The wrong side of history: SASB says public health is not material for property and infrastructure companies. Let’s fix it!
The Context
The concept of materiality is a core tenet of business practice and central to environmental, social, and governance (ESG) disclosure, scoring, and benchmarking. It provides an operational definition for actions, services, and management practices that deserve attention from investors. Materiality helps investors and companies understand which issues to prioritize and measure in order to mitigate risk and create value.
The Global Reporting Initiative (GRI) provides a deceptively simple definition for materiality:
Materiality…is the threshold at which Aspects and topics become sufficiently important that they should be reported. Not all Aspects and other topics are equally important, and the organization’s report should emphasize information on performance regarding the most material Aspects.
Sustainability Accounting Standards Board (SASB) is at the forefront of efforts to apply the materiality concept to ESG reporting by listed companies. The heart of SASB’s approach is the idea that ESG issues are material and reporting on material issues helps “…businesses around the world report on the sustainability topics that matter most to their investors.”
This concept is reflected in SASB’s widely used Materiality Map. According to SASB, the Materiality Map, “…identifies financially material issues, which are the issues that are reasonably likely to impact the financial condition or operating performance of a company and therefore are most important to investors.”
Initially, this seems like “Mom and apple pie”. Materiality appears to boil down to simply telling investors what they need to know. What’s wrong with that? The COVID-19 pandemic provides clear warning signs that prevailing approaches to materiality are not working. Specifically, SASB’s approach to materiality missed fundamental public health issues that are clearly relevant to the financial performance of companies, industries, and the economy as a whole.
The Problem
In late 2019, the emergence of a novel coronavirus ignited the on-going COVID-19 pandemic. The result has been global social and economic disruption. The scope of these impacts is unprecedented, but not unanticipated. They have been predicted by academic researchers and government leaders for decades (e.g., the 2006 U.S. National Strategic for Pandemic Influenza). Yet, the COVID-19 pandemic illustrates the limitations of prevailing approaches to materiality as a framework to guide risk assessment and disclosure.
The critical observation is that the SASB Materiality Matrix deems public health issues as immaterial to almost all “infrastructure” industries — including real estate development, real estate services, and more. Recent experience shows that this is incorrect, since the public health issues have resulted in existential damage to individual companies and whole sectors. Moreover, these impacts were foreseeable based on available scientific research, and they should have been considered during materiality assessments and the development of plans to address systemic risk.
The Cause
The question here is why did SASB miss it, and, most importantly, how can we fix it going forward.
First and foremost, the SASB Materiality Concept was inspired and informed by professionals with expertise in energy, emissions, and other environmental issues. A scan of ESG professionals involved in SASB’s research and stakeholder consultation suggests that the primary pathway to these positions involved either fiance or some kind of environmental management. Few individuals appear to have professional or educational experience with relevant aspects of public health. The result is that few people “in the room” were aware or inclined to identify public health as a material issue. In other words, few stakeholders were prepared to raise public issues or provide references to relevant information or literature.
This cascades into the next issue. Despite these limitations, the SASB Materiality Matrix did not entirely miss “health” in the broadest sense. However, the recommended reporting elements do not reflect terms or metrics that are widely used or understood by public health professionals. In other words, smart people with expertise in domains other than health recognized that some aspects of health were relevant, but they did not have the technical vocabulary to describe issues in ways that health professionals would understand. This may initially seem like a semantic issue; however, the result is that SASB’s recommended indicators are cut off from the scientific literature and expertise. In other words, relevant health professionals would not have immediately guessed that SASB was talking about their issues, and SASB staff could not easily connect these issues to existing information.
These issues are fundamental; however, there is one more critical consideration. SASB’s concept of health is biased toward issues within the “fenceline” of a reporting company. The implicit theory is that health matters on an assembly line, in a mine, or maybe even within a construction site. The primary issues are related to workplace safety and productivity. However, recent events make it clear that public health cannot be partitioned along fence lines. Public health issues cut across these arbitrary boundaries, and companies are intimately connected to issues such as housing, education, access to medical care, and insurance. Collectively, these factors contribute to systematic risks to companies and industries. Traditionally, these broader health-related factors were not recognized as part of ESG reporting. Current events indicate that this was incorrect, and these issues are highly material to investors.
The net result of all this is that public health was largely missed as a material issue by SASB. This omission reflects a failure of the way that materiality has been defined and operationalized. The idea of directing investors to the most important issues is sound. However, we must take this opportunity to question why the prevailing approach to materiality almost entirely missed the greatest threat to the world economy and listed company performance since World War II.
The Path Forward
Collectively, we can envision a better way to define, assess, and communicate material issues. This will include:
- Engaging more people with more diverse professional perspectives, including individuals with public health experience and expertise.
- Thinking more broadly about economic, social, and environmental risks, including explicitly recognizing the role of firms in shaping the social, economic, and environmental determinants of health.
- Revisiting the intersection of ESG, “tail risk”, and materiality with respect to health-related systematic risks.
- Challenging management to understand and effectively address health needs reaching across corporate “fencelines”, including essential aspects of housing, education, and access to medical care.
- Incorporating TCFD-style scenario analysis to understand the potential impact of public health issues and structure disclosure.
These steps can help unlock opportunities to promote health and reduce risk. The scope of opportunities for health promotion may be surprising. Our recent research shows that widely-available green building strategies can serve employees, support communities, and reach across supply chains.
The good news is that it is possible to do all of these things today. Breakthroughs are not required; only recognition of the problem, willingness to change long-standing practices, and action to engage professionals with different perspectives and backgrounds. The result will be better risk assessment, more relevant communication with investors, and, ultimately, opportunities to improve returns over time.
Learn more about our work at www.greenhealthpartnership.org
