Contact our guests:
Shari Littan - https://www.linkedin.com/in/shari-littan-58bb40114/
Mario Abela - https://www.linkedin.com/in/mario-abela-75a95957/


FULL EPISODE TRANSCRIPT
Adam: (00:00)

Hello again and welcome back to Count Me In, IMA's podcast about all things affecting the accounting and finance world. We have a unique episode for you today as both Mitch and I facilitated a conversation with two guests to provide multiple perspectives on the topic of sustainability. We spoke with Shari Litton, IMA's manager of corporate reporting and technical activities and Mario Abela, a director for redefining value at the world business council for sustainable development. Let's head over to the in depth conversation held about topics relating to sustainability such as ESG and integrated reporting. 

 

Mitch: (00:36)

There have been many articles and publications for guidance on sustainability. So to start things off, what is sustainability and why are organizations so concerned about it? 

 

Mario: (00:53)

Thanks. There are many definitions of sustainability from the very narrow, it's just about the environment through to the inter-generational legacy that we leave for future generations to be able to kind of enjoy the same, lifestyles and the same resources that we've been at today. So the term doesn't really have any fixed meaning and it continues to evolve at the WBCSD when we talk about sustainability, we really looking at the sustainability of the business model. Can the business continue to operate as it's currently doing? Can it sustain those operations into the future? 

 

Shari: (01:47)

No, I just want to recall that for me, when I first became fascinated by what we'll call accounting for sustainability or sustainability or integrated reporting. I always recall my reaction to the first photos that the astronauts sent back. One of the famous photos is called Earthrise and you can actually see the earth rising from the surface of the moon. And many people say that the modern environmental movement started with that photo because all of humanity reflected back on what a small planet that we have. And to me, coming with an accounting background, I think of one of the primary goals of why we have accounting to begin with, which is we have limited resources. And that picture coming back is a stark reminder that limb resources here on earth are limited. So we have to be a little bit broader or maybe evolve what account for how we're using those resources. How are we all allocating our precious resources, what are we doing with them? So for me, that one photo ties back to accounting. And when I am thinking about sustainability and business, for me personally, that's where I come. 

 

Adam: (03:23)

So then what kind of relevant data is available for sustainability and how are businesses reporting this information? In other words, what is the current challenge? 

 

Mario: (03:33)

The problem is that the, the relevant data is a really good so there's been a number of surveys done by the CFA Institute and other investor bodies that have demonstrated that there is actually no shortage of data and to some extent information, but that information is not particularly relevant to the sorts of decisions that investors and other stakeholders need to make. So if a board would ask management about the reliability, a lot of sustainability metrics reported today a lot of CEOs would struggle to really put their hand on their heart and commit to the credibility of the data. And in fact, PWC in its CEO survey looked at what are the sort of key decisions that CEOs, Nate, about their company, what sort of information are they getting and to what extent do I have confidence in that information? And for a number of data points where these things are absolutely critical to the business and its value creation, in fact, they either don't get very data or the data that I get I have very little confidence in and we have to remember that a lot of this data is not subject internal assurance. So often it's not, there are reviews done by internal audit and it's also not subject to external verification either. And, and the other point is that companies now report as you know in many different through many different channels. So the 10K is just one form of reporting that companies report, you know, every minute through social media.and then there are news outlets and others who are also providing information about companies. And we did some work last year where we went around the world and, and spoke to investors about ESG information. And one of the things that I told us was that at the moment, because there's the lack of standards or at least a single standard because there are, many frameworks, many standards of sorts of we've identified at the WBCSD. In fact, we have countered at least 200 frameworks with over 5,000 indicators. The problem for investors is comparability. They've, they've got no idea how to compare one number against another number because the basis upon which those numbers are calculated are often very different. And so what happens in practice is that companies use a mix of measures from existing frameworks and then often adapt them to their own requirements. So we have the entities specified criteria which makes it even more confusing. And the other issue in all of this is that at the end of the day we have, we understand our accounting calculations. We know that making a profit where there's a kind of excess of revenue over cost is a good thing. And that's what companies should do. And we know that making a loss, particularly a piston loss is not a good thing because it means that there isn't sufficient revenue to cover costs and also reward the providers of capital. But when it comes to a lot of these sustainability areas in the social and environmental domain, it's less clear. What's a good number for the percentage of women on boards? Is it 20%, is it 50%, is it 75%. So these normative judgments about, well, what's good are very difficult to make. And, and so that is also an issue for investors because even on greenhouse gases take two, you know, comparable S&P companies with very similar activities. What's a good number in terms of their greenhouse gas emissions? Well, it depends, depends on stakeholder. It depends on what outcomes in particular you're trying to pursue. So, there are lots of challenges really in not only pulling this information together, but then in making sense of it. 

 

Mitch: (09:17)

And how about specific to the finance and accounting team? What role are you seeing CFO teams and these finance and accounting professionals taking with respect to sustainable business performance information? 

 

Shari: (09:29)

Yes, so what we're doing at here at IMA is where taking a little bit of a listening tour for our constituents who mostly sit in what I'll call a CFO unit or finance and accounting on the corporate side. And here's what we're hearing, that the gathering and reporting of what we'll call sustainable business information has grown up outside of their unit. That it's primarily by a unit with a title of a corporate social responsibility or sustainable business, but outside of the, what we'll call the mainstream finance and accounting unit. But as the company focuses more or takes more initiative and progress's in its understanding and its desire to use this perspective for we'll call longterm performance of value creation, it's inevitable that the CFO team members of finance and accounting are getting involved. And when they do, it's amazing. What they tell us is that suddenly there's a new different eye because the CSR teams, as Mario says, can be sitting on tons of data that's really valuable and talks to various aspects of the business that haven't been looked at before. But that data needs to be a analyze with that professional eye, the rigor, the professional experiencing auditing and controls and bringing vigor and rigorous oversight to the data itself. Here's what once said is that our finance team, they don't take our numbers at face value. As that progresses, we see that the finance team, the accounting and finance team takes even more of a role. They get involved and they start saying, well, why can't we get better data? Can we put some of these metrics into our mainstream ERP system? So we have some oversight, we know what we're gathering and we know what we're reporting on and see companies that as they take steps to understand what investors are demanding to look at the various frameworks that Mario talks about and say, well, what's most relevant to our business? That takes that finance and accounting eyes sometimes to say, how do we put it all together? And the people who are sitting in what I'll call the CFO unit have that expertise to help bring that forward. 

 

Adam: (12:21)

So then to connect us all together, what are the benefits of the involvement of corporate finance and accounting professionals? 

 

Shari: (12:27)

So as I mentioned, when we see members of the accounting and finance team get involved in sustainable business information internal and then for external reporting we see more of a compliance mindset. And in some cases actual controls that traditional COSO framework can be applied. And that oversight of the data as, because in many ways the flow of information, whether it's sustainable business information or strict monetary information, it's a similar process. You're deciding what you're going to report on, you gathered the data, you summarize it, you analyze it and put it in a report whether for internal extent or do you use for decision making. So that process is the same when we have that control and oversight internally over the data. When that finance team brings that expertise it enhances the quality of the information and enhances the reliability. So it makes the whole reporting process. It makes the activity of looking at your sustainable business activities more relevant, more reliable. It brings credibility to it and their buy creates value just by deciding on what information is good and what information is less good. And this also helps, as Mary was saying with the view of the marketplace because as companies are able to understand and speak to these issues and begin to incorporate them with an enterprise mindset, it does speak to investors and other stakeholders. And in fact it shows indicators of good governance that management is looking at these issues that they're not narrowly focused and that helps engage with investors and other stakeholders. And as Mario mentioned, can be way to engage longer term investors and lower your cost of capital. And we're seeing the research bare that out. 

 

Mario: (15:01)

Just to follow on Shari. We did some research in 2018 where we looked at, we extended the study we done previously and we looked at some of the largest companies in the world and we looked at a 10K and what they've reported in terms of the risks and then we look to taste sustainability reports and for the same companies we found that only 8 percent had the same risks listed in a sustainability report as I did in a 10k or, or statutory financial filing, which is a kind of staggering figure, but it really just stresses this point back with sustainability information. Often we're not talking about, we're not starting with a single source of data. And so there are a number of preach conditions we need to satisfy in order to be able to implement some of the measures that we would take for granted when it comes to financial information. It's also the nature of that information I share is pointed out earlier on. This is a diverse set of information. Some of it is monetized, some of it is not monetized. If we're talking about greenhouse gas emissions, what do you see? These aren't necessarily monetary amounts. We are looking at converting to some sort of physical amounts. So there are all sorts of complexities and it really stresses the importance of the finance department work very closely with the sustainability team to understand some of the inherent challenges in the title itself. And yet, the other point of make is that and it's in the COSO framework but internal control framework but often overlooked and that's the cultural dimension to an effective internal control environment. 

 

Shari: (17:27)

So one of the things that we hear again and again is for many companies is how did they get started on the pathway and to start thinking about how to address some of these issues. Almost always I will hear something about senior management. Our created some initiative. Our CEO went to Davos and came back with ideas and there was a lot of initiative and a lot of innovation in very many cases as it does start with a spark or insight or some step by senior leadership. And then we start to see the 2020 vision plan or something along those lines. And that's where many, many companies first start to get that bigger handle, that broader picture before they start getting more into the detail. 

 

Mitch: (18:33)

So along the lines of this spark and the ultimate benefits that are brought up, I've heard you both mentioned the term value creation. So how does this tie into the concept of the CFO as a value creator? 

 

Shari: (18:49)

Oh as we've mentioned that what we're seeing is that initiating a sustainable business program or projects or initiatives or responding to new investor demand for information or the desire to take a more enterprise approach is the collaboration that takes place. So while much of this grew up in a corporate responsibility teams to take it to the next steps, to invigorate, to bring that business case. When the CFO team, finance and accounting gets involved, that tends to start to happen. And it also brings in other teams, investor relations. In other cases, it brings in even further collaboration across the enterprise environmental health and safety people, HR people, because they're holding onto data and metrics as well. And that brings that enterprise view across the organization. 

 

Mario: (20:11)

I cannot add Shari that there's of value creation value creation and value production dimension to this that say photos are increasingly you know, front of mind, for example sustainability issues often incredibly important risks to a business and with in its annual survey of global risks, a has year on year started to identify that financial risks are less important when it comes to significant business risks and other factors like environmental and social factors having a much greater impact in terms of destroying value within companies. And then the other side of that is opportunities. I mean, CFOs, part of their role is to ensure that the company is seizing on opportunities to grow and expand a product and to grow their revenue and markets. So, so there's kind of two sides to this coin important to hold together that there's a significant risk dimension. So that's why this matters to the CFO, but also there's a significant opportunity dimension as well. And we've seen companies that have become much more sustainable attract a lot consumers, sales, a lot more consumer interest and loyalty. So there, there is an important dimension here that a CFO is in terms of that intangible value are starting to recognize. 

 

Mitch: (22:06)

So just to kind of wrap it up, you know, if someone would like more information about all the stuff we've just discussed today, where can they go and what resources? 

 

Shari: (22:15)

Yes. So I will say that one of the things that I'm observing is an incredible uptick.some of the things that we've observed in the past are changing and they are changing fast. So in the past, maybe year to year and a half, there's been an incredible movement. Investors are a big driver. Attention to climate change is a big driver. The concerns of the next generation as millennials take more prominent roles and actually become investors. So we're seeing a lot more attention to movement. So we at Ima are going to be looking into these issues, how we can support our constituents in the accounting and finance roles as they learn and evolve and take on some of these broader concepts for the specific issues of enhancing the quality and internal controls over sustainable performance information. I invite our listeners to review a paper that we produced a few years ago by Jeff Thompson, our CEO, along with Bob Harris, who is the former FASB chair and a member of the SASB oversight board today. They put out a paper a few years ago that actually looks at applying the COSO principles to these new information forms. And a summary of that was published recently in the CPA journal of the New York state society of CPAs. I also wanted to say how thrilled I am to be collaborating with the world business council for sustainable development and the great research and work that they're doing. Thanks Mario. 

 

Mario: (24:17)

Thanks Shari. And in terms of our resources as a member body and our members some of the largest corporations in the world, we have worked with companies to take the COSO work, for example, on enterprise risk management and look at how ESG related issues can be embedded within that process. So it's not about a new process, it's about a much more integrated process. And so we have available on our website, which we produced in conjunction with COSO guidance for applying enterprise risk management to environmental, social and governance relationship risks. And we also have on the specific topic of internal controls guidance on improving the quality of ASG information for decision making. And we developed that with companies in Denmark and the Danish accounting body, they FSR. So it's very much a kind of practical guide in terms of where to start and how to progress on this journey to ensuring that we have much more credible is ESG information. And so we're, we're thrilled to be working with IMA on this project and our common interest really for the profession really to advance and really step up to the challenge that the world and, and all the turmoil is presenting for accountants in having businesses succeed in environments that are a lot more uncertain and a lot more volatile in the past and ensuring the value is created. Nonetheless, 

 

Announcer: (26:21)

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.