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Sustainability now: Setting your reporting boundaries · PwC's accounting podcast

• 0:00
  SPEAKER_00: Thought Leadership from PWC's National Office.
• 0:06
  SPEAKER_02: Hello, and welcome to our podcast today.
• 0:08
  SPEAKER_02: I'm Heather Horn, PwC US Sustainability Technical Leader, and I'm so happy to welcome you to the next episode in our series talking all about sustainability reporting and the landscape today.
• 0:20
  SPEAKER_02: And as those frequent listeners will know, this is one of our, well, this is actually our first video podcast series.
• 0:26
  SPEAKER_02: So definitely, if you're listening, I would highly encourage you also check out our video if you'd like to watch as I'm having my chat with my guest today.
• 0:35
  SPEAKER_02: So in this nine-episode series that we're recording, we're going to take you through the key steps in the reporting process and then really focus in on some of the key topics in our sustainability reporting guide.
• 0:46
  SPEAKER_02: So very exciting.
• 0:48
  SPEAKER_02: And today's topic is a very important one, and it's a term we don't use really in connection with financial reporting, although we're going to explain why it actually applies there as well.
• 0:57
  SPEAKER_02: And that's the boundaries of reporting.
• 0:59
  SPEAKER_02: And for this episode, I'm happy to welcome Diana Stoltzfis back to the podcast.
• 1:03
  SPEAKER_02: So thanks for joining me again today, Diana.
• 1:06
  SPEAKER_02: And looking forward to our conversation.
• 1:08
  SPEAKER_02: And maybe I'll just start where I just was, which is this whole idea of boundaries.
• 1:14
  SPEAKER_02: It just seems so unusual to us, but actually when you start to dig into it, it makes sense.
• 1:19
  SPEAKER_02: And in fact, we do have this for financial reporting.
• 1:22
  SPEAKER_02: But can you just give us the really high level what we mean when we refer to boundaries of reporting?
• 1:28
  SPEAKER_02: And then we can dig into some detail.
• 1:30
  SPEAKER_01: Sure.
• 1:30
  SPEAKER_01: Yeah, I think as you said, like we don't use this concept in financial reporting.
• 1:34
  SPEAKER_01: So I think it's not intuitive to people.
• 1:36
  SPEAKER_01: But really, it's identifying what are the entities, assets, and operations that are going to be included in your report.
• 1:42
  SPEAKER_01: So we do have consolidation.
• 1:44
  SPEAKER_01: Consolidated financial statements.
• 1:46
  SPEAKER_01: So the same concepts.
• 1:47
  SPEAKER_01: So there's some nuances that we'll talk through, but very similar to thinking about like, okay, what's my consolidated financial statements?
• 1:53
  SPEAKER_01: That determines what's going to be reported in it.
• 1:55
  SPEAKER_01: So you need to come up with the that same reporting boundary to determine what's going to be included in the sustainability report.
• 2:01
  SPEAKER_01: And also what time period is covered by your sustainability reporting.
• 2:06
  SPEAKER_01: And so it will follow your financial statements, but then there's also some other concepts of time horizons that we'll talk through as well.
• 2:13
  SPEAKER_01: And then also, you know, lots of companies go through changes in their reporting structure during the year, whether that's an acquisition or a disposition.
• 2:20
  SPEAKER_01: And so how do you think about those changes in reporting and sustainability?
• 2:25
  SPEAKER_01: Let me just see if there's a couple other.
• 2:27
  SPEAKER_01: So I think one of the things that you touched on too was the financial statements.
• 2:32
  SPEAKER_01: And that is like a foundational concept within the reporting boundaries and really within sustainability reporting overall is a connectivity between the sustainability reporting and the financial statements.
• 2:43
  SPEAKER_01: And so we'll touch a little bit on some of these concepts and starting to talk about how they connect with each other.
• 2:49
  SPEAKER_01: And maybe one of the things, first things that we'll start with when we're talking about the reporting boundary is this concept of your own operations and your value chain.
• 2:58
  SPEAKER_01: And that is something that's different in sustainability reporting versus financial reporting, is this consideration of what we're going to talk about as your value chain.
• 3:07
  SPEAKER_02: All right.
• 3:07
  SPEAKER_02: And then I think just why do we care?
• 3:10
  SPEAKER_02: Like if it has to be in the report, anyways, does it matter if it's own operations or value chain?
• 3:15
  SPEAKER_02: And I think it's probably important to highlight that here before we get into the detail.
• 3:19
  SPEAKER_01: Yeah, I think that that's a great point, Heather.
• 3:21
  SPEAKER_01: I think, you know, when you think about your own operations, there's going to be certain disclosures and disclosure requirements, especially in ESRS, where there's very prescriptive requirements, and there are certain certain things that are required for your own operations and for your value chain.
• 3:34
  SPEAKER_01: And also when you're thinking about like how do you gather the information, what types of impacts, risks, and opportunities are being reported, thinking about whether that's in your own operations or within your value chain could give rise to different types of risks and opportunities as well as what types of disclosures you're going to provide around those, given that there's going to be a different level of action or prevention or mitigation that you can take for some of those.
• 3:59
  SPEAKER_02: Yeah, I think what's a bit funny here, maybe, maybe not completely funny, is the fact that reporting boundaries, as you said, that's basically your consolidated financial statements.
• 4:08
  SPEAKER_02: So what do you include in the report?
• 4:10
  SPEAKER_02: But we have for preparing the consolidated financial statements.
• 4:14
  SPEAKER_02: I mean, you've had guidance going all the way back to one of the ARBs, like 75 years ago, and then all the way to the present, we have, you know, its own standard, same thing under US GAP and IFRS.
• 4:25
  SPEAKER_02: And for determining reporting boundaries for sustainability reporting, we have a very, very small amount of guidance.
• 4:32
  SPEAKER_02: Other than, of course, the relationship to the financial statements, and there is some specific guidance, which maybe does actually make it a bit harder.
• 4:40
  SPEAKER_02: So I find that really interesting as we kind of think about that.
• 4:43
  SPEAKER_02: This seems like a case for a lot of sustainability reporting.
• 4:46
  SPEAKER_01: Well, I think that that kind of as you think about the maturity of sustainability reporting and the maturity of financial reporting, as you've said, financial reporting has a very long history and has evolved over a very long period of time.
• 4:56
  SPEAKER_01: And there's a lot of guidance and uh interpretation and how people have thought about it over a long period of time, whereas sustainability is relatively young.
• 5:04
  SPEAKER_01: And uh a lot of these frameworks, it's the first time we're seeing mandatory reporting for this year, right?
• 5:09
  SPEAKER_01: And so I think that that is a difference between.
• 5:12
  SPEAKER_01: So I think hopefully the guidance will continue to develop.
• 5:15
  SPEAKER_01: But I think given this connectivity to the financial statements, I think we lean a lot too on some of the concepts that are in the financial statements, but I definitely think there's some new concepts that are being introduced here that we're still really trying to fully understand.
• 5:28
  SPEAKER_01: So we'll try to help companies think a little bit about how to start thinking through some of those.
• 5:33
  SPEAKER_02: Okay, and that's helpful.
• 5:34
  SPEAKER_02: And again, I think it's particularly for these topics where this connectivity with the financial statements is very important.
• 5:40
  SPEAKER_02: I mean, obviously we see it other places as well, but this is definitely a place.
• 5:44
  SPEAKER_02: So the one other point maybe I'd make here before we get into it is that the boundaries that we're gonna going to talk about today is actually different when we're talking about GHG emissions to some extent.
• 5:56
  SPEAKER_02: Well, yes, yes.
• 5:57
  SPEAKER_02: And so uh later uh in this uh series, Marchela Lewinsky and I will talk about that.
• 6:03
  SPEAKER_02: So for listeners' benefit, just know that's coming.
• 6:06
  SPEAKER_02: Anything you hear today, just like close your ears with respect to GHG reporting because it is uh a different approach.
• 6:13
  SPEAKER_02: So that's important.
• 6:14
  SPEAKER_02: Right, that's a great point.
• 6:15
  SPEAKER_02: All right, own operations, such an interesting term.
• 6:17
  SPEAKER_02: I think it's a great description once you understand what it is.
• 6:20
  SPEAKER_02: But what is it?
• 6:21
  SPEAKER_02: Why do we use that term?
• 6:22
  SPEAKER_02: Where does it come from?
• 6:23
  SPEAKER_02: Like, what's the whole background there?
• 6:25
  SPEAKER_01: Sure.
• 6:26
  SPEAKER_01: And um, just to start, maybe to your point around where does the term own operations come from?
• 6:30
  SPEAKER_01: So own operations is from the ESRS.
• 6:33
  SPEAKER_01: So the ISSB standards don't use the term own operations.
• 6:37
  SPEAKER_01: But I think as we talk through it, the concept applies under both ESRS and ISSB.
• 6:41
  SPEAKER_01: And to your point, because both standards require reporting of value chain information, I still think this distinction around what's your own operations versus what's value chain is important because when you get to the next step after you've determined your material IROs and you're thinking about what's material information, that's gonna differ depending on whether it's in your own operations or in your value chain.
• 7:00
  SPEAKER_01: So maybe starting with like how would you determine your own operations?
• 7:03
  SPEAKER_01: So it's really thinking about what are the entities' assets and operations that comprise your own operations.
• 7:10
  SPEAKER_01: And the first starting point is your consolidated financial statement.
• 7:12
  SPEAKER_01: So thinking about what is contained.
• 7:14
  SPEAKER_01: So that's the reporting entity and all of their consolidated subsidiaries.
• 7:18
  SPEAKER_01: And maybe, you know, emphasizing that point, all of your consolidated subsidiaries.
• 7:22
  SPEAKER_01: So sometimes in um financial reporting, we'll have where you have a consolidated subsidiary, but the reporting entity doesn't actually own 100%, right?
• 7:31
  SPEAKER_01: So they'll reflect 100% of the assets and um, you know, income statement amounts, income and expenses in the financial statements, but then you'll show an allocation to the non-controlling interest if you know in the equity and income.
• 7:46
  SPEAKER_01: But when we think about it from like a sustainability reporting perspective, the reporting entity is controlling that subsidiary and they're controlling those decisions to around those impacts, risks, and opportunities.
• 7:58
  SPEAKER_01: As applicable.
• 7:59
  SPEAKER_01: As applicable, yes.
• 8:01
  SPEAKER_01: Sorry, we will use that kind of impacts, risks, and opportunities, which is a good point because impacts, risks, and opportunities are required under ESRS, but only risks and opportunities are required under ISSB.
• 8:11
  SPEAKER_02: So if you want to know more on that, tune in next week because Diana and I will we'll talk more, but I had to at least throw that in there because I didn't want to throw off our ISSB reporters in the audience.
• 8:21
  SPEAKER_01: Yes, yes, good point.
• 8:23
  SPEAKER_01: Um and so, you know, when we're thinking about those reporting around those things, is uh the can the reporting entity really is controlling those decisions.
• 8:32
  SPEAKER_01: And so a hundred percent.
• 8:34
  SPEAKER_01: And also, I don't know how you really like have a proportionate risk or a proportionate impact.
• 8:39
  SPEAKER_01: You know, I think you're really evaluating what are those impacts, risks, and opportunities.
• 8:43
  SPEAKER_01: Um, and also sometimes in financial reporting, too, there can be instances where there's materiality decisions that are made that maybe a uh subsidiary is not material and so they're not consolidated when you're thinking about the financial statements overall.
• 8:58
  SPEAKER_01: But from a sustainability reporting perspective, every single entity within the consolidated financial statements needs to be assessed for impacts, risks, and opportunities as applicable.
• 9:08
  SPEAKER_02: And I think one key thing there is I do think we've gotten so many questions.
• 9:12
  SPEAKER_02: Well, the subs and material, the subs and material, but they're full they're solely looking at that from a financial reporting perspective.
• 9:21
  SPEAKER_02: And even under sustainability reporting, your financial risks and opportunities may, you may have different conclusions than you do from a financial reporting perspective.
• 9:30
  SPEAKER_02: So definitely do not just write off those, you know, some of those small subs that don't have a huge financial statement impact.
• 9:37
  SPEAKER_01: Right.
• 9:37
  SPEAKER_01: And I think we've seen instances where there are financially immaterial subs, but there are from a sustainability perspective, there are material matters in those subsidiaries.
• 9:47
  SPEAKER_01: Exactly, agree.
• 9:48
  SPEAKER_02: And I just want to rewind for a moment to these non-holy owned subsidiaries.
• 9:52
  SPEAKER_02: So obviously, you're saying they control the reporting entity controls that entity, that is why it's consolidated.
• 10:00
  SPEAKER_02: And so you're reporting 100% of the sustainability data.
• 10:05
  SPEAKER_02: You don't get this non-controlling interest.
• 10:07
  SPEAKER_02: I just want to clarify because you mentioned non-controlling interests.
• 10:10
  SPEAKER_01: Yes, that's right.
• 10:10
  SPEAKER_01: You're reporting 100% of it.
• 10:12
  SPEAKER_01: And that's really going back to that discussion around you're controlling those decisions, therefore you're reflecting the full amount of those impacts.
• 10:20
  SPEAKER_02: Now, I know there's a lot of other, I'll say complicated decisions on all different types of entities, but maybe we can run through a few of them.
• 10:27
  SPEAKER_02: So unconsolidated subsidiaries, how do you think about those?
• 10:30
  SPEAKER_01: So I think from an unconsolidated subsidiary perspective, that those would not be included.
• 10:35
  SPEAKER_01: They're not in your consolidated reporting.
• 10:37
  SPEAKER_01: So you would need to think about those from a value chain perspective.
• 10:40
  SPEAKER_01: There are certain instances within the ESRS where unconsolidated subsidiaries need to be considered from like an operational control perspective, but those are in kind of very specific parts of the ESRS.
• 10:53
  SPEAKER_01: So I think when we think about the reporting boundary overall, that those unconsolidated subsidiaries would not be included.
• 10:59
  SPEAKER_02: All right.
• 10:59
  SPEAKER_02: And so then all of this is based on financial statements.
• 11:03
  SPEAKER_02: But then I actually was talking last week to Val about the case that we have so many cases where there's like a holding company or other intermediate entity that's the one responsible for reporting, but in fact is not preparing financial statements because it's taking some type of exemption.
• 11:18
  SPEAKER_02: So in that case, yeah.
• 11:21
  SPEAKER_01: So I think we get this question a lot, and people are asking, so do we have to prepare consolidated financial statements if we're not otherwise required to?
• 11:28
  SPEAKER_01: And I think the answer is no.
• 11:31
  SPEAKER_01: But you would still like apply the same concepts as identifying what are those entities' assets and operations that would require, would be required to be reported if you did prepare consolidated financial statements.
• 11:43
  SPEAKER_01: So you kind of look at that same group of entities, assets, operations.
• 11:48
  SPEAKER_01: But I think the other thing that's important to note is even in sustainability reporting, because of this connectivity to the financial statements, there's lots of disclosure requirements that do connect to the financial statement.
• 12:00
  SPEAKER_01: So intensity metrics, you know, your assets that are subject to physical risks, you know, there's a lot of them throughout.
• 12:06
  SPEAKER_01: And also thinking about what are the current financial effects of some of these sustainabilities, the anticipated financial effects.
• 12:12
  SPEAKER_01: So I think even though you're not required to prepare fully consolidated, a full set of consolidated financials, there is still gonna be financial information at a consolidated level that's gonna need to be prepared to support the sustainability reporting.
• 12:26
  SPEAKER_02: All right, very helpful.
• 12:27
  SPEAKER_02: Now, as I said, I don't want to go through every single different type of entity.
• 12:32
  SPEAKER_02: However, I hope our listeners keyed into the fact you said entities, assets, and operations.
• 12:37
  SPEAKER_02: It's not just entities.
• 12:39
  SPEAKER_02: So any examples of either operations or assets that you would highlight in terms of things you should be thinking about when you're preparing this boundary?
• 12:48
  SPEAKER_01: Yeah, I think that there, I think one that comes up frequently, and and Heather, you might even be more familiar with me given your background as an energy partner.
• 12:58
  SPEAKER_01: But I think joint operat I think joint operations is a common type of operations that we see.
• 13:05
  SPEAKER_01: And those are where you would have a proportionate share that's reflected in your financial statements of the assets, liability, income, and expenses related to maybe a site, an entity, an asset, or an operation.
• 13:16
  SPEAKER_01: So you're not showing 100%, but a proportionate amount of it.
• 13:20
  SPEAKER_01: And so I think that is an area where there isn't a lot of explicit guidance in either ESRS or the ISSB.
• 13:28
  SPEAKER_01: But I think when we think about it, we would go back to the same principles of thinking about looking at what is included within your financial statements and assessing those for any sustainability matters to identify if there's things that need to be reported related to those.
• 13:42
  SPEAKER_01: And then for the portion of the operations that are not included in your financial statements, I think that we would think about that as part of our value chain.
• 13:50
  SPEAKER_02: Yeah, so I think these are very tricky, right?
• 13:52
  SPEAKER_02: Because you actually wind up one sort of um, well, it's not an entity, but one arrangement that then maybe has two different types of impacts on your sustainability reporting.
• 14:03
  SPEAKER_02: So maybe we'll come back to that when we talk more about value chain.
• 14:06
  SPEAKER_02: Um and I guess leading then into value chain.
• 14:10
  SPEAKER_02: I think this is one of the things when people are new to sustainability reporting, it's a little mind-boggling.
• 14:15
  SPEAKER_02: It's like, okay, well, obviously, even in the financials, you have this idea of your customers, your suppliers, and otherwise, but you're not actually reporting information about those, and you're not talking about their risks and their opportunities, their impacts as applicable.
• 14:30
  SPEAKER_02: So I think, can you really explain what we mean when we talk about value chain and then why this is something that is brought in from a sustainability perspective?
• 14:40
  SPEAKER_01: Sure.
• 14:40
  SPEAKER_01: And maybe I'll start by talking a little bit about the definition and maybe even doing a quick quote, but it's really thinking about what are the full range of activities, interactions, the resources and relationships that the entity and its business model has with the external environment in which it operates.
• 14:58
  SPEAKER_01: And I think we really in this um in IFRS S1 paragraph two, I think that kind of helps bring to light this.
• 15:05
  SPEAKER_01: So I'll just read this paragraph.
• 15:07
  SPEAKER_01: Together, the entity and the resources in relationship throughout its value chain form an interdependent system in which the entity operates.
• 15:15
  SPEAKER_01: The entity's dependencies on those resources and relationships and its impacts on those resources and relationships give rise to sustainability-related risks and opportunities for the entity.
• 15:26
  SPEAKER_01: And so I think when you think about that and like why, why is that important?
• 15:31
  SPEAKER_01: Obviously, those relationships, like if an entity is no longer able to get critical resources that it's using to produce its product, uh, raw materials, it's its dependencies on its workforce to be able to create those value, right?
• 15:49
  SPEAKER_01: And create those products and then its customers.
• 15:52
  SPEAKER_01: So I think when you think about those dependencies and the impacts that it has on those, those create risks and opportunities for the entity.
• 15:59
  SPEAKER_01: And so you have to think about more than just the entity itself.
• 16:02
  SPEAKER_01: And I think especially when we're thinking about sustainability-related matters and we're thinking about the environment and we're thinking about how that impacts the entity.
• 16:10
  SPEAKER_01: And especially when we're focused on the ISSB, you know, we're focused on risks and opportunities that comes in under ESRS too.
• 16:16
  SPEAKER_01: But I think we can see this, I love the term the interdependent system, is really, I think, um, what I really like about that quote.
• 16:23
  SPEAKER_01: And I think that really highlights why it's important to have this information reporting on the value chain as well, not just, you know, how the entity itself is having these, um, being affected by these sustainability matters.
• 16:37
  SPEAKER_02: Yeah, and I know you're gonna give some more examples later, but one that really stands out to me when you know we were first working on this is just this idea, okay, well, so I'm an entity and I'm I'm buying various things.
• 16:49
  SPEAKER_02: And if, you know, if I'm reporting my financial statements, so I'm so profitable and all of this, and and maybe I am doing great from a financial point of view, but then if you dig into it from a sustainability point of view and you're using child labor and you're not protecting your workforce and you're polluting, and but it's not you, it's it's all your suppliers, well, that's actually important information to know versus the company that actually is practicing, you know, uh reuse and recycling and treating their work as well and all those different things.
• 17:19
  SPEAKER_02: And so if you think about sustainability, my the people providing supplies to me, the fact that I'm buying choosing where to buy from is such an important thing, and then as well as what um products I'm selling.
• 17:34
  SPEAKER_01: Yeah, and I I think that's um I was listening to to a company talking about they were a clothing manufacturer and they were had sustainable practices, and they were talking about one of the key differences between them and some of their competitors was that they instead of going out and producing a bunch of of um clothing that they hope that the market will like and buy, and you know, the the amount of waste and and fashion, especially fast fashion is really high.
• 17:57
  SPEAKER_01: And they said, well, we design a product and then we wait for the orders to come in and then we decide how much we're gonna manufacture.
• 18:04
  SPEAKER_01: And so it takes a little bit longer for customers to get it, but it's like no one's a delivery.
• 18:09
  SPEAKER_01: No, but uh it's just and you know, but it's just interesting.
• 18:11
  SPEAKER_01: Like if you're making decisions as a consumer as to how you want to support sustainable practices, understanding those differences and how they're using their value chain, right?
• 18:20
  SPEAKER_01: And when they're contracting to, you know, supply the labor to develop their products and stuff, I think is important.
• 18:25
  SPEAKER_01: And so to your point, that this is why the information of not just what your operations, but maybe beyond is is important, right?
• 18:31
  SPEAKER_01: Yeah.
• 18:31
  SPEAKER_02: So then, Diana, I kind of jumped in before you really got into the detail, and we've used the terms and hopefully it's relatively clear.
• 18:38
  SPEAKER_02: But I know we talk about upstream and downstream value chain.
• 18:41
  SPEAKER_02: I think that people can get confused, even though, you know, so what is the upstream versus downstream value chain and how do you think about those?
• 18:49
  SPEAKER_01: Yeah.
• 18:49
  SPEAKER_01: So your upstream value chain is really I think the most basic thing is thinking about what are your direct suppliers, what's like feeding into, you know, what's coming into your operations that then you're creating your products and your services.
• 19:00
  SPEAKER_01: And then your downstream value chain is, you know, your distribution of those products and services, your ultimately your consumers, your end users of those products and services.
• 19:09
  SPEAKER_01: I think the thing that's challenging too with um both ESRS and ISSB is when we're talking about the value chain, it's not even just your direct suppliers and your direct customers.
• 19:19
  SPEAKER_01: Um, it's that second tier beyond that.
• 19:22
  SPEAKER_01: And so and third.
• 19:24
  SPEAKER_01: Yeah, it can go, it can keep be ever expanding.
• 19:26
  SPEAKER_01: And then also other contractual relationships, other business relationships, which I think is, you know, kind of how we think about these that are outside kind of those direct contractual first-tier relationships.
• 19:36
  SPEAKER_01: And so I think once you get into that, it's um, you know, it can be really expansive.
• 19:42
  SPEAKER_02: Yeah, and I think uh, you know, we've talked on this series about our sustainability reporting guide.
• 19:47
  SPEAKER_02: And one of the diagrams I probably love most in the sustainability reporting guide is like a spider web almost, which shows going in different directions, the entities in the middle, and then these value chains, and then there's these spots where there's you know impacts, risks, and opportunities is applicable.
• 20:04
  SPEAKER_02: And I love it for one thing because a team of our staff spent time working together, bringing together a bunch of topics to develop this uh this picture.
• 20:13
  SPEAKER_02: But the other thing is I think it's helpful.
• 20:15
  SPEAKER_02: But if I'm a company and I see this spider web that just keeps growing, how do I then think about, okay, what what is the boundary on this boundary?
• 20:26
  SPEAKER_01: Yeah, and I think, you know, they're they've tried to put out, um, especially ESRS has um the value chain implementation guide, which I think is really helpful.
• 20:37
  SPEAKER_01: Um, and and I would say both ESRS and ISSB kind of have this concept that's maybe just a little bit more built out since ESRS has this implementation guide.
• 20:46
  SPEAKER_01: But they talk about you don't have to identify every single, each and every single actor in your value chain.
• 20:52
  SPEAKER_01: And that what you're really trying to identify is where you think there's like material risk within that, or they also use the term hotspot.
• 21:01
  SPEAKER_01: It's always hard to use these because we impacts risk opportunities, you know, so we have to think about the words that we're using carefully.
• 21:07
  SPEAKER_01: But I like the term that they use hot spots.
• 21:10
  SPEAKER_01: Um and so trying to identify those.
• 21:12
  SPEAKER_01: And so, you know, I think it's it's going back to thinking through what are some of those critical supplies.
• 21:17
  SPEAKER_01: So, you know, if you are making a product that uses, you know, microchips, you know, there's like there's like rare minerals that are being mined somewhere that then are probably getting processed into a chip that then you're using to use in your product.
• 21:30
  SPEAKER_01: So that's not just the chip, you know, it's going back into those and how that gets there and where, you know, where where are those minerals being mined and what are the conditions that are there, what are impacts on you know the communities and the environment there.
• 21:43
  SPEAKER_01: So I think it's that kind of thing about thinking through what are kind of some of the critical components that might go into your product or service, uh, or who are um, you know, end users down the street, you know, your ultimate end users, and that you may be selling to another business that then ultimately goes to consumers.
• 21:59
  SPEAKER_01: So I think.
• 22:00
  SPEAKER_01: it's it's thinking through who are my critical suppliers, who are my critical customers, what are significant impacts throughout my operations that that could create those areas, you know, those risks and opportunities or or those impacts.
• 22:15
  SPEAKER_02: All right.
• 22:16
  SPEAKER_02: That's super helpful.
• 22:17
  SPEAKER_02: So then if we start thinking then how I think you've gone through this, but just to make sure, so now I've identified my value chain, I've I'm thinking about these hotspots, but then how do I decide which ones I'm really going to report on?
• 22:34
  SPEAKER_01: Yeah.
• 22:34
  SPEAKER_01: And I think that's thinking through kind of that gets a little into our another episode, which is our materiality assessment process of thinking through the materiality of those.
• 22:44
  SPEAKER_01: But I do think, you know, there's maybe going through maybe two more examples of this kind of secondary, you know, secondary third, I'll just go two away, but you know, you could could go even further.
• 22:56
  SPEAKER_01: But I think, you know, like one example that that we've talked about in practice actually is like a tobacco grower.
• 23:02
  SPEAKER_01: So a a farmer grows tobacco, they sell their tobacco to a cigarette manufacturer and then that cigarette manufacturer sells those cigarettes to customers that obviously can have a negative impact on the health of those customers.
• 23:16
  SPEAKER_01: And so thinking through or you know if we want to take it from an ESRS perspective, there's also lots of laws and regulations around cigarettes and, you know, areas where you know you can't sell to certain ages or other things.
• 23:28
  SPEAKER_01: And so you know thinking about whether that creates risks or opportunities or impacts those people, you as the tobacco grower need to think about that, even though you're not directly selling to those customers.
• 23:38
  SPEAKER_02: Yeah.
• 23:38
  SPEAKER_02: And then you said two examples though.
• 23:40
  SPEAKER_01: Oh yes and then another one too, which I think this one is interesting too is thinking through like financial institutions.
• 23:46
  SPEAKER_01: And so financial like a financial institution might provide a loan to a company and maybe that that company's operations you know significantly pollute the local environment, that financial institution will need to think about, you know, does that pollution that that company is doing, given the connection through that loan, does that create impacts or risk to the financial institution?
• 24:08
  SPEAKER_01: You know, if they're causing major pollution, like maybe they could be sued or go bankrupt, right?
• 24:14
  SPEAKER_01: And then they won't be able to repay the loan.
• 24:16
  SPEAKER_01: So I think there's we try not to just think about impacts even though they're they're easy to think about.
• 24:21
  SPEAKER_01: But you know I think you have to think about the full risk opportunities and impacts.
• 24:26
  SPEAKER_02: Yeah.
• 24:26
  SPEAKER_02: And I think maybe the key key thing here is we still hear companies coming to us and saying I'm only looking at my first tier.
• 24:33
  SPEAKER_02: And so that would mean the ones that you have the direct relationships with that.
• 24:36
  SPEAKER_02: And I guess if you don't take anything else away from this podcast, it value chain is not just tier.
• 24:42
  SPEAKER_01: And I I think when you're thinking about you know the the full life cycle of your product or service, I think that's really what we're trying to get at, right?
• 24:51
  SPEAKER_01: From like the inception of that product all the way through its ultimate and sometimes that even includes um you know the end of life treatment of that that product too.
• 25:02
  SPEAKER_02: Yes I think people get so focused on like okay there's a buyer and then like what happens at the end is definitely something to think about.
• 25:08
  SPEAKER_02: Well and that's again we see companies that they have their turn in programs and otherwise and that is you know going into those that aspect of the value chain.
• 25:17
  SPEAKER_01: Yeah.
• 25:17
  SPEAKER_01: And so I think you know another thing that we've heard is around kind of like mapping out your value chain or creating some sort of way to think about all of that spider web that you're talking about.
• 25:27
  SPEAKER_02: There you go.
• 25:28
  SPEAKER_02: All right so we could definitely obviously talk much more about the value chain but why don't we jump into then the other aspect of the reporting boundaries I think is key, another one we don't really think about from financial reporting, but actually it's like inherent in financial reporting which is the time boundaries and I kind of love that term.
• 25:46
  SPEAKER_02: But what what do we mean by time boundaries then?
• 25:49
  SPEAKER_01: Yeah and maybe we'll start with the basic is just what what report period are you covering, right?
• 25:55
  SPEAKER_01: What what period is your sustainability report covering, which is the same as your financial statement.
• 26:01
  SPEAKER_01: Something that's easy yes so it will cover the same period.
• 26:04
  SPEAKER_01: But I think there are some concepts within the sustainability reporting that is a little bit different than from our traditional financial statements.
• 26:12
  SPEAKER_01: And so when I think about you know what are you reporting within your sustainability statement you're required to report your impacts, risks and opportunities over the short, medium and long term there's also anticipated financial effects of sustainability matters as well as you know what is an entity doing related to its targets and goals?
• 26:30
  SPEAKER_01: Those could be over various periods of time, as well as then what are these actions that the company's taking to prevent, mitigate or remediate any impacts or risks or pursue any opportunities.
• 26:42
  SPEAKER_01: And so for the ESRS, there's a define, they define what short, medium and long term is so for short term, it's one year from the day of the financial statements medium term is after that period through five years and then the long term is is more than five years.
• 26:57
  SPEAKER_01: Companies if they did want to define time periods differently they could do that.
• 27:00
  SPEAKER_01: They would need to provide disclosure around that the ISSB standards do not have any prescription they still use the term short, medium and long term, but don't have any prescriptive requirements around what those time horizons are.
• 27:12
  SPEAKER_02: Before you go on then why why do you think why did ESRS define them and then do I mean any insight into that I think it's interesting.
• 27:21
  SPEAKER_01: Yeah I mean I think I think one of the things that we've heard from sustainability reporting for you know moving from this voluntary landscape to mandatory is one of the challenges with the voluntary reporting was inconsistency in the information that was provided by entities.
• 27:37
  SPEAKER_01: And so I think having more definition around what is a short, medium and long term then hopefully provides more of that consistency and comparability between and among companies.
• 27:47
  SPEAKER_01: But I think on the flip side of that, we also know that different companies have different planning cycles, different life cycles of their products and services.
• 27:56
  SPEAKER_01: And so it they may not fit well into predefined terms.
• 28:00
  SPEAKER_01: And so I think the ISSB standards which is more principles based, you know, I would say ESRS is more prescriptive and ISSB is more principles based.
• 28:08
  SPEAKER_01: I think they went with that principles of having those still short, medium and long term, but allowing entities to provide and you require they're required to provide disclosure around what how they've defined those time horizons, but then you would be able to see that gives a little more flexibility to companies.
• 28:23
  SPEAKER_02: Yeah it's this is an interesting one to me because you did see ESRS and ISSB go in different or FRAG and the ISSB go in different directions on this.
• 28:32
  SPEAKER_02: But on the other hand it's interesting because in many cases you're actually going to wind up in the same place and particularly obviously short term is basically the financial statement like one year.
• 28:43
  SPEAKER_02: But anyway it is a place where there's a difference but maybe not really a difference.
• 28:48
  SPEAKER_02: Well it I guess it depends on the particular company.
• 28:51
  SPEAKER_01: But anyway I jumped in so what what else from uh now that I cut you off you have to see see where you were maybe a a a couple other concepts that I think one maybe that's more specific to uh sustainability reporting and then a couple where we tie in more to the financial statement.
• 29:06
  SPEAKER_01: So one is the concept of a base year or a baseline year.
• 29:10
  SPEAKER_01: And those are really important when you're thinking about a sustainability, an entity sustainability related like targets and goals, usually having their base year or their baseline year and then how they're measuring progress against that is really important to understand that.
• 29:24
  SPEAKER_01: It is really common when we're talking about GHG emissions uh when we're thinking about base year.
• 29:29
  SPEAKER_01: So we will leave that for another discussion, another podcast, but just to at least introduce that that concept is is out there related to time horizons.
• 29:37
  SPEAKER_01: And then the few other things is one is subsequent events.
• 29:41
  SPEAKER_01: There's no specific guidance in the sustainability standard.
• 29:44
  SPEAKER_01: So we would think about it very much the same as you would from a financial reporting perspective.
• 29:48
  SPEAKER_01: So if you're getting information after the end of the reporting period but it relates to the reporting period.
• 29:54
  SPEAKER_01: So an example could be like you get a new pollution report about an operation that was part of your reporting during the year and it was material, you would update for that.
• 30:04
  SPEAKER_01: If you had an event that happened after the year end, you would evaluate whether that was material for disclosure.
• 30:10
  SPEAKER_02: All right very helpful from that point of view.
• 30:13
  SPEAKER_02: And then how about I'll throw a couple more comparatives.
• 30:16
  SPEAKER_01: So comparative so it does require comparative information.
• 30:20
  SPEAKER_01: I think that helps users look at trends, look at how things have changed over time.
• 30:24
  SPEAKER_01: So that's helpful information.
• 30:26
  SPEAKER_01: One thing to note is a lot of both actually reporting standards provide transitional relief.
• 30:32
  SPEAKER_01: So for the first year of reporting comparative information is not required.
• 30:35
  SPEAKER_01: Good news.
• 30:36
  SPEAKER_02: Yes a little bit of relief there.
• 30:38
  SPEAKER_02: All right and then you made me think of another question when you mentioned I don't know why this pollution report reminded me of this but if you have a change in your entity structure during the year obviously this happens a lot you sell something you buy something you discontinue and operate like there's just so many different scenarios.
• 30:54
  SPEAKER_02: So it's again it's pretty straightforward when you think of this little org chart that never changes and that's what I'm reporting.
• 31:00
  SPEAKER_02: But now you know you you have these changes what do you do with them?
• 31:05
  SPEAKER_01: We're gonna follow the financial statements.
• 31:09
  SPEAKER_01: So I guess you know as you're thinking about that, like what does that really mean?
• 31:12
  SPEAKER_01: Right.
• 31:13
  SPEAKER_01: So let's just we'll and we'll stick with the basics here and maybe we could get into more complex situations later.
• 31:18
  SPEAKER_01: But if you're thinking about um you know say you have an acquisition during the year, I think you would think about does the do those new assets do those new operations are there new impacts, risks or opportunities that come with those assets or operations.
• 31:32
  SPEAKER_01: So they would just flow into your normal process of assessing um you know your entire reporting operation to determine your material disclosures and then thinking about do you have new policies or actions?
• 31:43
  SPEAKER_01: I think maybe the one interesting piece is kind of the metrics piece of it, right?
• 31:47
  SPEAKER_01: You have metrics that could be reported as of a period end or you have metrics that are reported kind of we like to call them flow metrics or or maybe we don't cover the entire period.
• 31:59
  SPEAKER_01: The entire period.
• 32:00
  SPEAKER_01: So I think you know if you from the date of acquisition through the end of the year is what you would include related to those assets or operations and then they would obviously be included any year end metrics disposal you would just have the same where you'd consider does that change in any way your materiality assessment, the disclosures that you would require and for metrics you would include them through you know the beginning of the reporting period through the disposal date and then at the end of the period since you don't have the asset or operation anymore it would not be included in the metric.
• 32:28
  SPEAKER_02: I mean it does seem rather intuitive actually but it's definitely something that there's been a lot of questions and we spent a lot of time on so that you know there could be more complex situations.
• 32:37
  SPEAKER_02: But all right so Diana I know there's more to this but I think we hit the highlights so again if if you're a company you're thinking about different aspects of these boundaries what advice do you have or or what sort of key takeaway would you have here?
• 32:52
  SPEAKER_01: Yeah I think maybe maybe two key takeaways.
• 32:54
  SPEAKER_01: I think one is and we've tried to highlight this I do think that this connectivity with the financial statements is critically important.
• 33:02
  SPEAKER_01: And I know we'll talk about that more in some of our future podcasts.
• 33:05
  SPEAKER_01: But I think you can at least stick with like when you're thinking about kind of your own operations and what you're reporting.
• 33:10
  SPEAKER_01: I think we can we can think about you leveraging a lot of the principles from financial reporting.
• 33:14
  SPEAKER_01: And I think the one at least major area of difference in my mind is the value chain.
• 33:19
  SPEAKER_01: And I think that that is something that companies really need to focus on.
• 33:22
  SPEAKER_01: And I think it's gonna take the entire company right because you're really going to have to think about what are your products and services and how throughout kind of their entire life cycle how how they're interacting with different entities and businesses and what types of relationships they have.
• 33:42
  SPEAKER_01: And so I think that mapping of the value chain and trying to identify where those hotspots are areas of heightened risk, I think is really critically important and it it will take a lot of people outside of you know whether that's financial reporting or a sustainability reporting function, it's gonna really encompass you know operations and and thinking through all the different aspects of the company.
• 34:02
  SPEAKER_02: Yeah and I think the other one for me that stands out.
• 34:04
  SPEAKER_02: So you mentioned short, medium and long term and reporting over that.
• 34:08
  SPEAKER_02: And again we do have that concept in financial reporting.
• 34:11
  SPEAKER_02: So for example if you're doing valuations or otherwise but it's to me it's not the same because in this case you're actually reporting information about what you think you know what is your risk going to be is a flood going to occur or you know what could happen in the future and it's to me it's more directly part of the reporting that you're making.
• 34:32
  SPEAKER_02: And so again a lot of judgment that's involved and a lot of people in the company that may be needed.
• 34:37
  SPEAKER_01: Right.
• 34:38
  SPEAKER_01: Yeah I think especially the longer term you get out and I think some of these too when you think about you know some of the commitments that that companies are making like those those can be farther out.
• 34:48
  SPEAKER_01: And I think those are typically those commitments are being made potentially farther out than when we typically think about like a company, you know, if you think about your budgeting or your planning from a more of a financial statement perspective, you know, those are usually a few years whereas some of this stuff that companies are thinking about that are targets or goals or what their plans are to transition to you know a greener economy that those are over a longer period of time.
• 35:11
  SPEAKER_01: So I definitely think that the time horizon is longer in the sustainability reporting.
• 35:16
  SPEAKER_02: And that leads directly into materiality which is a perfect ending because that's what we're gonna be talking about next week.
• 35:23
  SPEAKER_02: So to our listeners definitely please join us again next week I'm gonna have Diana back again and we will be talking about materiality so going into this impacts risks and opportunities as applicable.
• 35:33
  SPEAKER_02: And for today Diana is always such a pleasure to talk to you and thank you so much for joining me.
• 35:38
  SPEAKER_02: Thanks Heather great talking with you.
• 35:39
  SPEAKER_03: That's our show for today tune in next week for more fresh episodes so that you never miss any of our audio content follow the PWC Accounting podcast wherever you listen to your podcasts.
• 35:52
  SPEAKER_03: And to stay up to date on all our latest accounting and reporting news sign up for our newsletter at viewpoint.pwc.com from thought leadership at PWC I'm Heather Horn thanks for tuning in this podcast is brought to you by PwC All Rights Reserved PWC refers to the U.S.
• 36:19
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• 36:25
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• 36:34
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