< Intro >
– Welcome to another exciting episode of Count Me In.
Today we have a special guest with us, Janis Parthun.
VP, Advisory and Project Services, at RGP.
She is an expert in the field of Environmental, Social,
Governance or ESG, as many of us know it.
Janis brings a wealth of knowledge providing a fresh perspective
on the complexities and significance of ESG.
She will walk us through the intricacies of ESG,
discuss its growing prominence,
and share valuable insights on its implementation.
So if you're looking to understand ESG better,
and how we can add value to your business model,
this is one episode you won't want to miss.
Let's dive right in.
< Music >
– Janis, we're really excited to have you
on the Count Me In podcast.
As we go into today, we're going to be talking about ESG
or Environmental, Social, and Governance,
and we hear a lot about that.
IMA talks a lot about that.
We've been publishing articles.
There's a lot of things happening in the industry.
But maybe we can start off just at a higher level
and talk about what does it mean,
what does it represent, in an organization?
– Yes, Adam, happy to do that.
The term ESG or Environmental, Social, and Governance
can really differ just depending on who you speak to.
But I'd like to establish some initial background here.
Where environmental focuses
on the company's impact on the environment.
On the risks, and opportunities
associated with the impact of climate change on the company,
its business, and its industry.
Social may focus on the company's relationship with people and society,
or whether the company's investing in its community.
And governance focuses on issues
such as how the company is run,
and possibly connect to executive compensation.
So ESG has been an important element
to organizations approach to create value, as part of the business model,
and just to the greater society impact.
But what does this entail? Is what I often hear.
And to elaborate a little bit more,
a company's overarching ESG program
will likely have top priorities determined around ESG matters.
With goals, which includes metrics
and possibly targets for future outlook set and established
To reach the goals and the targets,
the company may have various initiatives and action,
in order to support their goals.
For example, a company may have climate change
as one of its ESG priorities or material topics,
and a goal to reduce emissions with the target of 40% by 2040.
The organization, then, may have an initiative or a project
to convert all transportation fleets
to electric vehicles, as a strategy to reduce the emissions.
But when we're discussing ESG,
at the overarching program or program level,
this is applicable across multiple material topics or priority topics.
Now, the topic of ESG is not new, and there are significant funds
and investments around this.
Currently, over 96% of the S&P 500 already, voluntarily,
publish sustainability reports in some form or fashion.
But an increasing interest from parties to invest,
and companies wanting to communicate or report on ESG.
Regulatory and standard-setting bodies
are also paying attention to how companies
are reporting on ESG matters.
– Definitely, and you see a lot
of the bigger organizations implementing it.
But smaller organizations may not quite be ready or there, yet.
And if you are one of those organizations
that are saying, "You know what, I want to jump into this, get into this."
What are some steps that a typical company might undergo
to establish an ESG-type program?
Is there a specific, strategic, approach
that you need to take when you're implementing that?
– Yes, that's a great point, Adam,
and there is a recommended strategic approach to this.
So the other aspect to think about is the ESG strategic roadmap
or steps that companies, typically, may undergo to establish an ESG program.
First, is really having to determine materiality.
This is driven by stakeholder and market input,
industry profile, business strategy,
and suggested standards and frameworks.
And, then, setting goals and targets and execute on the reporting.
So establishing process and oversight
to have that accountability, and report
or update related to performance metrics.
And, then, establishing quality control.
Establish process and governance
to ensure the quality control of the data that's collected or reported,
and of course, reevaluate in that cycle.
But, more often than not, companies
are encountering challenges, during the midpoint stages of executing
on the ESG program strategy.
And this includes adhering to regulations,
standards and frameworks, and just trying to stay current and up to date.
There are several in the horizon, and it's a lot going on
for companies to navigate through.
Program management and governance,
having organizational governance over the ESG program,
and monitoring and tracking against existing goals, appropriately,
and evaluating progress.
For example, do you have a governance process around adding
or revising priorities or metrics?
And monitoring the actions or involved in ESG committee
that helps govern the goals set and tracked.
And data quality management; is the information reliable?
For example, is the information collected comprehensive
to the metrics being tracked?
Such as inclusive the various regions and markets.
Is that information reliable?
Such as is it trackable or include supporting details.
And with each of these challenges,
it's important to pull the right resources in to help and address.
– Before we get too much into the details
of program management and those challenges.
You've mentioned a few times, about different regulating bodies
have been watching in certain areas.
There are regulations and new standards coming up,
and that can be challenging for anybody and everybody.
A lot of people are overworked.
People are getting stressed out,
and the idea of having more regulations to follow
can be very stress-inducing.
But, maybe, you can talk a little bit more about
how it's affecting companies and what people can expect?
– Yes, I can, definitely, elaborate that a little bit more, Adam,
and dive a little bit deeper.
From a regulatory driver perspective,
and you're so right on this.
And there's such an increasing scrutiny
just on how companies are presenting
the ESG-related information.
As well as the push to reduce
the climate impact to the environment.
That multiple regulatory authorities are pushing their agendas,
and that's what's creating all this pressure, too.
For U.S. public companies the pressure is coming from the SEC.
With the biggest proposal
on climate-related disclosures announced last year.
To disclose governance, strategy, risk management,
and targets on the climate impact
and, specifically, greenhouse gas emissions.
And there are multiple elements
within the proposal that's creating concerns for many public companies.
Especially around disclosing climate-related
financial impact and Scope 3 Emissions.
I think by the time this recording is released,
the SEC will likely announce an update
and issue, possibly, a reduced-scope version of the original proposal.
It is a lot to ask for companies to disclose on those areas.
And this is just one specific proposal,
and there are several other SEC proposals anticipated
to finalize in the horizon, this year, as well.
Beyond the climate-related disclosures.
And in the EU, the pressure is coming from the EU Commission.
The Commission recently adopted a new rule, late last year,
The Corporate Sustainability Reporting Directive or CSRD.
For companies to publish detailed information on sustainability matters.
To increase the company's accountability,
and to prevent divergent sustainability standards.
This is a pretty big ask since there are 12 standards drafted
with 10 specific ESG topics.
Spanning from climate, to workforce, to business conduct.
And this may also impact a U.S. company
if the company has subsidiaries in the EU market.
And there are also country jurisdictional
specific requirements to consider.
That I won't mention here because there's just a lot to capture.
But beyond reporting, the EU is also proposing
another new rule to streamline information
about companies' environmental performance of products,
and to reduce misleading claims.
So just to add one more thing to this,
related to all this, is that companies are also, increasingly,
being asked to communicate and report information
that's understandable, across a broad base of the investor community.
So more so around voluntary standards.
And this is happening through recognized standards
and frameworks for comparability,
and there are a number of them as well.
So the top two standards
that are frequently referred to is SASB and GRI.
But there are also others, each with a specific mission.
And, again, this is just a lot for companies
to get a handle of and stay on top of.
And I just wanted to, at least, share a little bit of the landscape
of the different type of requirements
or voluntary type of disclosures.
And, then, interesting enough,
just to highlight or illustrate a little bit.
So, for example, we at RGP had helped one of our clients
on a related issue last year.
The Task Force for Climate-related Financial Disclosures or TCFD,
issued new recommendations in October 2021.
And the client needed to understand
the degree of the changes.
As well as consider how this impacts the clients reporting
to another global environmental disclosure system, the CDP
in connection to the TCFD changes.
So that's just one example.
But the reporting information
can also be interconnected across the requirements.
– That's really interesting,
and as you're going into this process,
either get some help or make sure
you're staying on top of that, or find an organization
that can help you stay on top of those standards,
and help understand it better.
Because depending on where your organization is,
will be what standards you have to follow, obviously.
So we've talked about the standards
and the different regulations,
and you've gotten a very good overview of that, for the audience.
But you mentioned aspects
of program management and governance
outside of their keeping up with the standards and regulations.
You have to actually manage the program.
Maybe you can talk about what you've seen
where companies are on track, where they're not on track,
and maybe give some best practices.
– Yes, happy to do so, Adam, it's a great point to bring up.
So I've seen companies where they're really leading the pack,
and companies where they're falling short
on their ESG commitments to their stakeholders.
Now, in terms of companies
where they're really on track and where they're not.
Industries that are ahead of the curve in ESG reporting
are in consumer products and real estate, and for good reasons.
So for consumer products, recent studies show that
consumers are shifting their spending towards products
with ESG-related claims, and products making ESG-related claims
have averaged higher cumulative growth, over a five-year period.
This is a major reason that consumer product companies
are pushing to be ahead of the curve in ESG initiatives,
and to report on ESG commitments.
Chipotle is one setting a good example, recently.
The company announced that its 2023 ESG goals will be linked
to executive incentive compensation.
Impacting its 2023 annual incentive bonus by 15%.
So making that commitment to set the goals
and hold its people accountable,
to achieve the goals, is a great example.
For real estate, considering there's a significant emission generation
from the real estate value chain,
ESG is now a top-risk priority for the industry.
And CBRE is one setting a good example.
When the company entered into a new
five-year revolving credit agreement, last year,
to increase it's revolving credit facility.
It linked the agreement with achieving
certain sustainability goals.
Such as to provide procurement spending with sustainable suppliers
to converting vehicle fleet to electric vehicles.
But there are instances where the companies are using ESG
to promote and market products misleadingly.
And this is a lesson learned for one retail company last year.
On what might happen when your organization lacks the program
governance and the structure to manage the ESG initiatives,
and the integrity of the data reported.
In this instance, the apparel company was investigated
by regulators for misleading sustainability-related products,
and had to remove the labels from their products and websites.
I mean, the company really broke the brand promise
of offering sustainable apparel.
It's clear that there's consumer demand
for more eco-friendly products.
But, again, this is where the regulators are stepping in.
And the European Commission had, recently, highlighted that
over 50% examined environmental claims,
in the EU study conducted,
were found to be vague, misleading, or unfounded.
And because of this, the Commission had since proposed
a rule that I just had mentioned earlier to address.
And companies that are lagging behind in ESG reporting
are more likely in IT or healthcare industry.
With less direct customer or consumer pressures,
or just have other pressures to take priority,
such as COVID-19 in the past few years.
And companies may also have other external pressures,
such as having to obtain capital, for example,
from the mergers and acquisition perspective.
A number of studies indicate that senior management suggest
they're willing to pay premiums
to purchase companies with positive ESG records.
ESG is also influencing capital raising process.
For example, this year, credit ratings agency, Fitch Ratings,
announced plans to use its climate vulnerability scores
to enhance the process to consider credit-relevant,
climate-related risks or its corporate credit ratings
for non-financial attributes.
So with the increasing demands by stakeholders,
companies may wonder how they can establish or elevate
to a solid ESG program and governance.
To start, it's about understanding
your priorities, based on your industry profile and business model.
Because once the priorities are established,
organizations can drill down further.
Understand what specific metrics,
goals, and targets are relevant,
and integrate these activities to the business strategy.
With all this having a structured, more formal ESG program,
with governance structure,
can help set clear strategic goals and expectations.
That are recognizable by a broader audience,
and hold management and internal stakeholders more accountable.
Whether public or private organization;
just having structure can really help
better communicate ESG efforts and progress
to the community, to creditors, or investors that large
– Janis, as you're given that answer
one thing that really stuck out to me is data quality.
And as we, in the accounting world,
know how important your data is,
and having numbers in the right place,
and reporting accurate numbers.
And I know that there are concerns
around the quality of data in ESG information that is reported.
And you made some examples of people
not giving that accurate thing
and, especially, on how they're marketing things.
What can companies do to address these types of issues?
– Yes, that's a great point to have a discussion.
Yes, data quality is a significant concern for companies.
And the concerns used to be more around the data collection
and the availability of the information.
But now companies are getting more comfort
around what information is available
just through understanding and research.
And it's been shifting more focus on the data quality,
or the completeness and the accuracy
of the data collected, calculated, and reported out.
And there's been an increasing focus
on the data quality with a number of our clients in preparation,
more so for future assurance.
And this is an increasing trend
that's also being observed at the board level.
According to a recent survey, conducted with corporate directors.
Over 50% of public company director respondents
indicated that the higher quality of ESG information
is being presented to the board.
But, then, with a lower percentage
and less progress for private companies.
To address the concerns or focus area
companies are seeing how they can prove the quality,
through building internal control structure to ESG data.
And interesting, and timely enough,
the IMA, also, recently, issued a publication,
Achieving Effective Internal Control over Sustainability Reporting.
That directly speaks to having effective control
and oversight to that ESG information.
To have that high-quality and fit for purpose for decision-making.
This publication is really resourceful,
it's providing an overarching, regulatory landscape
and incorporating the COSO Internal Control Framework.
As, also, at RGP, we've also built a consultation approach
on this for our clients,
incorporating the COSO Internal Controls Framework.
So that we can be able to help guide the clients
to be able to add control structure,
and improve the reliance of ESG-related information.
Now, another strategy is around automation
for the data collection and reporting systems.
And while I don't, necessarily, think
there's one true solution leader, yet.
But there are definitely tools,
currently, out there in the market,
to help address either at the initial collection process.
To the generation of the report or disclosures,
and there are, definitely, a few that are more prominent.
But I do think that the platforms are maturing.
They'll likely be a leader on this as the platforms mature.
But it's also important to consider what systems
you can leverage within your organization.
You'll want to think about what system
or a combination of systems, can also be able to help you
pace all the way through.
– Definitely, and depending what systems,
as you can tell, as we talk about ESG,
it applies across multiple functions within an organization.
But who are we, in IMA podcast,
to not talk about the finance and controllership
function within an organization?
What role does the finance team provide
in the ESG reporting ecosystem?
– Well, Adam, within the finance organization.
Historically, controllership functions are familiar with implementing
new reporting requirements.
Working across multiple stakeholders
and, at the same time, bringing that structure
and that rigor to the process outcome.
And this can be, similarly, said about the FP&A's function, as well,
or the reporting and analysis role.
Leveraging the same expertise
to apply to ESG reporting.
I really see the future role of accounting
and finance professionals, to be ranging from the orchestrator
to the gatekeeper of the ESG programs.
Depending on the industry and the business model of the organization.
If the company is more focused on addressing risk,
finance may likely play a more significant role, as an orchestrator.
Versus if the focus is on supply chain;
operations or sustainability office
more likely would be the orchestrator.
While finance is the gatekeeper for the reported information.
But regardless of which spectrum
of the role the finance organization fulfills.
One, definitive, role is to be the partner,
working collaboratively alongside other functions.
I have seen similar experience and value translate
from financial reporting to ESG reporting.
Besides staying on top of regulatory updates,
finance and accounting professionals
can also provide process and governance structure
to sustainability reporting.
This includes developing standard processes for data collection.
With associated reviewers and workflows,
with sign off functions to building
similar support structure such as a SharePoint site.
For a one centralized communication of requirements,
such as with dates, processes, sources, and training.
The same attributes apply to operational reporting.
As organizations are setting goals and targets to monitor
and work across multiple stakeholders.
Finance professionals can also bring
that structure and the rigor to process outcome.
The shift towards the future role and change
can really be accomplished,
through guidance development and education.
Companies in more mature stages of reporting,
are developing guidance and, typically, expected
from the finance organizations to enhance policies and procedures.
That add to the structure and the rigor.
But there are still many organizations
not at that mature stage,
and this is where education and training is key.
To educate the finance and accounting professionals,
to be the partners to the ESG reporting ecosystem.
The other aspects to consider
is to educate the process or data owners.
Who may not have been previously involved
from regulatory reporting or audit perspective.
To be able to strive for and achieve for that level of detail
and the quality of information expected.
And as finance and internal control functions
are, increasingly, getting involved.
We at RGP are also developing the project methodology
and an ESG training program.
To educate our consulting team on ESG reporting,
and this is really to upskill our talent base,
and to be able to anticipate our client need,
and to be better prepared.
– That's awesome, and it sounds like you're doing great work,
and those are some great insights.
And we've covered a lot during this podcast.
And, maybe, to finalize things, maybe you can give
a summary of some final thoughts
that you want our listeners to remember, as they walk away.
– Yes, happy to, and a key point I want to emphasize is that,
now, there are many more external pressures and expectations
to consider when companies are issuing sustainability reports.
And it's important to bring in the right people,
to either implement and manage or to improve the ESG program.
And this includes bringing in finance
and accounting professionals.
Who can be a valuable partner,
working, collaboratively, alongside other functions.
I am, personally, passionate about this topic.
But more, importantly, how much value
our finance and accounting profession
can bring to a company's sustainability program.
We should advocate more for this role,
and just provide the guidance
associated to support the profession.
And that's really my last point, I want to emphasize.
So thank you, Adam, for having me on this podcast.
And I'm very excited about the future developments
to come related to sustainability reporting.
– Yes, thank you so much, Janis, for coming on.
I really appreciate you sharing your insight with the audience.
< Outro >
– This has been Count Me In, IMA's podcast providing you
with the latest perspectives of thought leaders
from the accounting and finance profession.
If you like what you heard, and you'd like to be counted in,
for more relevant accounting and finance education,
visit IMA's website at www.imanet.org