Total time: 15:29
Jessica McHugh: I'm Jessica McHugh, marketing director here at Sage. In today's podcast, my colleague ESG research analyst Emma Smith and I talked with Anton Gorodniuk, who is a financial sector analyst at the Sustainability Accounting Standards Board, or SASB. SASB’s audience is investors who are looking for information about what sustainability issues are the most financially material to each industry and to have companies disclose this information in a standardized way. Financials is broken down into seven industries. We have asset management, commercial banks, consumer finance, insurance, investment banking, mortgage finance, and security and commodity exchanges. How should investors and reporting companies think about the sector?
0:48
Anton Gorodniuk: You know, the financial sector is also interesting because some of the largest companies they usually are not, you know, pure-play firms. They are diversified and involved in multiple segments. So that's something to consider for companies when they start looking at our standards is that you know, they need to think of what their business breakdown is, what their segment reporting that they follow using their traditional financial accounting rules, and kind of not only pick the what the primary classification using our system is, but rather thinking about what are the most applicable standards.
1:28
Jessica: The financial sector is unique because it is heavily regulated. How aligned are the SASB standards with what is already required regulatory reporting?
Anton: Yeah, so this is a great question. What we really try to get at and to figure out is what are the most decision-useful leading indicators could be in getting the decision-useful information to investors. And I think one of the metrics that we have is the Consumer Financial Protection Bureau database, complaints database. And so essentially our metric is asking for the number of complaints that the specific company received during the fiscal year with respect to a specific set of products. Let's say an analyst at a company would like to get the data -- they would be able to actually go to the CFPB website and download the spreadsheet and do the pivot tables and all kinds of analysis, and figure out what that data is data point is. But again, it's a lot of data mining, it's maybe not that effective to do, so it would be much more decision useful and, you know, better for an investor had the company actually presented that data point in their report by itself.
2:45
Jessica: And conversely, was there anything that you found when you're putting the standards together where companies in the financial sector are not reporting, but SASB found it to be a sustainability issue that was important enough to include?
Anton: Yes. So this is a this is also really a good one. And it's also kind of ironic, I think, the good example is the topic related to Transparent Information and Fair Advice. They appear in asset management, in investment banking, through the professional integrity in consumer finance. And the metrics are actually more qualitative, just purely about the company's strategy to make sure that the information that they provide to customers is fair, that it benefits their clients, that they act in their best interest. And unfortunately, by doing the research and analysis of corporate disclosure, we have not found any really good examples of companies discussing this information.
3:52
Jessica: One of the things that SASB created was a materiality map and it illustrates the disclosure issues that are most financially material to each industry within the financial sector. Of the issues that are likely to be financially material for more than 50% of the industry, which of those has been identified as the most financially material?
Anton: Okay, so this is a great question. So first thing I would like to say yes. So the materiality map, it's a great tool that we provide, and our framework divides the sustainability universe into 26 issues. And within each issue, the disclosure topics within each industry will be more focused on specific issues that are related to the industry. In terms of the question related to which issues are more material and less material – SASB actually does not take a stance on saying that, you know, this issue is likely to be more significant than this issue. So we would not say, let's say, climate change is more important for this industry than human capital if both issues are present. So we don't do that type of ranking. We just try to highlight where the issues are. And then it's up to investor to determine what the magnitude of financial impact is likely to be. And that may differ based on the company rather than the industry.
5:22
Emma Smith: And can you give us your thoughts on how the most relevant issues in an industry might be reflected in valuations? How will SASB’s service impact credit ratings or will it impact credit ratings?
Anton: So yes, I think definitely. And then you know coming from the fundamental angle, that of financial materiality, that there is a good hypotheses that where we start from and then we compile the evidence showing that there is an impact -- a clear financial impact -- on the risk exposure. And I think it would be prudent for rating agency to then adjust a rating based on the sustainability performance of a company. And I actually think that, you know, several rating agencies already do look at sustainability information. I think that the evidence shows that there is a lot of impact that may come from companies not managing their systemic risk exposure. Well, you know, there are several instances of banks being penalized for not meeting certain requirements. It definitely has an impact on the cost of capital.
6:32
Emma: What are the challenges for companies in the financial services sector that you see? Is it data-gathering, policies, reporting?
Anton: Number one, quite a few companies in the sector are diversified. Companies are trying to figure out how to use multiple standards for their reporting, and how to determine materiality -- whether the materiality is determined at the segment level or if it's determined at the entity level. We are continuing to get feedback from companies. And we're going to be publishing helpful guides and implementation guidance on that.
7:15
Jessica: One of the things that I thought was really interesting personally, because I've worked in the financial sector for a while now. And I know that diversity is lacking. Diversity, as a reporting issue appears in less than 50% of the seven industries in financials. It's actually, as you said, only in two of the seven. But I was listening to a presentation that you did, Anton, and you said that studies show that diversity leads to better financial outcomes for companies. And we've read the same thing, seen the same studies. . . Do you think that there's a reason why we're seeing diversity topics appear in less than 50% of the financial industries? Is it because companies aren’t reporting it? Does SASB think that they should be?
8:00
Anton: That's a good question. So, again, since we are very industry specific, the type of evidence we try to get is the evidence that shows that that there is a financial link between diversity within, let's say, the asset management industry and performance of the asset management industry. And in that case, we do see studies showing that, you know, diverse groups of investment managers, portfolio managers, and analysts lead to better performance in terms of investment banking. There was evidence showing that the diverse groups of traders and risk analysts are likely to reduce risk-taking activities. At the end of the day, the investment bank’s performance is dependent on the risk exposure. Those are the two industries where there was the most compelling evidence showing that link with financial performance. It's usually the asset management and investment banking sides that were kind of lagging where, you know, they were not very diverse.
9:09
But on the retail side it was much more diverse. And so that gets to the point that how important it is to actually look at the diversity at the department level, like a segment level, rather than at the company overall. But going forward, I would like to mention here, is that our standards are not definitely not final, for good, and not going to stay as this forever. We are going to be updating them on a rolling basis. And we actually always welcome feedback from companies.
9:44
Emma: Going back to that same kind of question with data privacy -- that one seems to be one that you would think would be across industries, and for financials, data privacy appears to be in less than 50% of the industries. That one was kind of shocking to us that it was in so few of the industries when it seems to be such an important topic, especially in financials.
Anton: The second part of my answer applies here as well, that we always welcome input, and we will continue doing the research. What is challenging? First point is we actually know a framework. If you were to look at the materiality map and our general categories, we draw the line between data security and customer privacy. So those are two distinct sustainability issues as we define in our framework. So data security is about making sure that information that you got from your customers for the primary purposes is actually secure from cyber threats. And on the customer privacy angle, it’s more about how do you actually use this information for secondary purposes -- are you misusing customer information? And even if there are no issues related to cyber threats, there may be still other sustainability issues, so that's important to understand there.
11:09
And the second part of the answer to this question is that the SASB standards in these 26 general categories are the ESG-like sustainability issues. And customer privacy and data security I included in the social capital pillar of our framework. So essentially, we definitely know that if you look at data security it's probably a material issue in every single one of the industry's in the economy because it's hard to imagine an industry that is not exposed to technology risks and is not technology dependent these days. And although if there is a cyber security attack, it probably will impact the company financially. But will there be an exposure of personally identifiable information? Will it impact the society? Or is it going to be huge impact on customers of that company? So that's the question we would try to answer. And if the answer is yes, then it's likely to be included in in our standard. So we want to show that it's not only a material topic, but it also is a topic that has a social implication, and that's what makes it the sustainability issue.
12:33
Jessica: Anton, you mentioned that one of the common misconceptions about SASB is that SASB doesn't make a judgment call on what are the most financially material issues -- SASB simply determines what financially material issues should be reported and how to report them. Are there other common misconceptions or questions that SASB receives?
Anton: The other type of question that we get is whether we actually rank companies in terms of their sustainability performance. So we rank companies in terms of their level of disclosure. We provide some type of information, and it is available through our Standards Navigator. But that's on the level of disclosure. When it comes down to the actual performance on sustainability topics SASB is not involved in that. It's our licensing partners and other third-party data providers who provide this value-add on top of it. We really always want to try to stay independent and develop standards independently from performance of the companies.
Jessica: After six years of research and market input, late last year SASB released a set of 77 industry-specific standards. Anton, what are the next steps for investors going forward?
Anton: What investors will see is that more and more companies will be reporting on the same topics and in a similar way using SASB standards, which will give them ability to do this pure comparison. And I think in terms of the next steps for investors, I think it is having now a codified set of standards. It gives them a checkbook for engagement with companies, for having this conversation with companies around the topics that are likely to be most financial material and the metrics that are most likely to be decision useful.
14:31
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