Technical Standards are Public Policy, and Must Be Monitored by the States

Technical standards are public policy. Many people tune out at the very mention of standards, but they are part of the public policy world as their impact can be broad and dramatic for any number of activities in a state, either enabling or hobbling them.

Technical standards bodies, in some ways, rival the power of legislatures but without the accountability of elections. State legislators should be paying attention.

Standards exist across a wide array of issues that are critical to a state’s success. Education, innovation, voting, and accounting are just a few areas where standards bodies make determinations that may or may not comport with the wishes of the legislature.

As those standards get incorporated, often by reference under the state laws or administrative determinations, the functions of the state and those operating within it change. Keep in mind these are technical standards created by an organization not an industry standard, business standard or custom which may become a de facto standard.

One standards organization, the Sustainability Accounting Standards Board (SASB) Foundation was created to “establish industry-specific disclosure standards across environmental, social, and governance topics that facilitate communication between companies and investors about financially material, decision-useful information. Such information should be relevant, reliable and comparable across companies on a global basis.”

The idea is to develop accounting standards for specific sustainability metrics, because SASB believes that climate-related financial disclosures are useful to, and necessary for, economic decision-makers.

The SASB has a similar structure to the Financial Accounting Standards Board (FASB), which establishes financial accounting and reporting standards for public and private companies, and not-for-profit organizations that follow Generally Accepted Accounting Principles (GAAP). Without such standards businesses could interpret financial information in whatever way makes them look best.

So, accounting standards improve the transparency of financial reporting, and provide a means for objective auditing, upon which many financial decisions rest.

The SASB would create a world where investors would be provided financial data shaped by standards that are intended to include “sustainability matters” that are financially material. Obviously, one open question is defining sustainability particularly and reaching an understanding of when sustainability, or lack thereof, creates a financial event. Regardless of one’s view the resulting impact will be a quite noticeable policy shift.

And that shift is underway, as adoption of the SASB rules is happening in a significant way.

BlackRock Inc., the largest asset manager in the world, with more than $7 trillion in assets under management, recently released an open letter stating that companies in which BlackRock is investing will have to, “… comply with the rules from a ‘Sustainability Accounting Standards Board’ on issues such as labor practices and workforce diversity.” Additionally, the asset manager is requiring operations plans that assume controls to keep warming to two degrees Celsius this century, and that they disclose climate risks as required under SASB.

Whether one agrees or disagrees with the factors influencing climate change are largely irrelevant to the main point, that new technical standards are changing the public policy playing field. How fast will the change occur?

BlackRock, along with Vanguard and State Street, the three largest asset managers, according to Business Week own 22% of a typical S&P 500 company. This level of ownership provides them huge influence over, if not control of, the world’s largest company’s most important decisions including CEO succession and director elections.

While the funds have claimed in the past that there is little to worry about because they are not pursuing any special agenda, the recent open letter seems to call that into question. With the S&P 500 forced to adopt the standards the rest of the business world will follow. The standards have provided the impetus for a vast policy change.

The impact of just this set of standards is potentially more sweeping than most legislative initiatives. Other examples abound. Several consequential public policy challenges are found in standards setting bodies where few would even think to look.

If state legislators really are some of every state’s experts on the public policy being pursued in the state, then keeping an eye on any standards being implemented are fundamental to doing the job right.