB has stated that materiality cannot be captured by a formula61 and that quantitative thresholds should not be used to make materiality determinations .62 Financial rules of thumb and formulas cannot, by definition, capture material information that investors are interested in .

Question 7

Recognize key elements of Regulation S-K and other prominent legislation and what is required for disclosure (i .e ., financial and nonfinancial information that alters the total mix of information) .

Answer 7

1. Regulation S-K is a prescribed regulation under the US Securities Act of 1933 that lays out reporting requirements for various SEC filings used by public companies. Key elements related to sustainability:
   
   1. MD&A (Item 303 of Reg s-k) -

“known trends or uncertainties that the registrant reasonably expects will have a material impact
on net sales, revenues, or income from continuing operations .” Registrants “shall focus specifically on material events and uncertainties known to management that would cause reported financial information not to be necessarily indicative of future operating results or of future financial condition .”7

2. **Description of business (Item 101 of reg s-k)**(explicitly certain costs of complying with environmental laws, discharge into environment - impact on capex, earnings and competitive position
3. **Legal proceedings (item 103 of reg s-k\_** - explicity dischage into environment or air
4. **Risk factors (item 503c of reg s-k)**

Question 8

Explain why MD&A section was added to the 10-K and why it is an appropriate place for the disclosure of sustainability information .

Answer 8

1. Why added:
   
   1. To provide narrative expanation of financial statments
   2. Enhance overall financials disclosures
   3. Quality of and the potential variability of earnings and cash flows
   4. Focus on Material Information, Include key Performance Indications (fin and non-fin), Disclose Known Trends and Uncertainties that Are Reasonably Likely, Analyze the Info that is Disclosed
   5. Reasonably likely - when doubts about materiality arise then disclose

Question 9

Describe the trends driving demand for the disclosure of sustainability information .

Answer 9

1. Investor demand - in 2016 80% of SEC Concept Release called for improved sustainabiltiy disclosures
2. Regulatory: SEC “climate issues should consider for disclosure”
3. When in doubt disclose
4. Consequences of inadequate disclosure…boilerplate disclosures about sustainability topics carry legal risks

Response to short termism

Fiduciary duty

Universal owner

Question 10

Explain why sustainability information is increasingly important to investors for investment decisions (e .g ., reduced ratio of net assets to enterprise value, increased risks and opportunities) .

Answer 10

1. Reduced ratio of net assets to enterprise value (rise of intangible)
2. Non-financial drivers grow in significance
3. non financial info can serve as a leading indicator for future financial performance

Question 11

Discuss the challenges that investors face in integrating sustainability information into investment decisions (e .g ., information is available, but often its quality varies, it is not comparable, and/or it lacks obvious financial implications) .

Answer 11

1. Info is not available
2. Varies in quality
3. Not comparable
4. Not material
5. Lacks obvious financial implications
6. Sustainability reports targeted to broad stakeholder group (not investor specific)
7. disclosure overload
8. Greenwashing (neg info not reported)

Question 12

Distinguish SASB’s approach (sustainability accounting) from other approaches to sustainability tracking and reporting .

Answer 12

1. Focus on US capital markets- but standards applicable globally

• Surface sustainability info likely to be material
• yield decision useful data

1. be cost effective for corp issuers
   * identify industry specific disclosure topics

standards

Financially material

decision useful

cost effective

industry specific

evidence based

market informed

Question 13

Discuss the implications of making statements about “materiality” outside of SEC filings .

Answer 13

• Many companies using different definition of materiality in SEC filings and sustainability report.
• SEC registrants who publish a sustainability report using a proprietary definition of “materiality”—such as the definitions offered by GRI, IIRC, and others—may be exposed to legal liability
• The differences in the Supreme Court definition and proprietary definitions fall
  into three categories: whose perspective is considered, what kinds of decisions
  are affected, and the threshold for disclosure. The securities law definition takes
  the perspective of the reasonable investor. Information is material if it is important
  to investors in their decisions to buy, hold, or sell a security, or how to vote on a
  corporate matter. The threshold for disclosure is whether the information would have
  assumed significance in the deliberations of the reasonable investor.
  By contrast, proprietary definitions of materiality often consider what matters to
  a broad range of stakeholders, including local communities, customers, employees,
  and interest groups. While the decisions and assessments affected are not specifically
  identified, they might include the company’s attractiveness as an employer, or how
  prospective customers view the company.
  _For SEC registrants, their use of a definition of materiality that deviates from the
  securities law definition entails risks,_because this definition is among the elements
  that can trigger legal liability in Rule 10b-5 lawsuits.134

Companies can ensure compliance with SEC disclosure obligations, and reduce
potential legal risks, by taking the time to distinguish between material and
immaterial sustainability informationand ensuring the description of that information
is appropriate and consistent across all corporate reporting channels. Writing in
the American Bar Association’s Business Law Today, Nancy Cleveland, David Lynn,
and Stephen Pike explained that information that is relevant to stakeholders other
than investors should be labeled as “significant,” “important,” or “key,” and not
“material,” if the information does not satisfy the definition outlined in U.S. federal
securities laws.

Question 14

Describe the criteria that guide the selection of SASB’s accounting metrics.

Answer 14

Principles for Metric Selection:

• fair representation
• useful
• applicable
• comparable
• complete
• verifiable
• aligned - Metrics are based on those already in use by issuers or are derived from standards, definitions, and concepts already in use by issuers, governments, industry associations, and others .
• neutral
• distributive

Fair Representation: A metric adequately and accurately describes performance related to the aspect of the disclosure topic it is intended to address, or is a proxy for performance on that aspect of the disclosure topic .

Useful: A metric will provide useful information to companies in managing operational performance on the associated topic and to investors in performing financial analysis .

Applicable: Metrics are based on definitions, principles, and methodologies that are applicable to most companies in the industry based on their typical operating context .

Aligned: Metrics are based on those already
in use by issuers or are derived from standards, definitions, and concepts already in use by
issuers, governments, industry associations, and others .

Comparable: Metrics will yield primarily (a) quantitative data that allow
for peer-to-peer benchmarking within the industry and year-on-year benchmarking for an issuer, but also (b) qualitative information that facilitates comparison of disclosure .

Complete: Individually, or as a set, the metrics provide enough data and information to understand and interpret performance associated with all aspects of the sustainability topic .

Distributive: Metrics are designed to yield a discernable range of data
for companies within an industry or across industries allowing users to differentiate performance on the topic or an aspect of the topic . Not every topic will need metrics that are directional . For instance, a topic such as “employee diversity” does not need to, and cannot, always be increasing .

Neutral: Metrics are free from bias and value judgment on behalf of SASB, so that they yield an objective disclosure of performance that investors can use regardless of their worldview or outlook . (see sidebar .)

Verifiable: Metrics are capable of supporting effective internal controls for the purposes of data verification and assurance .

A unique set of characteristics make SASB standards stand apart from other

sustainability reporting initiatives. SASB standards are designed to:

1. Focus on the U.S. capital markets;
2. Surface sustainability information likely to be material;
3. Yield decision-useful data;
4. Be cost-effective for corporate issuers;
5. Identify industry-specific disclosure topics.

Following the codification of the standards, SASB continues to conduct research, engage with corporate professionals, investors, and subject matter experts, and monitor existing, evolving, and emerging sustainability issues. We will approach any changes to the standards through our rigorous process which includes evidence-based research, broad and balanced stakeholder participation, public transparency, and independent oversight and direction from the Standards Board.

Question 15

Describe the components of a sustainability accounting standard and their purpose for supporting disclosure.

Answer 15

1. FIVE Components of a sustainable accounting standard and purpose
   
   1. Sustainability Dimension: e.g., environment
   2. Sustainability Issue: e.g., environmental impacts on assets and operations
   3. Disclosure Topic: industry specific impacts of broader sustainability issue
   4. Accounting Metric: 1 or more associated with each disclosure topic. Can be Quantitative or Qualitative
   5. Technical Protocol: Clarification points for each metric. Definitions, scope, accounting guidance, compilation instructions and presentation guidance to ensure disclosures in the same industry are comparable and verifiable.
2. Disclosure topic Principles
   
   1. Of interest to investors
   2. Relevant across an industry
   3. Potential to effecto corporate value
   4. Actionable by companies
   5. Reflective of stakeholder (investor and issuer) consensus
3. Accounting metric CRITERIA
   
   1. fair representation
   2. useful
   3. applicable
   4. aligned
   5. comparable
   6. complete
   7. distributive - designed to yield a discernable range of data fror companies within an industry or across industries allowing users to differentiate performance on the topic. Not every topic will need to be always increasing e.g., employee diversity.
   8. neutral - free from bias and value judgement by SASB
   9. verifiable

Question 16

Distinguish SICS sectors based on their distinct sustainability profiles .

Answer 16

1. SEE QUIZLET
2. SASB 5 dimensions of sustainability with 30 general sustainability issues
   
   1. Environment
      
      1. GHG Emissions, Air Quality, Energy Mgmt, Water and Wastewater mgmt, Waste and Hazardous Materials mgmt, Ecological Impacts
   2. Social Capital
      
      1. Human Rights and Community Relations, Customer Privacy, Data Security, Access and Affordability, Product Quality and Safety, Customer Welfare, Welling Practices and Product Labelling
   3. Human Capital
      
      1. Labor Practices, Employee Health and Safety, Employee Engagement, Diversity and Inclusion
   4. Business Model and Innovation
      
      1. Product design and lifecycle management, Business model resiliance, Supply chain mgmt, Materials sourcing and efficiency, Physical impacts of climate change
   5. Leadership and Governance
      
      1. Business ethics, competitive behavior, mgmt of the legal and regulatory environment, Critical incident risk mgmt, Systemic risk mgmt
3. Eleven sector categories (each sector has a multiple industries in which sustainability can manifest in multiple ways)
   
   1. HC - Health Care (Biotech/Pharma, drug retailers, equipment)
      
      1. # 1 - Social Capital: Data security, access and affordability, Product Quality and Safety, Customer Wellfare, Selling Practices and Product labelling
      2. Other high: Business ethics
   2. FN - Financials (banks, asset mgrs, insurance, exchanges)
      
      1. No “High Prevelence” Dimension of Sustainability
      2. Medium Prevalence: Social Capital, Business Model and Innovation, Leadership and Governance
      3. Other high: Selling Practics and Product Labelling, Product design and lifecycle Mgmt, Business Ethics, Systemic Risk Mgmt
   3. TC - Technology (Hardware, internet, software, telecom, manufacturing)
      
      1. # 1 - Business Model and Innovation: Product design and lifecycle mgmt, Materials sourcing and efficiency. Human Capital: Employee engagement, diversity and inclusion
      2. Other high: Energy mgmt, Consumer Privacy, Data Security, Competitive Behavior
   4. EM - Extractives and Minerals Processing (Coal, Oil and Gas, Minerals and Mining, Construction Materials)
      
      1. # 1 - Environment: GHG, Air quality, Water and Wastewater mgmt, Waste and Hazardous Materials mgmt, Ecological Impacts. Human Capital: Employee health and Safety. Leadership and Governance: Critical Incident Risk Mgmt (only Sector to have Dimension of Leadership and Governance as High Prevalence)
      2. Other high: na
   5. TR - Transportation (Air, Auto, Cruise, Rail, Road)
      
      1. # 1 - Environment: GHG, Air Quality. Human Capital: EE Health and Safety.
      2. Other high: Critical Incident Mgmt.
   6. SV - Services (Advertising, education, hotels, Leisure, Media, Casinos)
      
      1. # 1 - Human Capital:
      2. Other high: No single “**General Sustainable Issue” where more than 50% of Industries within the Sector have a disclosure topic linked to it. Medium Prevalence on Environment and Social Capital.
   7. RT - Resource Transformation (Aerospace and Defense, Chemicals, Containers, Electrical, Industrial Machinery)
      
      1. # 1 - Environment: Energy Mgmt, Waste and Hazardous Materials Mgmt. Business Model and Innovation: Product Design and Lifecycle Mgmt., Materials Sourcing & Efficiency.
      2. Other high: Product Quality and Safety
   8. FB - Food and Beverage (Agricultural, Meat, Poultry Dairy, Restaurants, Alcohol/Tobacco)
      
      1. # 1 - Environment: GHG, Energy Mgmt, Waste and Hazardous Materials Mgmt. Social Capital: Product Quality and Safety, Customer Welfare, Selling Practices and Product Labelling. Business Model and Innovation: Product Design and Lifecycle Mgmt., Supply Chain Mgmt., Materials Sourcing and Efficiency.
      2. Other high: na
   9. CG - Consumer Goods (Apparel, Appliance Mftg, E Commerce, Household Products, Retailers)
      
      1. # 1 - Business Model and Innovation: Product Desing and Lifecylcle Mgmt., Supply Chain Mgmt,
      2. Other high: Product Quality and Safety
   10. RR - Renewable Resources and Alternative Energy (Biofuel, forestry mgmt, fuel cell, paper and pulp, solar, wind)
       
       1. # 1 - Environment: Energy Mgmt, Water and Wastewater Mgmt. Business Model and Innovation: Product Design and Lifecycle Mgmt., Materials Sourcing and Efficiency.
       2. Other high: na
   11. IF - Infrastructure (Electric Utilities, Engineering svcs, Gas Utilities, Home Builders, Real Estate, Waste mgmt, Water Utility)
       
       1. # 1 - Environment (no red dot sust issue cateogories), Human Capital: Employee Health and Safety. Business Model and Innovation: Product Design and Lifecycle Mgmt, Business Model Resiliance
       2. Other high: na

Question 17

Explain the organization of SICS and the implications of a sustainability-based industry classification .

Answer 17

1. Organization of SICS
   
   1. Industries with similar business models and sustainability impacts (risks and opportunities)
2. Implications of sustainability-based industry classification
   
   1. better comparability
   2. More consistent information
   3. Allows focus on what matters
3. Traditional industry classification systems organize companies into groups based on similar business models, sources and seasonality of revenue, and behavior in financial markets. This approach allows market participants to assess the impact of traditional industry trends on a portfolio, and analyze sector and/or industry contributions to portfolio performance. While analyzing the applicability of these traditional classification systems in the context of sustainability accounting standards development, the SASB realized the philosophy underpinning the basis for classification in these systems frequently produced industry categorizations that were either too granular or not granular enough in terms of shared sustainability characteristics. To gain efficiencies in workflow for standards development, the SASB needed to group like industries in terms of their sustainability risks and opportunities. Additionally, industries needed to contain peer companies that have similar types of impacts, for ultimate benchmarking of performance as well as applicability of the sustainability accounting standards. In order to address this shortcoming, the SASB developed the Sustainable Industry Classification System™ (SICS™). SICS groups companies into industries based on shared sustainability risks and opportunities.
4. In essence, the taxonomy is based on industries’ sustainability profiles. This approach adds value to traditional systems by considering the importance of non-financial factors and their impacts on companies and investment decisions, as well as by providing another lens through which to understand the complexities of the marketplace. Sustainability issues affect different industries in various ways. Analyzing the likelihood for material impacts related to sustainability issues requires an understanding of the specific impact of business on society and the environment, as well as the impact of sustainability issues on business. SICS was developed with this in mind.

Question 18

Explain the cross-functional nature of preparing sustainability disclosures in the 10-K .

Answer 18

1. Companies can rely on the same or similar collaborative policies and procedures they’ve established for accomplishing the tasks necessary for disclosing financial statements and related material information . However, these practices may need to be expanded to include sustainability data .

Companies will likely also need to include new individuals—such as sustainability staff—in the disclosure process .

2. CEO, CFO, legal counsel, controller, chief audit executive
   and internal audit team, risk management team members, investor relations professionals, and managers of business units and information technology . With the addition of the chief sustainability officer, the same employees can be involved in the disclosure of material sustainability information .

3.

Question 19

Explain the timeline and process for 10-K disclosure .

Answer 19

Common Form 10-K Preparation Timeline

• December
  
  • Hold planning meeting and update controller’s questionnaire
  • Review prior year Form 10-K
  • Review new regulatory developments/rules and peer practices and industry trends
  • • Consider changes to known trends, uncertainties for MD&A
  • • Determine information necessary to ensure disclosures are complete and accurate
• January
  
  • Draft the following sections:
  • • Business section
  • • Risk factors
  • • Compensation discussion and analysis - Exhibits
  • Executive officers review business section
  • Request compensation data

February (and potentially March for filers with later deadlines)

• Disclosure committee meets to review Form 10-K drafts and to evaluate disclosure and internal controls
• Submit for audit committee and compensation committee reviews
• Gather board signatures
• File with SEC via EDGAR

Question 20

Discuss the stages of 10-K preparation where sustainability information could be incorporated .

Answer 20

1. Controller’s questionnaire - magnitude and prbability of the topic in future periods

SASB standards are most useful in helping management comply with disclosure obligations under Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) of Regulation S-K . The purpose of MD&A is to give investors a meaningful, candid assessment of a company’s performance and prospects through the eyes of management .

1. MD&A, SASB disclosures may also be warranted within a company’s
2. description of business
3. legal proceedings and
4. risk factors
5. These four locations are consistent with those highlighted in the SEC’s interpretive guidance on disclosure requirements related to climate change and cybersecurity .

Question 21

Discuss the role of SASB standards in helping companies develop strategies for long-term value creation, and benchmark and improve operational performance.

Answer 21

1. Combat short-termism earnings myopia -taking a long-term mindset consistently outperform industry peers on nearly “every financial measure that matters .”
2. Sustainable accounting can provide insight on where resources are being wasted and further improve operational efficiency.
3. Hard to get tangible apples to apples comparisons to benchmark by

NOTE: Without evidence of a financial impact, a sustainability factor is not included as a disclosure topic.

Question 22

Explain the influences of internal controls and third-party assurance on the data quality of sustainability information and disclosures .

Answer 22

1. Sarbanes Oxley does not explicitly cover internal controls over non-financial info, but the certification requirements place a higher standard of accountability on sustainability in SEC filings than may exist in other channels.
2. Internal controls - mitigates risk of incorrect data and disclosures
   
   1. Sustainability disclosures in SEC filings are subject to the same SOX certifications regarding disclosure controls and procedures and the accuracy and completeness of the information that apply to financial reporting
   2. Therefore, SASB recommends registrants integrate sustainability disclosures with existing financial reporting processes, including the internal control framework . The COSO Internal Control Integrated Framework specifically references non-financial reporting objectives, which allows companies to integrate sustainability reporting objectives into their existing internal control framework Two non-financial reporting objectives relevant to SASB are the inclusion of SASB information in SEC filings and the assurance of SASB information . By applying the COSO (internal control framework) framework to SASB information, a company can implement internal controls that mirror the rigor and robustness of ICFR (internal controls over financial reporting) . Establishing internal controls over SASB information can support the SOX certification requirement regarding sustainability information included in SEC filings, and also support an external party’s assurance of SASB information .
3. Assurance - Independent assurance provider can assess the data quality of sustainable disclosures including the design and operation of the internal controls, for purposes of getting comfort over management’s assertion

Question 23

Describe the special disclosure considerations for multinational and diversified companies .

Answer 23

14 .1 .2 .1 . Operational Considerations

SASB recommends that registrants use SASB standards specific to their primary industry as identified by SICSTM . If a registrant generates significant revenue from multiple industries, SASB recommends that it consider sustainability topics that SASB has identified for those industries and disclose the associated SASB accounting metrics where relevant .

SASB recommends that consolidated entities calculate metrics for the whole entity, regardless of the size of the minority interest, but data from unconsolidated entities does not need to be included. A registrant should disclose, however, information about unconsolidated entities when it is deemed necessary for investors to understand the effect of sustainability topics on the company’s financial condition or operating performance (typically, this disclosure would be limited to risks and opportunities associated with these entities) .

14 .1 .2 .2 . Regional Considerations

Multinational or non-U .S . domiciled SEC registrants may have special considerations around certain SASB disclosure topics and/or accounting metrics . In some cases, those registrants may conclude that a given SASB accounting metric does not constitute material information and therefore does not warrant disclosure in SEC filings .

For example, SASB recommends Responsible Lending & Debt Prevention as a disclosure topic for companies in the Mortgage Finance industry . The related metrics are likely to yield material information for companies domiciled in the U .S ., where a robust secondary market for securitized mortgages facilitates capital efficiency but may increase the risk of default and present systemic risk management challenges . However, the metrics are less likely to constitute material information for companies issuing mortgages in the U .K ., where these loans typically remain on the balance sheets of originating banks and capital adequacy is more heavily regulated .

In some cases, the information captured by SASB metrics may be incomplete or otherwise materially misleading without accounting for differences associated with multinational or non-U .S .-domiciled registrants . Consequently, SASB aims to incorporate the consideration of international factors into its metrics, disclosure guidance, and/or normalization .

Nevertheless, in some cases, a company may need to provide contextual information to make its disclosures decision-useful for investors. For instance, Recruiting & Managing a Global, Diverse & Skilled Workforce is a recommended disclosure topic for companies in the Software & IT Services industry . However, when reporting gender and racial/ethnic group representation, where those percentages are significantly influenced by the country or region where the workforce is
located, the registrant should provide contextual disclosure to ensure the proper interpretation of the results .

Question 24

Discuss the utility of SASB standards in investment decisions (e .g ., portfolio allocation, risk/return profile) .

Answer 24

Furthermore, it has been argued that a sector-based diversification strategy for risk management can still yield high portfolio returns. There is some initial evidence corroborating this argument . State Street Global Advisors (The Rising Tide of Sector and Industry Investing, 2016) has suggested that “the use of sector and industry strategies is clearly on the rise” due to four distinct advantages the approach has over style-based (i .e ., value, blend, growth) investing:

1. Sectors are a key driver of risk: Beyond company-specific factors, industry exposure has been the most influential driver of equity market returns, accounting for 22 percent of gains for U .S . stocks over the past 20 years .214
2. Sectors exhibit differentiated correlations to the broader market:
   
   1. Average sector correlations to the S&P 500 Index range from 0 .60 (Utilities) to 0 .92 (Industrials), whereas style correlations are 0 .98 (growth) and 0 .97 (value) . This diversity allows investors to manage risk and potentially improve diversification through more precise and agile allocations .
3. Sectors produce a wider dispersion of returns: Between 2000 and 2015, the average yearly difference between large-cap growth and value returns was 7 .8 percent versus 36 .1 percent between the best- and worst- performing sectors . Thus, over- or underweighting certain sectors may offer greater alpha-generating opportunities than style-based strategies .
4. Sectors are dependent on economic cycles: Sector performance varies from year to year based on cyclical macroeconomic factors, which allows investors to add the potential for alpha by harnessing these trends through over- or underweighting .

SASB’s analysis of sustainability issues and related financial impacts can complement or improve the typical research analysis framework . It can do so through two mechanisms:

1 . Providing additional value drivers or risk factors; and
2 . Providing factors that impact existing value drivers, risk factors, and valuation

models .

pecifically, SASB standards help investors identify the firms that stand out
as sustainability leaders—or laggards—in their industry . Analysts use material sustainability disclosures as an indicator of a company’s ability to respond to emerging needs and demand trends. Analysts are using sustainability factors to identify which companies are best at leveraging market opportunities and to analyze the strength of their industry position .215

Analysts also identify and consider operating risks as part of traditional financial analysis. Sustainability factors can negatively affect a company’s operations

SASB standards—and the data they yield—can also be incorporated into the fundamental analysis of specific firms and related discounted-cash-flow analyses.

Question 25

NOT and LOS but Important: Discuss the Benefits of improved sustainabilty disclosure

Answer 25

1. For companies
   
   1. Opportunity for competitive advantage
   2. Improved access to capital
   3. Enhanced reputation
   4. Increased efficiency and waste reduction
   5. Improved employee loyalty
   6. Lower cost of capital
   7. Expanded revenue growth
   8. Improved risk management
2. For Investors
   
   1. Increased transparency
   2. More effective allocation of capital
   3. Improved market stability
   4. Greater market liquidity

Question 26

Five Factor Test

Answer 26

The five-factor test aims to objectively and impartially strike a balance between considering a wide range of potential sustainability topics with the need to assign relative importance to some topics over others. They address the following -

Financial impacts and risk

Legal, regulatory, and policy drivers

Industry norms and competitiveness

Stakeholder concerns and social trends

Opportunities for innovation

When determining which of the SASB topics might be material, based on the legal and regulatory interpretations of that term, companies can use the following five-factor test . (See “Part II: Understanding SASB Standards” for more detail .)

Financial impacts and risks: Consider the likelihood that the topic may have a material impact on the entity’s ability to create value in the short-, medium-, and long term through other factors .

Legal, regulatory, and policy drivers:

Consider the current and future regulatory environment surrounding the topic .

Industry norms and competitive drivers: Consider the completeness of current disclosures by evaluating the practices of industry peers .

Investor/Stakeholder concerns
and social trends: Consider whether the topic has been raised by investors and other stakeholders in the form of questionnaires or shareholder resolutions .

Opportunities for innovation: Consider the organization’s business model and the potential to capitalize on opportunities relevant to the sustainability topic .

Question 27

Six principles for SASB disclosure topics

Answer 27

Six principles for SASB disclosure topics

1. Applicable to investors
2. Pertinent and relevant across an industry
3. Focused on driving value creation
4. Expected to bring benefits that exceed the costs
5. Actionable by companies
6. Reflective of the views of stakeholders

Question 28

The criteria for SASB accounting metrics

Answer 28

1. Relevant
2. Useful
3. Applicable
4. Cost-effective
5. Comparable
6. Complete
7. Directional
8. Neutral

Question 29

Technical protocol

Answer 29

Technical protocols provide definitions, scope, accounting guidance, compilation instructions, and presentation guidance to support the comparability and verifiability of disclosures from companies in the same industry.

Question 30

Materiality

Answer 30

Materiality is defined by the U.S. Supreme Court as information presenting “a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.

Question 31

The Brundtland Report (1987)

Answer 31

DEFINITION : SUSTAINABILITY

The concept of sustainability, or sustainable development, was defined in the Brundtland Report (Our Common Future) as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”

As it relates to corporate activities, and for the purpose of the SASB standards, “sustainability” refers to environmental, social, and governance (ESG) dimensions of a company’s operation and performance .

Question 32

Internal Audit

Answer 32

As risk managers, they help assess the processes that minimize the risk of unreliable data

Question 33

SASB Industry Research Briefs

Answer 33

The Industry Research Briefs accompanied each respective industry provisional standard. Each brief provides evidence for the financially material sustainability topics included in the respective provisional industry standard.

Can complement industry level equity analysis in the following ways:

Describing new value drivers or risk factors

Supplementing existing valuation models with sustainability factors’ value impacts

• HOTEL AND LODGING Sample Industry Brief Intro

SASB’s Industry Brief provides evidence for the material sustainability issues in the Hotels & Lodging industry. The brief opens with a summary of the industry, including relevant legislative and regulatory trends and sustainability risks and opportunities. Following this, evidence for each material sustainability issue (in the categories of Environment, Social Capital, Human Capital, Business Model and Innovation, and Leadership and Governance) is presented. SASB’s Industry Brief can be used to understand the data underlying SASB Sustainability Accounting Standards. For accounting metrics and disclosure guidance, please see SASB’s Sustainability Accounting Standards (disclosure topic, metric, technical protocals etc). For information about the legal basis for SASB and SASB’s standards development process, please see the Conceptual Framework.

Question 34

Consolidated/Unconsolidated Entities

Answer 34

For decision-usefulness, companies should report data on SASB metrics for all consolidated entities, and for unconsolidated entities when it is necessary to understand the company’s financial condition or operating performance

Question 35

Q. What are two steps a company should consider taking to minimize the risk of material misstatements or omission of material information related to sustainability reporting?

Answer 35

1. Apply the 2013 COSO Framework to data collection and reporting processes
2. Use the AT 101 standard for an external attestation engagement

The AICPA’s AT Section 101 standard, which was recently superseded by AT-C 105, was frequently used for attest engagements over sustainability information . It applied to attestation engagements executed by a certified public accountant over a determined subject matter .

Therefore, SASB recommends registrants integrate sustainability disclosures with existing financial reporting processes, including the internal control framework . The COSO Internal Control Integrated Framework specifically references non-financial reporting objectives, which allows companies to integrate sustainability reporting objectives into their existing internal control framework .172 Two non-financial reporting objectives relevant to SASB are the inclusion of SASB information in SEC filings and the assurance of SASB information . By applying the COSO framework

to SASB information, a company can implement internal controls that mirror the rigor and robustness of ICFR . Establishing internal controls over SASB information can support the SOX certification requirement regarding sustainability information included in SEC filings, and also support an external party’s assurance of SASB information .

Question 36

Four Stages of Sustainable Value Creation

Answer 36

These stages get more difficult as you move from 1 to 4

1. Minimize costs - low hanging fruit - cost and risk management.
   
   1. Since 1975, 3M has saved $1 .7 billion by changing products or processes and recycling or reusing materials (e .g ., replacing a solvent-based paper treatment process with a water-based process) .
2. Optimize efficiencies -
   
   1. Through its “zero waste” initiative, DuPont weighed future earnings against business and environmental risks, eliminating divisions with significant waste products (e .g ., carpets and nylons)
3. New products and/or technologies -
   
   1. Dow’s focus on sustainability innovation led to new products and breakthroughs such as solar roof shingles and hybrid batteries, which helped shift Dow’s core business from commodity chemicals to advanced materials and high-tech energy .
4. New business models and differentiated value proposition - NOT all companies achieve this level
   
   1. GE’s ecomagination initiative generated $160 billion in revenue between 2005 and 2014 based on $12 billion in R&D . Consequently, GE has emerged as a differentiated energy and environmental solutions provider .

Question 37

Controller’s Questionnaire

Answer 37

1. First steop in updating 10-k in December - update controller’s questionnaire
2. The controller’s questionnaire can be instrumental in gathering additional information needed to assess the magnitude and probability of the topic in future periods .

Question 38

Disclosure Review Committee

Answer 38

Review the accuracy and completeness of statements subject to Sarbanes-Oxley certifications.

Question 39

SEC’s guidance on duty to disclose known events, trends and uncertaintiesin the MD&A

Answer 39

Disclosure is required if management cannot determine if the known event, trend, or uncertainty is not reasonably likely to occur

Disclosure is required if management cannot determine if a material effect from the known event, trend, or uncertainty is not reasonably likely to occur

Therefore, the issuer has a duty to disclose the known trends and uncertainties that are reasonably likely to have a material effect on results of operations and financial condition .

In determining whether a known trend or uncertainty is reasonably likely to have a material effect, the Commission advises management to ask two questions:

(1) Is the known trend, demand, commitment, event, or uncertainty likely to come to fruition? If management determines that it is not reasonably likely to occur, no disclosure is required .
(2) If management cannot make that determination, it must evaluate objectively the consequences of the known trend, demand, commitment, event, or uncertainty, on the assumption that it will come to fruition . Disclosure is then required unless management determines that a material effect on the registrant’s financial condition or results of operations is not reasonably likely to occur

The “reasonably likely” test is a lower standard of disclosure than “more likely than not,” meaning that the likelihood need not reach 50 percent .

Question 40

Private Securities Litigation Reform Act (PSLRA)

Answer 40

The Securities Act and the Exchange Act contain safe harbors for “forward-looking statements” that predate the Private Securities Litigation Reform Act of 1995 (PSLRA) .80 These safe harbors apply both to the required disclosures on known trends and uncertainties, as well as to voluntary forward-looking disclosures in MD&A .81 Protection under the PSLRA requires the company to accompany forward-looking statements with “meaningful cautionary statements identifying important factors that could cause actual results to differ meaningfully from those in the forward-looking statement .82 The cautionary statements should be specific to the company and not boilerplate.83

Question 41

Special Disclosure Situations

Answer 41

Operational Considerations:

• If a registrant generates sig revenue from multiple industries, SASB recommends that it CONSIDER sustainability topics for those industries
• Consolidated entities - regardless of size of minority interest, calculate metrics for whole entity
• Unconsolidated entities - when deemed necessary

Regional Considerations:

• Multinational or non-U .S . domiciled SEC registrants may have special considerations around certain SASB disclosure topics and/or accounting metrics . In some cases, those registrants may conclude that a given SASB accounting metric does not constitute material information and therefore does not warrant disclosure in SEC filings .

*

Question 42

SASB and FASB Critera - same components

Answer 42

• Relevant
• Complete
• Neutral

• Relevance, which explicitly recognizes the importance of materiality; and

SFAC No . 8 reinforces the value of financial reporting—to provide investors, lenders, and other creditors information to help them assess the prospects for future net cash inflows . But it also recognized that financial reporting does not, and cannot, provide all the information those users need . The FASB also reinforced the importance of the decision-usefulness of information . In doing so, it adjusted some of the characteris- tics of useful financial information . The new characteristics are:

• Faithful representation, which more specifically means that the information is complete, neutral, and free from error .

To enhance the relevance and faithful representation of the information, it should also be:

• Comparable;
• Verifiable;
• Timely;
• Understandable

Question 43

Social Capital - High and Medium Prevalence

Answer 43

• High
  
  • Health Care
  • Food and Beverage
• Medium
  
  • Financials
  • Technology
  • Services
  • Resource Transformation
  • Consumer Goods
• Low
  
  • Extractives and Minerals Processing
  • Transportation
  • Renewable Resources and Alt Energy
  • Infrastructure

Question 44

SASB Industry Topic Research Methodology

Answer 44

1. Surfacing Issues - topic identification (would be of interest to a reasonable investor AND - pose direct financial risk, are or may be regulated in near future, are becoming industry norms and drive competitive best practices, are raised by investors and other shareholders, represent opportunties for innovation and growth
2. Materiality Assessment - Does topic affect financial condition or operating performance
3. Characterizing Nature of Financial Impact - DCF modeling across 5-year horizon
4. Vetting - industry working groups generally 75% approval required
5. Verification - evaluates current state of disclosures
6. Validation - quant analysis to assess the effect on price values

Question 45

The SEC’s Climate Change Guidance

Answer 45

FOUR climate change issues that registrants should consider for disclosure:

1. The impact of legislation and regulation: Changes in federal and state legislation on climate change may trigger disclosure obligations in different Items of Regulation S-K, as discussed below . Examples of potential effects of pending legislation and regulation related to climate change include:

Costs to purchase and/or profits from sales of, allowances or credits under a “cap and trade” system;

Costs required to improve facilities and equipment to reduce emissions in order to comply with regulatory limits or to mitigate the financial consequences of a “cap and trade” regime; and

Changes to profit or loss arising from increased or decreased demand for goods and services produced by the registrant, which result directly from legislation or regulation, and/or indirectly from changes in costs of goods sold .

2. International accords: Issuers should disclose material impacts of international agreements and protocols regarding climate change mitigation .

3. Indirect consequences of regulation or business trends: Risks, as well
as opportunities, arising from developments in climate change law, politics, and technology should be considered for disclosure if they are determined to be material . Examples of such consequences include: increased or decreased demand for goods depending on the amount of greenhouse gas emissions they produce; greater competition to develop innovative, sustainable products; and greater demand for energy from alternative and renewable sources . Another indirect impact from climate change that should be considered for disclosure is a reputational impact’s effect on business operations and financial condition, depending on the registrant’s business, competitive conditions, and public opinion . Some companies may experience bigger reputational damage than others because of their inaction or nondisclosure of their climate change response .

4. Physical impacts of climate change: Severe weather events, changes in sea level, decreases in arable farmland, and changes in water quality and supply can affect a company’s operations and financial results . Examples of possible physical impacts of climate change and severe weather events include:

• Property damage and disruptions to operations, including manufacturing operations or the transport of manufactured products, for registrants with operations concentrated on coastlines;Indirect financial and operational impacts from disruptions to the operations of major customers or suppliers from severe weather, such as hurricanes or floods;

Increased insurance claims and liabilities for insurance and reinsurance companies;

Decreased agricultural production capacity in areas affected by drought or other weather-related changes; and

Increased insurance premiums and deductibles, or a decrease in the availability of coverage, for registrants with plants or operations in areas subject to severe weather .

All four climate change issues could potentially need to be disclosed in MD&A . A company should apply the same “reasonable likelihood” test to the four climate changes issues that it does to the rest of MD&A .

In the 2010 guidance, the Commission reiterated that “unless management determines that a material effect is not reasonably likely, MD&A disclosure is required .”88 When doubts about materiality arise, the company should lean toward disclosure: “In view of the prophylactic purpose of the securities laws and the fact that disclosure is within management’s control, ‘it is appropriate that these doubts be resolved in favor of those the statute is designed to protect .’”89

Question 46

Consequences of indadequate disclosure

Answer 46

Under the Exchange Act, the officers and directors who cause statements to be made in SEC filings may be liable for materially false or misleading statements contained in Commission filings .91 Shareholders can bring civil actions for
damages for violations of Exchange Act Section 10(b) and Rule 10b-5 against the company’s executives and board members for alleged material omissions and misrepresentations.9

What Is Rule 10b-5?

Rule 10b-5 is a regulation created under the Securities and Exchange Act of 1934. It was formally known as the Employment of Manipulative and Deceptive Practices. This rule makes it illegal for anybody to directly or indirectly use any measure to defraud, make false statements, omit relevant information, or otherwise conduct business operations that would deceive another person in the process of conducting transactions involving stock and other securities.

Question 47

Distinction between required disclosure and voluntary information in MD&A

Answer 47

The 1989 Interpretive Release explains the important distinction between required disclosure and voluntary forward-looking information to be included in MD&A .

Both required disclosure regarding the future impact of presently known trends, events or uncertainties and optional forward-looking information may involve some prediction or projection . The distinction between the two rests with the nature of the prediction required . Required disclosure is based on currently known trends, events, and uncertainties that are reasonably expected to have material effects, such as: a reduction in the registrant’s product prices; erosion in the registrant’s market share; changes in insurance coverage; or the likely non-renewal of a material contract . In contrast, optional forward- looking disclosure involves anticipating a future trend or event or anticipating a less predictable impact of a known event, trend or

uncertainty.78 (emphasis added)

Therefore, the issuer has a duty to disclose the known trends and uncertainties that are reasonably likely to have a material effect on results of operations and financial condition .

In determining whether a known trend or uncertainty is reasonably likely to have a material effect, the Commission advises management to ask two questions:

76

77 78

(1) Is the known trend, demand, commitment, event, or uncertainty likely to come to fruition? If management determines that it is not reasonably likely to occur, no disclosure is required.
(2) I_f management cannot make that determination,_ it must evaluate objectively the consequences of the known trend, demand, commitment, event, or uncertainty, on the assumption that it will come to fruition . Disclosure is then required unless management determines that a material effect on the registrant’s financial condition or results of operations is not reasonably likely to occur.79

Question 48

Describe the current state of disclosure of sustainability topics in the 10-K.

Answer 48

1. SASB’s research shows that, in their SEC filings, 69 percent of companies are already addressing at least three-quarters of the sustainability topics included in their industry’s SASB standard, and
2. 38 percent are already providing disclosure on every SASB topic .
3. However, this information is rarely disclosed in a decision-useful way. The actionable value of a statement tends to increase as it becomes more specific .
4. However, more than half of these disclosures contain boilerplate language: broad, nonspecific wording that does not describe the realities of the registrant’s particular operating context . Rather, it could apply to multiple companies and/or a variety of industries .
5. Meanwhile, less than 24 percent of these sustainability disclosures use metrics .

• SEC’s climate change guidance
  
  • The impact of legislation and regulation
  • International accords
  • Indirect consequences of regulation or business trends
  • Physical impacts of climate change
• MD&A, Legal, business description, risks

Question 49

Assurance vs Attestation

Answer 49

DEFINITION: ASSURANCE VS. ATTESTATION

“Attestations” are defined by the PCAOB (public company accounting oversight board) and can cover a range of non-financial subjects, including but not limited to sustainability . When sustainability assurance is conducted

in accordance with a PCAOB attestation standard, the assurance engagement is the same as an attest engagement . However, sustainability assurance is sometimes provided by professionals who are not certified

public accountants and/or by professionals who do not follow a PCAOB standard . In those instances, a sustainability assurance engagement is not an attest engagement .

“Assurance”
is defined as a review by external,
independent professional(s) to opine
on the credibility of the data . The
independent third-party assurance
provider applies established assurance
procedures in order to report an
opinion on its findings . The opinion
helps the user of the information

make a decision about its reliability .

Audits are likely the most well-known assurance services among public corporations and the investment community .

Attestations are another
type of assurance service . In
attestations, certified public
accountantsprovide an
examination or review over
the agreed-upon subject matter, which may include financial information or non- financial information .206 They then may issue an opinion on the conclusion of the assurance procedures .207

An attest engagement can be conducted at a comparable level of rigor as an audit or at a less rigorous level, with a less detailed review . These differences result in different assurance testing procedures and opinions . The most rigorous attestation services, on par with audits, review the reported information, the source data, and the organization’s internal controls for protecting the integrity of the source data . The internal controls are reviewed to gauge how effectively they mitigate the risk
of misstated data . This level of rigor is called reasonable assurance . A less rigorous attestation engagement—limited assurance, or a review—will be more limited in scope, which can be associated with a lower degree of confidence that the reported information is reliable .