Bloomberg Sells ‘Sustainability,’ but Buyer Beware

Mr. Bloomberg bankrolled the outfit, which was founded in 2011, to impose his enlightened political and cultural values on American corporations. SASB drew more attention in January when BlackRockCEO Larry Fink threatened to use his firm’s massive ownership stakes to oppose corporate managers who fail to follow the board’s standards.

SASB is modeled on the Financial Accounting Standards Board, which governs how businesses report financial information. It has a nine-member board that sets guidelines on the kinds of “sustainability” information corporations should disclose to investors. This information is supposed to be “material” to a company’s long-term financial performance.

Materiality is essentially a progressive term of art. SASB’s standards vary across 77 industries based on what its “stakeholders”—academics, attorneys, auditors, asset managers and businesses—consider important. Greenhouse-gas emissions are “material” to food and beverage companies but not to those that make consumer goods. Safeguarding customer welfare is important for health insurers though oddly not for airlines or banks.

SASB also directs companies to collect and report detailed data on everything from their share of recyclable and compostable packaging to the gender and racial composition of their workforce. Online retailers have to disclose their greenhouse-gas footprint and “behavioral advertising,” among dozens of other things. Internet companies must report the results of employee engagement surveys. Beverage makers have to account for their revenue from zero- and low-calorie, no-added-sugar and artificially sweetened drinks. Should companies count drinks sweetened with Stevia as “artificial,” zero-calorie or no-added-sugar? And who should make this decision?

Companies hire external auditors like PricewaterhouseCoopers and Deloitte to validate their financial accounting. Incidentally, these firms have donated to SASB while hawking their sustainability accounting services to companies. Deloitte boasts that its “services help companies go beyond traditional financial reporting to deliver a more holistic view of corporate performance.”

More than 130 companies claim to report information according to SASB guidelines, but their disclosures aren’t standardized like corporate financial disclosures. Companies sometimes omit information they say is proprietary or immaterial while highlighting other data as a mark of their sustainability. Mr. Bloomberg’s company, Bloomberg LP, chooses not to report the number of data breaches as SASB standards require, though this seems to be more material information than its renewable-energy consumption, which it does report.

Because SASB disclosures don’t follow a prescribed format, investors might have difficulty retrieving and analyzing information. Thankfully, Bloomberg LP has created tools for that on its financial platform. “Proliferation of the SASB standards, which help translate material ESG issues into financial terms, will enable our clients to see how ESG factors can significantly contribute to their investment and risk mitigation strategies,” explains the company’s former global head of sustainable business and finance, Curtis Ravenel.

Bloomberg has also developed ESG—environmental, social and governance—stock benchmarks based on SASB metrics. Bloomberg’s ESG benchmarks mostly mirror run-of-the-mill stock indexes and include companies such as Pfizer, Coca-Cola and Exxon Mobil that don’t stand out as beacons of sustainability virtue.

But asset managers can charge higher fees for funds wrapped in the ESG label. Vanguard’s exchange-traded fund for ESG stocks has an expense ratio of 0.12%, or $1.20 on every $1,000 invested—four times what it charges for its S&P 500 fund.

This helps explain why BlackRock, Vanguard and Fidelity are backing SASB. In a January open letter, Mr. Fink announced that BlackRock would expand its ESG index offerings and may cast proxy votes against corporate managers who don’t follow SASB.

“We will use [SASB] disclosures and our engagements to ascertain whether companies are properly managing and overseeing these risks within their business and adequately planning for the future,” he wrote to CEOs. “In the absence of robust disclosures, investors, including BlackRock, will increasingly conclude that companies are not adequately managing risk.”

Goldman Sachs and State Street, which manage assets for large investors, also refer to SASB in their proxy-voting guidelines. To win shareholder support for executive compensation packages—“say on pay” advisory votes that are mandated by the Dodd-Frank Act—CEOs may be obliged to follow SASB.

Corporate managers may have their own motives to report sustainability information. Most important, SASB standards can obfuscate poor financial performance. A company can claim it is “sustainable” even if it is bleeding money, and keep drawing investment dollars from the ESG crowd. Executives may also hope that disclosing favorable information about their workforce diversity or carbon emissions will forestall criticism of other business practices, such as opposition to unions.

Wespath Chief Investment Officer Dave Zellner, who manages funds aligned with the United Methodist Church principles and helps advise SASB, tells me that “companies want to own their message” rather than let others “make up a narrative.”

Yet Mr. Bloomberg’s ultimate goal is to encode his standards in federal regulation. In his campaign proposal for financial reform, he says he’d urge the Securities and Exchange Commission to adopt a rule “requiring companies to publish information on the racial and gender composition of their boards, senior executives, hiring, pay and procurement,” as well as “climate risks.” If such a rule were adopted, companies could get sued even for unintentionally misreporting information. Trial lawyers stand to make out big.

Liberals like to say that sustainability is good for business—but mainly for those promoting it.

Ms. Finley is a member of the Journal’s editorial board.