Episode 2 - From Financial Reporting to Sustainability Reporting

00;00;06;03 - 00;00;39;09
Marc Siegel
Welcome to People Behind the Impact, a podcast from Fordham University's Responsible Business Center at the Gabelli School of Business. I'm Marc Siegel, and in this series, we talk with leaders whose work sits at the intersection of business, sustainability, reporting, governance, and long-term value creation. Today, I am really pleased to welcome Jeff Hales. Jeff is a professor of accounting at the McCombs School of Business at the University of Texas at Austin, where he also serves as executive director of the Global Sustainability Leadership Institute.

00;00;39;11 - 00;01;03;00
Marc Siegel
He has spent his career thinking deeply about reporting, standards setting, decision making, and how information helps investors and other stakeholders make better decisions. Jeff also has a unique role in the evolution of sustainability reporting. He served in leadership roles at the Sustainability Accounting Standards Board, including as chair of the SASB, and now serves as a member of the International Sustainability Standards Board.

00;01;03;02 - 00;01;20;25
Marc Siegel
He is a graduate of the accounting program at Brigham Young University and received his PhD from Cornell University. And on a personal note: Jeff and I first got to know each other years ago when he was an academic research fellow with the Financial Accounting Standards Board, while I was serving on the FASB board. Jeff, it is so great to have you here.

00;01;20;25 - 00;01;23;01
Marc Siegel
Thanks so much for joining me.

00;01;23;03 - 00;01;29;05
Jeff Hales
Thanks, Mark. It's, it's completely my pleasure. Always great to have a chance to connect with you again.

00;01;29;07 - 00;01;49;27
Marc Siegel
Awesome. I wanted to start by giving people a sense of who you are and how you got here. You went to BYU for accounting, and you did your PhD at Cornell. And your PhD was more in behavioral disciplines rather than accounting. So with that, what kind of drew you then to focus in on accounting in the first place?

00;01;49;29 - 00;02;14;18
Jeff Hales
Yeah. Well, I actually didn't start my college career thinking that I wanted to be an accountant. Maybe some people do. I did not. I was trying to follow in my big brother's footsteps. He was interested in computer science, and that is actually what he still does today. So I started, studying computer science when I got to college, and, and following his footsteps, he was getting a business minor.

00;02;14;18 - 00;02;44;07
Jeff Hales
I also decided to get a business minor, too. And, what I kind of found is that pretty soon I was turning first to do my accounting homework and putting off the programing till to a last minute, and I just was interested in business, interested in accounting. I enjoyed it and, and kind of decided to, to pivot toward, that and then, you know, ended up going straight into a PhD program.

00;02;44;07 - 00;03;07;10
Jeff Hales
And, and you're right that, the work at Cornell was pretty different. You know, I think, one of the one of the things that is sort of counterintuitive is like the first five years of my college career, I was learning more about accounting rules. And then over the next five years, during a PhD program, they were really training me how to be a researcher, but they weren't really teaching me any new accounting rules.

00;03;07;10 - 00;03;31;08
Jeff Hales
So, I probably knew less accounting by the end of that. But I also was in a much better position to, to start to research. And so that has been very helpful over the long, course of my career. But it did feel a little bit weird, when I was graduating from Cornell to have, you know, in some ways, not spent much time in the FASB standards, you know, for example.

00;03;31;11 - 00;03;32;11
Jeff Hales
At that point, yeah.

00;03;32;15 - 00;03;36;25
Marc Siegel
It's healthy to get away from the FASB standards and rules for a while, believe me.

00;03;37;00 - 00;03;39;16
Jeff Hales
Every once in a while. Yeah.

00;03;39;19 - 00;03;58;17
Marc Siegel
And that, you know, that resonates with me. I was similar in start out thinking of accounting. And, when Jerry Arnold from USC visited my school and did an accounting introduction and started off with, the time value of money based on and thinking about it in terms of a sports contract. I'm like, okay, I get it.

00;03;58;19 - 00;04;30;24
Marc Siegel
And that was really, really helpful. So, I totally get it. Talking about, I'm going to get to the research in a second, but you are an accounting, an academic research fellow at the FASB. And that's actually where we first got to work together. It seemed from the start that you were really interested in the investor perspective, and some of your work as a research fellow at the FASB was on a project that you and I both had a keen interest in, and that's financial statement presentation, which is now part of the dice rule, that the FASB put out.

00;04;30;26 - 00;04;41;25
Marc Siegel
But did that short stint it says be scratch sort of a standard setting it for you. Maybe it foreshadowed your future in standard setting, although that ended up being in sustainability, not financial reporting.

00;04;41;27 - 00;05;15;14
Jeff Hales
Yeah. It was, in some ways an unexpected turn in my career. I had become interested in the work of the FASB because of the course that I had been asked to teach. When I landed my first job at the University of Texas, they asked me to teach kind of an intermediate financial accounting course that covered the basics of how to recognize the asset side of a balance sheet plus revenue recognition, but also really focused on teaching students about the conceptual framework and how you would think about, how to set standards, why we would set standards, what we're trying to achieve, not just what the rules happened to be.

00;05;15;14 - 00;05;34;23
Jeff Hales
And, and that was a great class to be involved with. But it also required me to really up my understanding level of understanding, because, you know, up until that point in time, I had been sort of a consumer of the rules, but not really, you know, a critique of them or even certainly not a producer of them.

00;05;34;25 - 00;05;59;22
Jeff Hales
And so I was trying to, engage more with the FASB to understand how standards get set. And that then led to an opportunity to apply to be the research fellow there, which was, you know, an amazing career, a career change. I would say, we could chat about, but in terms of, like, scratching the itch. So, I think they’re I'm not sure how much of an itch was there when, when I got to the FASB.

00;05;59;22 - 00;06;26;16
Jeff Hales
And in some ways, after a year of being there full time, it might have actually sort of like scratched and satisfied it. You know, I think at that point I was also pretty ready to get back to campus. But it did light a fire, in that it, it was transformative in how I began to think about what questions I really wanted to study. What I wanted to talk about when I was teaching accounting standards and ultimately, like, what do I want to spend my time on?

00;06;26;18 - 00;06;34;21
Jeff Hales
And, and so I think it did light a little bit of a fire there, even though I was also ready to, like not completely walk away from campus.

00;06;34;24 - 00;06;57;06
Marc Siegel
Yeah. So then when you got back to campus and you started thinking about your research. Let's get back to the research for a second. Do you think your research is a bit different from other accounting academics? Do you seem to look at the behavioral stuff, decision making, how people actually process the information from getting that right? How do you differentiate your research from other accounting professors?

00;06;57;08 - 00;07;17;11
Jeff Hales
so I'm certainly not like a unicorn in that sense. There are other people that that are interested in the kinds of questions that I'm interested in. But I also think that, but there are those that, that are interested in a whole set of other kinds of issues. And the way I sort of think about it is that, you know, you can make a perfectly good career as an academic, very successful.

00;07;17;11 - 00;07;38;06
Jeff Hales
It's still hard work, but like, you can be very successful at essentially like writing and publishing papers for other academics and, you know, and it's interesting these people, you know, are intellectual thought leaders. They build the reputations of their universities. They, I hope, but very often are also like, great in the classroom.

00;07;38;06 - 00;07;59;06
Jeff Hales
And so, they're doing things that are expected of them and it is perfectly reasonable. But sometimes, I take a step back and say, but what does that doing beyond that? Is this knowledge really edifying anybody other than, you know, other academics who are going to, like, write a follow up, a paper about it.

00;07;59;06 - 00;08;22;07
Jeff Hales
And so, one of the things that, I think will resonate with any Ph.D. student I've worked with is that I will often ask them, regardless of the subject is, when they come in with the proposed idea. What is the problem you're trying to solve? Right. And the answer to that can't be, well, we don't know what happens when in this scenario, like, curiosity is important, but it is.

00;08;22;12 - 00;08;42;16
Jeff Hales
You know, for me, it's not. The goal is that we're not just trying to satisfy our curiosity. We're actually, I hope, trying to apply our, time and effort, to learning things that will help, the organizations that depend on the public good, which is, you know, accounting information.

00;08;42;19 - 00;09;04;17
Marc Siegel
So, man, that's a great segue because it's kind of like purpose led, research. Right? It's not research for research’s sake. It's research to actually solve, a problem or solve some situation that's actually going to benefit others, in some way and whatever that is. And you can have a broad definition of that, but, but that you should narrow out or filter out the research just for research itself.

00;09;04;20 - 00;09;15;27
Marc Siegel
Now at some point, you made a pivot toward sustainability, or maybe it was an evolution you could tell us toward sustainability reporting. How did that happen? Was there a moment or was it more gradual?

00;09;16;00 - 00;09;36;14
Jeff Hales
There was definitely a moment. You know, and, I should probably appropriately caveat everything with, a quote that I’ll attribute to one of my uncles in his memoirs is like: this is the history as I remember it. So, but there was there was a point, in my career where I had, you know, I had sort of been unsuccessful in the research track for a while.

00;09;36;14 - 00;10;03;12
Jeff Hales
And, by the time I landed at the SASB, things had started to turn, actually. And by the time I got back from that, I was able to make tenure and I think my national reputation, international reputation had also improved. And so, there were, I felt a lot more sort of job security, and I think, you know, as many professionals will sort of feel like as you start to hit different milestones in your career, you know, where the risk, the feels, of what happens.

00;10;03;12 - 00;10;34;08
Jeff Hales
You know what failure in the future might look like. It just, you know, it, it changes. And so, you start to think like, well, what's next for me? And so, I was definitely going through a little bit of, what I felt like was an existential crisis of like, you know. I had spent my entire PhD program, all my years, as a junior professor at the University of Texas and then even, like the time at FASB, felt still like, very sort of selfish because the phase we gave me, quite a bit of, of room to, to pick the things that I wanted to work on.

00;10;34;08 - 00;10;58;17
Jeff Hales
And, then I came back and, you know, I just felt like I had had over a decade of being totally focused on primarily my own research and, and teaching and, and I was thinking like, I just want to be involved in something that is bigger and more important than my own research agenda, my own things, you know, my own career. And so, I was thinking that I just needed to get involved with philanthropy.

00;10;58;17 - 00;11;13;25
Jeff Hales
And I didn't know how what would be the best way, because you can give time and money to a lot of good causes. But I was sort of thinking, ideally there would be an organization out there that would benefit from the unique set of skills that I have. And, I really had no idea what that would be.

00;11;13;25 - 00;11;38;13
Jeff Hales
But as you know, fate would have it, somebody in the universe did know, what the right fit was, and she called. So I am referring, of course, to Jean Rogers, who was, back in 2012, in the process of setting up, you know, this nonprofit to, to develop standards, and, and so she was, looking for people to support that, that early effort, the early efforts there

00;11;38;15 - 00;11;58;14
Jeff Hales
and she tracked me down and I really don't know how, but she called in and, I thought it was super interesting and, also thought I wasn't really the right person to be involved with it. I didn't really understand anything about sustainability. I felt like it was way beyond my skill set. And so, I was a pretty reluctant to actually get involved, mostly because I just didn't think that it was something that I could be useful for.

00;11;58;14 - 00;12;11;02
Jeff Hales
But, you know, founders have a way of being persuasive. And she was like, “I've got a role for you, I've got two roles. Here's the role I prefer for you to be in.” And that sort of started that process, being involved with SASB.

00;12;11;04 - 00;12;37;19
Marc Siegel
Yeah, that's, that kind of resonates with something that I try to tell students when I get a chance to be in front of them and just to think about their career, not as a linear progression, but more about, you know, continuing to navigate in a serpentine way around to find the things that you're passionate about and just to have the intellectual curiosity and an open mind to let yourself be inspired by something that other people are doing, because you never know where that will end up.

00;12;37;22 - 00;12;58;22
Marc Siegel
And it seems to have worked out well for both of us, because we both got involved in standard setting in ways that were never on our radar, I don't think, at the beginning. So, you mentioned Jean Rogers and SASB. So, for anyone listening that isn't familiar, can you give us a movie trailer version of what SASB was trying to do and why it was formed when it was by Jean?

00;12;58;24 - 00;13;26;09
Jeff Hales
Yeah. So I would say when Jean started the work to launch SASB it was, I would put it at roughly 10 to 15 years behind the work of say, like GRI, the Global reporting Initiative, which had, quite successfully, I think really helped the corporate community to up their game, in terms of disclosure about the sustainability implications of their business activities

00;13;26;11 - 00;13;51;22
Jeff Hales
and so by this time, so like circa 2010, we had moved from a previous era of disclosure as an exception to the rule to disclosure, as the norm for, a large global company, especially, I would say so they were mostly still voluntarily producing sustainability reports, but not in a way that was meeting or like it was designed to meet investor needs.

00;13;51;22 - 00;14;14;24
Jeff Hales
And so that's really where Jean stepped in. And she said, look there's a particular way that investors analyze companies then, and they're standing outside of a company and they need to be able to process information efficiently. And they need, you know, they don't want essentially like the to be, sort of greenwashed. They mean, they want objective information, relevant information.

00;14;14;26 - 00;14;35;00
Jeff Hales
So, she had, along with some, some co-authors come up with an idea for how, a standard setting organization might be able to do that, to help companies to produce information on sustainability, indications that would be relevant, and decision useful for investors. And so, I think, you know, she around that time, she wasn't the only one to have an idea like that.

00;14;35;00 - 00;14;54;28
Jeff Hales
There were other organizations integrated reporting, the work of the Climate Disclosure Standards Board that also kind of recognized this gap, that was out there. And then there were later efforts like the task force on climate related financial Disclosures. But SASB was it was one of those efforts. And she had a particular unique vision for how to do that.

00;14;55;00 - 00;15;22;12
Jeff Hales
And, one of the key things was this kind of industry approach. So, I think that was, where she saw, a real opportunity to try to do something and, you know, and I think it was an ambitious, maybe sort of foolhardy to think that, like, this could actually be done, but pretty amazingly, there's been, you know, a lot of luck, and hard work that has gone along the way to support this idea that has really taken off.

00;15;22;15 - 00;15;49;07
Marc Siegel
Yeah. Sure has. And just to anchor the timeline again, it's this is not long after the financial crisis of 2008-9 that in the wake of that to be thinking of, well, let's set up, a board to, increase disclosures about things that are, indirectly or longer term financial than regular financial reporting it's just a fantastic, fantastically visionary thought.

00;15;49;10 - 00;16;07;20
Marc Siegel
And to be able to execute it in a way where, where SASB ended up becoming the most popular voluntary framework, followed by companies in, in the Americas. And so, you mentioned the industry approach. And so, you know, at the SASB they write standards that are sort of one size fits all, any industry, you have to comply with the SASB rules.

00;16;07;23 - 00;16;26;01
Marc Siegel
But this was a uniquely different take at SASB where you went industry by industry. And it really distinguishes SASB from pretty much everything else that's out there. Can you walk through the thinking there? Why does it matter that a pharmaceutical company and a steel manufacturer say, have different disclosure requirements?

00;16;26;03 - 00;16;49;28
Jeff Hales
Yeah. You know, the way I think about this is that, when you're constructing financial statements, there's the ability in a sense, to, not that we should, but there's the ability, in a sense to abstract a little bit away from the underlying business activities, in the sense that, you know, cash is cash and it can come from, like a lot of different ways, places, in a lot of different activities.

00;16;50;00 - 00;17;13;07
Jeff Hales
And, you can think of sales revenue as spares, as sales revenue. And, business has generated a lot of different ways. And so, that approach can, can lend itself to, I think, a little bit of abstraction a way, because we're putting everything into a currency and in trying to produce statements that will be comparable between companies and, yeah, I think that's a super important exercise.

00;17;13;09 - 00;17;30;00
Jeff Hales
And it's often, you know, going to be most beneficial to then use that. And I think you've been really good about this in your career. I like to then dive into like, well, you know, in specific industries, what you know, what looks unusual here, what looks, you know, what looks more, what looks different, but shouldn't what look the same? But again, like should or shouldn't.

00;17;30;03 - 00;17;52;21
Jeff Hales
I think when you start talking about sustainability disclosure, where we're not really looking for, you know, another set of financial statements, but we're really looking for information that is going to, complements the financial statements that are being created. It's really the focus is heavily on the disclosure aspect, less on recognition, in the financial statements. And, and so now like, well, what else do you want to know?

00;17;52;21 - 00;18;20;29
Jeff Hales
I think oftentimes what you want to know is something more about the business activities that are driving those revenues that are leading to expenses that might be, deriving value for your assets or creating, you know, risks that could lead to liabilities. And, so when you start talking about those risks and opportunities, it's very hard to have a meaningful conversation about risks and opportunities that is, you know, disconnected from the underlying business activities.

00;18;21;01 - 00;18;46;14
Jeff Hales
And so, I just feel like we’ve with sustainability reporting, we go sort of like a level deeper into the company. Well, you know, sort of a step closer to the underlying business activities and, that can only efficiently be done if you focus on, you know, what a typical business activity in the given industry, if you could think about, well, what are the business activities that every company engages in.

00;18;46;15 - 00;19;25;21
Jeff Hales
Try to pick it at a super high level, but they're going to be so few of those things that are relevant to actually talk about that. I think you're going to miss a lot of important stuff. You also can't do it at the level of an individual company because that's essentially a consulting engagements to do a materiality assessment, you know, and so from a standard setting perspective, what we can do, is we can say, well, somewhere between treating every company like it's the same or treating every company like it is completely unique, we can settle on which companies, similar enough that we could say, let's talk to them. Let’s

00;19;25;21 - 00;19;53;26
Jeff Hales
talk to the investors, figure out like, what are the core issues that they're focused on. You know, that there'll be performance differences on as well, that they could reasonably provide information about and that investors would find useful. I mean, like, let's focus on that. And so, the industry is really, less conceptual in its motivation and more practical as like, you know, a sweet spot between one size fits all and everything is unique, you know, completely bespoke.

00;19;53;28 - 00;20;14;05
Marc Siegel
Yeah. I think, we could do a whole podcast on this topic alone. I think it's, to me also, an excellent filter to facilitate the communication that needs to go on in the capital markets. And what I mean by that is that there's a million different kinds of sustainability issues that are out there, and to try to think of the right one.

00;20;14;05 - 00;20;52;29
Marc Siegel
And again, to go back to the early 2010s, when companies were starting to get inundated with different questionnaires for them to fill out requests to talk about different topics. And they didn't even, well-intentioned companies didn't know which to reply to, SASB coming in and saying, look, we're going to help focus in on the 10 to 13 different most relevant issues to your business as you operate in your industry that also are going to matter to the to the investors and the ancillary benefit in addition to the filtering aspect is in a polarized world like today.

00;20;53;01 - 00;21;19;25
Marc Siegel
It’s it seems to me that it’s if you talk about these issues under the context of or under the guise of a business issue, that matters to a company's business and to their investors. It's an easier way to get into a conversation that ends up being about sustainability without the label of ESG and sustainability. And then you could talk about this in Austin, or you could talk about it in San Francisco. But you're talking about business issues.

00;21;19;25 - 00;21;41;28
Marc Siegel
It's not to say that these are the only sustainability issues that the world cares about. It's the ones that are, most relevant to leaders of a business who are thinking about long term value creation and to their investors. So, you know, the approach of going industry by industry, it also required a really heavy lift, right? Because SASB eventually ended up with standards for 77 different industries.

00;21;42;00 - 00;21;48;07
Marc Siegel
So, what did that process actually look like, how did you figure out what was material or relevant in every industry?

00;21;48;09 - 00;22;12;03
Jeff Hales
Yeah, it was certainly a lot of work, and when I think back to my own kind of skepticism of, like, you know, is will this even work? You know, I think early on, it just seemed like the if you think of any entrepreneurial activity, there's first, like the technical problem that you face, like, can you actually create the product that you're saying you can create, right.

00;22;12;05 - 00;22;32;06
Jeff Hales
And for us, it was to develop standards, you know, across 11 sectors, 77 industries. That the second thing, of course, that you need is then you need the market to want to buy the product. In a sense, now, we weren't selling it, but like we needed people to adopt the standards. So otherwise, there was going to be no information for investors.

00;22;32;08 - 00;22;53;11
Jeff Hales
And so, there were there were two big questions. But early on it was really just a question of like, you know, would we actually be able to do this work? And because to do the work you need-- Well, first you need money, right. Because it's a nonprofit and it's got to be funded and people, this is the job of staff members, you know, and so then they got to get paid.

00;22;53;11 - 00;23;17;10
Jeff Hales
And so, you know, it's not easy to fund something like this. And, so I would say in the early years, there was always a question of whether we could, you know, exist long enough to, to actually finish the work. And could we get high quality input into the process to do good work and, and so the, the technical work, really was focused on a sort of sector by sector.

00;23;17;10 - 00;23;59;20
Jeff Hales
So, we, we didn't go industry by industry, but we also didn't go all at once. So, we grouped these 77 industries into initially I think it was maybe 12 sectors later, reorganized to 11. And so we rolled that out, sector by sector and it would involve initial technical work by the team to do desk research to try to surface what, what issues, show up in different industries by looking at, it’s at academic research, legal filings, you know, the doing searches through, like, Bloomberg terminals and, you know, just, you know, trying to do that, that fundamental kind of like, you know, analysis of different, you know, industries and sectors and then trying to vet

00;23;59;20 - 00;24;20;25
Jeff Hales
that by putting that out to these industry working groups that we had developed. So, we reached out to, experts in the industries and said, would you be willing to give us feedback on these issues and here's what we're targeting or, you know, sustainability issues that would be relevant to investor decision making? Thinking about financial materiality was kind of, the language that we used.

00;24;20;25 - 00;24;47;12
Jeff Hales
And then they would give us feedback and the staff would work that, we would vet that through our standard setting bodies inside of SASB and ultimately put that out for public comments, get comments on that, and then as, you will be, aware of course, because you were there, you know, the SASB Standards Board eventually, codified the provisional standards development and put it out there for the public to actually start, using,

00;24;47;12 - 00;25;05;29
Jeff Hales
And, yeah. And, you know, it remains, an ongoing work because business constantly evolves and, and no standard setting work is ever perfect. And so you have to constantly work on the standards to make sure that there suitable for objective that they have.

00;25;06;01 - 00;25;25;15
Marc Siegel
Yeah. That due process that you talk about is probably, not always appreciated by everybody that that the thinks about these standards. But there's a lot of due process that was involved of researching, then vetting, then getting feedback and redeliberating and then going back to the desks and trying again and then doing a second round.

00;25;25;17 - 00;25;44;19
Marc Siegel
All in all, it took years before it was codified. You know, you said this the vision sort of came around in the early 2010s. It was I think, 2018, late 2018, when it was fully codified and, and published as standard. So, you know, that level of due process takes time. And, yes, it's constantly changing.

00;25;44;19 - 00;26;09;01
Marc Siegel
I mean, AI was a glimmer, in somebody's imagination when you, when you guys started and now it's, it's ubiquitous, it's everywhere. And so how do you incorporate that into these standards? Well, let's spend a second. Actually, let's spend more than a second. Let's spend a minute talking about, you know, one of my favorite topics, which is materiality, which is a term of art for us that we've lived with for, for our entire careers. But is, used differently by different people.

00;26;09;01 - 00;26;32;20
Marc Siegel
So, you know, think of it is kind of relevance, to, to the ultimate user consumer of the information. It is probably materiality, the most important and most misunderstood concepts in the whole conversation. But, you know, how does materiality and the sustainability context compare to what we mean by materiality and financial reporting, as we sort of grew up with in our careers?

00;26;32;23 - 00;27;16;14
Jeff Hales
Yeah, it has been a troubling word to, you know, you the idea is if for language to facilitate understanding, and usually a well-defined word will do that, but, but when words get used in, in multiple ways, it can become a bit of a roadblock towards progress in a sense. So, I think what, you know is very reasonable for this to happen. But I think what happened is, is that when sustainability disclosure was first taking off around the, you know, the early 2000, they needed a way to communicate, to companies about, like, how would you decide what to disclose? Because they weren't telling companies to disclose everything and they weren't telling companies:

00;27;16;16 - 00;27;42;25
Jeff Hales
Here's the set of things that you should focus on. They were saying you're going to have to figure it out. This was the approach that [Inaudible] took was, to have companies do an assessment of what who were their stakeholders, what were the issues that they were facing. And, then decide what to disclose. So, they very reasonably labeled that a materiality assessment to figure out, like, you know, what is important to your stakeholders that you should be talking about.

00;27;42;28 - 00;28;12;21
Jeff Hales
So, the problem then is that, what's material for that purpose may not be the same thing is what we have historically thought of when we sort of developed this with said we. But when the system developed this notion of materiality from a securities regulation standpoint. So, you know, the Supreme Court has told us that what is material is something that could be viewed as, as changing the mix of the information that's available.

00;28;12;21 - 00;28;32;19
Jeff Hales
I mean, I think of it as like, what would matter to a decision maker. Sure. The mix of information might have been different, but if it wouldn't have changed the decision reasonably for a reasonable person, if you can't expect that, it's not that big of a deal. And it's a very proportionate way to say not everything is going to be as big of a deal as, you know.

00;28;32;19 - 00;29;00;24
Jeff Hales
Like we can focus on the most important things when thinking about how to kind of police the disclosure or the reporting and disclosure space, you know, through securities law. So, that is a really useful construct. And I can see why they would apply it. In the context of, of broad sustainability disclosures. But you can then no longer talk about something being material without sort of having to ask a follow up question like material to whom?

00;29;00;27 - 00;29;10;09
Jeff Hales
Yeah. And if you don't answer that, I just don't know what you're talking about. If you if it's not clear and you're definitely talking about different things if you have different users in mind.

00;29;10;12 - 00;29;29;09
Marc Siegel
Yeah, I think that's exactly right. Whenever materiality comes up in a conversation, you know, I usually recommend to people to stop the conversation and level set material to whom what are you talking about? Because otherwise you can go off for an hour and not have a constructive dialog about things. I guess I need to bring in the concept of double materiality.

00;29;29;12 - 00;30;05;29
Marc Siegel
And here's where I always joke that double just means that twice as many people don't know what we're talking about. You know, so they so the EU, the European Union has gone a little bit of a different direction with their rules, the Corporate Sustainability Reporting directive, and they've embraced this concept of double materiality. And to me, it really represents the idea that companies need to report on both how sustainability issues affect the company or an outside in approach, kind of like financial materiality, as you've described it, and also how the company affects the world around it or inside out.

00;30;06;01 - 00;30;17;26
Marc Siegel
And you've given lots of thought to this. How do you describe the Venn diagram of single versus double materiality or financial versus impact materiality to students or even to other stakeholders?

00;30;17;28 - 00;30;50;07
Jeff Hales
It is super tricky. I often talk about them as being, interrelated but not identical. And for me, the way I think about it is that, you know, you gotta just stay grounded the user conversation and, and then if you do that, if you actually think about the different users of information that exist out there in the complex world that global businesses operate in, then the notion, the concept of something like double materiality is not at all new and not at all controversial and no big deal.

00;30;50;08 - 00;31;19;17
Jeff Hales
So, and the way I sort of explain that is there are a lot of users of accounting information inside of companies and they get their information through a management accounting system, and it is flexible and it is detailed and so complicated systems these enterprise resource systems help companies to figure that out. You know, because you got you got to manage your relationship with like all these key customers and suppliers and track where your cash is coming from.

00;31;19;20 - 00;31;50;15
Jeff Hales
But the other thing you know, is that, like that gets used to produce information for investors outside of the company. They have different information needs because they're not running the company. They're thinking about investing in the company. And that is different. Right. And so, the things that they need will just be different. You know, the timing of the of the disclosure that the what the information actually needs to be decision useful because it's like they're thinking about benchmarking against peer companies and somebody inside of a company,

00;31;50;17 - 00;32;18;20
Jeff Hales
it's just got to figure out whether or not this is the right supplier to do business with, right, and track that relationship. So, interrelated for sure. Right. But not at all the same thing of management accounting system and a financial accounting system. And then you can layer in like a tax reporting system, you know, so you've got not just one tax compliance, rules to follow. But actually, for a global company, all these different jurisdictions so you prepare information for them and they have particular things that they care about.

00;32;18;20 - 00;32;37;11
Jeff Hales
And some of those are like, well, how much money did you make and how much cash do you have? So, we can figure out the right amount to tax you. But the other thing is like they want to encourage and discourage certain activities because they are trying to, you know, because there's a because taxes get used. You know, I think very reasonably as a policy tool as well.

00;32;37;13 - 00;33;01;15
Jeff Hales
And so, they have those different, needs they like, we want to encourage more innovation. And so, we're going to allow for deductions on R&D and capital investments on that. So, you have all these different users of information out there and we've never taught and that has existed long before sustainability reporting. We never call that double or triple materiality because that's not actually helpful.

00;33;01;15 - 00;33;22;12
Jeff Hales
It wouldn't have been it wouldn't help us understand more the complicated world of management accounting, financial accounting and tax accounting. If we said, you know, what we need is the concept of triple materiality. What are the things that are material to inside a company, outside of a company? And also to tell the taxing regulators or bank regulators? I mean, it's sort of a nonsensical sort of conversation.

00;33;22;14 - 00;33;48;19
Jeff Hales
What is important is to say what information would be useful in each of those different circumstances. How do we design a system that actually works well for its given needs? And I think also very reasonably like intersects well with the other systems because and you’ll know this, right. You know, you've heard over the years when the SASB has said, hey, we think, you know, investors are telling us that they need this information.

00;33;48;21 - 00;34;07;24
Jeff Hales
And companies will come back and say, that's not how we manage our business. You're right. I mean, they're basically telling you there’s-- in their view, there's a disconnect between the management accounting system and what the financial accounting system would be asking for, and they might just be bluffing. They don't want to talk about something, but also that might be pretty legit.

00;34;07;26 - 00;34;28;08
Jeff Hales
And so, I think that raises an interesting talking point for standard setters, to then, in a sense, you know, to sort of negotiate or interrogate, but there's not at all a problem, you know, generally speaking, with the fact that you get these different systems and they are interrelated, but not at all identical. And so, to me, I think we just lose this all the time in the conversation.

00;34;28;15 - 00;34;30;16
Jeff Hales
And it's a it's a big barrier of progress.

00;34;30;18 - 00;34;50;18
Marc Siegel
Yeah. I think the other, one of the other connecting dots is, is the investment time horizon, right? Is the investment time horizon for the investor grows. More things can impact that company over that time that that could become financially material, that might not be financially material over the next 12 to 13 weeks. But over the 12 to 13 years, for sure would be.

00;34;50;25 - 00;35;15;09
Marc Siegel
So now SASB being merged into what became the Value Reporting Foundation, and that got consolidated into the IFRS Foundation and the creation of the International Sustainability Standards Board of the ISSB. And the ISSB now has released two standards, IFRS S1 and S2, which is S1 is the general sustainability disclosure standard and S2 is the climate specific one.

00;35;15;11 - 00;35;19;16
Marc Siegel
How much of SASB is work ended up sort of embedded in those in those standards?

00;35;19;19 - 00;35;52;18
Jeff Hales
Yeah. So, you know, when we started the work of the ISSB, I think one thing that the foundation did really well in and working in the backgrounds and, in the ecosystem to make sure that this effort wasn't going to add complexity, but was going to try to help resolve some of it. Was they had reached out to organizations like the Value Reporting Foundation, because we had integrated reporting and SASB at that point, under one organization, but then also the Climate Disclosure Standards Board and we're working with the CFD Secretariat,

00;35;52;18 - 00;36;18;04
Jeff Hales
so all these different organizations in the investor space and said, hey if we launch this ISSB, can we, you know, to basically take all your missions and consolidate this work, be a global solution, will you essentially either, transfer your IP and your people over to the foundation to do that work? And, also or, you know, just or just sort of stop, you know, doing the work that you're doing to trust us to carry it forward.

00;36;18;07 - 00;36;46;05
Jeff Hales
And a lot of that could be almost immediately brought in into S1 and S2, because those frameworks were, pretty high level, you know, hitting on six capitals and, and providing principles for how to, convey the, the way in which a company brings those capitals together to create value, thinking about risk, governance, strategy and metrics when it comes to, to climate reporting. Take those concepts and bring them together.

00;36;46;05 - 00;37;14;02
Jeff Hales
So, I think, you know, the ISSB did a good job of immediately consolidating a lot of that IP. But the SASB work is, is pretty vast right here. So, we've been talking about 77 industry standards with disclosure topics, metrics underlying, technical protocols to help companies, to produce that information. And so that work couldn't just be sort of like, you know, well, it could have been but we chose not to just like rubber stamp it and say, boom, this is ISSB’s content now.

00;37;14;09 - 00;37;42;23
Jeff Hales
And so, what we have done instead is to build into our requirements for the ISSB standards, the, the requirement the companies produce industry, information, industry relevant information. And, then we point them to the, for the most part, we point them to the work of SASB to, then help companies, find ways to identify what those issues would be in an industry-by-industry basis and disclose information.

00;37;42;26 - 00;38;12;29
Jeff Hales
But for right now, a company could make the determination that that guidance is not applicable to their circumstances. And so, they could then they still have the requirement to disclose information that is, you know, industry specific information that would be relevant to their circumstances, but they could look to other sources for, how to do that. So, what I would say is that, the focus on investor relevance and, and the importance of industry as a key part of that infrastructure is, now embedded in, our work.

00;38;13;01 - 00;38;38;23
Jeff Hales
But the process of doing global engagements on the SASB standards to really give jurisdictions around the world the chance to comment on whether the industry structure is, capturing the way that these industries operate businesses operate in their jurisdictions and that the issues are the issues that resonate globally and that the information that we're asking for, it could be produced on a global basis.

00;38;38;23 - 00;38;56;10
Jeff Hales
You know, to do that whole process of engagement will take time. And we're in the midst of a big SASB enhancements project, just still in the phases, I would say like the middle to late phases of phase one, but we're going to have for sure a second phase where we continue that work.

00;38;56;17 - 00;39;08;16
Jeff Hales
And in my mind, I like the idea there is that this idea then, helps the jurisdictions around the world to vet the work that we've been doing it, you know, that started that SASB more than a decade ago.

00;39;08;19 - 00;39;34;17
Marc Siegel
And more of a big picture question here. So, you've got this one, you've got us two. You're making progress on that SASB Refresh. You're also making progress on natural capital and looking at human capital. You know, some people worry that, at least in this country, there's been a little bit of a step back in Europe, there's the omnibus, you know, and so two steps forward, one step back where, you know, big picture:

00;39;34;19 - 00;39;39;18
Marc Siegel
Where are we on the maturity arc of of sustainability reporting.

00;39;39;20 - 00;40;05;05
Jeff Hales
Yeah. That's a good question. I think what we saw is sort of 15 to 20 years of flourishing where, you know, there was just a lot of uptakes, first by the largest companies, globally and then by, by smaller and smaller companies. And so now it's not unusual to see even a small cap company producing sustainability information, even voluntarily.

00;40;05;08 - 00;40;28;20
Jeff Hales
But, the first was broadly focused on, just the types of impacts companies were having. And, and then we saw the, you know, the that started to shift to include a focus on investors and that then brought with it, a lot of questions about like, well, where's this information coming from? And is it suitable for, for informing capital market decision making.

00;40;28;23 - 00;40;56;26
Jeff Hales
And so capital markets regulators and also legislators, started to say, how comfortable are we with this information? And, maybe we should also, you know, require assurance on it. And, and maybe we ought to mandate the disclosure of, of that. So, we got to a state of I think regulation, mandatory disclosure requirements. And that then led to, I think, a very reasonable, question of like, well, what about the cost benefit?

00;40;56;26 - 00;41;16;12
Jeff Hales
This was fine. When companies were choosing to do this, you know, they have a lot of latitude to decide, how much they want to spend in communications, you know, when they're doing that voluntarily. But if we're going to make them, do it, and, and, and if that's going to come with, you know, additional liability and in some jurisdictions, like, you could be on the hook now for what you're saying,

00;41;16;14 - 00;41;36;16
Jeff Hales
are we spending too much on this system? Is it capturing the right issues? And is society changed the focus in some ways, you know, what are capital markets regulators focused on and what is broader society focused on. So, I think quite reasonably, we have come now to what I think of a little bit as what, you know, I call it sort of like that, the reckoning.

00;41;36;18 - 00;42;02;02
Jeff Hales
And so, I think with The Reckoning, you know, we're seeing two things. We're seeing, recalibration on what's relevant from a capital markets perspective. And we're seeing recalibration on what society cares about from a broader policy perspective. And, in my view, both of those re calibrations are, you know, are appropriate like we audit, we ought to be checking if we can't answer the cost benefit, question then I think that's a problem.

00;42;02;05 - 00;42;32;05
Jeff Hales
And so, I think that's okay. But I do also always worry that, you know, that sometimes we can be so worried about, you know, notions of like regulatory burden, which I think is a very real thing. And we ought to be we ought to be careful with it, but we can be so worried about making things easier that we can sometimes make things so easily that we essentially give, a company a license to, to companies to basically that I would say, like, not say whatever they want to say, like they can't lie, you know, and that's generally going to remain the case.

00;42;32;07 - 00;42;57;23
Jeff Hales
But, maybe to be more silenced then, what would benefit the markets I think and so you know, I'm hopefully optimistic that that business issues remain business issues and, and investors will need certain information about that and that the system will sort of support that. Because I think that, you know, accounting information is crucial to well-functioning capital markets. It's crucial to well-functioning businesses.

00;42;57;23 - 00;43;15;21
Jeff Hales
So, I also hope that, like businesses in some of these recalibrations don't suddenly say, you know what? We no longer need to track that. Because for some companies tracking their energy use, as we've sort of seen recently, is a big deal, right? Because you may not be able to get the energy that you need. You may not be able to get the fuel that you need.

00;43;15;23 - 00;43;35;02
Jeff Hales
I mean, we've seen airlines cutting, you know, major routes for months because of the cost of, of jet fuel, you know, and so this, you know, when you depend, when you depend on natural resources, when you depend on, on humans, you know, and I hope that we continue to rely on humans and, and have natural resources to rely on, you know, for, generations and generations to come.

00;43;35;02 - 00;43;50;11
Jeff Hales
But like, that means, like sustainability issues will remain business issues for forever. And the question is, you know, what is accounting doing to really help businesses meet their objectives and investors to have the information that they need?

00;43;50;13 - 00;44;10;07
Marc Siegel
I can't think of a better place to leave it. Jeff, thank you so much. This has been absolutely terrific. Thank you for joining me for sharing not only the history of SASB in sustainability reporting, but also your own path into this work and what you're building now, at University of Texas and the global baseline, at the ISSB.

00;44;10;07 - 00;44;13;04
Marc Siegel
Thank you. Thank you so much. Really appreciate it.

00;44;13;06 - 00;44;14;21
Jeff Hales
Thanks, Mark. Super player.

00;44;14;24 - 00;44;32;15
Marc Siegel
And thanks to everyone listening to people behind the impact. If you enjoyed this conversation, please take a moment to like the episode, subscribe to the series and share it with others who are interested in responsible business, sustainability, reporting and leadership. Thanks again to everyone for listening and we'll see you next time.