Sustainability Accounting Standards Board Moving toward a market standard for the disclosure of material sustainability information Eric Kane, Health Care Analyst September 20, 2017 2017 SASB
Agenda Introduction to SASB SASB s standards development process Current state of disclosure Examples from Health Care Discussion 2
Investors Care about Sustainability A rapidly increasing share of global assets are managed with ESG issues in mind Trends in U.S. Sustainable, Responsible, & Impact Investing 2005-2016 Today, 1 out of every 5 dollars under professional management in U.S. managed under sustainable and responsible investment strategies. Key sustainability-related investor initiatives and Assets Under Management Initiative AUM (US $) PRI CDP International Corporate Governance Network Investor Network on Climate Risk $59 trillion $95 trillion $26 trillion $15 trillion Adapted from US SIF Foundation 3
The Pain Point for Investors Investors lack the tools needed to integrate sustainability into investment decisions 100 Focusing specifically on US-listed companies, how satisfied are you with the information currently being provided by these companies on the following topics? 80 60 40 20 0 How risks and opportunities are identified and quantified in financial terms Comparability of sustainability reporting between companies in the same industry Relevance and implications of sustainability risks/issues Key performance indicators related to each identified material issue Process used to identify material sustainability issues Source: PwC Sustainability Goes Mainstream, May 2014 Satisfied Dissatisfied 4
Lack of Common Language = Communication Breakdown Current communication on sustainability metrics is inadequate Why report? What s material to measure? Companies How to report? Where to report? Investors 5
SASB Helps You Cut Through the Noise Provides companies and investors with a common language Material Decision-Useful Cost Effective Companies Investors Transparency Benchmarking Accountability 6
The SASB Mission Improved sustainability disclosure enhances market efficiency The mission of SASB is to develop and disseminate sustainability accounting standards that help companies disclose material, decision-useful information to investors in a cost-effective way. That mission is accomplished through a rigorous, transparent process that includes evidence-based research and broad, balanced stakeholder participation. Facts about SASB Independent 501(c)(3) non-profit Develops & maintains industry-specific standards for 79 industries in 10 sectors Intended for use in mandatory SEC filings such as the Form 10-K and 20-F 7
The SASB Difference SASB standards are created for the market, by the market 8
Designed for Integration into Mandatory Public Filings SASB standards enable effective disclosure without additional regulation or reporting mechanisms SEC Form 10-K Material information is defined by the U.S. Supreme Court as 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 Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976) 9
Complementary Efforts Mandatory and voluntary reporting serve different purposes for different audiences Relevant Information All environmental, social, and governance topics of interest Stakeholders Alignment is key (e.g., consistent use of the description material ) Material Information Sustainability factors likely to effect the financial condition or operating performance of a company Investors 10
SASB s Investor Advisory Group Leading asset owners and asset managers dedicated to advancing uptake of SASB standards 11
Ongoing Standards Development Process SASB standards will be maintained to evolve along with the markets they serve Stakeholder consultation Technical agenda, proposed changes Provisional Standards Codified Standards Standards maintenance Updates to Standards Public Comment 2017: Proposed changes, public comment, and finalize standards Ongoing: Track emerging issues and revise standards periodically 12
Sustainable Industry Classification System SICS industries are grouped by resource intensity and sustainability impacts Health Care Biotechnology & Pharmaceuticals Medical Equipment & Supplies Health Care Delivery Health Care Distributors Managed Care Drug Retailers Financials Commercial Banks Investment Banking & Brokerage Asset Management & Custody Activities Consumer Finance Mortgage Finance Security & Commodity Exchanges Insurance Technology & Communications Electronic Manufacturing Services & Original Design Manufacturing Software & IT Services Hardware Semiconductors Telecommunication Services Internet Media & Services Extractives & Minerals Processing Oil & Gas Exploration & Production Oil & Gas Midstream Oil & Gas Refining & Marketing Oil & Gas Services Coal Operations Iron & Steel Producers Metals & Mining Construction Materials Transportation Automobiles Auto Parts Car Rental & Leasing Airlines Air Freight & Logistics Marine Transportation Cruise Lines Rail Transportation Road Transportation Services Education Hotels & Lodging Casinos & Gaming Leisure Facilities Advertising & Marketing Media & Entertainment Professional & Commercial Services Resource Transformation Chemicals Aerospace & Defense Electrical & Electronic Equipment Industrial Machinery & Goods Containers & Packaging Renewable Resources & Alternative Energy Biofuels Solar Technology & Project Developers Wind Technology & Project Developers Fuel Cells & Industrial Batteries Forestry & Paper Pulp & Paper Products Food & Beverage Agricultural Products Meat, Poultry & Dairy Processed Foods Non-Alcoholic Beverages Alcoholic Beverages Tobacco Food Retailers & Distributors Restaurants Consumer Goods Household & Personal Products Multiline and Specialty Retailers & Distributors Drug Retailers & Convenience Stores E-Commerce Apparel, Accessories & Footwear Building Products & Furnishings Appliance Manufacturing Toys & Sporting Goods Infrastructure Electric Utilities & Power Generators Gas Utilities & Distributors Water Utilities & Services Waste Management Engineering & Construction Services Home Builders Real Estate Real Estate Services 13
Rigorous Process Drives SASB Standards Standards for each industry are rooted in evidence and shaped by market input Industry Research Evidence of Financial Impacts SUSTAINABILITY UNIVERSE OF ESG ISSUES Industry Working Groups 2800 Market Participants Evidence Vetting Standards Council Sub-Committee on Metrics Quality Public Comment 90 days Final Revisions Provisional Standard Average of 5 topics and 13 metrics Standards maintenance Ongoing 14
Corporate Consultations Incorporating industry perspectives and driving cost-effectiveness 224 corporate briefings $11.8 trillion in market cap 159 industry-level consultations conducted with 141 companies $7.5 trillion in market cap 41 briefings with industry associations led to 19 consultations (representing hundreds of additional companies) SASB reached out to engage 655 companies and 61 industry associations in all 15
Investor Consultations Incorporating investor perspectives and driving decision-usefulness SASB engaged 38 institutional investors to conduct 271 industry-level consultations SASB s Investor Advisory Group Engagement 85% of IAG members participated in standards consultation process to date About 2/3 of the 271 investor consultations were with IAG member firms 16
Robust Standards Designed to Provide Decision-Useful Information SASB standards contain industry-specific disclosure topics, metrics, and guidance Accounting metrics for each disclosure topic Industryspecific disclosure topics Technical protocol for compiling data; activity metrics for normalization 17
Cost-Effective Disclosures SASB provides a cost-effective way to report on material sustainability factors SASB standards average 5 topics and 13 metrics (78 percent quantitative) per industry. SASB metrics are aligned with over 200 existing frameworks, regulations, and certifications. 18
Materiality of SASB Disclosure Topics is Well-Established Current state of disclosure shows improvement needed on detail 69% of companies are already addressing at least three-quarters of SASB disclosure topics for their industry 38% are already providing disclosure on all SASB disclosure topics However, more than 50% of sustainabilityrelated disclosure in SEC filings uses boilerplate language State of Disclosure in Annual SEC Filings Health Care Financials Technology & Communications Non-Renewable Resources Transportation Services Resource Transformation Consumption I Consumption II Renewable Resources & Alternative Energy Infrastructure 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% No Disclosure Boilerplate Company-Tailored Narrative Metrics Source: SASB analysis performed between May and August 2016 using the latest annual SEC Filings (i.e. Form 10-Ks and 20-Fs) for the top companies, by revenue, per SICS industry (maximum of 10 companies). 19
A Standard Will Improve Disclosure From Boilerplate to Metrics Analysts need comparable data in order to compare performance and price risk Sector: Consumption: Food & Beverage Industry: Alcoholic Beverages Disclosure Topic: Water Management SASB Metric: (1) Total water withdrawn and (2) total water consumed, percentage of each in regions with High or Extremely High Baseline Water Stress Boilerplate disclosure: Climate change and water availability may negatively affect our business and financial results Clean water is a limited resource in many parts of the world and climate change may increase water scarcity and cause a deterioration of water quality in areas where we maintain brewing operations. The competition for water among domestic, agricultural and manufacturing users is increasing in some of our brewing communities. The above risk, if realized, could result in a material adverse effect on our business and financial results. [Form 10-K filed 12-Feb-15] Quantitative disclosure: Overall this year, Diageo has delivered improved performance across all water and other environmental target areas versus the prior year, and progressed towards meeting 2015 goals. We reduced absolute water use by 9% or 2,268,000 cubic metres while water efficiency improved by 2.4% compared to the prior year. In water-stressed locations, we have reduced water wasted by 12%, an important contribution towards our target of a 50% reduction versus the company s 2007 baseline. [Form 20-F filed 12-Aug-14] 20
Current State of Disclosure Health Care Sector Annual SEC filing disclosures on SASB topics State of Disclosure in Annual SEC Filings Health Care Sector Biotechnology Pharmaceuticals Medical Equipment & Supplies Health Care Delivery Health Care Distributors Managed Care 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% No Disclosure Boilerplate Company-Tailored Narrative Metrics Source: SASB analysis performed between May and August 2016 using the latest annual SEC Filings (i.e. Form 10-Ks and 20-Fs) for the top companies, by revenue, per SICS industry (maximum of 10 companies). 21
Pharmaceuticals State of Disclosure in Annual SEC Filings Pharmaceuticals Industry State of Disclosure in Annual SEC Filings Energy, Water, and Waste Efficiency Access to Medicines Drug Safety & Side Effects Safety of Clinical Trial Participants Affordability & Fair Pricing Ethical Marketing Counterfeit Drugs Employee Recruitment, Development, and Retention Employee Health & Safety Corruption & Bribery Manufacturing & Supply Chain Quality Management 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% No Disclosure Boilerplate Company-Tailored Narrative Metrics Source: SASB analysis performed between May and August 2016 using the latest annual SEC Filings (i.e. Form 10-Ks and 20-Fs) for the top companies, by revenue, per SICS industry (maximum of 10 companies). 22
Evolving World, Evolving Standards Counterfeit Drugs in Pharmaceuticals and Biotechnology PhRMA Importation & Counterfeits 10 percent of medicines worldwide and up to 50 percent of drugs in developing nations are counterfeit Sector: Health Care Industry: Pharmaceuticals Disclosure Topic: Counterfeit Drugs SASB Metric: HC0102-20: Description of methods and technologies used to maintain traceability of products throughout the supply chain and prevent counterfeiting. HC0102-21: Description of process for alerting end customers and business partners of potential or known risks associated with counterfeit products. HC0102-22: Number (and description) of actions that led to raids, seizure, arrests, and/or filing of criminal charges related to counterfeit products. 23
Improving Disclosure Effectiveness Moving from boilerplate to decision-useful disclosure BOILERPLATE COMPANY SPECIFIC METRICS Pharmaceuticals Counterfeit Drugs The illegal distribution and sale by third parties of counterfeit versions of our products or stolen products could have a negative impact on our reputation and business. Third parties may illegally distribute and sell counterfeit versions of our products, which do not meet our rigorous manufacturing and testing standards. A patient who receives a counterfeit drug may be at risk for a number of dangerous health consequences. Our reputation and business could suffer harm as a result of counterfeit drugs sold under our brand name. We undertake significant efforts to counteract the threats associated with counterfeit medicines, including, among other things, working with the FDA and other regulatory authorities and multinational coalitions to combat the counterfeiting of medicines and supporting efforts by law enforcement authorities to prosecute counterfeiters; assessing new and existing technologies to seek to make it more difficult for counterfeiters to copy our products and easier for patients and healthcare providers to distinguish authentic from counterfeit medicines We strive to minimise the risk of counterfeit medicines. In 2015, we extended our end-to-end supply chain serialisation programme, Fingerprint, across 86 packaging lines in more than 18 manufacturing sites. The programme applies unique serial fingerprints on products and logs them into a government-managed database, which they can be verified against at any point in the supply chain Disclosure examples from FY 2015 annual SEC filings 24
Toward a Market Standard Cost-effective for companies and decision-useful for investors SASB provides a market standard for the public disclosure of material sustainability information SASB standards provide investors with material, decision-useful, and cost-effective information SASB standards are developed through a rigorous process that is evidence-based, transparent, and stakeholder-informed 25