Sustainability Accounting Standards Board (SASB)

The Sustainability Accounting Standards Board (SASB) was a non-profit organization founded in 2011 with a laser-focused mission: to develop and maintain sustainability accounting standards for publicly listed companies. Think of it as creating a common language for companies to talk about their performance on key environmental, social, and governance issues. Its goal wasn't just to encourage companies to “be good,” but to help them report on the sustainability factors that have a financially material impact—that is, issues that could actually affect a company’s financial performance and long-term value. Instead of a one-size-fits-all approach, SASB cleverly developed a unique set of standards for 77 different industries, recognizing that the sustainability challenges facing a mining company are vastly different from those of a software developer. In 2022, SASB's journey took a major leap forward when it consolidated into the IFRS Foundation to help form the new International Sustainability Standards Board (ISSB), embedding its industry-specific approach into the foundation of new global disclosure rules.

Before SASB, corporate sustainability reports were often a chaotic mix of glossy photos, vague promises, and vanity metrics. It was nearly impossible for investors to compare one company's performance to another's or to figure out which ESG (Environmental, Social, and Governance) issues actually mattered to the bottom line. SASB brought order to this chaos. Its key innovation was its focus on industry specificity and financial materiality. The organization's researchers delved into each industry to identify a small number of topics most likely to impact a company's financial condition or operating performance.

“Materiality” is a concept borrowed from traditional accounting. It means information that is significant enough to influence an investor's decision. SASB applied this to sustainability. Consider two companies:

• A Beverage Company: For this company, water management is highly material. Water scarcity could disrupt its entire supply chain, increase costs, and lead to regulatory fines. Access to clean water is a direct input to its product.
• A Software Company: While this company should be mindful of its water usage, it's far less material to its core business. For them, data security, customer privacy, and the ability to attract and retain top tech talent are the far more critical, financially material sustainability topics.

By zeroing in on what's material, the SASB Standards helped investors focus their attention on the risks and opportunities that truly count, rather than getting lost in a sea of irrelevant data.

In a landmark move for corporate reporting, the IFRS Foundation (the folks behind the global IFRS Accounting Standards used in over 140 countries) announced in 2022 the formation of the International Sustainability Standards Board (ISSB). To create this new global standard-setter, two key organizations were consolidated into the IFRS Foundation:

• The Sustainability Accounting Standards Board (SASB), contributing its industry-specific standards and materiality-focused approach.
• The Climate Disclosure Standards Board (CDSB), contributing its expertise in climate-related financial disclosures.

This means the SASB Standards haven't disappeared. On the contrary, they have been “powered up.” They now serve as the foundational bedrock for the ISSB's new, globally recognized IFRS Sustainability Disclosure Standards. Companies applying the new ISSB Standards will be required to consider the SASB Standards to ensure they are reporting on all relevant industry-specific risks and opportunities.

For a value investing practitioner, the work pioneered by SASB and now carried on by the ISSB is a goldmine. A true value investor seeks to understand a business deeply to calculate its long-term intrinsic value. Traditional financial reports, like the balance sheet or income statement, only tell part of the story. The SASB framework helps you see the rest of the picture:

• Uncovering Hidden Risks: A company might look cheap based on its price-to-earnings ratio, but if it faces massive, undisclosed risks from future carbon taxes or poor labor practices that could lead to strikes, its true value is much lower. SASB's standards force these risks into the open.
• Identifying Durable Competitive Advantages: Companies that excel at managing their material sustainability issues are often more efficient, innovative, and resilient. A well-managed supply chain or a strong brand reputation built on trust are powerful components of a competitive advantage, or “moat.”
• Making a Better Valuation: By providing standardized, comparable, and reliable data on material ESG factors, these standards allow you to make a more informed and conservative estimate of a company's future cash flows. This leads to a more robust valuation and, ultimately, a greater margin of safety.