The following is an April 8, 2021, telephone conversation with Daniel Goelzer, a standard-setting member of the Sustainability Accounting Standards Board (SASB) since 2017. He previously served as general counsel of the SEC and acting chairman of the PCAOB.
The SASB currently has 77 industry standards, and more companies are voluntarily choosing to use the board’s standards in their environmental, social, and governance (ESG) or sustainability reports. In the past year, there was a 363 percent increase in SASB disclosures.
The conversation was edited for length and clarity.
Q: Since you have experience both at the SEC and the PCAOB, how is it similar or different in terms of the standard-setting process at the SASB?
Goelzer: I would say there are similarities and differences.
The most important similarity is that SASB prides itself on applying the same kind of due process in standard-setting that the regulators do. We have open meetings and issue exposure drafts for comment. There is a process to understand what investor needs are and what’s practical for companies. If anything, SASB is more driven by investor and company preparer inputs than the PCAOB or the SEC in part because people only use our standards if they want to use them. If you are subject to the PCAOB’s jurisdictions, you have to follow its rules whether you like it or not.
The biggest difference is PCAOB members or SEC commissioners are full-time positions. It’s part-time for SASB members.
Q: In a move towards establishing consistent reporting of sustainability issues, the SASB and the International Integrated Reporting Council (IIRC) said in November last year that they plan to merge into a unified organization, the Value Reporting Foundation. How is the merger going?
Goelzer: The structure is kind of like the Financial Accounting Foundation (FAF), the oversight organization of the FASB, which sets accounting standards. The merger itself is more about the foundation. I am not really involved in the day-to-day developments of the merger. My understanding is that they hope to formally implement the merger late May or sometime in June this year.
Our standard-setting work will be pretty much the same. I don’t think that will be directly affected by the merger for both SASB and IIRC. The world of ESG disclosure has many different participants, perspectives, and frameworks. Some address things other than what’s important to investors and what affects the value of the enterprise, and they get into issues like how companies affect society. SASB and IIRC focus on enterprise value creation.
Q: The SEC under the leadership of Acting Chair Allison Herren Lee in the past couple of months has been issuing a dizzying number of statements and starting projects related to ESG matters, especially climate change. Incoming permanent Chairman Gary Gensler is likely to continue the work that has been started.
Goelzer: I can’t think of another example of this kind of sharp pivot to an issue when somebody else came in. The Biden administration generally prioritizes climate change. It also reflects the fact that the SEC may feel they have some catching up to do with a lot of the rest of the world, particularly Europe already has more developed disclosure in these areas.
Q. What do you think of the SEC’s consideration of ESG reporting requirements?
Goelzer: Most companies make some sort of ESG disclosure, but they may follow different frameworks or may not follow any frameworks. The problem is comparability and consistency of the disclosures, which makes it hard for investors to use at a time when investors—particularly large institutional investors—are demanding more and more decision-useful ESG information. Some order has to be brought out of this chaos.
But at the same time, companies should be given discretion and allowed to use judgment about what is material in their situation. I don’t think this is an area that really lends itself well across the board with prescriptive disclosure requirements.
Because ESG issues vary widely, SASB writes industry ESG standards. But there has got be some level of standardization, and we currently don’t have it.
Q: Then the SEC itself should not set standards or set up a separate board that writes ESG standards?
Goelzer: The commission shouldn’t try to recreate, reinvent the work that SASB and certainly others have done over the last four or five years. It’s very hard for the commission to adopt prescriptive rules in this area. What I would envision is that the commission will have some sort of requirement that companies make disclosures about certain types of ESG issues, sort of broad principles-based requirement. But then, at least encourage, if not require, that those disclosures be made pursuant to a recognized disclosure framework like SASB’s. There are others as well.
For example, when you assess the effectiveness of your internal controls, you have to follow a third-party framework. So, everybody uses COSO even though the SEC doesn’t order you to use COSO as your framework.
Another example is the SEC’s conflict mineral disclosure rule. It says the company’s due diligence must follow a recognized framework. The SEC doesn’t specify what it has to be, but it has to meet certain criteria. I think there is only one out there that meets the criteria.
Editor’s Note: Section 404 of the Sarbanes-Oxley Act of 2002 requires a public company’s management to set up and evaluate its internal control over financial reporting (ICFR). The company’s external auditor then must attest to the management’s assessment of financial controls. COSO is Committee of Sponsoring Organizations of the Treadway Commission, a joint initiative of five private sector organizations that develop frameworks and guidance on enterprise risk management, internal control, and fraud deterrence. COSO’s Internal Control—Integrated Framework is widely used, and market regulators have said that companies that have adopted the framework are more likely to simplify their financial reporting and their efforts to comply with the SEC and PCAOB control requirements.
Goelzer: It seems to me they could do something similar in the ESG area: Set out criteria for sustainability disclosure framework and then require or encourage companies to follow such a framework.
If the IFRS Foundation establishes a global Sustainability Standards Board (SSB), one possibility is for the SEC to recognize the framework set by the SSB.
As John Coates, acting director of the SEC’s Division of Corporation Finance, has hinted at in his speech, there may have to be a “comply or explain” element so that if a company felt that a particular aspect of framework or type of disclosure didn’t fit for its situation, it would have latitude and disclose why that was the case.
This approach is much more workable than the SEC trying to start all over on these issues and come up with a set of its own requirements.
Q: Acting Chair Lee in a speech said whether the SEC should consider doing something similar to the IFRS Foundation’s SSB for domestic companies.
Goelzer: I hope that doesn’t happen. I think the IFRS Foundation’s initiative is a good one. I hope that will produce some globally recognized set of standards at least as a starting place for most countries around the world. And maybe the FAF ought to participate in that initiative. It’s hard for me to see how it would help things for them to establish their own sustainability standards board particularly if the IFRS does the same thing, then you are going to end up with a situation with accounting: Two competing sets.
Most of the ESG issues are global issues. Most companies that have a significant impact have global operations. I would hope we move more towards to a single global set of standards rather than competing systems.
But at the end of the day, it’s going to be the SEC’s decision. If the SEC decides they want to have the kind of control over U.S. ESG standards that they have over U.S. accounting standards, will they want to do all the work themselves, have the FAF set up a sustainability standards board? There is no reason that couldn’t happen. I just don’t think that’s the best approach.
Q: The SEC is already deeply involved through IOSCO in helping the IFRS Foundation with the SSB. So, it looks like the commission is far ahead on that front anyway.
Goelzer: Almost everybody who is interested in this area has coalesced behind IFRS. SASB supports, and we are part of a working group to advise on the next steps. It would make a lot of sense to have a global foundation for ESG disclosure standards and then perhaps there would be regional variations.
Q: In the meantime, the SEC last year adopted a human capital management disclosure rule that is principles-based. There are some questions about whether the commission should write a more prescriptive rule or at least provide interpretive guidance. So, what could be the SASB’s role in this context? Human capital management is sort of embedded in the 77 industry standards.
Goelzer: Because the SEC’s rule is principles-based, the disclosures have been all over the place. Last year, SASB issued a bulletin describing how SASB standards could be used in complying with the SEC human capital management disclosure rule.
The SASB also has a separate research project on human capital management. Because it has become such an important issue as the SEC’s new rule illustrates, we thought it would be a good idea just to step back generally and ask how human capital issues should be reflected in our standards that might produce an overall framework that we could then test whether the industries where we don’t currently have human capital measures ought to have them added, or there ought to be an expansion or additional metrics, standards in the industries where there already are human capital measures.
Q: What is the timeline of the project?
Goelzer: We would like to finish up the framework reasonably soon. Then the job of applying the framework to each of the 77 industries, that could be a series of standard-setting projects that would take more time.
Q: Assurance of ESG information is another topic that comes up. Should auditors check the information for accuracy? Or is this far down the road?
Goelzer: I would break it into two parts.
The first step on the road: I think one of the issues in this area traditionally has been companies haven’t had the same kind of controls and procedures around their ESG disclosures as they have around their financial disclosures. So, the first step is to create that kind of control structure to give some assurance that the information being put out is accurate and consistent from year to year. And if accuracy were to be challenged, companies would be able to point to a process that produces reliable information. And you have to have those controls in place in order to have the information be auditable.
Before jumping to assurance, I think there is a lot of work done to be done, probably a lot of work to be done by accounting firms as advisers to companies to putting in these controls in place over the information. But down the road, some companies are getting third-party assurance already on aspects of their ESG reporting. I think that demand from investors is likely to increase as companies increasingly connect ESG issues to their cost of capital. They may feel that it may be worth their while to get third-party assurance so investors will have confidence in their data.
Ultimately, it wouldn’t surprise me if there were formal requirements for third-party assurance. You might have to distinguish between quantifiable metrics and things that are more statements of what the company intends or claims. That’s much harder to audit.
Q: Last question. Do you like your SASB member job?
Goelzer: I like it a lot. My background is really in more traditional SEC disclosure and financial statement reporting. I have learned a tremendous amount since I have been involved. It’s a fascinating area. It’s kind of being involved in what I really think is the cutting issues on disclosure. It’s fun, it’s a pleasure, and it’s rewarding to be involved in this.
This article originally appeared in the April 16, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.
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