(This transcript has been edited for clarity)
Total time: 14:54
Emma Smith: In today's podcast we're going to talk about the services sector and some of the financially material sustainability issues identified by the Sustainability Accounting Standards Board, otherwise known as SASB. I'm Emma Smith, and I'm an environmental, social, and governance analyst here at Sage. Today I'm talking with Sonya Hetrick a SASB analyst who covers the services sector, which includes industries such as casinos and gaming, advertising and marketing, and education. First off, for the services sector, is there a financially material metric that SASB has included in the materiality map that would not necessarily be included as a required disclosure by the Financial Accounting Standards Board?
00:42
Sonya Hetrick: So we actually commonly get asked about financially material metrics, but it's not how SASB approaches materiality. So SASB instead considers financial materiality at the topic level instead of at the metric level. What we do is gather research and stakeholder input to determine if a disclosure topic is likely to be material across an industry. And then we select metrics to capture performance on that topic. And when considered as a whole, the metrics associated with the topic are designed to capture the sustainability risks and opportunities associated with the topic. So if a company looks at one SASB metric by itself, the company may or may not feel that the metric is financially material to its operations. But the metric is not designed to be financially material. It's only intended to capture performance on one or more aspects of the topic.
01:47
Emma: Yeah, no, thank you so much for that clarification.
Sonya: And with respect to what financially material topics SASB has included in the materiality map that would not necessarily be included, as a required disclosure by the FASB – that is a great question as well. So my understanding is that the FASB structures its topics around understanding different elements of financial statements – profit, loss, assets, liabilities, cost of capital, and so forth. For SASB, our topics are structured around environmental or social externalities. So to me, some of the most interesting issues included in the standards for the services sector are those related to human capital, which is a key value driver across the sector. These topics include issues related to employee diversity, as well as labor practices, such as fair wages and working hours.
02:52
Emma: So that's really helpful and helps me segue into the next question, in that it seems to be that this sector is pretty diverse in terms of material topics. When you see the services sector, it seems that the topics pertain to less than 50% of the industries in the sector. So can you explain why this industry is more diverse than some other more homogeneous sectors or industries.
Sonya: So the sector is definitely made up of a diverse set of industries. As you noted, we have everything from colleges to casinos. We group the industries into three main categories. The first category is consumer and business services, which includes education and professional and commercial services, like staffing, accounting, consulting, and law. The second category is media, which includes the advertising and marketing, and the media and entertainment industries. The third category is hospitality and recreation, which includes hotels and lodging, casinos and gaming, and leisure facilities – Everything from Disneyland to a spa to a movie theater. As I mentioned earlier, all of the services industries rely heavily on human capital for value creation. But the ways in which they create value often differ significantly from one industry to the next. So for example, colleges create value by educating students; casinos create value by providing a fun gambling experience for adults. These are quite different activities. So since the sustainability risks and opportunities differ from one industry to the next, this as the disclosure topics tend to differ as well.
04:53
Emma: I noticed that the topic of physical impacts of climate change was only considered to be a material topic in the hotels and lodging industry specifically. I wanted to know more about how that decision was made as to which industries were considered material and which weren't, because I would have expected it to be material in casinos in gaming and leisure facilities as well.
Sonya: So SASB has a pure-play approach to our Sustainability Industry Classification System.
That means that the standards for each industry are developed for companies that are only involved in activities in that one industry. If a company is operating in multiple industries, they may need to review the standards for multiple industries to determine what topics are financially material to their operations. So the SASB standard for casinos and gaming is written for a casino company that does
not operate hotels, because not all casino companies operate hotels. It's also written for a casino company that does not have restaurants, because not all casino companies have restaurants. We have separate standards for hotels and lodging, and for restaurants. At the same time, we acknowledge there are many integrated companies that have casinos, restaurants, and hotels. And so for those companies, they would look at possibly all three SASB industry standards. That's just kind of generally how SASB thinks about integrated companies – is that they may need to look at multiple industry standards.
06:45
And specific to the physical impacts of climate change topic – in the hotels and lodging industry, we're looking at how hotels operating in coastal areas may be impacted by risks like inclement weather and flooding. So hotels tend to be located in coastal regions. Everyone wants to go to the beach, but casinos don't tend to be located in those regions necessarily. So the physical impacts of climate change topic is not included in the casinos and gaming industry standard. And as I mentioned, casinos that have hotel operations would also look at the hotels and lodging standard. And they would thus consider the physical impacts of climate change topic, as well as other topics like ecological impacts and water management that are not in the casinos and gaming standard.
07:45
Emma: I was going to mention the water scarcity issue with climate change with casinos. But I guess if casinos are also running hotels, they would go to both standards, as you were saying.
Sonya: Exactly, and just to finish off this question – with respect to leisure facilities, we also found that most of this industry does not tend to be located in flood-prone areas. Again, it's a very diverse industry. So the physical impacts of climate change topic is not in that standard either. There are some amusement parks and other large facilities that are located away from urban centers where this could be a concern. But when you look at overall industry revenue, this is a small segment of the industry. Most of the movie theaters and amusement parks and other facilities are not at risk of being impacted by climate change.
08:42
Emma: That definitely makes sense. And thank you for addressing that question. It was kind of a big question. Okay. I want to kind of move on to wrapping it up. What are some of the core issues in terms of materiality for this industry versus more satellite issues or issues that are still undergoing continued evaluation?
Sonya: Key value drivers across the services sector are human capital issues. Social capital issues are also very important. And social capital issues are how the company relates to its customers and society. Human capital issues are how the company treats its workers. And these issues show up in different ways in different industries. In many industries, such as the media and entertainment, advertising and marketing, and professional and commercial services, employee diversity and inclusion is likely to be material. At consulting firms, for example, employee salaries and benefits can represent up to 60% of the company's total revenue. And the work that these firms do involves significant interactions with their clients. So as these firms are serving increasingly diverse clients who are located around the globe, having a more diverse workforce may better position them to meet their client's needs. There was a study done by Forbes in fact that found that diversity was a key driver of innovation and success for global companies. Another human capital issue in the hospitality and recreation segment of the sector is worker safety. So the hotels and lodging industry is highly reliant on labor to operate all their facilities, and a service-oriented workforce that provides guests with a pleasant stay is important
to ensure that guests come back. And combined with the labor force dynamics, this can lead to low job satisfaction for hotel workers, resulting in high turnover and even potential lawsuits, which raise expenses for companies.
10:56
One hotel chain estimated that a 1% increase in employee turnover could cost the company up to $15 million per year. Hotels really would like to reduce employee turnover. One more example I'll give in terms of customer safety, which is a social capital issue, is from the leisure facilities industry, where this issue typically gets a lot of media coverage. So companies in this industry are operating parks and facilities where guests may be exposed to potentially unsafe conditions. Safety management includes managing amusement park rides and ski slopes, as well as operating buildings where there are large crowds of people like sporting and concert venues. So the industry is subject to low probability, but high magnitude safety risks. According to the International Association of Amusement Parks and Attractions, the chance of being seriously injured on a fixed site ride at a U.S. amusement park is only 1 in 18 million. However, when injuries occur, they can lead to significant reputational damage, because they get a lot of media coverage, as well as costly lawsuits in the millions of dollars. So that's an important issue for the industry to stay on top of.
12:30
Emma: Okay, so those are considered the kind of core issues.
Sonya: Yeah, those are examples of some of these social and human capital issues that I think are core across this sector. And in terms of issues that are undergoing continued evolution, although the standards are codified, we are continuing to work to ensure their relevance and usefulness. We're always open to feedback from companies and investors, and later in 2019 we're planning to publish a research agenda, which will let the market know what topics are likely to be high priority areas for research and stakeholder consultation prior to the next update to the standards.
13:16
Emma: Great, that's great to know.
Sonya: For example, we will likely look at how changes in industry structure and new entrants like Airbnb could affect the sustainability risks and opportunities that companies face.
Emma: Absolutely, we will definitely be looking out for that. Alright. Well, thank you so much for your time, Sonya. I really appreciate it. And I think we all learned a lot here.
Sonya: Great. Thank you so much.
13:56
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.
