Choosing SASB industry metrics for a bundled hardware-and-subscription business
Northwind Systems designs fleet telematics: it sells ruggedised hardware units and bundles a three-year subscription covering connectivity, firmware updates and a data platform. Hardware is 38% of revenue, but subscriptions generate 71% of gross profit and the contracts are sold as a single performance obligation spread over three years. A captive insurance entity covering device warranties contributes under 2% of revenue. Management must select industry-based metrics for its first IFRS S1 report. The sustainability team proposes the Software and IT Services standard set. The CFO argues for the Hardware set, because the legal entity's industry classification code and most manufacturing employees sit in the hardware subsidiary. Two metric areas are contested: data privacy and security incident metrics, and product lifecycle environmental metrics. The company has announced a net-zero target covering Scope 1 and Scope 2 only.
1. How should Northwind determine which SASB industry metrics to apply, and how should the disagreement be resolved and documented?
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Framework test. SASB standards are industry-specific and are assigned through the SICS classification, which looks at the business activities that generate the entity's revenue and drive its economics, not at legal structure or headcount. An entity whose activities span more than one industry applies the metrics of each relevant industry, disclosing which sets were used and why.
Reasoning. Revenue is majority subscription-derived and gross profit is dominated by the platform, so the Software and IT Services set is the natural primary anchor. That does not extinguish the hardware activities: manufacturing and product lifecycle exposures remain real, and the hardware standard may add metrics that the software set does not cover. The captive insurer is immaterial on any measure and can be excluded with a stated explanation.
Resolution and documentation. Adopt a primary industry set with supplementary metrics from the hardware set where they capture a material exposure, and disclose the SICS basis and the judgement. Record the analysis of revenue, gross profit and risk drivers underlying the choice, and apply it consistently year to year; a change of industry set is a change in the basis of preparation and must be explained, not made quietly to drop an unwelcome metric.
2. The CFO wants both contested metric areas marked not applicable. Distinguish the possible grounds for not reporting a metric and state what disclosure each requires.
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Three grounds are being merged. (1) Not applicable: the business activity that the metric addresses is absent from the entity's operations. (2) Not material: the activity exists but the associated exposure is assessed as immaterial to enterprise value, using the entity's materiality process. (3) Not yet measured: the exposure is material but the data infrastructure is not in place. These are different claims with different consequences, and using the first to cover the third is a misstatement of the entity's position.
Application. Data privacy and security incidents plainly apply: Northwind operates a platform holding customer fleet data, so the incident metric addresses a live risk and cannot be marked not applicable. Product lifecycle metrics attach to the hardware the entity manufactures and sells, so applicability is arguable but on the facts it is present, and materiality would need evidence about customer requirements and end-of-life obligations.
What to disclose. For non-applicability, state the conclusion and the reason. For immateriality, state the judgement and the process behind it. For absent data, say so, describe the gap and the plan and timeframe to close it; IFRS S1 expects an explanation rather than silence or an unexplained n/a. Avoid inventing a definition to fill a gap: where a metric is reported using a definition other than the SASB technical protocol, disclose the difference.
3. Assess the credibility of a net-zero target limited to Scope 1 and Scope 2 for this business, and state how the target should be disclosed.
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Reasoning. For a manufacturer that sells energy-consuming devices and buys electronics components, the dominant emissions sit outside Scope 1 and 2: purchased goods and the use of sold products typically dwarf the entity's own combustion and purchased electricity. A net-zero claim covering only Scope 1 and 2 would therefore be technically accurate and substantively misleading if presented without the boundary being made unmissable.
Framework test. IFRS S2 requires targets to be described with their scope, the gases covered, the base period, whether the target is absolute or intensity-based, the intended use of carbon credits and whether the target is science-based, together with progress. SASB metrics for the relevant industries separately require Scope 1 and 2 emissions and, where applicable, Scope 3 categories.
Disclosure. State the boundary in the headline claim, not only in a footnote. Disclose Scope 1 and 2 emissions against the target, identify the material Scope 3 categories and whether any target or management incentive covers them, and describe how the product portfolio must change for a whole-value-chain claim to be made. If a Scope 3 target does not exist, say so and explain the plan; do not describe the target as net-zero without qualification.