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SASB Releases Sustainability Accounting Standards for Health Care Sector

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By Michael Cohn
July 31, 2013

The Sustainability Accounting Standards Board released its first set of industry-focused provisional standards on Wednesday, starting with the health care sector. 

The provisional SASB standards address non-financial issues that have a material impact on health care companies. The provisional standards are available for six industries in the health care sector: biotechnology, pharmaceuticals, medical supplies and equipment, health care delivery, health care distributors and managed care.

The standards address the environmental, social and governance issues that are likely to be material for companies in these industries. The issues addressed by the standards include resource management, pharmaceutical water contamination, drug safety and side effects, ethical marketing, affordability and fair pricing, managed care price performance and safety of clinical trial participants.

Jean Rogers

“We actually are doing 88 industries over the next two and a half years, and we do all of the industries associated with a sector in parallel, so it was not so much that we were picking on health care, but prioritizing what to do first,” said SASB executive director Dr. Jean Rogers. “Coming out of the gate, we selected health care because it has a broad range of environmental, social and governance issues, so it was a good sector to demonstrate the range of issues that SASB looks at. It’s a very significant sector, 18 percent of the U.S. GDP, and it has a very significant environmental impact. It’s the second largest user of energy. Many facilities operate 24/7, and it’s a big generator of greenhouse gas emissions. The implementation of the Affordable Care Act amplifies attention on social issues.”

SASB is encouraging corporations to begin using the provisional standards, which are designed for disclosure in the Form 10-K, 20-F and other required SEC filings. SASB is accredited to set standards by the American National Standards Institute.

“We would consider them non-financial accounting standards,” said Rogers. “They don’t affect U.S. GAAP. We’re really working in a different language, in the language of environmental and social impacts. So the standards themselves are designed for use in the MD&A section of the Form 10-K. They are both quantitative as well as qualitative metrics that companies can use to disclose their material sustainability impacts in the MD&A section. The qualities that we look for and the way we designed the metrics were to provide companies with a way to cost effectively communicate their material sustainability impacts in a way that was decision-useful for the readers and investors.”

SASB’s standards development process includes research supported by Bloomberg technology, data and analytical tools; industry working groups; a public comment period; and review by an independent Standards Council comprising experts in standards development, securities law, investment, environmental law, metrics and accounting.

The working groups for the health care sector—which included 127 survey responses—represented publicly traded companies with more than $800 billion in market capital and investment firms with more than $952 billion in assets under management. Representatives from organizations such as Baxter, Cleveland Clinic, J&J, Kaiser Permanente, Pfizer, Merck, Novo Nordisk, AllianceBernstein,  Breckinridge Capital Advisors, Calvert Investment and USB Securities were part of the working group.

SASB standards help corporations comply with existing regulation, Regulation S-K, that requires that all material issues must be reported in the Form 10-K. U.S. federal law requires publicly listed companies to disclose material information, defined by the U.S. Supreme Court as “presenting a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.”

SASB standards will be developed for 80+ industries in 10 sectors over the next two years. The health care sector was an important one to tackle initially, particularly with all of the uncertainty around the health care reform law.

“I think that there are several interesting things that come out of the positioning around health care reform,” said Rogers. “Certainly those are very material issues that investors want to understand: how well positioned are companies to succeed in this era of new regulation and, broader than that, finite resources and also the opportunities that are represented by addressing global sustainability challenges. At its essence SASB really always is looking forward to describing those issues where investors want to understand how well are companies positioned to deal with future changes, some of which are uncertain in their impact or in their magnitude but have a high probability or are actually occurring. The Affordable Care Act is definitely one of those that are in play in this sector, and we have looked at some of the issues surrounding quality of care, patient satisfaction, access for low-income patients, and things like patient privacy, electronic health records, and even things you might not expect, like counterfeit drugs, and safety of clinical trials. So they really do address issues that are highly relevant to both the management of the corporations as well as investors. We tried to get consensus in our working groups between both the corporate management side as well as investors on those issues, where there was good agreement that they would be material.”

Sustainability Services from Accountants
SASB is also getting support from the former head of FASB. “By establishing standards for reporting industry-focused metrics on material non-financial information, SASB helps provide investors with a more complete view of a company's risks and opportunities,” said former Financial Accounting Standards Board chairman Robert Herz in a statement.

Sustainability is becoming an increasingly important service line for accounting firms, even small and midsize practices. A poll released Tuesday by the International Federation of Accountants found that 73 percent of the nearly 4,000 small- and midsize accounting practices surveyed are either currently providing or have plans to provide sustainability services to their clients, suggesting that there is a sizeable market for these services among the small businesses that small and midsize practices typically serve.

Of those that offer sustainability services, many provide more than one service. The most common service provided, indicated by over 75 percent of the poll respondents, is advisory services. Reporting is provided by about 50 percent and assurance by approximately 40 percent of the respondents. The results varied somewhat by the size of the practice and region of the world. The larger the size of the accounting firm, the more likely it was to be offering sustainability services. More than half of the firms with 21 or more professional accountants currently offer these types of services, compared to 37 percent of sole practitioners. By region, Asia and Africa/Middle East were the most likely to offer sustainability services, while Central/South America and Australasia/Oceania were the least likely.

Policy Implications
Rogers believes that some sustainability disclosures can have implications for government policymakers and regulators. “There definitely are policy implications from some of the data and from understanding the issues that are material,” she said. “Some of the disclosures that we are recommending for investors are available under the Freedom of Information Act, but are not generally available when you’re out picking a stock or making your comparison of companies, so it’s more about whether the information is accessible, not about whether it’s something companies are managing. Sometimes they’re already reporting it, but not in a way that’s accessible. I think that most if not all of these have policy implications, but in the near term we are enabling investors to make more informed decisions and hopefully also facilitating capital formation.”

SASB hopes to level the playing field for investors by making such information more readily accessible. “The types of things that are included in the standards are things that are relevant to most if not all companies in the industry, and are also relevant to most if not all investors who are interested in long-term value creation, so we’re essentially leveling the playing field as to the kind of information that investors have access to for material risks and opportunities,” said Rogers. “We include things like products that are listed in the FDA’s MedWatch safety alerts for medical products, and the FDA’s Adverse Event Reporting System. That information sometimes is reported, but it’s not necessarily in an accessible, comparable format for investors to be able to benchmark it. There’s a lot of sustainability information out there, and even a lot of reporting on it, but we’re pulling it together in a way that is decision-useful so that investors can look at a benchmark and see whether a company is outperforming or not. That’s what is needed for investors to act on the information, and that’s what these standards do is make the information decision-useful and level the playing field for companies.”

In the coming months SASB plans to release provisional sustainability accounting standards for the financial sector. Those standards have already gone through the research phase, as well as industry working groups and a public comment period. In about three months, Rogers anticipates SASB will be releasing the standards for seven industries in the financial sector.

“The material issues that are in financials are more around things related to access to capital and escrow lending and things like that,” said Rogers. “They’re really a set of unique issues that you wouldn’t find in health care, and I think that is exactly the work that SASB does, which is to take these broad sustainability issues that are somewhat generic and translate them in a way that’s highly relevant to the industry, so the issues that we’re now working on that have come out of the working groups for financials look and feel very different from health care. They’re highly tailored to the financial sector.”

The financial sector will be followed by the technology and communications sectors. Standards for the non-renewables sector are also in active development. The full schedule of SASB’s standards development process is available on the SASB Web site.

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