Globally, investor demand for transparency regarding Environmental, Social and Governance (ESG) issues is driving a transformation in fiduciary responsibility and the wider landscape of corporate governance. There is a need for stronger and deeper communication between shareholders and the companies that they own. In the past decade, many initiatives (such as GRESB, GRI, UNPRI, MSCI, etc.) have contributed to developing standards to cater to this need of ESG assessment tools for companies and investors. SASB is one of the leading standards.
Here is a quick and easy overview of SASB and its relevancy to real estate sustainability.
About the Sustainability Accounting Standards Board
SASB stands for the Sustainability Accounting Standards Board. It is an independent 501(c)(3) non-profit organization that provides sustainability accounting standards for publicly listed corporations in the U.S. to disclose material sustainability information for the benefit of investors and the public. Since 2016, SASB has developed standards for 79 industries in 11 sectors.
Purpose for SASB
The purpose of sustainability accounting is to provide material information to institutional investors to enable them to evaluate the performance of companies through an ESG lens (non-financial capital associated with environmental, social, and governance issues), which they rely upon for sustained, long-term value creation. It provides a complete view of a corporation’s performance and value creation by integrating financial and sustainability information so that they can be evaluated side by side.
SASB Disclosure in Form 10-K
SASB standards are designed for compatibility with mandatory filings to the Securities and Exchange Commission (SEC), such as form 10-K (Form 20-F for foreign issuers).
For purposes of comparability and usability, SASB’s guidance suggests companies to consider making disclosures on sustainability topics in the MD&A (Management’s Discussion and Analysis), in a sub-section titled Sustainability Accounting Standards Disclosures.
Other relevant sections for disclosure in Form 10-K include Description of Business, Legal Proceedings, and Risk Factors.
SASB Material Map
SASB has attempted to identify the topics that are likely to have a material effect on a company’s financial condition or operating performance in the form of a materiality map (Image 1). It includes issues likely to be relevant for more than 50% of the industries in this sector. However, SASB recognizes that each company is ultimately responsible for determining what information should be disclosed. For Real Estate Owners, Developers and Investment Trusts, the identified material issues are the following -
Image 1: SASB's Materialy Map
Image 2: Environment - Sustainability Disclosure Topics and Accountability Metrics
Environment
Energy Management – Companies that effectively manage the energy performance of their assets may see reduced operating costs and regulatory risks, as well as increased tenant demand, rental rates, and occupancy rates, all of which drive revenue and asset value appreciation.
Water Management – Companies that effectively manage water efficiency of assets, even when they don’t face direct exposure to water costs, may reap similar benefits as above.
Image 3: Business Model and Innovation - Sustainability Disclosure Topics and Accountability Metrics
Business Model and Innovation
Management of Tenants’ Sustainability Impact - While companies own real estate assets, it is the tenant operations of such assets that are a dominant driver of the environmental impacts produced by the built environment.
Climate Change Adaptation - Ongoing assessment of climate change risks and adaptation of such risks are connected to company value over the long term.
SASB Adoption & Case Studies
According to SASB’s latest “State of Disclosure Report”, 73% (69% in the previous year) of the companies in the analysis reported on at least three-quarters of sustainability topics included in their industry standard, and 42% (39% in previous year) provided disclosure on every SASB topic. However, more than 50% of the time, sustainability disclosures consisted of generic boilerplate language – which is not useful for investors.
In the Real Estate sector reporting, 75% of the possible disclosures were either non-existent or boilerplate, with metrics representing just 12% of available disclosures. Some leading REIT case studies for SASB disclosures are Host Hotels & Resorts and Kilroy Realty Corporation. Both reported on SASB metrics for energy and water management in their 10-K filings. During the 2018 NAREIT ESG Forum, Kilroy’s VP of Sustainability described that their company directly benefited from making SASB disclosures, as one of their investors upgraded their stock to a “buy” due to the ESG information they had included in their 10-K filings. During the same event, the key takeaway from an investors panel was that they were eager to see more material ESG disclosures along with the financial metrics to help with their due diligence process. The Verdani Partners team is working with several clients to incorporate SASB recommended disclosures on their annual 10-K filings.
Conclusion
SASB serves as a natural complement to traditional financial reporting and offers a practical path forward for companies to provide the capital market with more effective disclosure on material environmental, social and governance matters. While the signs of market adoption are visible – a great deal remains to be done to make the communication to investors more meaningful and comparable.
References
SASB – Real Estate Owners, Developers & Investment Trusts – Sustainability Accounting Standards, March 2016, https://www.sasb.org/wp-content/uploads/2016/03/IF0402_REOD_IT_Standard.pdf
SASB’s Materiality Map - https://materiality.sasb.org/?hsCtaTracking=28ae6e2d-2004-4a52-887f-819b72e9f70a%7C160e7227-a2ed-4f28-af33-dff50a769cf4
Forbes, How to heed BlackRock’s call for Corporate Social Responsibility, Feb 2018 https://www.forbes.com/sites/hbsworkingknowledge/2018/02/03/how-to-heed-blackrocks-call-for-corporate-social-responsibility/#3ba21833290a
SASB State of Disclosure - https://library.sasb.org/state-disclosure-report-2017/
Host Hotel & Resorts Form 10-K filing: http://ir.hosthotels.com/phoenix.zhtml?c=60734&p=irol-reportsannual
Kilroy Realty Corporation Form 10-K filing: http://www.annualreports.com/HostedData/AnnualReports/PDF/NYSE_KRC_2016.pdf
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