The ABCs of ESG
Never heard of environmental, social, and corporate governance (ESG)? Well, it likely won’t be long before your finance team will be required to report on it. Smart teams are already starting. Darcie Brossart joins Drew Deubner and Steve Soter to discuss what to look out for.
The ABCs of ESG | Transcript
Drew Deubner: Hello. Hello. What is up, and welcome to Off the Books, where we're surfing the uncharted waters of accounting, of finance, and wherever else those waves take us. This episode is brought to you by Workiva, the risk, reporting, and compliance platform that makes sense of all the tangled data problems your team deals with. Check it out at workiva.com/podcast. I'm Drew Deubner, and I am your host. I am not an accountant, but I like asking questions of people who are so finance professionals can do their jobs better. And hot diggity dog. We got ourselves a show, capital SHOW, today. We've got Steve Soter, and we've got Darcie Brossart. Hey, Steve, would you tell the fine folks at home who you are?
Steve Soter: Certainly, Drew. Very happy to be here. Steve Soter, accounting enthusiast and Diet Coke aficionado. Looking forward to debiting some everyday street gangsta, wait, no, sorry. Emerald, sapphire, and gold. Sorry. Elvis spirit guide. No, expanding sphere generator. Oh wait, I've got it now. Looking forward to debiting a great discussion on environmental, social, and governance.
Drew: Boy. Can you top that, Darcie?
Darcie Brossart: I can. Happy to be here, guys. Darcie Brossart. Worked in corporate communications and reputation management for over 20 years and contributed to the foundation of ESG reporting for multiple organizations in four different industries. I'm the opposite of a Diet Coke aficionado. Regular Coke for me.
Steve Soter: Brutal. That's a first.
Drew: Break it up. Break it up. No fighting. Podcast just started. So today, the Secret Society, us three, are gathered to discuss ESG: environmental, social and corporate governance. Not to be confused with EKG, which is what you need when your ticker is not ticking, or ESP, which is some spooky wookie X-Files stuff. ESG is quite the hot topic, and it's scaled from a nice to have crunchy granola, touchy feely, Grateful Dead sort of thing with the companies reporting into something mammoth and critical for all companies in 2021 and beyond. So Darcie, I think you might be the best person to ask this. Certainly not, Steve. What is ESG? Is this just bragging about, you know, like all the trees your company has planted?
Darcie Brossart: So ESG is the long-term measurement of an organization's operations around a variety of issues like talent management, corporate or ethical governance, climate change, diversity and more. Essentially, ESG is showing the value behind the intangible assets of a company that may not be visible on a balance sheet.
Steve Soter: You know, we've been talking about corporate social responsibility. We've been talking about sustainability, and now there's ESG. How have all these things evolved, and how are they different?
Darcie Brossart: So I think if you asked a variety of people this question, you'd get a variety of answers. But since you're asking me, I like to think of it this way. Corporate social responsibility represents an organization's efforts around being a good community citizen or good employer. Examples would be a charitable donation, the creation of an employee resource group, volunteerism, or even offering customers the opportunity to round up their purchase to the nearest whole dollar and the difference going to charity. It's all good stuff, but it doesn't dive that deep into the understanding of the true impact or the full value of a company. CSR reports tend to be mostly showcase documents for a company. There are lots of smiling people. Now essentially the term sustainability and ESG, to me, they're interchangeable. I think the term ESG ended up winning out because when you think about the term sustainability, it can be kind of confusing. When someone uses that term, most people tend to think about environmental issues versus the long-term durability of a company.
Drew: Yeah, that's certainly the way I was thinking of it. I just imagine that picture inside of an ESG report of someone holding their hands out and there's some dirt with a seedling in it. And that just seems to be kind of the cliché.
Darcie: Definitely. I think every CSR report had those coupled hands with the gentle little new plant emerging out of it. Definitely.
Drew: And the photo company just says, "Thank you for the money."
Steve: Which is exactly how I cradle my Diet Coke. Only two hands.
Drew: Isn't that where Diet Coke comes from, from like, a little seedling in your hands?
Steve: We plant it in the back. There's a garden. It's kind of weird. I don't know where the aluminum cans come from, but it works.
Drew: Strange. Anywho, we've been talking about ESG and all of this stuff for a long, long time, historically. Back years and years and years ago. So now it feels a little different. And certainly it's a topic of conversation for companies today because we're talking about it right now. So why is it different? What's different this time?
Darcie: There's a movement of going from voluntary to involuntary disclosures. There's been an increasing focus and scrutiny on issues from investors, regulators, stakeholders, so much so that we're seeing sustainability reporting becoming more mandatory, whether through public pressure, shareholder proposals, regulations, a requirement as part of receiving or keeping funding. You see it in a lot of different places, but ultimately stakeholders, whether they be customers, employees, or investors, are looking to understand the true value of a company. This is creating new demands for companies to meet higher levels of transparency in their reporting.
Steve: So, Darcie, you talked about investors and regulators there. I'm sure you've seen it. The SEC keeps pounding the market with messages about climate disclosures and enforcement. A new task force has been created for enforcement of these matters, and I think we can certainly expect more to come from the new SEC Chair Gary Gensler. But you mentioned investors, and I just wonder if this is investor-driven and investors are generally getting what they need, why are regulators like the SEC so freaked out about this?
Darcie: Well, Steve, it's not just investor-driven, but certainly, they hold quite a bit of influence over a company's actions. But to answer your questions, why introduce more or new regulations? I'd say it's twofold. First, longstanding disclosure requirements need to be updated to meet the needs of today's modern investor. As Larry Fink wrote in his 2021 letter to CEOs, better technology and data are enabling asset managers to offer customized index portfolios to a much broader group of people. So essentially, technology is helping to lead the way and open up investing to a larger group of people. And that capability was once just reserved for a very elite group of investors. And now it's really anyone can do that. And as more and more investors choose to tilt their investments toward sustainability-focused companies, we're going to continue to see this acceleration of more disclosure so that investors can make clear decisions in their investment choices. The second thing I would say is that companies typically only disclose what they are legally required to disclose, and it's not because they're hiding anything, but rather there are thousands of bits of information a company could potentially disclose. So they leave it to regulators to be the arbiters to determine where the goalposts are going to be set.
Steve: Darcie, that's helpful. Certainly we're thinking about broadening the audience of people who are paying attention to this kind of information. And obviously, if I'm a regulator by legally requiring something, I tend to add a little more control and level the playing field. So if I'm on an accounting and finance team and I'm already accustomed to complying with similar regulations as the ones that we presume are coming for ESG, how should I be thinking about this tidal wave of ESG heading towards me? Is there perhaps some opportunity there for me and my accounting and finance team?
Darcie: There absolutely is. The opportunity for accounting and finance teams is to be proactive about incorporating this data and these reporting outputs into their existing processes. Just like finance data is at the core of what they do today, ESG is going to become the same way. ESG allows them to stand out in a way they probably couldn't otherwise.
Drew: Yeah, and that's a good place to jump off to a commercial. Just like that little tiny twig in our hands, we have to make like a tree and leave this conversation for just a minute. Be back in a hot jiffy.
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Drew: And we're back. So, team, we left off with a thought about ESG showing some value, which we all have to do in some way, shape, or form. Here at Off the Books, I have to show value to Steve by keeping his Diet Coke mug filled, or I'll get a pink slip on my desk. Seems like "value" means different things to different people. We have executives, we have shareholders, and probably other folks. Darcie, tell me more about that. What are different people looking for here?
Darcie: So value certainly means different things to different people. It's that way in most things, whether we're talking about ESG or otherwise. But in the case of ESG, investors are valuing a company on more metrics than just the balance sheet these days, especially long-term institutional investors. They want to know if a company is operating in a way that will either stunt or advance the company's future growth. Customers and employees want to understand the value the company is providing to society and the world. And company executives, in my opinion, especially the good ones, they assess value in all of it. It just comes down to what's the company's overall ESG goals, what and how to measure those goals, and ultimately how to operationalize them into the company in a balanced way. That's what takes the most time. It's finding that right balance.
Drew: Absolutely. So, Darcie, you've unlearned me from the fact that ESG is not about the touchy feely granola plants in a hand sort of thing. I gathered now that ESG isn't just about environmentally and socially perfect companies. It's about measuring your progress toward stated goals. Would you say that to be true?
Darcie: That is correct. A company doesn't have to be environmentally or socially perfect. What's important are the incremental steps that companies take in achieving their ESG strategy and goals, and once they achieve those goals, implement new ones. What's not important is the industry a company operates in. Most ESG standards or surveys track and rank companies by industry, which helps to understand the industry's overall progress, as well as how competitors stack up against each other. You know, I spent six years in the recycling and waste industry prior to moving to tech, and certainly back in 2012, 2013, when we began tracking ESG, industry ranking really wasn't a thing yet.
Steve: Darcie, that brings up a really interesting point then. I mean, obviously there are certain industries that have different environmental footprints. I guess what you're saying is that when you start to think about it by industry, maybe ESG actually puts a fresh smell on something or an industry that isn't otherwise so fresh.
Darcie: Yeah, that's exactly right. As you and your listeners can imagine, when the company that you work for is one of the largest owners of landfills in the country, the amount of GHG or the greenhouse gases, that we disclosed was very high. We pick up your trash, and we own it forever. Of course we're going to report high greenhouse gases, but it's not fair to get compared to other companies outside of our industry. It truly is an apples to oranges comparison. The disappointing part about it was back in 2012, 2013, that we didn't get credit for the recycling facilities or that our thousands of garbage trucks ran on renewable fuel or the renewable energy projects that the company had in place. We took full penalty points for owning everyone's garbage, but no credit for our responsible management of it. And so that was a pretty tough time, but that was just the infancy of really starting to track and monitor ESG. But thankfully it didn't take long for ratings and standards organizations to begin categorizing companies by industry, as well as to begin to incorporate those industry-specific nuances into their assessments. So once that occurred for us, we could really see where we were flourishing in our efforts and where we had opportunities. Today, the company, while I'm not there, it's actually a perfect example of how sustainable operations can drive the business and profitability as well as the corporation's reputation. Not only are they consistently recognized as a leader in sustainability, but they are also one of the most admired companies in the country.
Drew: Awesome. Yeah. I had no idea about any of that. So clearly shareholders want to see earnings growth, deeper data transparency, and progress in all areas of ESG. But it seems like these might be competing requests. How do companies reconcile that?
Darcie: They're not mutually exclusive requests. And there has been much research done on how closely aligned purpose and profits are. There's a lot of research out there that aligns those two together. So the best, most profitable companies are setting financial and ESG business goals and tracking their progress. And as I said earlier, whereas the balance sheet has traditionally been the primary measurement of a company's health, we now know that there are other metrics that need to be tracked to fully understand the long-term viability or durability of a company. And that's ESG. A former executive I used to work for used to say you can't have sustainability without profitability. And I believe that still holds true today. There has to be a thoughtful, balanced plan to make meaningful ESG progress without bankrupting or financially harming a company. So there are lots of considerations at the C-suite level and primarily coming out of the office of the CFO, by the way, that have to be made to help chart the path forward to where you're being able to disclose good ESG information and also being a profitable company that your stakeholders need you to be.
Steve: Darcie, that helps me a lot as I think about, OK, why is ESG different, but why is ESG important? I love that "beyond the balance sheet" comment. But one thing that occurs to me is that, as if there weren't enough metrics associated with face financial statements, including the balance sheet, now you start to get into all of these other categories of potential metrics. How do you measure it, given that there's got to be hundreds in each of the three categories of ESG, not to mention different standards setters and other people creating their own version of those metrics. How do you reconcile all that?
Darcie: It's an important question. Peter Drucker famously said, if you can't measure it, you can't improve it. And that's, again, the whole point of ESG. It's to improve, constant improvement within a company to provide that transparent information. So in order to make those incremental improvements and provide the data that stakeholders are requesting that's auditable, mind you, good ESG tracking is critical. With that said, ESG tracking is the wild, wild west. I don't have to tell that to any of the listeners out there that it is their day-to-day job is the tracking and bird dogging down within their organization a specific number that they need to be able to account for in their ESG. It's rough. But truth be told, the diversity of ESG tracking and reporting is very, very confusing. And setting up a reporting system that covers the metrics most relevant to a company or industry can be incredibly overwhelming because it is hundreds and hundreds of questions that are part of ESG frameworks. It is no simple task. It's a manual process. It's time-consuming. It's typically executed on multiple spreadsheets. There certainly is room for improvement. If we're looking at where there can be improvement on ESG tracking, it is in coming up with something that kind of pulls it all together to make it less painful and easier to keep track of that information that typically has to be updated on a quarterly to yearly basis.
Drew: 100%. I can get that entirely. And speaking of that, I got to pull this whole conversation together with the closing question of the day. So team, we've talked quite a bit about nature today. When you get outdoors, what is the perfect spot outdoors for you? Where do you like to go?
Darcie: I'm fortunate. I'm here in Arizona, so right here in the heart of the beautiful Sonoran Desert. And it's breathtaking. So to me, the desert, which many people think is dead, it looks dead. It's alive, and it's beautiful. The blooms are unbelievable all year round. So when I want to get away, I go to the Desert Botanical Garden here in Phoenix. It's absolutely spectacular. It's 140 acres of some of the most amazing and crazy looking cacti that you've ever seen in the world. But I love it. So highly recommend it.
Steve: I actually went to school in Arizona, Darcie, so I would wholeheartedly echo that. One of our favorite things to do on the weekends was to go for hikes and look at the cactus blooms. But Drew, today, to answer your question, I would actually put Paraguay at the top of my list.
Drew: That's bizarre.
Steve: Would you like to know why?
Drew: Just like walk out of the house and you're in Paraguay?
Steve: Well, no, you can't walk out of the house. You actually have to fly to the Dr. Luis Maria Argana International Airport, which goes by the code ESG.
Drew: I was wondering where you were going with that.
Steve: There it is, Drew.
Drew: Pretty crafty. How clever of you.
Steve: How about you?
Drew: I'm here in beautiful, sunny Des Moines, Iowa, and there is a fantastic network of trails that zigzags across town. I can get right out of my house, walk a block, and be on a trail. They'll take me pretty much anywhere I want to go. I can't complain. Maybe that's a very pragmatic way of looking at things. I don't like to go to wilderness, but I like to get to one place on a bike or on a run. Who knows?
Steve: That's a great example of that Midwestern sensibility there. I expect nothing different.
Drew: Ruthless pragmatism at every point. I'm Drew Deubner. This has been Off the Books. Please subscribe, leave an Apple podcast review, which really, really helps us, or tell your buddies if you like the show. Hey, if you want to be on the show, if you want to tell us nice things, write us at email@example.com. Surf's up, and we'll see you on the next wave.