Ep. 52: Mike Wallace - ESG Related Metrics for Accounting and Finance Professionals

Mike Wallace, Partner at ERM: Environmental Resources Management, joins Count Me In to talk about all things relating to ESG. Mike previously spoke with IMA around the Global Reporting Initiative (GRI) in 2011 and was able to provide insight into some changes that relate to ESG data and integrated reporting. With so much data now available, businesses and investors are very interested in particular metrics that represent an aptitude for managing their money and their firms responsibly. Mike is an internationally recognized expert in sustainability, ESG, and human capital, and brings this global knowledge to IMA once again to provide advice and insight into the development and implementation of sustainability. He has helped launch a range of sustainability programs inside existing organizations, helped create new initiatives, and helped organizations expand into new markets and, in this episode, he speaks specifically to those in accounting and finance of small and medium sized businesses. Listen now to hear about how your business can measure its reporting and performance with all the tools and resources available in today's industry!

Contact Mike: https://www.linkedin.com/in/mikewallace/

Mike's Recommended Resources:

FULL EPISODE TRANSCRIPT
Mitch
: (00:05)
Thanks for coming back to Count Me In, IMA's podcast about all things affecting the accounting and finance world. This is Mitch Roshong and I'll be bringing you to episode 52 of our series. My cohost Adam Larson, had a great conversation about various reporting expectations with Mike Wallace. Mike is partner at erm environmental resources management and is an internationally recognized expert in sustainability, ESG and human capital. He explains the recent changes since the global reporting initiative, measuring data for the expectations of different sectors and all things accounting and finance professionals should pay attention to regarding ESG. Keep listening to hear about how you can measure your company's reporting and performance with all the tools and resources available. 
 
Adam: (00:55)
So we first met, uh, almost a decade ago when you were working for the GRI or the global reporting initiative and a lot's happened since then. And can you let us know what changes you've seen most since then? 
 
Mike: (01:08)
Yeah, sure. The I mean I think, you know, the GRI is an interesting one where we met because the GRI itself is an entity but also the world's leading provider of our sustainability reporting framework, which has now become a standard. But that year I was created literally almost 20 years ago and was developed by a group of stakeholders that got together and said, you know, it's really fantastic what all these companies are doing about their environmental reporting and voluntary sustainability reporting, but they're not doing it in a very standardized manner. Let's create a framework by which companies can, how used to guide how they disclose this type of information. And that was the birth of the GRI literally 20 years ago. At about the same time a similar group of companies and stakeholders got together and they were talking about of all things greenhouse gas emissions disclosure and how those disclosures weren't consistent either. And that was the beginning of the greenhouse gas protocol. So today the GRI is the most widely used reporting framework out there. If you Google any company and and the word GRI after it, you're very likely to find it. The GRI report for the company so you know that they've done it according to a recognized global. My standard and the greenhouse gas protocol underlies all of the ways that we measure and manage and disclose carbon emissions today. So it feels like there's a sudden flood of all these things but it's actually been growing for the last, you know, 20 years or so. Probably the biggest things that have happened to the most significant changes that more and more people have grabbed onto the GRI's approach and enhanced it and tweaked it in ways to help focus it into certain areas or directions. For instance, the CDP is very focused on greenhouse gas disclosures and it's backed up by lot of investors who were saying, we want this type of information. There is, there are things that are specific to health and safety and how you treat your people or your human capital one in particular. It's called the workforce disclosure initiative and they've taken the ball and run with it around disclosures that companies should make about how they treat their people. And that can be gender and diversity issues or it could be right down to health and safety policy. And probably the biggest, most influential is, is the TCFD cause it's, it's the biggest one out there with the most players around it. And in essence the entire global market. The financial community, it's gotten together under this entity called the task force on climate related financial disclosures. Long name, but just think about it from the name of the standpoint of TCFD. You look up the signatories on that and you're going to see stock exchanges, the major rating agencies, insurance companies, lenders, asset management firms, commercial banks, private banks. And you'll see a lot of companies names on it and essence. They all got together and said to each other through this platform, the TCFD, we've got some issues here related to climate change risk and we all want to do business together. But it's in all of our best interest. If we figure out how we as individual companies and within our industries should measure, manage and report on the risks we face. I want to list, you says stock exchange, who's part of TCFD? But I want to know that you're going to be around for the future. I want to ensure you says insurance company, but I want to see your TCFD disclosures. I want to rate you says one of the ratings firms, but I want to see your TCFD disclosures and the companies are turning around and doing this because they want that finance financing. They want those business partners and they realize that these risks are true and real to their business. That's probably the biggest thing I've seen in the last decades, the TCFD emergence. But then this week we just last week we just had Davos and the world economic forum throughout all sorts of new news for us to digest. And yeah, it might feel overwhelming for companies, but it's actually pretty consistent with the pattern that we've been monitoring for the last 20 years. 
 
Adam: (05:09)
So thanks for those points, Mike. One of the things we noticed that um, black rock released their letter in January. You know, how was this shaking out in the marketplace? 
 
Mike: (05:21)
Yeah. It's interesting, Adam, because we've seen the letter come out for the last few years from Larry think and it's increasingly evolve to include more and more discussion about environmental, social and governance topics. And it's just put yourself in the driver's seat. There. World's largest asset manager. They have a lot of customers, asset owners like the big public pension funds and sovereign wealth funds as well as other institutions who say to black rock, we want to be responsible investors too. Can you make sure that you're managing our money in this way? So black rock and Larry Fink are responding to their customer demand and ramping up their ESG services offerings. They've got a growing team of engagement specialists. And third, is it this latest letter from Larry Fink, not only spells out why and what they're doing in their ESG area of work, they're talk about their own sustainability performance as an institution. And they own their own policies. They have a pretty big footprint, right? They fly people all over the world. They have data centers, they have a footprint themselves and they want to walk the talk. So that's in this letter, this time, hyperlinks to other things. There's an entire FAQ this year, so if you're a client or a customer or just a curious competitor, you can see how seriously black rock has taken this by looking at the FAQ and then to make the case for why they're doing it. They've got a letter that they've seen that right written in. It's in this document that explains how they're responding to their own clients. You asked for us to manage your money responsibly and with a view toward sustainability. Here's what we're doing. So they're pretty much showing us all the recipe for success, if you will. It does ping pong through companies. We've, you know, that letter comes out, we hear about it from our clients. The publicly traded clients are the ones that are being aimed at primarily what private equity companies do get the ripple effect from this as well. Why is that and how is that? Well, black rock also has private equity investments. There are many other private equity firms out there that are now starting to look at ESG issues as they work with there companies, their portfolio companies, and in the black rock case, as that pressure builds on the marketplace for the publicly traded companies, the publicly traded companies undoubtedly and almost always well look at their suppliers because the supply chain is a big part of a company's footprint. So while it feels like BlackRock's doing that only two publicly traded companies and putting the pressure there and actually ripples through the economy quite quickly, the other really important thing to take out of that is, you know, we talked about GRI in these various reporting frameworks over the years they've evolved. One of the ones that emerged in about 2010 was the sustainable accounting standards board. Yeah. Black Rock's a big supporter of this nonprofit initiative and this standards body and black rock spells it out very clearly in their letter. They also call out TCFD, which I mentioned earlier. So black is basically saying of these frameworks out in the world needs standards that are in the world. These are the two things we're paying close attention to. And you as a CEO receiving this letter from black rock, you might want to pay attention to these things too. And so that's certainly playing out in a really interesting way. And you know companies are are seeing this now from their biggest owner and they're saying I haven't got to finally do something. 
 
Adam: (08:40)
So then what should companies be paying attention to then? 
 
Mike: (08:44)
Well I think you know what it's easy approach to this is you need to realize that of somebody like a black rock doesn't just buy your stock because they just looked at you and your performance only they are looking to diversify their portfolio. That means they look sector by sector, you and all your peers and they don't just look at your view S peers or your Canadian peers. They look globally at all of the automotive sector or globally at all of the aviation sector or globally. All of the oil and gas sector. Well, we know on Friday trends and data is that European companies are more transparent on these issues. So there's a lot of data that those European peers of yours have put out into the marketplace and in some cases they've even verified or have that information assured by a third party. So they're saying this is true, incredible information. Here is my greenhouse gas footprint and it's been assured by this third party. So it's getting very serious. And if any of the companies that are trying to figure this out, you want to understand what sort of performance you're actually demonstrating to the world. It's easy to go to your Bloomberg terminal. Most of you have this and in the Bloomberg terminal is an entire ESG data service that you can look up your company, but again, don't just look up your company, look peers, and then there you're going to see a bunch of the ESG scores that are out there in the marketplace that are making a lot of ripples in the market. For instance, Sustainalytics is in the Bloomberg terminal. There's a CDP score in there. There's an ISS score and the list of scores goes on and on, but more importantly you can start to look at the other metrics that Bloomberg has gathering on you and putting into their database. The only way that they can gather it is if it's in the public domain. So if you see a bunch of blanks next to your name, but a bunch of numbers and qualitative information like, yes, I have a health and safety policy. Yes, I have a climate change policy in the boxes for all your peers. Then you can quickly see how you're lagging against your sector and your peers. Now a lot of companies that we deal with, we end up talking to the general counsel or corporate secretary and investor relations because these two offices within the company are the ones that field these external questions. They're not quite sure how to handle these requests for nonfinancial data and the legal is always, you know, in charge of voluntary and regulatory regulated disclosures. So you want the legal team involved in this. Then you got to start to reach out to your chief sustainability officer, your environment, health and safety people, your human resources department and others to start to think about what are the metrics we already have in house? What are we already measuring, managing it and disclosing because in many cases companies are disclosing this information to various regulatory databases or in other reports and then by looking at Bloomberg data. Yeah and your what your peers are saying. You get a good sense of what the world is already seeing and expecting from your sector and you can start to pick and choose certain things you want might want to measure, manage and report and going back to the black rock letter, definitely you want to take a look at it. TCFD guidance on climate change risk and what it means to you and in that area you want to do some scenario planning. You're looking out three, five, 10 years. How does our business look? Sea levels are rising. Do we have facilities close to, yeah. Ocean fronts close to rivers, close to deltas that could be impacted. That's a big infrastructure project to how I have to move a factory or an operation. And again, in Bloomberg I can now look up a company and see their locations around the world and I can see within the Bloomberg terminal where are those risky locations are as sea levels go up a few feet at a time over the course of years. The other thing that black rock mentioned SASB, right? So the sustainable accounting standards board is a great resource for you to use. Turn too quickly and see which metrics for your sector sadly has identified as being the most material. The key word in our field and in, in all work today is, is it material to the business? Is it material to this transaction? So SASB has done a lot of great research to identify the most material topics per sector and that's a quick way for you to get to those people specific metrics that gets you started on the roadway to managing and navigating this area of sustainability disclosure. 
 
Adam: (13:17)
So to kind of wrap up our conversation, you know, see now this is a podcast for accounting and finance professionals. What's the biggest impact that you see on them today? Based on what you've seen? 
 
Mike: (13:30)
I think, you know, the beauty of the accounting profession is that it's been around for a long time and it's very mature and very focused on facts, right? The associations that are affiliated with accountants are actively involved in this. When I ran GRI in North America, we actually were hosted by IFAC, the international Federation of accountants. Why was IFAC hosting us? Because all of the accounting associations around the world, we're starting to get these interesting questions about non financial information and, and you know, the big four accounting firms were part of the GRI as launch in North America. Why is that? Because more and more of their clients were saying, should we put this information in their 10K or annual report? Can you share this information for me? So accountants, incorporations and external accountants as well should be realized that entities like the American Institute of certified public accountants have task forces already in place that are looking at these issues. In fact, the big four came together in partnership with bank of America and some other large corporations and announced that this year is world economic forum. The a launch of the latest guidance on how companies can report, and in essence that report is kind of the, the brain trust of a lot of accountants work for many, many years in this space. 
 
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