(This transcript has been edited for clarity)

Total time: 13:54

Komson Silapachai: In today's podcast we're going to talk about the consumer goods sector and some of the financially material sustainability issues identified by the Sustainability Accounting Standards Board, otherwise known as SASB. I'm Komson Silapachai, and I'm Vice President of Research and Portfolio Strategy here at Sage. Today I'm talking with Taylor Reed, a former equity research analyst who leads research and standards development for the consumer goods sector at SASB. So we'll just dive right in and kind of start big picture here for the consumer goods sector. Could you give us an example of an issue that SASB included as material that would not have been added in traditional financial reporting?

0:44

Taylor Reed: So some examples of SASB disclosure topics that don't occur in traditional financial reporting but would occur in SASB disclosures are topics like management of chemicals and products, labor conditions in the supply chain, and packaging lifecycle management. And sometimes I think it's, it's really easy to draw the connection between these topics and the financial impact. For example, if we think of a company like P&G, when P&G can reduce the weight of their packaging, it can have significant cost-saving benefits, which would show up in those traditional financial statements. However, there are other SASB topics like employee engagement, inclusion and performance, which can be more challenging to draw that clear line from the sustainability risk or opportunity to that financial impact. But I like to think that as these topics and metrics become more widely used, and integrated into company strategy and management, I think that our ability to kind of make those connections will probably become clear and much easier to define.

2:01

Komson: Okay, great. You know, one of the industries that really stood out to me within the sector was e-commerce. And that it was, it's a little different than the rest. It's more heavily reliant on online interaction. So issues such as customer privacy, data security, are uniquely material to this industry. And so can you give us some examples of some accounting metrics around these two issues?

Taylor: Sure. So I'll just point out first that SASB kind of views a few of these issues as cross-cutting issues. And data security and customer privacy are of those cross-cutting issues that show up in the e-commerce industry, but also show up in a in a number of other industries, because these are really critical topics to a number of companies across industries. But as you noted, the e-commerce industry does identify those two topics as material. And it's unique in that this industry, specifically dependent on customer data to provide consumers with relevant services, targeted ads, and product recommendations. However, the amount of data that companies collect on customers, and the ways in which that information is used, can raise some serious privacy concerns among consumers, which we've obviously heard about in the media and has actually gained quite a bit of attention.

So at the high level, the customer privacy topic is focused on how companies balance this risk of using customer data with generating revenue. For investors to assess performance on the topic, they would need to understand the extent to which companies collecting use this data; for example, they would need to know the number of users whose information is used for purposes like behavioral advertising and marketing. And they may also need to know how the company is obtaining its customers’ consent to use that data.

4:13

On the other hand, the data security topic is focused on protecting consumers’ personal information from cyber threats. So customer privacy is talking about how that customer data is collected and used, and data security is really focused on how that information is protected. In the e-commerce industry, you know, customers have access to a ton of different online retailers right in the palm of their hands. So e-commerce companies have to work really hard to maintain the trust of their customers in order to sustain those customers and grow their market share. So customer loyalty is highly influenced by their perception of how safe their financial and personal information is. And unfortunately, e-commerce firms are a major target for cyber-attacks.

So in order to understand and evaluate a company's performance on the issue, investors would need to understand the company's approach to identifying and addressing data security threats, they would further need to assess historical performance of how that company is addressing those security threats. So to do that, they would probably be looking at the magnitude of the data breaches a company has been exposed to, and the extent to which customers were affected in those data breaches. So together this information can help illustrate the strength of the company's data security systems, as well as the financial impacts from those major data breaches.

5:58

Komson: Okay, great. So another kind of top-of-mind area with regards to consumer goods is supply chain management. You know, we see on the materiality map that it is an issue that is material for more than 50% of the industries. Can you walk us through some examples of some supply chain management metrics that would be important for companies to disclose?

Taylor: So topics related to the supply chain appear in four of the seven industries in the consumer goods sector, and this is no surprise as many of these industries depend on complicated global supply chains to manufacturer their products. The supply chains that many of these companies depend on are challenged in three key ways.

6:44

First, the value chain is commonly stretched across multiple countries that have varying levels of regulation and enforcement. Second, the suppliers on which these companies rely to produce their products may not manage some of the common risks associated with manufacturing. So things like fair pay and forced labor. And third, the materials and manufacturing processes use to create consumer products can often result in some pretty harmful impacts to workers and the environment. Altogether, these factors present significant risks to the company's brand reputation and their overall production.

7:34

So one example that illustrates this scenario well is the supply chain topic in the apparel industry that focuses on labor conditions. There have been several highly publicized events, one of the most notable being the tragic collapse of the Rana Plaza building in Bangladesh. And events like these can be extremely damaging to the company's brand value and result in some pretty critical production disruptions. So to capture performance on how apparel companies are managing their exposure to these risks, there are three associated metrics in the standard. One is qualitative and gives some forward-looking insight to how the company assesses and manages its social environmental risks related to its supply chain. And the other two are quantitative metrics that measure the company's ability to identify and correct safety and labor incidents once they find them through audits of their supply chain

8:42

Komson: Are there any industries within the consumer goods sector that have been leaders in reporting sustainability-related issues or any particular companies that you would like to highlight?

Taylor: So I think, fortunately, because this sector is consumer-facing, and most of the companies depend on their brand reputation, I think most of the sectors and industries and their associated companies are generally pretty willing to share information and engage in conversations around sustainability issues. However, on the flip side, I think because they are consumer facing and their brand is such a valuable part of their business, some companies have been accused of kind of inflating their sustainability practices or maybe conveniently highlighting the issues or stories that show them in a positive light, and maybe minimizing the ESG issues where their performance is lagging.

But from what I've observed, I think companies in the apparel industry are typically very willing to collaborate with peers, and competitors, to tackle some of the more challenging ESG issues that their industry faces. I know there are several industry groups that have representation from many of the largest brands, and they focus on issues like labor conditions and chemicals management. And then one other point I'll make is just that, out of all the industries in the consumer goods sector, apparel has the most companies reporting information using the SASB standards. And according to the conversations that I've been having with companies, I expect that number to continue to grow.

10:27

Komson: Are there any things that you're evaluating, issues or metrics for future editions of the standards that haven't been included in the current edition?

Taylor: All the standards are codified; however, as you may know, we will continue to research and assess the materiality of the current topics included in the standards to ensure they're still relevant and applicable. And then additionally, another part of my work is to follow these kind of more emerging sustainability topics in the industry to determine if there are new topics that might be appropriate for inclusion. And one of those issues that I've been researching and thinking about lately is along the lines of product lifecycle impacts in the apparel industry.

11:15

Komson: Could you define what you mean by product lifecycle impact?

Taylor: Sure, what I'm getting at there is really the end of life cycle of apparel. So a topic we've been hearing a lot about is kind of fast fashion and how fashion has taken on this characteristic of really being disposable. And things are made in a way that's much more cheaply. So there's this question of what is happening to apparel at the at the end of its use, and where is it going? How is it being disposed of? What are the financial impacts of that? And also, you know, what are the environmental impacts that may also result from that culture of fast fashion and disposable apparel.

12:04

This is a topic we've looked into in the past, but basically came to the conclusion that there wasn't sufficient evidence of financial materiality to suggest the topic would impact the financial performance of apparel companies. But since we've conducted that research, I think there's more attention being paid to the topic. And the evidence that we couldn't find before may be there now that this conversation has been ongoing for a while. So I think that that might warrant us taking another look.

12:42

Disclosures:

Sage is a SASB Alliance Member. Alliance Members share the belief that today’s capital markets need standardized sustainability disclosure and effective ESG integration into investment practices for the benefit of both companies and investors.

Sage Advisory Services is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. This podcast is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results. For additional information on Sage and its investment management services, please view our web site at sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.