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Mandi vs. Steve on the SEC Climate Disclosure Proposal

Key Takeaways

ESG Talk’s Mandi McReynolds joins Off the Books to give an ESG director’s point of view on the SEC’s climate disclosure proposal, while Steve offers the perspective of an SEC reporting director. Will they see eye to eye? Will Catherine have to give them a timeout? Will the Workiva podiverse ever be the same? Tune in:


Season 3, Episode 18: Mandi vs. Steve on the SEC Climate Disclosure Proposal | Transcript

Steve Soter: 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 risk reporting and compliance platform that simplifies your complex work and your grilling plans for the summer. Check it out at My name is Steve Soter, accounting enthusiast and Diet Coke aficionado. I'm looking forward to having a great conversation today and I'm happy to have you with us. I'm also 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 Diet Coke aficionado, but I like asking questions, learning new things, and writing about them later. So, I'm here to learn. Who's joining us today, Steve?

Steve: Today, we're very happy to have Mandi McReynolds joining us, who is Workiva's head of ESG.

Catherine: We wanted to get Mandi and Steve together to talk about their reaction to the SEC's climate disclosure proposal, especially now that the comment period is wrapping up.

Steve: Well, let's get right to it.

Catherine: Mandi, thank you for being with us today. Tell us a little bit more about ESG Talk.

Mandi McReynolds: Hi, Catherine. So great to be with you and Steve. I'm a huge fan of the Off the Books podcast. I am regular listener. Unfortunately, I'm not a Diet Coke aficionado like Steve—just for the record as I come on the show—but I am a massive coffee drinker and drink way too much coffee for my own health. ESG Talk is a podcast that's a go-to resource about all things environmental, social, and governance, and we really wanted to design the show to take away from all the hype that you hear out in the marketplace and in the media, and really talk to individuals who are doing the real work to drive business and society impact forward. So, we have fun little formats on the show from the chats, which are quick hits on what's happening in the latest research, to full-fledged interviews with individuals who have been longstanding in the field or are tackling some of the latest issues. And in fact, we'll have Steve on the show later this season as we do a regulatory wrap-up. So it's been a really fun journey to start that and have it meet a big need in the market.

Steve: I'll bring the Diet Coke.

Mandi: That's right.

Catherine: Well, since you're here, Mandi, we're very interested in hearing your perspective as an ESG leader about the SEC's recent climate disclosure proposal, and also hearing Steve's point of view as someone with an accounting and finance background. What were your first reactions to that proposal?

Mandi: Well, my first reaction was I need to text Steve and get his breakdown and my SEC colleagues'. ESG—environmental, social, governance—is a team sport, and so I think that was my first reaction was, okay, now that we know what the proposal is, how are we going to assemble a team? How are we going to look at what we need to prepare for these disclosures? And then my second reaction was, as we look at this work, many of the practitioners in the field look at regulation as hope for standardization. But we understand that it's not going to be the main driver for why we wake up every day. We wake up every day to serve our stakeholders, which are our investors, our customers, our employees, our board members and our executives, and regulation is a part of that picture. And so as I read through the proposal, I began to think about how does this relate to the other stakeholder demands that you have in your practice? How how does it relate to what my customers in EMEA want from us? The investor audience wants us to share with them as they're making investment decisions. And where are their commonalities and where does this take it a little bit deeper? And so, for me, there was that piece. And then the third part that I thought about was my heart broke for a lot of people who haven't begun their journey yet, and this is going to take a significant amount of work and intentionality between a lot of members of their team. And the hope is that you can do it. Yeah, I've done it, I've built it at different companies. It is possible. And when you have great colleagues like your finance department and your compliance department and your facilities team or wherever your missions may lie, you can get through it together, but it is going to be an accelerated journey for many, many companies.

Catherine: Yeah, well, let's dig into some of those concerns. You alluded to some and Commissioner Hester Peirce has also raised some concerns. But what is it that makes your heart break a little bit about this proposal?

Mandi: I wish in some ways that it is aligning to the Task Force for Climate-Related Financial Disclosures, the TCFD. What I wish is like other regulations we've seen in the world—when you look at UK, you look at Singapore, you look at other areas where they've just named the framework—I think that's really helpful. It eliminates this area of like it's leaning towards, it's aligned to, it's like let's just call it that it is, and I think that will help companies better map their global journey. That said, I think TCFD is a good framework. It's a good starting place. It's a mix of the qual that allows you to tell your story really, really well where you are, where you've been, and where you're going. And I think that's that's a good first step for companies.

I really do appreciate Peirce's response. I think that was one of the things Steve and I chatted about, is when you listen to stakeholders, you have to learn to listen to those who agree with you and those that disagree with you. And the things that gave her pause are really important for companies to come together. Scope 3 emissions are very complicated. It is something that takes an extensive amount of work. You have to think through in Scope 1 and 2 where you have operational control and financial control. Scope 3 is what I call where you have influence control, and a lot of her questions really pointed to how far is influence control and to what extent and how is that financially material. When you look at the asset management business and thinking about their entire portfolios or retirement accounts, is the fiduciary responsibility more important and the return on investment or the analysis of risk? Now, there's difference of opinions in the market on that position, and I think that was a worthy point to come forward on and discuss how that's going to play out in the proposal. Steve, I know you and I've talked about the footnoting and some other elements to it where as companies are on their journey, this accelerated timeline is going to be really important for them to get started now, for them to assemble their team, to look at frameworks like TCFD, to begin to capture their data, and begin to prepare for this future. But it is quite the accelerated process, and I appreciated that she called that out in her remarks.

Catherine: I wish I could have been a fly on the wall when you two were texting each other and sharing first reactions to this proposal. Steve, what was your perspective being an accounting and finance person?

Steve: I think a little bit of discomfort if I'm being honest. There were some things that weren't a surprise when I talked about, "Hey, what risks do you see? What governance do you have in order to handle those risks?" And maybe some of those, I'd say a little more generic qualitative. Those are those are really common disclosures. In fact, they matched the cybersecurity disclosure proposal that was maybe a couple of weeks ahead of these climate proposals. For any geeks like me out there who kind of watch this stuff, that piece wasn't a surprise. But I think, Mandi, your point about this is a team sport and needing to bring teams together urgently, very quickly and some really significant and I think fundamentally changing ways, you know, give me pause and give me a little bit of discomfort. I say that because, you know, SEC reporting, I mean, it's the highest-stakes reporting that there is. I mean, if you're negligent and, you know, let's hope that doesn't happen, but it's not outside the realm of possibility for you to be censured, for you to be, you know, barred from working for a public company again or up to and including, you know, fines and jail time and all that stuff. And, you know, we'll agree that all of that is a little extreme and only applies to sort of the worst of the actors out there, but just the fact that that's even a possibility that could be an outcome of a financial reporting exercise, I think illustrates just how high stakes it is.

And so when you start to introduce data sources, you know, climate or anything ESG related is a financial reporting person. That makes me a little bit uncomfortable because I'll probably have some initial question about, okay, well, can I trust it? Is it validated? Is this ready for prime time from an audit perspective? I think the other thing that was a little bit concerning is the differing materiality thresholds. One of the things that the proposal talked about was including this extra financial statement footnote, and that right there triggers external audit review. It triggers internal control over financial reporting, which again are super high stakes. And it asks me to use this 1% threshold to say, okay, if climate had more than a 1% impact on financial statement, light items, you need to disclose that. You need to talk about that. I mean, look, if I have a productive asset, let's say a plant that floods due to a climate-related event or I'm going to spend some money transitioning to climate-hardened infrastructure, whatever, that's going to be easy to tell what the impact is of financial statements. But what about imperceptible changes? Like, my revenue starts to slowly change because maybe my customers don't see my product as being as as climate friendly, or maybe what could be a very real thing is that the cost of my suppliers might start to change again imperceptibly because of changes that they're making from a climate perspective.

Now, presumably, those are all impacts that I would have to be able to identify and monitor and to be able to demonstrate that those things cause these, you know, again, greater than 1% impacts, if in fact, it is greater than 1%. And that just gets you into an area of, I think, a lot of discomfort and uncertainty because those kind of processes to that level of precision really just doesn't exist today in most companies. And frankly, if it does, it's probably not reliable enough at this point to withstand audit scrutiny and the rigor of internal controls or financial reporting. The ironic thing is that my impression is that those types of processes exist today for ESG teams, maybe not down to like a 1% level of precision, but those processes exist. Now was the time, as Mandi indicated, I think, to really start to merge those two worlds and start to just begin the process of saying, "Okay, what do you look at as an ESG team and its impacts?" How do we then kind of meld that with what we look at from a financial reporting perspective of, you know, changes period over period or variance to your forecast or your budget or whatever. Mandi called it out, so I don't need to spend a ton of time talking about it.

But the accelerated timing, you know, it's tough to get a 10-K out the door in time now to have to do that, including your greenhouse gas audit attestation within that same amount of time. I can't even imagine what that looks like because, Mandi, you can keep me honest, but, you know, my understanding is that often isn't done until the spring or maybe even the early summer. So now having to have that kind of ready and you know what, end of January, February for, you know, most calendar year public companies. I think that's going to represent an enormous challenge and is really going to start to require teams to be looking at that today, and that's before we even have a final rule. Right? It's just a proposal. But if it gets adopted, as you know, the timeline that they laid out, you got to be ready to start looking at this stuff January 2023.

Mandi: I agree, Steve. You know, one of the things we talked about early on was that cycle difference. And even as you work on sustainability reports, I've had experience where our environmental data takes longer because you're waiting for the utility bill to come in January and different aspects, and then for it to go through the assurance process and the due diligence process and then have your data ready for your report. Teams were already working really hard for like a Q1 and a year in alignment with the annual report. Now we're looking at, like you said, January, February, an even earlier accelerated timeline for the companies who have been reporting for years.

For those that are new, it's really important to recognize that getting your baseline for your greenhouse gas emissions takes an extensive amount of time and diligence and accuracy and finding the most accurate data. So, for example, even if you're looking at Scope 3 emissions employee commuting. To get to real data quality, a lot of companies have done just general surveys of their population. We went through a journey with our solution engineer at Workiva and our platform, and we looked at could we pull ZIP coding data of employees assigned to offices and correlate that with our survey of the types of transportation in addition to maybe badge entry data and when the building was closed. So think about that process to get that right. And it was the scale process between the U.S. and then expanding out to our international offices and then combing through the data for outliers where somebody might have been tagged to an office, but they lived 400 miles away. You know, how do you get to a near 90 to 95% accuracy? And I think those are pieces where there are tools and platforms that exist that help make the accuracy more possible. It also takes time to ensure the accuracy and the inputs and the types of formulas you're going to use are there as well. And that could be a six-month journey for a team. And then when you go through it and refine it and put together your process maps and your controls and your checklists, right? See if you can articulate, that's a whole other process to get ready for pre-assurance or pre-audit piece. And so I think if we're after great investor-grade and board-grade data, the teams coming together and pulling that together now was so key so that you're prepared with the level of data you need, and the assurance you will need in the future.

Steve: Well, we're going to take a quick break from talking with Mandi and get to a commercial. We'll be right back.

Steve: And welcome back. Let's get to our conversation again with Mandi McReynolds, Workiva's head of ESG.

Catherine: So with these different concerns about the rule, are you worried that the importance of climate and ESG reporting overall might get clouded or hidden by some of these debates?

Mandi: I always think that the desire for transparency is good. And I keep going back to what is the market demand and who are the stakeholders that companies serve. And what I appreciate about where the regulation is going is it's bringing to light that investors want better data. They want more accurate data. They want data they can trust. And in our Workiva individual investor survey, 70% really wanted to use ESG to get data to make decisions on their portfolios and investment calls, yet they couldn't trust it. And so I look at it as even though it's accelerated, it's answering the market demand that's coming from investors. And what we're also seeing is from consumers who are interested in making these decisions, and they're trying to put some rigor around it so that it can create that honesty and transparency in society. So I don't look at it as a negative, I look at it as a positive. And I look at it especially with the XBRL® tagging and some other opportunities that came with this proposal is we might be then able to do more comparison data and that is really exciting when you're trying to make either an investment decision, a consumer decision, or leading an industry and trying to see peers compared to others in your field.

Steve: You know, a lot of the debate, Catherine, tends to surround some of the more onerous requirements within the proposal. But I think, Mandi, you're right. The silver lining, almost regardless of what gets adopted, is most likely going to result in, you know, those things you just shared. I wonder, Catherine, it's only a proposal at this point, right? But, you know, already there's, you know, lawsuits planned and, you know, a possibility of something happening after the midterm elections, depending on the outcome of that. And so you wonder if strategically, maybe the SEC intentionally said, "Hey, we're going to ask for the moon" expecting there will become some kind of a challenge. We end up watering it down a tiny bit, but then we end up getting something that still achieves, you know. Mandi, some of those basic outcomes that you just shared that I think, you know, everybody who's a stakeholder, you know, for ESG, I think would applaud and would welcome. And so I wonder if maybe strategically that was the SEC's play all along.

Catherine: Yeah, interesting. I'm putting you on the spot, but is there anything that you think might get watered down in the final rule?

Steve: I think that 1% threshold, honestly, and not to geek out too much on the financial reporting aspect of it, but there's a notion of materiality within SEC filings. And the way that you define it by the Supreme Court is that if you were to have omitted that information and a reasonable investor would have cared, it would have changed the total mix of information that that investor was using then that information is material. There are occasional references and SEC rules to bright line tests, meaning that if it surpasses this bright line, you have to disclose it regardless of whatever that financial materiality analysis might tell you. But I think the fact that they used 1%, it's an incredibly low level of precision. If you're going to get something close to financial materiality, it's going to be maybe closer to 5%. I mean, there's no bright lines for that, but that's a common number that's generally used, and I think that it provides so many logistical questions about how to comply with that in a reliable way that withstands to external audit scrutiny and internal controls and so forth. I wouldn't be surprised if that was significantly watered down or maybe tabled just so they could get, you know, just if they could get the thing through. Because the feedback at least that I have seen is that nobody was asking for that in the first place. Meaning if you disclose everything else the proposal asked for and omitted the financial statement line item, I don't think anybody would have raised their hand and be like, "Well, hey, what about, you know, the impact of climate? Do you know beyond 1% of any financial statement line item?" I don't think the sentiment is that that's going to happen. So wouldn't surprise me if that ended up changing at the final adoption.

Mandi: And Steve, you brought up a really good point earlier when we were talking about this earlier today. There's still a lot of work to be done in the field to put a number to some of the assumptions you would have to make, and I really loved the example you gave of the supply chain. And we were we were talking about an example in our own company, and I said, "We recognize that this has a risk and that a third-party provider of what we need to deliver our solution, it has a commitment for net zero. Are they going to pass that cost on to us as a consumer, as a user of that product?" We don't know. They haven't disclosed that. They haven't talked about it. So how do we prepare for that? If you think about our colleagues in manufacturing or oil and gas and energy and everyone else in the consumer goods area like you discuss, those are a lot of assumptions that the market has yet to see. And when you start to get into the financial footing, noting that you're way more of an expertise than I am, that's where I think there's a lot of pause on both sides of the houses because that's a whole other level of financial modeling with a whole other level of assumptions that you would have to make in order to make that argument right now. And to that point is, how accurate can you be? And I, like the UN is who's really asking for it to that extent. If you're doing a scenario testing like that and looking at the risk, you're identifying the risk. You're talking about the risk. You're working through whatever reasonable modeling you can do. I think that's when an investor cares most about, or our future customer, or stakeholder, or board member wants to know is how are we mitigating the risk and amplifying that opportunity?

Catherine: Bottom line, I'll ask both of you. I'll start with Mandi. What are your hopes and dreams for where ESG reporting goes from here with this SEC proposal?

Mandi: Oh, that is a big, big question. And I think for me, it's one of the greatest joys that I've had, is looking at it from the lens of a team sport and executive team. And so I think if anything, it helps you look at the holistic picture of your company and where you mitigate risk and where you drive business value opportunities. We are going to go through a transition in economy. We are going to go through a future that looks different together. And if you're only looking at it from the sustainability lens or the ESG lens and you're not looking at it from the finance lens, you're not looking at it from the risk department lens, you're not looking at it from a customer facing lens, an opportunity you lose out on business value. And so my hope is this first step with climate and Steve and I've talked about, it's like this is one of many to come right away and we both have agreed to that. My hope is this allows the teams to really come together and start driving business value and start attacking the holistic risk that environment, social, and governance can bring to their company.

Steve: I would largely echo Mandi, exactly what you shared. I mean, you know, regardless of the connection that the people are making between, you know, financial results and ESG consideration, which I think the evidence is pretty overwhelming that those two are connected, but regardless of whatever that might look at, investors are asking for this information. I mean, you know, of all the kind of pot shots that were taken at Chair Gensler by the critics after the proposal was made, that was one that actually resonated to me as a financial reporting person, because if you have investors asking for this, then again, by that definition of materiality, it is material and therefore you should be providing it. But you need to have a framework and a construct that allows you to do that in a consistent, comparable way that that protects you from liability of maybe not disclosing enough or, you know, the wrong types or whatever. And so my hopes and dreams, I guess—not that I dream about this proposal very much—but if I were, you know, kind of my hope for it is that it maybe gets simplified a little bit so that we can get to a good starting point that doesn't maybe ask for such onerous disclosures as I said, that financial statement footnote, just using that as an example, that we can just get started on providing even a small subset of the information that investors want, but to be able to do that and incorporate it into our processes so that as we identify additional information that might be useful, we already have sort of a baseline, a foundational platform, or whatever to start to layer that stuff on. Again, the concern that I have is that this is pretty big and I'm not saying that's necessarily a bad thing, but I do think it's pretty onerous from a financial reporting perspective, and it would be great if it maybe got watered down just a tiny bit so that starting wasn't such a huge obstacle and we didn't have to have all these debates. And we could all agree that investors are asking for it. Here's how we could start to give them that information, and then we see where it goes from there. So we can then focus on, as Mandi said, that business impact. Because, again, I think that to me, and also providing the information that investors are looking for, I think those are really the two pillars that ideally should be coming from a rule like this.

Catherine: Yeah. Any final thoughts from anybody?

Mandi: I think this is just the beginning. So why not start? That's kind of what I take a step back and I think of all the customers we've had the privilege to talk to Steve and people in our respective professions and I haven't met a person yet that says, "Oh, this is the end of the line." Everyone's like, "We understand that this is the beginning and there'll be more to come." And so why not get started.

Steve: No, I completely agree. By the time this podcast actually gets live, there may be another proposal come from the SEC. We saw one recently for ESG investment funds.

Catherine: We'll be very interested to see how this all develops. But I think it's time for our closing question of the day. Ready?

Steve: Ready as I'll ever be.

Catherine: All right. Well, in her dissent to the SEC's climate disclosure proposal, Commissioner Peirce linked to a YouTube clip of The Simpsons. So, is there a famous meme or gif that you would link to illustrate how you're feeling about that SEC climate disclosure proposal?

Mandi: I think one that's gone around the last year has been what's the fastest-growing thing on earth? And it, you know, how it had cheetah, I think an ostrich, or some other really fast animals. And then the fourth was individuals with ESG experience. And I think it just resonates the growth on LinkedIn. In the last year, I think, 7,000 jobs that have ESG listed as a part of its work. And I know Steve and I talk about it: it's an exciting time, whether you're in finance, whether you're an environmental, social, and governance to be in the field. It is growing and is at a fast pace and regulation keeps you on your toes.

Steve: For me, it would be—I've heard it referred to as both the awesome kid meme or the success kid. But, you know, it's the young kid, you know, kind of like he's got a fist, like, "Yes, I can do this" with this, you know, determined look on his face. And I've been doing SEC reporting for quite a long time. But even more than that, get the privilege of associating with a lot of people who are in SEC reporting today. And, you know, just like that meme, like we'll figure this out. I have no doubt that, you know, the amazing professionals who do that work are going to be successful at it, are going to figure out how to make it work, regardless of what the final proposal, you know, ends up being when it gets adopted. So, yeah, I'd go with the awesome kid or success kid.

Catherine: Makes sense.

Steve: Well, how are you feeling about it, Catherine? What would be your gif or meme?

Catherine: Mine would be the keep calm, carry on meme. I think.

Steve: That's a good one. That's a good one.

Catherine: Because, I think if ESG teams and finance teams just keep their eyes focused on stakeholders and serving them and the information they're looking for, they can't go wrong.

Mandi: And waiting for the meme that's like "I'm amped up on Diet Coke and coffee to get through the next year."

Catherine: That's right. Well, thanks to both of you for being on today. It was great hearing the conversation between you two, and we'll see you over on ESG Talk soon, I hope, Mandi. Is that Steve's episode?

Mandi: That's right. Regulatory wrap.

Steve: I look forward to it.

Mandi: It'll be great.

Catherine: Mandi, how can we find ESG Talk?

Mandi: ESG Talk is wherever you get your podcast, and you can follow the conversation on Twitter at ESG Talk or connect with me on LinkedIn, Mandi McReynolds. Everyone who listens in on the show is a co-producer, so we welcome your feedback, comments, ratings to help us shape the show.

Catherine: Steve, do you think that others will share the same feedback that you and Mandi had?

Steve: Well, I think they will. I mean, in as much as the SEC is trying to consolidate, simplify, and unify ESG disclosures and, in this case, climate disclosures, I do think there's going to be some legitimate issues that people are kind of going to want to work through. And it'll be interesting to see how that shakes out once we see the inevitable news stories and summaries and so forth of what the comments have looked like.

Catherine: We'll be watching. Big thanks to Mandi McReynolds for joining us today. You can catch her on her podcast, ESG Talks. Follow her on Twitter at ESG Talk or on LinkedIn.

Steve: And big thanks to you, dear listener, for surfing along with us. I'm Steve Soter. That was Catherine Tsai, and this has been Off the Books presented by Workiva. Please subscribe, leave a podcast review, tell your buddies if you liked the show, 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 3


33 minutes


Steve Soter, Catherine Tsai, Mandi McReynolds

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