Accountants depend on standards to measure the financial health of companies, markets and industries. Ever since the Great Depression, the federal government implemented accounting standards to ensure investors understand the risks involved in spending money on a particular company. Because of risks associated with unforeseeable circumstances, sustainability accounting standards have become an issue, as the global economy presents different dangers to various sectors and industries.
Dr. Bob Eccles, chairman of ESG Quant and fund manager at Arabesque Partners, believes companies should start measuring nonfinancial performance standards, or how a firm measures its environmental, social and governance (ESG) metrics. Firms cannot do anything to immediately lessen the impact of unforeseen circumstances on markets, but they can show how they intend to create sustainability by preparing for outcomes that create risk. That's where new sustainability accounting standards come into play.
Why New Standards?
Sustainability accounting standards attempt to quantify ESG data that, until now, has been more qualitative in nature. Investors want to know as much information as possible before deciding on a stock purchase or another round of funding. These relatively new standards try to gauge the physical effects of material sustainability of companies.
Does the board have a plan to find new resources if one supply line runs dry? Should this company have a policy on social responsibility to ensure products or services come from safe sources? Do foreign labor markets prevent disruptions of the company's mission? What happens during a supply line issue?
All of these questions could be answered by sustainability accounting standards. These nonfinancial performance issues affect a company's bottom line, yet these statistics may not show up in an annual report or a quarterly earnings call. That's where there Sustainability Accounting Standards Board (SASB) provides guidance.
Introducing the SASB
The nonprofit group known as SASB was started by CEO Jean Rogers in 2011. ESG metrics try to show investors how managers and executives handle risk management. The group divided 10 sectors into 79 different industries. Each industry has likely material issues that may affect a company's financial performance. With respect to environmental policy, a chemical company's carbon emissions may incur extra expenses in future years. However, this type of issue may not weigh as heavily on a bank unless the financial company invests in high-carbon emitters.
Sustainability of future profits drives value, and companies that disclose this data on financial statements help investors make better decisions. If oil prices fluctuate for a month, how does that affect a firm in six months? Does an investment have a lot of diversification to reduce risk? Can a firm's hiring practices increase or decrease expenses? These aspects affect a company's profitability, but they rarely show up on financial reports.
When these new accounting standards quantify the nonfinancial issues, it allows investors to compare businesses based on this data. SASB's mission has yet to be established across all industries, but the nonprofit's tools are gaining steam. As global standards start in 2017, accounting regulatory boards may start adding sustainability standards in future action.
Accountants should keep an eye on sustainability accounting standards for possible implementation. However, this may take several years because the SASB is still testing the effectiveness, precision and accuracy of its numbers.
Photo courtesy of Stuart Miles at FreeDigitalPhotos.net
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