Sustainability Accounting Standards as the New GAAP

It took the 1929 crash, fueled in part by misleading financial reports, to prod congress to create the SEC and mandate reporting for publicly traded companies. But neither Congress nor the SEC established accounting standards. In 1973, the Financial Accounting Foundation formed the Financial Accounting Standards Board (FASB) and the SEC called FASB’s standards “generally accepted.”

Since then publicly traded U.S. corporations have reported financial performance using FASB’s “Generally Accepted Accounting Principles,” or GAAP. Almost immediately, however, some argued that financial metrics alone do not accurately reflect corporate value.

In 1989, the Coalition for Environmentally Responsible Economies published its “Valdez Principles,” advocating environmental disclosures. The Global Reporting Initiative (GRI) grew out of that effort in the 1990’s. Since then, non-financial reporting has proliferated. Today sustainability measures are applied to a broad spectrum of corporate operations. None are financial issues, yet performance on any of them can affect corporate value.

The Sustainability Accounting Standards Board changed the status quo in 2012. It laid out evidence based, objective, potentially material, and industry-specific standards to guide an analysis. SASB sets standards by researching each industry’s unique issues, and by soliciting input from industry groups, investors and other stakeholders.

When FASB launched GAAP, 83 percent of corporate assets were tangible and easily valued. Today 80 percent of assets are intangible and value can be difficult to assess. It appears the market is adopting a different understanding of corporate value.