In this illuminating episode of the Count Me In, we sit down with our esteemed guest, Janis Parthun, VP, Advisory & Project Services at RGP. She is a leading voice in the world of Environmental, Social, and Governance (ESG). Dive into the intricacies of ESG, understand its importance in a business context, and explore its different facets - from the environmental to the social and governance perspectives. We also delve into the challenges companies face in implementing ESG strategies, discussing the evolving regulatory landscape and offering insight into the best practices adopted by forward-thinking businesses. Whether you're an industry veteran looking to refine your ESG approach or a newcomer eager to implement an ESG program, this episode is brimming with valuable insights.

Connect with Janis: https://www.linkedin.com/in/janisparthun/

Full Episode Transcript:
Adam:            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.

 

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?

 

Janis:              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 has been set and established.

 

To reach the goals and the targets, the company may have various initiatives and action, in order to support the 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.

 

Adam:            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?

 

Janis:              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.

 

Adam:            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?

 

Janis:              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.

 

Adam:            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 goverments 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.

 

Janis:              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

 

Adam:            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?

 

Janis:              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, 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 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 combination of systems, can also be able to help you pace all the way through.

 

Adam:            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?

 

Janis:              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.

 

Adam:            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.

 

Janis:              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.

 

Adam:            Yes, thank you so much, Janis, for coming on. I really appreciate you sharing your insight with the audience.

 

Announcer:    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