For the Investor
By Marc Siegel, FASB Member

Should the FASB Have a Role in Sustainability Disclosures?


At more than one conference in recent months, the question has been raised as to whether FASB should promulgate standards requiring corporate disclosures about sustainability or environmental, social, and governance (ESG) issues.

It is important to quickly note that even though “sustainability” and “ESG” and even “integrated reporting” are sometimes used interchangeably, they are quite different. While the nuanced differences could fill another column, the question of whether FASB should engage in any of these areas is a good one.

My personal opinion (in other words, not an official position of the FASB) is that the answer is not an adamant yes or no. In some respect, I believe that the FASB already does engage in these areas—when they intersect and overlap with the FASB's boundaries of financial reporting.



Two considerations in developing my beliefs are how these issues impacted my analysis of companies, and the FASB’s Conceptual Framework.

At times, ESG issues could have a direct, and perhaps dramatic effect on the forecasted outlook for a company.
In my days as an analyst working closely with buyside investors developing valuation models for stocks in many industries, it was clear to me that at times, ESG issues could have a direct, and perhaps dramatic effect on the forecasted outlook for a company.

As an “environmental” example, if a mining company has significant operations in a country experiencing a major drought or limited access to clean water for their workers, a reasonable investor should take that into account and project additional costs for that company to overcome those obstacles.

In terms of “social issues,” if management of a manufacturer with a unionized labor force is in the midst of a protracted collective bargaining battle, analysts certainly take notice and adjust their models to take into account their forecast of the impact on future labor costs.

“Governance” issues include many matters, some of which go to the core of how an investor judges management’s ability to guide the company to future profits and a higher stock price. One aspect of this is executive compensation, which could be cash, share-based, or more likely a combination thereof.

To me, one thing those three examples have in common is that they do not just apply to investors who are solely focused on socially responsible investing. Any investor who is concerned with assessing the nature, timing, and prospects for future cash flows likely would tweak their models in the face of changes in the labor cost structure or questions about the viability to continue mining operations where it costs much more to ensure that miners have adequate supplies.

The next question is whether these issues overlap and are within the boundaries of financial reporting, as outlined in the FASB’s Conceptual Framework. For example, paragraph OB1, Chapter 8, of that Framework, in part, states that “The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors …in making decisions about providing resources to the entity.”
Sustainability and/or ESG issues overlap in FASB standards about recognition, measurement, presentation, and disclosure related to historical transactions or the financial position related to existing assets or liabilities.

Paragraph OB3 goes on further to say “Investors’ …expectations about returns [on their investments] depend on their assessment of the amount, timing, and uncertainty of (the prospects for) future net cash inflows to the entity.” These paragraphs should not be read to imply that anything which impacts the assessment of future cash flows is within the purview of the FASB.

So where do sustainability and/or ESG issues intersect with financial reporting?

They overlap in FASB standards about recognition, measurement, presentation, and disclosure related to historical transactions or the financial position related to existing assets or liabilities.

For example, Topic 410 of the FASB’s Accounting Standards Codification®, Asset Retirement and Environmental Obligations, contains guidance regarding environmental liabilities as well as asset retirement obligations. There are significant rules in the governance area related to share-based compensation. For many years, a number of companies did not reflect an expense when compensating their employees with shares. Now, Topic 718, Compensation–Stock Compensation, contains the requirements around recognizing and measuring these expenses, including all the accompanying disclosure requirements.

While the objective of financial reporting is to provide information that is useful for investors in their capital allocation decisions, that should not be read to imply that all sustainability or ESG information is within the boundaries.
For those interested in learning more about how our standards overlap with natural capital and human capital concerns, please see this Landscape Map created by the Corporate Reporting Dialogue. This interactive tool is very helpful in showing how different standard setters’ guidance addresses these types of questions.

Again, while the objective of financial reporting is to provide information that is useful for investors in their capital allocation decisions, that should not be read to imply that all sustainability or ESG information is within the boundaries.

Paragraph OB6 of Chapter 8 of the Framework is explicit about this. It basically says that financial statement users can and should look beyond financial statements and footnotes for information that will help them make their decisions. For example, in the United States, 10-Q, 10-K, and Proxy (and 20-F) filings also contain significant information around many of these issues, such as risk factors for the company, compensation discussion and analysis, and more.

To conclude, the answer to the question of whether FASB should engage in sustainability and/or ESG issues is not binary. To me, the Board engages where those issues are within the boundaries of financial reporting set forth by our Conceptual Framework.