What evolving sustainability regulation means to finance

Sustainability has become a prominent topic of discussion in business, but it can mean different things to different people. Jeffrey Hales, Ph.D., professor of accounting at the University of Texas at Austin and chairman of the Sustainability Accounting Standards Board (SASB), explains what it means to management accountants. As SASB chair, Hales heads efforts to set standards for how companies should account for sustainability issues that represent likely financially material risks and opportunities within industries.

This is the first in a series of podcasts that explore how the finance function can drive sustainable business success and account for environmental, social, and governance (ESG) issues.

What you’ll learn from this episode:

  • How sustainability issues can inform business strategy and a company’s operations.
  • The role management accounting plays in driving sustainable business success.
  • Worldwide regulatory efforts to incorporate sustainability into the finance function.
  • What the SASB is doing to get management accountants worldwide thinking about sustainability issues.
  • The skills management accountants bring to managing sustainability issues and creating long-term value.

Play the episode below or read the edited transcript:

To comment on this podcast episode or to suggest an idea for another episode, contact Sabine Vollmer, an 
FM magazine senior editor, at


Sabine Vollmer: How should management accountants think about sustainability? What are the issues, and why are they coming to the forefront now?

Jeffrey Hales: We think about sustainable development as the ability to meet the needs of current generations without compromising the needs of future generations. That's from sort of a public policy perspective.

If you think about firm value — this is kind of the approach that we take at SASB — I think of sustainability as being the ability for a firm to generate value today without compromising the ability of the firm to generate value in the future. So really thinking about long-term value creation and being a good steward of a company’s ability to do that going forward.

That can span a lot of different areas. We often hear discussion around environmental issues, but also social issues. Those social issues could be more around customers or around the effects of a company’s operations on the communities in which it operates. We hear a lot about human capital issues.

All of these things are issues that businesses have long known about and dealt with, but we’re increasingly recognising that a short-term perspective to managing these issues is just not going to cut it anymore. There’s increasing demand from markets, increasing demand from the public and from governments and regulators to think about the long-term implications of companies’ footprints on the world around them.

We’ve seen increasing focus on this because of the science around climate change. In 2020, we just saw so many other issues come to the fore, thinking about issues around — obviously with the pandemic, just the health and safety of everybody. Could you actually ask your employees to come into work, because you could be putting their lives at risk. It’s just not something that every business has had to consider before. Software programmers didn’t have to worry about the health of their employees in the way that, say, a mining company historically has had to cope with. That and then, of course, the issues around, particularly in the US, racial justice and the Black Lives Matter movement have really brought to the forefront the importance of companies managing these issues that a narrow focus on just short-term profits might have allowed them historically to not put as much weight on.

Vollmer: When you say short term versus long term, what kind of timeframes are you talking about?

Hales: That’s another really challenging question. It’s not one that I think there's going to be a definitive answer around where we say, Oh, one year is short-term and anything longer is long-term.” Typically, we do see a lot of companies having sort of a five-year planning horizon. That’s fairly typical, but industry to industry it will change. There are some that have very short operating cycles and others that have quite long operating cycles.

When you’re thinking about infrastructure development, some of those projects go on for 20 years, and so it’s a much longer horizon — just a part of normal business in some ways. So it does depend on that, but at the end of the day, it really is thinking about, I think, balancing the pressures. Often, management wants to think about long-term strategy, but it can be difficult, especially for public companies, to be able to balance that with the short-term pressures to operate efficiently right now.

Vollmer: I think a big question is what this all means for the profession. What are the implications of the sustainability issues on the finance function, and might they differ from business to business, industry to industry, country to country?

Hales: In my view, it comes down to strategy. Businesses don’t have the ability to choose whether these are real issues. The issues are there whether businesses acknowledge them or not. I would suggest that we sort of turn to science and look at what’s happening to be aware of that.

Then, what businesses have to do, either by choosing not to think about it or by carefully picking a strategy around it, it all comes down to strategy. That is going to dictate how these challenges around environmental, social, and human capital issues are going to be managed within a particular company’s operations. Whether they do a good job with that or not will have implications for their reported financial performance. So, it all links together through strategy.

Management accounting is actually part of this conversation because of the important role that management accounting has in analysing information. Actually, I like the way CIMA talks about this in terms of management accounting as analysing information to advise business strategy and drive sustainable business success.

It’s really going to be inside this enterprise resource system that’s going to be run by the finance function where all the information that you need to make decisions internally and the way that you communicate out about that externally is all going to kind of come together.

Back to your question of is it going to vary from business to business, yeah, every business is going to have its own unique circumstances, its own unique approach that it's going to need to communicate. I’m a big believer in the importance of an industry component to this because sort of within industry is where we really see issues rise to the fore, where we see if one company is facing this today, it’s very likely it could be an issue for a peer company. Investors are going to want to know about that. Regulators may want to know about that.

And inside the company, it’s often asked, “How are we doing against our peers?” Country to country, I think that also matters, less from a perspective of what the issues are. There is, of course, regional variation in what the issues are going to be, but a lot of these issues, they don’t stop just because there’s a national border, you know.

What does happen when you cross a border is that laws and regulations change, so there will be often compliance issues that will vary country to country.

Vollmer: We talked a little bit about the differences in industries, businesses, countries. Regulatory efforts tend to try to get everybody on the same page. So, what regulatory efforts are in the works to incorporate sustainability more in the finance function and in management accounting, and are these concerted efforts around the world?

Hales: This is all about what companies do, less so about what they say. It is really about managing the actions of companies and the impacts that they have and their ability to actually create long-term enterprise value. So, it is most important that we think about how this ends up affecting what companies do.

Now sometimes laws and regulations will say this is what a company is now allowed to do or is not allowed to do. Some of that will be about companies managing the compliance aspects of this internally. But a big part of it — going back to this idea that it’s around strategy — is going to be picking a good strategy that is going to help companies to execute on that.

As they engage in that, that will be partly shaped by what they see in terms of regulation and compliance, whether it’s from broader principles around where there will be additional scrutiny, what the markets are demanding, where there are business opportunities to solve problems that arise from these types of same issues.

And then there will be the reporting aspect of it, where transparency is, again, going to hopefully drive the action. It’s not reporting for reporting’s sake, but it is very clearly linked. I think where we’re seeing the policy movements is around what the laws are going to allow companies to do, what we’ll focus on in terms of reporting requirements, where there is support and new opportunities.

There’s some really big movements around sustainability reporting that companies should be aware of. I think we can start in Europe because Europe’s really leading on this. The EU Commission is reviewing the nonfinancial reporting directive that they already have.

I think that this revised version is very likely to include more stringent requirements around what companies should be reporting. Any company that’s got any kind of significant operations in the European Union is going to need to understand what the EU is going to be asking them to disclose on.

There’s going to be increased transparency around that in addition to, I think, a big push for improving sustainable operations, in part by the EU’s taxonomy around what is a sustainable activity.

There’s an EU taxonomy and that’s going to really support efforts for financing to facilitate solving some of these problems by being able to essentially take finance products and say, “This is something where this is sustainable.” Finance can then say, “There’s capital to help to solve a particular issue. We need a framework for thinking about what type of activity would actually qualify as a solution.”

It’s important for sustainability, particularly, I think when we think about the sustainable development goals, being able to think through what can qualify as being a sustainable activity and have implications for what business opportunities there are and the ability to get financing for that.

Outside of the EU, in the UK in particular, we’ve seen an increased focus around climate reporting.

We’re even seeing in the United States a big focus on climate from the Biden administration and sustainability more generally, but including in that, I think, we’re going to see a significant focus on improved sustainability disclosure.

Vollmer: You alluded to the fact that you're chairing SASB, which is the Sustainability Accounting Standards Board. What is SASB, and what does it do, and how does it touch the work lives of management accountants?

Hales: SASB is a nonprofit that was established in 2011 to develop reporting standards around sustainability issues with a particular focus on communicating company communications to capital market participants — investors, creditors — making decisions around capital allocation.

So very much in line with the way that we think of the role of accounting standards historically with financial statements and financial reports but recognising that existing accounting rules and even most regulatory regimes had very vague disclosure requirements when it came to anything beyond the bounds of financial statements.

If you already have a liability related to environmental cleanup, of course, that’s going to be on the balance sheet. But if you’re operating in a way where that may be an issue, the regulations could change. There was a recognition that if management was aware of those things, they should be talking about it, but not really a framework for disclosing around environmental, social, and governance issues in a way that could be decision-useful.

So SASB was developed in that respect to help facilitate decision-useful disclosure on these issues. We think of these ESG issues around 26 broad categories, from greenhouse gas emissions to customer privacy to the health and safety of employees.

We take those 26 different issues, and we then think about, “What are the businesses doing?”, so we carve up the economic world into 77 industries across 11 sectors. And then that creates a two by two where we can create a heat map and think, “OK, in a given industry, what are likely to be the issues?” It’s unlikely that everything’s going to be of equal importance in all industries.

We created a heat map there and developed reporting standards around the disclosure topics. So a typical industry, whether it’s in finance, or a consumer products company, or an extractives industry company, the precise number of topics that we identify as part of that industry standard might vary from five to seven — sometimes a bit more than that — disclosure topics, but usually two to three performance metrics for each of those disclosure topics, and in a way where it’s going to be a starting point for a conversation with the capital markets around the key ESG issues that are reasonably likely to be financially material for a given company and a particular industry.

We have 77 standards. The way that it relates to company operations is that increasingly, there’s calls from investors to report in line with SASB standards. Increasingly, we’re seeing some regulatory push that point in the same direction as well. To the extent that this is something that is going to be reported out externally, there’s going to be, we hope, an increased effort to manage these issues, to help balance that kind of like short-term pressure with quarterly or semiannual reported earnings.

Inside the company, management accounting is really going to be where companies can put into practice the strategy to actually identify, manage these issues, help build out internally both a control framework for reporting, but really even managing the issues so that the performance is consistent with what their strategy is and then the evaluation and assessment functions that are going to support execution on what it is that the C-suite and the board of directors has embraced as the company’s path forward.

Vollmer: Does SASB’s work focus on the US, or are you looking worldwide?

Hales: The organisation was founded in the US, and we initially started, recognising that in the US there was a big gap in the quality of reporting, historically what you see in the regulatory filings in the US. But it didn’t take that long before we were hearing from both investors and companies that companies need these disclosure topics to make sense across all of their operations, which for large multinationals, they have operations all over the place.

And investors want to form global portfolios and aren’t looking for just a region-specific solution. So, we’ve tried to embrace that and are very much looking to have a global reach. And in fact, we are seeing global use of the standards and interest in it.

I would say that most of the interest currently is still probably focused in the US, Europe, and Asia, but that, I think, is probably more a function of how developed those capital markets are more so than the region and specific importance of the issue or focus on it. I expect to see it expand elsewhere over time.

Vollmer: Companies or stakeholders can adopt it or can ask for it, but it’s not mandated, right?

Hales: That’s right. There isn’t anywhere that I’m aware of where a capital market or a legislative body has said that this is a mandate. That’s not to say that it couldn't happen in some parts of the world over time. I think the direction of travel is toward increasing mandatory reporting.

Our hope at SASB is that when there are mandatory reporting requirements that SASB could be used to meet that need because mandatory comes in many different forms. Mandatory could be there's a broad principle to disclose material information in a way that’s decision-useful, but we won't tell you what that is, but here’s a suitable way to do that.

Very much like in the US, the way the COSO framework gets used almost universally for the internal controls over financial reporting but without saying like you have to do it, just say you have to do something and this is a perfectly reasonable approach to meet that requirement.

We would hope for SASB’s ability to serve in that function as well. If a particular locality has a regional disclosure requirement, we would hope it would be consistent with what we're focused on, in part because we feel like it’s very important for companies to focus on the issues that are most likely to be financially material to them.

Vollmer: So, what does all this activity that you’ve been talking about mean to management accounting? Are these efforts likely to affect their roles that they play in business and their professional responsibilities they have?

Hales: I think part of it is going to be just making sure that they are professionally on top of the evolving landscape in which they’re working. I think what we’re seeing is that there’s new language being used. There are new issues being raised. There's evolving expectations of what companies need to do, both how they operate and also what they report on. But in terms of management accounting, they should be thinking about this being an applicant — applying the best practices that they’re already aware of to this new language, new issues, evolving expectations rather than thinking, “I’m going into some sort of brave new world.”

I think that that these are well understood business issues, but there’s a growing expectation around it. For example, if you think about needing to have good controls over financial reporting, management accountants are aware of the COSO framework and how that could be used to meet that need.

Those are practices that you would apply to financial information. Similar things can be applied to nonfinancial information, even if’s going to be probably a reasonably significant step for most professionals to say, “Well, what are these sustainability issues? What are some of the ones that we’re expected to manage within our company? How do they relate to what we’re doing already in our business and connect the dots there?”

I think that that’s going to require some professional development, but it’s not changing careers. We’re not asking the world of management accounting to become the world of climate scientists. It’s not that. It’s very much implementing what they already know and applying it to evolving sets of expectations around company performance.

Vollmer: What are the skills that management accountants already have and that they can bring to the increasing focus on sustainability, and what skills will they likely have to acquire as sustainability gains in importance?

Hales: Some of it’s going to be just a shifting of perspectives. Cost accounting, for example, has played such a big role in the way we think about what management accounting can help with. But other aspects of cost measurement have been around performance evaluation analysis, planning and decision support.

Those same things relate to nonfinancial information as well. As the organisations can shift some of the focus away from short-term costs to the managing of sustainability issues for long-term value creation, then there’s going to be a shift in the way that the strategy implements that, thinking about what are we going to be evaluating in terms of employee performance. How are we going to analyse that? What are we going to compensate around? What is the information that we need to support strategic planning around that?

Those are issues that management accountants are well aware of, but a lot of it has been focused on growing revenue and managing costs. It’s not a brave new world of something different, but it is thinking about, “Well, there’s increasing expectations around environmental issues, human capital, social capital. What are the ones that are relevant for our industry, for our company?” And then bringing in relevant frameworks to help manage that, still around the measurement, performance, evaluation, and planning, and decision support for that. But they’ll need to be aware of what those issues are, and so I think they need to learn the language at a minimum.

What I would recommend is, for example, just go to SASB’s website, look up your industry, and pull the industry standard. Read through what those disclosure topics are. Think about how they relate to your company. Think about to what extent are you already capturing some data related to the types of metrics that are identified in the disclosure standard.

Where would be the disclosure gaps if you were to try to actually get to the point where you’re comfortable using it for strategic planning, using it for performance evaluation, thinking about disclosure outside of the company? That’s where I would start.

Vollmer: I think what I’m hearing you say is that sustainability is a topic for management accountants that’s here to stay. If yes, why?

Hales: It absolutely is, because the need for businesses to adapt to a changing world is not going to go away. The need for businesses to be focused on long-term value creation isn’t going to go away, and the role of management accounting in supporting that is not going to go away.