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Back to Basics, Part 2: So…Who Regulates ESG? (And More Q&A)

Key Takeaways

Off the Books producer Mike Gravagno gets a chance to ask Steve Soter and Mark Mellen some burning questions about ESG, the SEC, CSRD, and more. Listen in! And check out Back to Basics, Part 1 here.


Back to Basics, Part 2: So...Who Regulates ESG? (And More Q&A) | Transcript

Mike: Hello and welcome to Off the Books, where we surf the uncharted waters of accounting, finance, risk, and wherever else the waves take us. This episode is brought to you by Workiva, the ESG, risk, reporting, and compliance platform that simplifies your complex work and adds even more wrinkles of knowledge to your brain. Check it out at My name is Mike Gravagno, and I'm an Off the Books producer, recovering Cherry Coke addict, and today's host. I'm looking forward to debiting a great conversation today, and I'm very glad to have you hanging 10 with us. This is a part two. I have with me Mark Mellen and Steve Soter, and they let me just ask all of the questions that I have been burning in the back of my head. And we went so long because they are so knowledgeable and were so giving with their time, so we're splitting this into two weeks. And that was Mark's adorable dog. Mark, what is your dog's name? 

Mark: Oh, that was Winfield making a guest appearance. Winfield, for those that haven't met him, is a wonderful mix of Australian shepherd, border collie, and German shorthaired pointer. 

Mike: And just a real sweetie. 

Steve: Pretty much the nicest dog in the universe. 

Mike: Yes. 

Mark: Doesn't love to be on camera, though. 

Mike: No, a little camera shy. 

Steve: I feel you, Winfield. 

Mike: You know, it takes some getting used to seeing yourself, and you're like, that's what I look like. Well, thank you for showing up, Winfield. And thank you again, Mark and Steve. Let's just get back to the conversation. 

Steve, a question I've had for a while is and, you know, we're talking about the SEC, a lot is do they actually have any teeth? Do they have any real "oomph"? Are people really afraid of them, or is it all like wrist slapping?

Steve: No, they're very afraid of the SEC to a point. And let me explain this. So, if you decide that you want to access the public capital markets, meaning that you, Mike Gravagno, could go to, you know, your trading app or whichever one that you're using and go buy some stock in some company. Yeah, generally speaking, that company is going to need to be registered with the SEC. There's certain requirements. I'll get into that in just a second, and the truth is that company probably doesn't care about you or any of us individually, but they probably care about who holds our 401K. They probably care about, you know, large institutional investors, those types of things. And in order to access those public markets, you've got to comply with SEC rules. And once you've kind of done that, and actually even as a private company—we're not going to get into that, but there's actually also some jurisdiction that the SEC has over private companies. But once you've done that and said, hey, I'm a public company, yeah, the SEC has a ton of teeth, up to and including for willful violation of their rules and fraud being sent to jail. And so the joke has always been as a financial reporting person in partnership with my legal counter, or excuse me, my legal partners, our job is to keep the CEO and the CFO out of jail, because basically every time you file a quarterly or an annual statement, a 10-Q or a 10-K, they're certifying that it's accurate to the best of their knowledge. They're sort of taking responsibility for it. And, again, I think errors made in good faith generally for the most part get worked out through the SEC process and don't, you know, involve people getting thrown in jail. But the SEC has a lot of teeth, and I'm only talking about companies here. If you're a broker-dealer, if you're in the crypto space at all, that's like, that's like multiple episodes of what's happened this last week with, you know, Binance and Coinbase and others. So yeah, the SEC has a ton of teeth. And the truth is if you're like a, you know, the humble Bob Cratchit accountant, you know, just kind of keeping the ledger or whatever, a mistake in SEC filings in some cases can be career ending. I actually know people who have been—disbarred is not quite the right word, but who have actually been prohibited by the SEC from working for a public company because of some error that was largely outside of their control, but maybe they should have known or had more careful review or whatever. We don't have to get into that. And so there actually are career implications. So this is high stakes. Now, if you're doing it right and you're acting in good faith, generally speaking, you can go home at the end of the day, at the end of the quarter and rest easy. But it can get high stakes pretty darn quick. And that's the exchange that you get for accessing capital markets. The greatest capital markets in the world is in the U.S. That's pretty undisputed. And this is kind of the price of admission, as it were. 

Mike: Gotcha. And how often—this is the my conspiracy-leaning brain. You saying you've known folks who've been the accounting equivalent of disbarred. How often is it like in they're a patsy? Like obviously some higher-up suit is using the little guy as a scapegoat.

Steve: Well, in those cases and, again, certainly don't want to get into particulars, but in those cases the accountant was the tip of the iceberg and those up the chain were also implicated. That is the one thing that I would say is that the SEC isn't just looking for a scapegoat. The SEC is trying to figure out, hey, who should have done what based on what they knew at the time and who is acting in good faith versus those who are like willfully, you know, demonstrating some kind of negligence. And so this wasn't just, hey, you know, you poor Bob Cratchit, you're going to take the fall. No, this was everybody implicated all the way to the top, at least in those cases. What I would say, though, Mike, is that today, and we also don't need to get into this as a whole other episode, but this is a fairly aggressive commission. They are looking for wrongdoers. They're looking for the bad guys, as it were. They're carefully scrutinizing disclosures. It feels different to be in SEC reporting today than it did, let's say, five years ago. And that's not uncommon. You know, as the administration shifts, so does the leadership of the SEC. But it is a much different commission than it has been, at least in recent history. And I do think that's got people on edge or agitated, as it were, and has raised the stakes just a little bit. 

Mike: Sure. Is there anything, and I guess it sounds like the organization changes a lot depending on the leadership, which makes sense. Is there anything you would change like in a structural level about the SEC, Steve? 

Steve: I don't know about structurally. I've always felt like it's been very helpful and constructive where the SEC has been open and welcoming and inviting for you to bring your issues to them, for you to bring your questions to them. I think today that's probably not quite the case for fear that, again, acting in good faith and bringing an open question might reveal some intentional problem, some error, or something like that that the SEC could glom onto. I still generally have faith that that ends up getting worked out without anybody getting in trouble or punished or whatever. But I do think companies are right to maybe be a little more cautious in terms of how they interact with the commission. And that to me is a little bit unfortunate because, at the end of the day, the commission and the public companies are both trying to get to the right thing, I would say, generally speaking, which is good for some useful disclosures, for the users of their financial statements, and for others.

Mike: That makes sense. Mark, you're our ESG cat. Is there an equivalent regulator in ESG reporting, or is that also fall under the SEC purview? 

Mark: Eventually that is the potential. I mean, even if we look back to some of the guidance that the SEC provided back in 2010, which is again—we didn't define this. It's nerdy again—principles-based versus rules-based guidance. But the modernization to S-K that we talked about related to human capital disclosures as well as the 2010 climate change guidance is very much principles-based, which is very up to interpretation and not as much aiding to that consistency and comparability. But as we look to the future and things like the climate proposal potentially becoming a rule, a newer human capital proposal that looks like more of a rules-based proposal, potentially. Those types of things I would look to as regulating ESG disclosure. But again, because investors are demanding it, not because the SEC is trying to regulate companies being net zero. They don't care whether a company is net zero or not. They're just asking for the information that helps a ringmaster make their investment decisions. So definitely the other parts of the EU that will be adopting CSRD as well would be somewhat equivalent, not the same capital market access that we have here in the U.S., obviously. But that's another I think lever that exists in the marketplace, maybe not an equivalent. But within the capital market system, there's an initiative called the Sustainable Stock Exchanges Initiative, which promulgates or helps their member exchanges around the world promulgate various requirements for being listed. So Nasdaq has some disclosure requirements around board diversity, for example, that if you're a Nasdaq-listed company you have to provide those kind of disclosures, and there's climate-related and ESG-related disclosure requirements across various exchanges, but not quite as much teeth, I guess, as the SEC. Similar but not quite. 

Mike: No, I think one of the most illuminating—so much of this is—is when coming to regulations, it's—none of these organizations are saying, and you have to have this kind of diversity or this kind of climate rules. It's just here's what you have to disclose that you have. They're not enforcing the investors and the public will enforce what they want to see from the companies, but the organization—that's been huge and maybe our listeners are like, yeah, duh Mike, but this is why we're having this episode. 

Steve: We're blowing your mind one question at time. 

Mike: You are. And I wanted to ask you a question. You said principal-based versus rules-based, Mark. So is rules-based like you have to do this? This is like there will be consequences if you do not. Is principles-based like come on, you know you should?

Mark: Principles-based is you should do this if a certain thing exists or is material, and you can disclose this in various ways. So a good example is the TCFD framework. It's very much a principles-based disclosure framework, where it asks for what does a company's governance around climate risk look like? What does their strategy around climate risk look like? What is their risk management process around climate risk? What are the metrics and targets that they use to manage and measure climate risk within the organization? So an organization can talk about their governance strategy, risk management, and pick different metrics and targets if those things are not prescribed. Whereas if it were rules-based, it would say what board-level structures are in place to help manage climate risk? What executive level management structures are in place? What line-level management structures are in place for governance of climate risk? That's much more prescriptive. And then you can compare what levels of governance an organization has in place. How often do they meet? What do they accomplish? All of those different things that you could much more prescriptively ask for similarly on metrics and targets. Tell me your GHG emissions. I don't care if you use water and waste to manage climate risk. I'm going to be prescriptive and just ask for emissions. 

Mark: Gotcha, no that makes sense. 

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Mike: Man, I know this can't be a two-hour episode, so I'll curtail some of the follow-ups I have. We've been very much in the weeds, so I'm going to pull it back a little. Steve, what is the most exciting aspect of the accounting today? 

Steve: Well, lots of thoughts on that. But in the interest of keeping this concise. Actually, these kind of issues that we're talking about right now are exciting I think. You know, that's one of the things that I really liked about SEC reporting is that it's not just debits and credits, journal entries, reconciliations, general ledger type of stuff. Bookkeeping might be the best way to describe it, although it's certainly more to it than that. It's actually thinking through complex disclosure issues. How do we take what we are doing as a company, put that through the filter in the lenses of what we think is most important for the users of that information, as well as the requirements that we have in order to disclose that stuff, and put together like a cohesive story, and especially when new things come up? And that could be a new rule like climate rule that we're talking about or the CSRD. That could be a new transaction where we acquired a company or we're in a new line of business. Those to me I think micro but becomes really, really interesting because it's ultimately a communication exercise—not to steal that from Paul Munter, Chief Accountant of the SEC. But that's what I think gets people excited. It's project based. You kind of get a seat at the table of, you know, I think maybe some kind of limited sort of perspectives at companies and, you know, to me anyway, that was always the part that I enjoyed the most. 

Mike: So it's like taking all these complexities and helping shape the narrative or how you're going to communicate the narrative.

Steve: Yeah, exactly.

Mike: All right. Storytelling. Now I can understand that. 

Steve: I would hope so, Mike, given your role. I would hope so. 

Mike: Mark, for you, what about ESG? What's the most exciting thing about the ESG reporting world? 

Mark: Gosh, what isn't exciting about the ESG reporting world or ESG broadly? I think, you know, when I look back—I'll have a real quick story here too, because I think it's kind of interesting. When I started my career, I was a CPA. I did normal accounting and somebody above me at my prior job said, you should leave for the day. It's too late. You are not saving lives, which maybe you could argue. Sometimes we were depending on where that money was going that we were accounting for. But then when we think about ESG, depending on what you're working on, there is a potential and maybe it's a stretch to save lives. And I used to work in the world of health and safety reporting and health and safety process management and understanding how an organization keeps their people from dying in the field on a day-to-day basis. That's just one example. But obviously, as we think about, you know, how climate issues impact the environment and the greater society, I think the ability to make an impact on some of those issues within an organization or even more broadly is pretty exciting. Or for those of us that care about those issues, whether they be environmental or social, and being able to make an impact on those things, I think brings a lot of meaning to people's lives when they're working in this space. 

Steve: And even in the interest of time, I'll keep this quick. But what's super cool, Mike, is the convergence of these two things. Those issues that Mark's talking about that really do make a difference that you as a professional might be really passionate about, but the newness of the disclosure exercise and the implication to companies. That is creating significant career opportunities for both ESG professionals and financial reporting professionals. I mean, again, regardless of how you feel about all this stuff, you cannot ignore the career opportunities here and personal development opportunities. That, to me, I mean, this doesn't come along very often. This is a huge, enormous one right here that professionals, I think, can really take advantage of if they're so inclined. 

Mike: Yeah, it feels like a really exciting time to get into these fields. Help shape the world! 

Steve: Right. 

Mike: Closing question, we've been talking a lot about regulations and regulators. What regulator in your life, and you can define regulator however you want, what regulator in life are you most afraid of? Mark, we'll start with you. 

Mark: Gosh, I didn't prepare for this question. 

Steve: I can tell you one regulator that we're clearly not concerned about is the clock. We start recording and it's like, oh yeah, this would be a short one. Let's just chat for a minute and we're, you know, sitting nearly 40 minutes. I find that funny. No, I'll tell you two things. My phone is old, but I love it. And the battery life now, like by the end of the day, I am, like, running on fumes. That tends to regulate how often I'm looking for chargers, that kind of thing. The other are my neighbors. And it's the pulling out of the garbage cans on Sunday night. You don't want to be late and you don't want to miss recycle. But the recycle is only every other week, and sometimes one person will pull it out incorrectly and then everybody does. And then it doesn't get emptied. Everybody's like, hey, who who messed us all up? Anyway, for that and other reasons, I feel regulated by my neighbors and my phone. 

Mark: It's funny because my neighborhood has the same regulator problem with trash bins, and we have the same every other week scheduled recycling. I don't know that I'm afraid of my regulator, but I think my dog definitely regulates a lot of what I do and what I don't do. So that's probably the regulator in my life, but it's a good one. 

Mike: Yeah, I would say my dog definitely regulates. If I'm feeling lazy and she needs to go out, I'm not allowed to be lazy. I think if we're talking fear. I've been boxing for the last year, and I'd say my coach is the regulator I'm most afraid of because he can tell if I am not working out and makes it harder. He's not like, oh, you've had a rough week. Let's go easy. Quite the opposite. 

Thank you both so much for just answering all of my questions. So big thanks to Steve Soter and Mark Mellen. Big thanks to you, dear listener, for surfing along with us. This has been Off the Books presented by Workiva. Please subscribe. Leave a review. Tell your buddies if you like the show. Sound off in the comments on YouTube. And feel free to drop us a line at Surf's up, and we'll see you on the next wave. 



Off the Books Season 4, Episode 29 Back to Basics, Part 2: So...Who Regulates ESG (And More Q&A)


20 minutes


Steve Soter, Mike Gravagno, Mark Mellen

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