ESG and Net Zero: Dinged If You Do, Dinged If You Don't

Key Takeaways

Season 4 of Off the Books is here! We’re kicking things off by talking about net zero and why it might be causing heartburn for some companies. Tim Paradis, an editor at Insider, talks with us about carbon offsets, a letter 19 attorneys general sent BlackRock about its investments, and of course, Halloween. Listen in or watch the video version on YouTube:

Show Notes:

• Here’s the attorney generals letter to BlackRock

• Here’s a response from BlackRock

• And this is what the New York City Comptroller sent BlackRock

• Hear the Off the Books crew chatter on other accounting topics

 

Season 4, Episode 2: ESG and Net Zero: Dinged If You Do, Dinged If You Don’t | Transcript

Steve Soter: Hello and welcome to Off the Books where we surf the unchartered waters of accounting, finance, risk, and wherever else the waves take us. Welcome to season four. We are so excited with more movies, more memes, more of everything. This season—and this episode—is brought to you by Workiva, the risk, reporting, ESG, and compliance platform that simplifies your complex work, like reporting the results of the scenario analysis you just did for your fantasy football team. Check it out at workiva.com/podcast. My name is Steve Soter, accounting enthusiast and Diet Coke aficionado. I'm looking forward to debiting a great conversation, and I'm so happy to have you with us. I am also extremely happy to have Catherine Tsai joining me. Catherine, can you please tell the fine folks who you are?

Catherine Tsai: I'm not an accountant or a Diet Coke aficionado, but I like asking questions, learning new things, and I'm here to learn.

Steve: So, Catherine, what are you looking forward to the most in season four? We spent a lot of time getting ready for this.

Catherine: I'm looking forward to watching more accounting movies with you and our producer, Mike Gravagno. But I'm also interested in just talking more about accounting matters that are in the news and learning a bunch of more new things.

Steve: Well, I am with you. So much to talk about. I am also looking forward to learning how to video as well as audio with the podcast.

Catherine: I know.

Steve: I don't know if I look at the camera, if I look at you, if I look at my notes, admittedly I have those. So I'm looking forward to learning and figuring out how this all works.

Catherine: Yeah, we have to tell our listeners we're available on YouTube now, and you can actually see us.

Steve: That's exactly right. We busted out our Off the Books t-shirts that we had made, especially for this season—very excited about that. And our audience can't tell, but it's a little bit fuzzy here there on the on the prints there. So cool.

Well, Catherine, I am super excited as well for season four and also very excited to get to our conversation today. So let's have at it.

Catherine: So today we are joined by Tim Paradis, who is the Future of Business Editor at Insider. Tim, what does that mean, Future of Business Editor?

Tim Paradis: Well, it's a purposefully amorphous title that lets me have a lot of reporters on my team who cover different things. We look at sustainability. We look at diversity, equity, inclusion, C-suite trends, HR stuff, careers. It's the whole gamut.

Catherine: And I should mention that Tim and I actually know each other. We grew up in the same town in Ohio.

Tim: That was Sylvania, Ohio.

Steve: Got it. I have no idea where that is.

Tim: It's a small suburb of Toledo. Just maybe, what, two miles from Michigan. Right, Catherine?

Catherine: Yeah. Yeah. Some people call it a suburb of Detroit.

Tim: Yeah.

Steve: Interesting. Well, Tim, we're super happy to have you here because this week we want to talk about net zero and what exactly it is and why it's causing some major heartburn for large investment firms like BlackRock. A lot of drama going on there that we're going to get into. But, you know, why do people or what do people like BlackRock's CEO, Larry Fink, mean by a net-zero economy? And maybe we can start there.

Tim: I think what he sees, according to his infamous annual letter, the last one was that he sees it as the biggest investment opportunity of our lifetimes. He said that decarbonizing the global economy is just going to provide unparalleled opportunity for all sorts of new investment. So he sees it that way as a real business imperative but also an opportunity. And in general, it just means that we're taking as much carbon out of the atmosphere, you know, as we're putting in.

Catherine: That makes sense. And what sort of pressure is there for companies to be setting a net-zero goal?

Tim: I think there's a lot of pressure. I think that the science is becoming clearer by the day of how catastrophic the situation could get if we don't do anything. We just saw that with the destruction from Hurricane Ian in Florida. And I think companies realize, shareholders realize, workers realize that they want to have operations that are at least as efficient as they can be and that do as little harm to the environment as they can.

Catherine: I know there was one survey by an investment management firm called Ninety One, and it showed that nine in ten investors say, "Yes, this is the right approach for investment managers to be focusing on achieving net zero." But they're split on whether asset managers should be divesting from companies that are high emitters of greenhouse gases or if they should stay invested to help them make the transition to net zero. I know Steve mentioned earlier BlackRock's experience.

Tim: Yeah, BlackRock has certainly been kind of the poster boy for being in the middle of this tug of war. You've got some investors who say that you need to be more aggressive in your stance with the companies you invest in, and then you've had I think it was something like 19 state attorneys general who accused the company essentially of engaging in woke capitalism and saying that you're dictating how companies should operate and that you're penalizing traditional energy makers and things like that. And that was something that came in part from the state of Texas, of course, a big energy hub. And so they have really been—they being BlackRock—have really been in the middle of kind of this fight.

Steve: Tim, I wonder and maybe I'll put you on the spot here just a little bit to try to read the tea leaves or read between the lines. But when you said that Larry Fink sees a net-zero economy is the biggest investment opportunity, does that mean that he also says, "Hey, BlackRock as a firm ought to be supporting that, and we ought to be moving both our company as well as our investments in that direction"? That's the sense that I got when I read his letter, but it's interesting. Having an awesome investment opportunity to drive a net-zero economy doesn't necessarily mean that, "Hey, I'm going to do everything I can to get there. I just want to make some, you know, good returns along the way."

Tim: Absolutely. And I think that was the point of the Larry Fink letter, which is to say that if you don't innovate, you're going to be left behind. So I think someone like Larry Fink sees this as as the future and that if you kind of put your fingers in your ear and pretend that this isn't going to happen, you're really going to miss out on an investing windfall.

Steve: Tim, do you—and again, I realize you might not have a crystal ball there hidden behind the camera—but do you foresee the time where these funds, for example, are going to have to actually be declarative about, "Hey, our number one priority is to maximize shareholder return"? Or alternatively, our number one priority is, "Hey, we are going to do what we can to make investments that will drive towards a net-zero economy"? And I'm actually thinking here specifically about the SEC proposal, about the naming of investment funds. And that's a tiny bit different than what we're talking about here, but I just wonder if we're getting to the point where these big, large investment companies are going to have to draw a little bit of a line in the sand and say, "You know what? For all of our investors, just so you know, this is what we're going to be focused on. If that bothers you or, you know, that's not consistent with, you know, your investing goals, then maybe you need to go somewhere else." I mean, nobody wants to necessarily make that tough choice, but I just wonder if that's the direction that we're going to inevitably be headed. Again, given the sort of tug of war that BlackRock is in right now.

Tim: Yeah, that's a great question. I think it's hard to say definitively, but I wouldn't be surprised at all to see more, again, self-sorting just the way we've seen geographically happening from an investment standpoint that we see people say, "I'm going to invest in these funds because they follow my belief system." And then other people who would say, "You know, I'm only curious about or only concerned about the maximum returns. And so that's what I want." And I wouldn't be surprised at all. I think you see it playing out in the consumer space with certain brands, right? Somebody likes, you know, I don't know, Patagonia and then somebody else like some other brand that they think is less quote unquote "woke." So I think that you can see the same thing kind of trickling into the world of finance, where we have different investment vehicles for different people, depending on their politics, maybe.

Catherine: I would love to be a fly on the wall at companies that are discussing whether they should set a net-zero goal at all because not every company has done it yet.

Tim: Absolutely. And I think, you know, it's also one thing to set a net-zero goal, and I think a lot of the people who are smart in this sector think that's not the hard part. The hard part is telling us how you're going to get there. And I've heard, you know, and we've talked to people, reporters on our team, who have said if they're not setting interim targets, then these aren't serious goals. Because it's very easy to say, in—I don't know—July that I'm going to join the gym in January, and then put it off til the future. And I think the same carries with these kinds of net-zero pledges. If you say we're going to do this by, say, 2050, the current leadership won't be in place. Presumably their stock options will have all paid out, all that sort of stuff. So unless the pledges are there to have interim targets and check ins and sort of measurable goals using science-based targets, I think that these pledges can be kind of flimsy.

Steve: And before we keep going with Tim Paradis, let's take a quick break for a commercial and we'll be right back.

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Steve: Welcome back. Let's continue our conversation with Tim Paradis, who is the Future of Business Editor at Insider. Tim, I want to go back to something that you mentioned earlier about the coal fire plant that maybe if I divest myself of that, well, the coal fire plant is still there. The emissions are still being produced. I may have been the one to invest in it initially and built it or whatever, and now I'm, you know, walking away from it. I'm wondering, can you share with us some of the criticisms about the notion of offsets, like, you know, for every mile we have a 747 flying through the air. We're going to plant another tree. I'm making that up. That's a stupid example. But the offsets, I guess mathematically or the arithmetic kind of makes sense. But again, I think that some people would say, well, if we're really going to get to a net-zero economy, that zero part of it actually needs to be not offsetting, but maybe stopping or fundamentally changing the activity that's causing the emissions in the first place. Can you tell us a little bit about the criticism, because it feels like a valid point?

Tim: No, absolutely. I think some of the criticism that we've seen is that people see the offset as kind of, you know, buying your way out of trouble. And so I think that without really any major cost in terms of changing your operations or how you operate. And I think we've seen that, you know, of consumers, we've seen that of businesses. So I think it's that same idea that you really need a more fundamental shift, that you can't just sort of pledge to, as you pointed out, plant a few trees and then sort of get by. There's also been criticism of the idea that some of these like—what was one example I read—that, you know, that areas that were designated to be protected weren't in danger of development as an example. Now, that's a slightly different thing than an offset. But as in if you take a stand of trees or something like that, you need to make sure that they're actually real and that we're not just kind of double counting things and saying, "Well, this is all protected." And then it turns out, well, it wasn't in danger and that you're still creating emissions, and therefore you're not really doing anything to offset those. So I think the challenge is that offsets can be kind of fungible a little bit. So you need to make sure that they're legitimate and that they are really helping change the course of your own emissions.

Steve: And Tim, is there also a point, though? Maybe the counter argument is that, "Hey, as a business, all I want to do is manufacture my product, sell it at a profit, pay my employees, and return some amount to my shareholders. I am ill equipped to be able to make this kind of fundamental difference in terms of the climate or whatever." And so do you also feel like, well, maybe there is an opportunity for governments or others who might be a little better suited to make those decisions, maybe play more of an active role with at least those companies who want to make those changes. And I'm hoping my question makes sense. I'm just putting myself in the place of a business owner or a CEO running a business and thinking, "Hey, that feels a little bit outside the scope of what I'm trying to accomplish here, just again, in order to generate a small profit and pay my employees and return to my shareholders."

Tim: Absolutely. I mean, I think that's a fair complaint, if you will, among CEOs and leaders. I think that the answer that a lot of people would give to that would just be that it's—we interviewed a CEO of a major consulting company earlier this year, and he said basically it's the hardest time ever to be CEO. There's more on your plate. There are more things that you have. It's kind of Whac-A-Mole. You know, you have more things you have to worry about and whether that be workers feeling upset or whether it be DEI concerns, whether it be these environmental concerns, it's just the nature of the job now. So that having to account for some of this stuff, it really is up to CEOs to at least have to think about this to some degree. Now, how much thought they put into it and whether they're doing it is more window dressing or lip service, that's for others to decide. But it certainly is a focus for boards and for companies because it's a focus for workers and for consumers. I think you all know you go to the grocery store or you go to a restaurant and they say whatever it is, right? This is a meat-free option or this is something else. People are faced with these choices every day, and they can vote with their wallets and figure out, "Okay, yeah, I want to support this or I don't want to support that." So I think CEOs realize that they've got to have at least some position on this.

Catherine: I think one of the takeaways from this conversation is that companies really have to be focused on what is important to their stakeholders. And then also, if they're setting some sort of net-zero goal or any kind of ESG goal, just having steps planned out for how you're actually going to reach your goal or your target.

Tim: Absolutely. I think that, again, when people look at the quality of these pledges, if you will. They're going to look for things like science-based targets. They're going to look for things like interim measurements. They're going to look for reporting that isn't just sort of a press release and a glossy PDF that makes it look like they're doing a lot of great things. But on the side, they have a lot of assets that are dirty or that they are cleaning up their act in some other way. So I think as that reporting gets better and more standardized, to your point, Steve, about government there, we've seen some discussions from the SEC, as you know, and you alluded to, as this stuff gets better then the grading on these pledges and things like that, I think we'll get tougher, as it should.

Catherine: There is a new community out there for ESG professionals, sustainability professionals to talk about all of this. It's called the ESG Professionals Group. And so it'll be interesting to see what sorts of conversations are happening there and what sort of actions come out of there.

Steve: I would add a very big plug to the ESG Pro Group.

Tim: I'm sorry to cut you off, Steve. I think for all this, it's interesting because in some ways, with all of these areas like ESG, we're kind of all making this up as we go along, right? This is all new. So there are people who, not to say that there haven't been people working on these issues for a while that used to be called corporate sustainable—what CSR corporate social responsibility, right? So the terms change a little bit, but some people have been working on this for a while, but in a broader sense, this is all so new to us, especially the environmental part of that and even the social that we've seen in recent years. You know, since George Floyd and all that sort of upheaval there, I think that in some ways we're kind of all making this up as we go along. So it's not a surprise that you'd see these new groups pop up, and they're probably going to really figure out how do you navigate these questions? There are a lot of people when you talk about ESG—I was in New York last week for Climate Week, and they were talking about, you know, some of the conversations I heard just kind of on the side were does ESG even make sense? Because it's such a, in some ways that you can see where there's an overlap, but on the other hand, there are others who say that it's kind of strange bedfellows and you have all these big topics that really need to have their own tent rather than be thrown into the sort of the junk drawer of investing, you know, and have and or a corporate leadership. So I think it's an interesting thing to see where this lands.

Catherine: I feel like we could talk to you all day, but I also feel like we're keeping you away from meeting some very important deadlines in the newsroom or something.

Tim: No, it's great to talk you guys as well.

Catherine: Well, we should probably get to our closing question of the day.

Steve: So speaking of BlackRock's position of you're darned if you do, or you're darned if you don't. Let's talk about Halloween decorations. We try to keep it a little lighthearted. So we've seen some houses already decorated, and our neighborhood feels like that might be a little bit early. I confess, though, our Halloween decorations actually are already up. But Tim, what do you think? When's the right time, if there even is one, to put up Halloween decorations.

Tim: I'm firmly October. I would like to say no shade to you, Steve, but I like to wait til October to see to see those things go up. But I understand the inclination. It's a pretty fun holiday. It's a secular one. You don't have to give gifts. It's all about candy and fun, so it's a pretty great holiday to get behind.

Steve: How about you, Catherine?

Catherine: I'm going to tie it firmly to my stakeholders and what they want, which would be the trick or treaters in my neighborhood. And I think as long as there's candy involved, they don't care when my decorations go out. They just want the candy to be there on October 31.

Steve: Got it.

Tim: You could go without decorations entirely, right?

Catherine: Yeah.

Steve: I think you have a very valid point

Catherine: Exactly. Well, Tim, thanks for being here. We really appreciate it.

Tim: Oh, thanks for having me. It was a lot of fun to talk to you guys.

Steve: A big thanks to Tim Paradis of Insider and big thanks to you, dear listener, for surfing along with us. I am Steve Soter. That was Catherine Tsai, and this has been Off the Books presented by Workiva. Please subscribe. Leave a review. Tell your buddies if you liked the show and feel free to drop us a line at offthebooks@workiva.com to tell us what you'd like us to talk about on upcoming episodes. Surf's up and we'll see you on the next wave.