Simone Grimes Digs Into the Pros and Cons of SASB Standards for ESG
Simone Grimes, the Chief Financial Officer at Acadia Insurance, says there is quite a bit to love about the SASB Standards on ESG (Environmental, Social, and Governance), which are now part of the International Sustainability Standards Board’s purview. The potential effects of SASB will vary depending on their implementation across 77 industries, but the end result is largely the same: more financial transparency about a company so that investors can make informed decisions.
“That said, SASB isn’t perfect,” says Simone Grimes. “There are some significant holes in how its standards have been put together. It’s a matter of weighing those potential drawbacks against the undeniable benefits to see their impact on investors and industries.”
Simone Grimes on the Benefits of SASB Standards
Broad Evidence-Based Research
Simone Grimes states that the foundation of SASB is qualitative research that draws upon broad and balanced input from companies, investors, and subject matter experts. “It is incredibly helpful that in putting together the standards, they went right to the source of information by conducting interviews, making first-hand observations, etc.” she says. “This gave them a solid starting point when creating the standards. They also operate under the oversight of an independent standards board, which builds credibility.”
Emphasis on Materiality
Relevance, Simone Grimes continues, is part of the guidelines created by SASB. After years spent examining the sector and subsector levels, SASB determined what should be disclosed to assist investors and regulators in making a determination about a company. It also factored in what would, and would not, affect the company’s bottom line.
Simone Grimes believes that the depth of detail in SASB is impressive. “Very few can compare to its guidance on ESG issues vs. financial performance for 77 different subsectors,” she explains. “This thoroughness means that companies are better able to supply investors with financially-material sustainability information. Investors, in turn, are better equipped to understand the ESG issues that are relevant to the bottom line of companies.”
Valuing Intangible Assets
With the SASB’s focus on qualitative data, investors are better able to determine the non-financial aspects of a business’ ESG value proposition. “A company is more than just its building or inventory,” says Simone Grimes. “Its brand, human capital, and the social value it creates for communities and economies are all important. SASB helps investors to analyze these intangibles when making a determination.”
Completeness, Reliability, and Objectivity
The SASB is generally highly regarded for its verifiable, objective, and reliable standards. It is true, Simone Grimes believes, that because of its standards, investors are empowered to make better decisions about investing and voting.
“SASB also allows for the reality that no two industries are the same,” Simone Grimes states. “For the sake of example, let’s say that an investor or regulator is looking at mortgage finance and beverages, two very different subsectors.”
SASB bases its standards on the material risks for each one. The risks for a mortgage company will include its lending practices, the historic discrimination in lending, and any environmental risks associated with mortgaged properties.
“Compare this to a beverage company, whose greatest risks are likely to be its energy management, water management, packaging and lifecycle management, ingredient disclosures, the environmental and social impacts of the ingredients’ supply chains, and the sourcing of ingredients,” says Simone Grimes. “Taking all of this into account is crucial and is one of SASB’s biggest advantages.”
SASB also offers companies guidelines for assessing and mitigating these risks through sector-appropriate governance actions. The mortgage company, for example, might provide transparency into its lending practices through its FICO score or metrics on foreclosure rates by mortgage type.
“The beverage company, on the other hand, would provide investors with information on how many of their ingredients are sourced from water-distressed areas,” says Simone Grimes. “Investors would also learn about any risks associated with main ingredients and their suppliers. SASB, therefore, helps investors understand what they can expect to receive from a company.”
Simone Grimes on the Shortcomings of SASB Standards
Simone Grimes says that as useful as SASB Standards have been, their inherent weakness is that they do not take into account a business world that is constantly evolving. “It is excellent that they draw upon decades of experience, of course. However, as leaders, we all know that what was true or worked yesterday is not necessarily applicable today,” she says. “ESG issues are always emerging and can impact a company’s future earnings. Yet, SASB does not account for this.”
Simone Grimes concedes that one of SASB’s biggest advantages is its ability to identify relevant issues across 77 sub-sectors. The problem, however, is that it does not factor in geography, which can have a significant impact on a company’s performance.
“Consider a utility company that is in the United States vs. one that is in China,” she says. “Because of political and regulatory differences, the two markets could not be more different and have their own risks, which is crucial for investors to be aware of. SASB does not consider this in its standards.”
Cross Industry Comparability
SASB has established itself as the go-to toolbox for comparing companies within an industry. That said, when an investor wants to compare companies in different industries, it falls short.
This is due primarily to its emphasis on ESG risks by sub-sectors, Simone Grimes explains. For that reason, she thinks the Global Reporting Initiative (GRI) and Integrated Reporting Framework (IR) frameworks are more useful.
Lack of Data for Forward-Looking Models
Another weakness of SASB is its assumption that an economy is healthy and that any known material risks are reflected by a company’s stock price. “It does not account for factors ‘not yet priced’ in valuation,” Simone Grimes states. “Hypothetically, if a sector is expected to see higher risks of emissions within the next 2-3 years, what is a reasonable GHG discount to use in a forward-looking scenario analysis? While this is a crucial data element for anyone making ESG-related investment decisions, SASB does not offer relevant data for this scenario.”
Lack of Guidance on Regulation of ESG Issues
Simone Grimes adds that while the Securities and Exchange Commission mandates that all public companies reveal material information to investors, including any possible ESG-related risks, SASB offers no opinion on how to regulate ESG issues.
Overall, Simone Grimes recognizes the usefulness of SASB and its ESG standards but believes they have a long way to go. There are still too many holes, and the burden is on investors and analysts to do the research and analysis to account for them. As ESG evolves, Simone Grimes expects more robust and reliable data to become more widely available from rating agencies and standard setters, which will ultimately help regulators, investors, and companies across all 77 sub-sectors.
Simone Grimes is an independent board member, audit committee financial expert, Chief Financial officer (CFO), and entrepreneur who has a BSC in Accounting, MS in Finance, and MBA from Cornell University. She has held financial leadership roles across various industries, including financial services, big-four (PwC) public accounting, tech, and consumer products. Simone Grimes serves on the audit committee of for-profit and nonprofit boards.
The views represented are those of Simone Grimes and do not represent the position of Acadia Insurance or W.R. Berkley.