SASB is establishing sustainability accounting standards for use by publicly-listed corporations in the U.S. in disclosing material sustainability issues for the benefit of investors and the public. SASB standards are designed for disclosure in standards filings to the SEC, such as the Form 10-K and 20-F.
The Definition of Materiality
Materiality is a fundamental principle of financial reporting in the United States. The concept of materiality recognizes that some information is important to the fair presentation of an entity’s financial condition and operational performance.
Federal securities law seeks to protect individual investors by requiring publicly listed companies to disclose annual and other periodic performance information that would be necessary for a reasonable investor to make informed investment decisions. U.S. Federal law requires publicly listed companies to disclose material information, 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.” (TSC Indus. V. Northway, Inc., 426 U.S. 438 (1976)). Both U.S. and global companies that trade on U.S. exchanges are subject to Federal disclosure requirements.
Regulation S-K, which sets the specific disclosure requirements associated with Form 10-K and other SEC filings, requires that companies describe known trends, demands and uncertainties that have a material impact on financial results in the Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) section of Form 10-K.
Why is Disclosure of Material Sustainability Issues Important?
Disclosure of material sustainability issues is important to investors, companies, regulators and the public for the following reasons:
- The SEC already requires disclosure of material issues in the Form 10-K, 20-F and other filings in use by investors.
- Institutional investors have a fiduciary duty that requires them to consider material issues.
- Companies have limited resources, and must therefore focus on disclosing and managing the performance of material issues.
- The potential for negative social and environmental impacts of operations can present high costs to investors, companies and society.
SASB and Materiality
SASB uses the U.S. Supreme Court definition of materiality in its development of sustainability accounting standards. SASB believes that every investor has the right to material information in an accessible and cost-free format. Accordingly, SASB focuses on making material sustainability information available in the Form 10-K.
SASB is determining material sustainability issues at the industry level. SASB’s materiality assessment is similar in nature to that applied by companies in the preparation of their Form 10-K. (For more information on how SASB determines material sustainability issues for 80+ industries, please see the Determining Materiality page.) By developing industry-specific metrics suitable for companies to disclose in the Form 10-K, SASB facilitates comparable corporate reporting.
It is important to note that SASB standards do not relieve the CFO and CEO from their accountability for disclosure of material information in the Form 10-K, as per Sarbanes-Oxley (Section 302, “Corporate Responsibility for Financial Reports,” requires the CEO and CFO of publicly traded companies to certify the appropriateness of their financial statements and disclosures and to certify that they fairly present, in all material respects, the operations and financial condition of the company.) Companies are ultimately responsible for determining which information is material to their operations and are required to include such information in their Form 10-K or 20-F and other periodic SEC filings.