The Investor Environmental Health Network sent a letter to the Sustainability Accounting Standards Board on Wednesday to provide feedback on the SASB Conceptual Framework as well as comments submitted by SASB to the Securities and Exchange Commission earlier in the week.
The IEHN letter notes that while SASB has undertaken a worthwhile effort to identify sustainability metrics that correlate directly to potential value impacts for reporting registrants, the Conceptual Framework and correspondence with the SECs or blurs the definition of materiality.
Under Supreme Court decisions,materiality refers to information which a reasonable investor would seek in the total mix of information, which may affect decisions to buy or sell stock, or to affect voting decisions. Contrary to the SASB approach, material information is not limited to information with a direct correlation to financial value– for instance, disclosures on political spending or climate change impacts are relevant to investor interest and concerns regardless of whether they represent a significant financial impact on the registrant company. Similarly, disclosures regarding significant externalities or systemic risks imposed on society by a firm are of interest to the reasonable investor, regardless of the likely prospect for costly internalization to the firm.
The letter notes that as a result of this distorted interpretation of materiality, the SASB took some positions in its comments to the SEC that were surprisingly off the mark. For instance, they took the position that line item disclosures of sustainability issues would not be appropriate to be required by the SEC, because they would require disclosure of immaterial information by some companies. This mistaken assumption seems to flow directly from the SASB’s erroneous interpretation of materiality.
As as an attorney who has long focused on issues of disclosure and sustainability, I believe there would be significant long-term implications to the distortion of the materiality standard by the SASB, especially given the intention of SASB to become a third-party rule maker equivalent to the FASB. I am hopeful that by calling this issue to their attention at this point in the process, they will develop a more accurately articulated description of their own process as well as the definition of materiality.
- Sanford Lewis
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