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Sustainability now: Foundational reporting concepts · PwC's accounting podcast

• 0:00
  SPEAKER_00: Thought Leadership from PWC's National Office.
• 0:07
  SPEAKER_03: Hello, and welcome to PWC's Accounting Podcast.
• 0:10
  SPEAKER_03: I'm Heather Horn, PWC US's sustainability technical leader, and I'm so happy you could join us for this next episode in our video podcast series on sustainability reporting.
• 0:21
  SPEAKER_03: And for those of you who are listening to us today and not watching our video, definitely please check that out in case you'd like to watch us in action instead of just tuning in.
• 0:32
  SPEAKER_03: In today's episode, I'm happy to welcome back for the third week in a row, Diana Stoltzfith, who's another partner in our national office working and one of our leaders in sustainability reporting.
• 0:43
  SPEAKER_03: And for today's episode, Diana, we're going to be talking about foundations of sustainability reporting.
• 0:49
  SPEAKER_03: So I guess it's taken us a while to get here, but we're going to be talking about really what goes into the report itself and some of the concepts and otherwise for reporting.
• 0:59
  SPEAKER_03: So very happy to have you here.
• 1:02
  SPEAKER_03: Back to our listeners for a moment.
• 1:03
  SPEAKER_03: Do you want to make sure you know that in today's episode, we will cover both ESRS, so reporting in the EU, as well as the requirements under the ISSB standards.
• 1:13
  SPEAKER_03: If you are very interested in what's going on in California or the other US states, we have a whole separate episode for you.
• 1:20
  SPEAKER_03: So I encourage you to check that out.
• 1:22
  SPEAKER_03: And then in addition, this topic this week is building on our prior topics, including, as I said last week, Diana was on talking about materiality.
• 1:30
  SPEAKER_03: So I encourage you to check those out.
• 1:32
  SPEAKER_03: But this definitely standalone, so you can keep listening for now.
• 1:35
  SPEAKER_03: So, Diana, welcome back.
• 1:37
  SPEAKER_03: And just to level set for everyone, we use the term foundations, and that is something we reference in our sustainability reporting guide.
• 1:44
  SPEAKER_03: That's the name of the chapter.
• 1:46
  SPEAKER_03: But I'm not sure it's intuitive to people what that means.
• 1:48
  SPEAKER_03: So I gave a brief highlight, some brief highlights, but can you explain what's encompassed when we talk about foundations?
• 1:55
  SPEAKER_01: Sure.
• 1:55
  SPEAKER_01: And when we're talking about foundations too, this applies across all sustainability reporting.
• 1:59
  SPEAKER_01: It applies regardless of the size of your entity, what industry you're in, or any of those things.
• 2:04
  SPEAKER_01: And so what are these concepts we're talking about?
• 2:07
  SPEAKER_01: One is the qualitative characteristics of information.
• 2:09
  SPEAKER_01: I think we've mentioned these, but I think going through them in detail and helping people really understand how to think about that when they're thinking about the information that's going to go into their reporting is important.
• 2:18
  SPEAKER_01: And then connectivity with the financial statements.
• 2:21
  SPEAKER_01: I think we've highlighted this a number of times that information that's used in your financial statements may also be used in your sustainability reporting, that there's connections between the two of those.
• 2:29
  SPEAKER_01: So we'll we'll explore that a little bit more.
• 2:32
  SPEAKER_01: And then measurement.
• 2:33
  SPEAKER_01: So thinking about when you can use direct measurements or exact data versus when you might have to use estimations or those types of things.
• 2:41
  SPEAKER_01: And then last is we'll briefly touch on some of the general disclosure requirements that are required under ESRS and the ISSB.
• 2:48
  SPEAKER_01: And in general, I would say those concepts are pretty much aligned between the two frameworks.
• 2:52
  SPEAKER_01: There are some slight nuances.
• 2:54
  SPEAKER_01: We probably won't go through all the minutiae of all the differences, but we'll try to at least highlight a high level where there are some differences.
• 3:01
  SPEAKER_01: So then if people are working through these different concepts, they can know that this is somewhere where maybe they should uh spend a little much more time to understand that.
• 3:08
  SPEAKER_03: Okay, very good, very helpful.
• 3:10
  SPEAKER_03: So let's start with the qualitative characteristics of sustainability reporting.
• 3:14
  SPEAKER_03: And I think this is interesting.
• 3:15
  SPEAKER_03: And you and I talked about this when we were preparing.
• 3:18
  SPEAKER_03: The fact is that from a financial reporting perspective, obviously you learn about the concepts of reporting, and I think people intuitively understand what they are, but you don't spend a lot of time studying them.
• 3:29
  SPEAKER_03: For the most part, maybe if you're dealing with very complex technical issues, you might need to go to them.
• 3:34
  SPEAKER_03: But from a sustainability reporting point of view, because there's relatively less in the standard, you really need often to look at them to make sure, like, is this answer or is this approach consistent with these qualitative characteristics?
• 3:48
  SPEAKER_03: So given how important they are, I did warn you, I was going to give you a quiz before I asked you the detail to see if you can name the qualitative characteristics.
• 3:57
  SPEAKER_01: Okay.
• 3:58
  SPEAKER_01: All of them.
• 3:59
  SPEAKER_01: All of them.
• 3:59
  SPEAKER_01: Okay.
• 4:00
  SPEAKER_01: So it is relevance, faithful representation, understandability, comparability, verifiability, and then for the ISSB timeliness.
• 4:11
  SPEAKER_01: You said it.
• 4:12
  SPEAKER_01: And faithful representation has three subcomponents.
• 4:14
  SPEAKER_01: So we were, I was trying to add one, like how many, what is the number that there are?
• 4:18
  SPEAKER_01: We were getting into a little bit of a silly discussion.
• 4:20
  SPEAKER_03: But I guess five is fair, the six of timeliness.
• 4:24
  SPEAKER_03: And maybe we could actually, it's a bit backwards, but maybe start with timeliness and why that one is different.
• 4:30
  SPEAKER_01: Right.
• 4:30
  SPEAKER_01: Okay.
• 4:30
  SPEAKER_01: So that is one where this is a difference where the ISSB has timeliness.
• 4:34
  SPEAKER_01: It's pretty straightforward.
• 4:36
  SPEAKER_01: And I think we've touched on this.
• 4:37
  SPEAKER_01: Your sustainability reporting and your financial reporting are supposed to cover the same period and be issued at the same period of time.
• 4:42
  SPEAKER_01: So that that information is available to the user at the same time.
• 4:45
  SPEAKER_01: Right.
• 4:46
  SPEAKER_01: And the reason that that's a difference, and the ISSB specifically has that, is because, as we've talked about, that it's kind of this global baseline and that each jurisdiction will adopt these standards themselves.
• 4:58
  SPEAKER_01: And so I think trying to create that consistency across, you know, all the different reporting and or reporting jurisdictions.
• 5:04
  SPEAKER_01: But then ESRS also has a lot of other EU regulations.
• 5:08
  SPEAKER_01: So the CSRD that really has specifics around the timing of reporting and the different requirements.
• 5:15
  SPEAKER_01: And so because it's so specific in the EU legislation, they didn't need to put anything additional in the uh European sustainability reporting standards.
• 5:22
  SPEAKER_03: Yeah, and I think in particular, right, you have to include your sustainability reporting together with your management report in the EU.
• 5:29
  SPEAKER_03: So you automatically are meeting.
• 5:30
  SPEAKER_01: And so I think, you know, it's uh one of those things where it's a difference in the writing, but I don't think in it's actually the same.
• 5:38
  SPEAKER_01: At the end of the day, it's the same.
• 5:40
  SPEAKER_03: So all right, so then let's go through the other ones.
• 5:42
  SPEAKER_03: And again, as I referenced earlier, I think there's a few of these in particular we really do look to when we're considering uh how people are reporting.
• 5:51
  SPEAKER_03: But let's start with relevance.
• 5:52
  SPEAKER_01: Yeah, and I think the thing that's interesting here, so materiality is a component of relevance.
• 5:56
  SPEAKER_01: And I know in our materiality discussion, we talked a lot about the relevance of information.
• 6:01
  SPEAKER_01: And really what we're talking about when we're talking about relevance is does it have the potential to make a difference in a decision of a user of the um of the sustainability reporting?
• 6:10
  SPEAKER_01: And so that really ties in with how we think about materiality too.
• 6:13
  SPEAKER_01: We talked a lot about users and the user perspective.
• 6:17
  SPEAKER_01: And so um, you know, thinking about is information relevant, then it's material.
• 6:21
  SPEAKER_01: So I think that's that's really the tie-in with those two together.
• 6:25
  SPEAKER_03: Well, slightly circular, but I think once you put it together with all the other ones, then yeah, it makes sense.
• 6:30
  SPEAKER_01: You know, it's thinking about what is the nature of the information, is it useful?
• 6:35
  SPEAKER_01: Uh, would it make a difference?
• 6:36
  SPEAKER_01: You know, those types of things.
• 6:38
  SPEAKER_01: Yes.
• 6:38
  SPEAKER_03: And I think we talked about this a bit that some of these words have relatively different meanings when they're used here, but relevance is probably one that you can take at the start of the state.
• 6:48
  SPEAKER_03: Yeah, exactly.
• 6:49
  SPEAKER_03: All right, faithful representation.
• 6:51
  SPEAKER_03: I think this is probably one we shouldn't love one more than the others, but this one is probably definitely very high up there in terms of importance.
• 6:59
  SPEAKER_03: So what do we need?
• 7:00
  SPEAKER_01: Yeah, and I think that's so they say that faithful representation requires information to be complete, neutral, and accurate.
• 7:07
  SPEAKER_01: And so I think maybe walking through each of those three characteristics I think is important.
• 7:11
  SPEAKER_01: So when we're thinking about completeness, that means that it includes all the material details and all the details necessary for a sustainability user to really understand the impact, risk, or opportunity as applicable that's being depicted.
• 7:25
  SPEAKER_01: Um, and it also means that, you know, that the entity is included how it's responding to those impacts, risks, or opportunities, including any metrics or targets.
• 7:35
  SPEAKER_01: So it's really giving, you're not just thinking about, oh, I'm giving a piece of information, but I'm explaining all the aspects of that.
• 7:41
  SPEAKER_01: So, you know, the impact, maybe what the response is from the entity, how it's measuring progress against some of those things.
• 7:47
  SPEAKER_01: So making sure it's complete.
• 7:50
  SPEAKER_01: Next is neutral.
• 7:51
  SPEAKER_01: And so that's making sure that it's um there's no bias in the selection of the information or the disclosure.
• 7:57
  SPEAKER_01: And so, you know, if you're talking about positive impact, you're talking about your negative impacts too, right?
• 8:02
  SPEAKER_01: You're not giving emphasis to more positive information than negative, downplaying certain things.
• 8:08
  SPEAKER_01: Um, and so you're giving a full picture in a neutral way of covering all the aspects.
• 8:13
  SPEAKER_01: It also includes, it says that neutrality is supported by prudence, which involves caution and making judgments.
• 8:19
  SPEAKER_01: And when there's uncertainty, that you're being clear about that uncertainty in those judgments.
• 8:23
  SPEAKER_01: Um, the last piece of faithful representation is accurate.
• 8:26
  SPEAKER_01: And I know you and I talked a little bit about this.
• 8:28
  SPEAKER_01: Like when I think of accurate, I think back to kind of my financial statement days and, you know, a precise number.
• 8:34
  SPEAKER_01: But I think what's interesting here is when they're talking about accuracy, they're recognizing that there isn't always going to be a precise measurement and that, you know, the use of estimates is important.
• 8:42
  SPEAKER_01: And so what's really important when they're talking about accurate is making sure that there's processes and controls in place to make sure that there's not material errors or misstatements in that information.
• 8:52
  SPEAKER_01: And that also if you are presenting estimates, that you're making sure that you're clear on what are the limitations and the associated uncertainty with that.
• 9:01
  SPEAKER_01: So I think it's making sure that your information is factual, that you have descriptions that are precise, you're recognizing where there's estimations, approximations, and forecasts.
• 9:11
  SPEAKER_03: Yeah, and I think what's interesting on all of these, well, a few things.
• 9:14
  SPEAKER_03: One is accuracy obviously doesn't necessarily just have the surface understanding, you know, um, name value that we would expect.
• 9:21
  SPEAKER_03: You have to dig a little deeper.
• 9:23
  SPEAKER_03: But also these really all work together because if you think about, but especially new completeness and neutrality, you know, I think there's completeness is okay, it's everything from all your entities, right?
• 9:33
  SPEAKER_03: You're not leaving some out or otherwise.
• 9:36
  SPEAKER_03: But also the idea that, well, you can't just give this, you know, I'm sorry for our listeners.
• 9:41
  SPEAKER_03: I'm now motioning as though it was only a video.
• 9:43
  SPEAKER_03: Um, but you can only you can't give just a slice of the information, but you have to make sure the whole pie is there if we want to use that analogy.
• 9:51
  SPEAKER_03: And I think this is something where it can be very helpful in your reporting is to take that step back and say, okay, do I have faithful representation?
• 10:00
  SPEAKER_03: Is someone really going to understand the full positive and negative impacts of our um scenario?
• 10:08
  SPEAKER_01: And maybe I know I like to go back to financial statement representation, but maybe when you're thinking too, you know, you think your financial statements taken as a whole, right?
• 10:15
  SPEAKER_01: So that you're giving that complete picture.
• 10:17
  SPEAKER_03: Right.
• 10:17
  SPEAKER_03: But I think what's interesting here is that you're talking as a whole for that risk or for the opportunity or the situation.
• 10:24
  SPEAKER_03: And so that's also it's again, it's using the same terms, but understanding new meanings.
• 10:29
  SPEAKER_03: Yeah, I agree.
• 10:30
  SPEAKER_03: Very helpful.
• 10:30
  SPEAKER_03: Okay, so but there's also obviously these other ones were very important too.
• 10:34
  SPEAKER_03: Um, this next one I also think actually can be very, very helpful, and that's comparability.
• 10:39
  SPEAKER_03: And so that's more than just you know, having your prior periods and making sure that they're covering the same things.
• 10:45
  SPEAKER_01: Yeah, I was thinking about that too, and I thought about this being especially important when we're thinking about the development of mandatory sustainability reporting too.
• 10:53
  SPEAKER_01: This like characteristic really comes to mind because it also talks about consistency, helping to achieve comparability.
• 10:59
  SPEAKER_01: And it's also talking about comparability across entities and, you know, especially uh entities that operate in the same like sector or industry and that type of information, and making sure that you're using consistent like methodologies for your disclosure, same approaches, like over periods of time.
• 11:16
  SPEAKER_01: And so there's more to comparability than I think maybe you would initially think.
• 11:20
  SPEAKER_01: You kind of think, oh, you make sure you have your prior period information.
• 11:22
  SPEAKER_03: Yes, exactly.
• 11:23
  SPEAKER_03: And that you haven't changed like your basis of accounting in the real time.
• 11:27
  SPEAKER_03: But I think this is one again where we've spent a lot of time because as you think about particularly measurement for some of these different metrics, that if there's one practice in the industry that's relatively common to measure, I think we were talking about this in the context of emissions, yeah, and then you are planning to take a different approach, you either need a lot of disclosure or otherwise because it's that much more difficult for users than if you're kind of going in a different direction.
• 11:53
  SPEAKER_03: And not to say industries aren't important for financial reporting, because we see the same thing.
• 11:58
  SPEAKER_03: And not to say just to follow your industry, but it's definitely something I think you need to think about here.
• 12:03
  SPEAKER_01: Yeah.
• 12:03
  SPEAKER_01: And I think as we've said, you know, sustainability and mature reporting is not as mature as financial reporting, where you have a lot more of this guidance and what different industries are doing or what you should do in different circumstances.
• 12:17
  SPEAKER_01: Um, there's a lot of decisions, I think, and judgments that are making, even in preparing some of the more straightforward data points.
• 12:24
  SPEAKER_01: And so I feel like this is something that we constantly say, you know, advice that we give, as well as making sure that you you're selecting a methodology and then you consistently apply it.
• 12:33
  SPEAKER_01: You make sure there's clear disclosure.
• 12:34
  SPEAKER_01: So I think to me, it seems like that embodies, you know, a lot, a number of these different points too, that we've talked about.
• 12:41
  SPEAKER_01: But there's still more.
• 12:42
  SPEAKER_03: There's still more.
• 12:43
  SPEAKER_03: That's right.
• 12:44
  SPEAKER_03: So then the next one, verifiability.
• 12:46
  SPEAKER_03: And this one I know is near and dear to our colleague Martin Olewinsky's heart, uh, coming at it also from an audit perspective.
• 12:53
  SPEAKER_03: But this is important for companies too.
• 12:55
  SPEAKER_03: So can you explain?
• 12:56
  SPEAKER_01: Yeah.
• 12:56
  SPEAKER_01: And I think, you know, talking about that verifiability point is and the interaction with audit is like it needs to be able to be corroborated, the information that you're you're providing, and whether that's against um, you know, the information itself or, you know, against systems controlled, and also making sure that, you know, from an independent perspective, that people reading that information would come to a similar consensus.
• 13:22
  SPEAKER_01: Um, I think that's so that, and it really ties back to that kind of like faithful representation too.
• 13:27
  SPEAKER_01: Are you giving like a complete information?
• 13:29
  SPEAKER_01: Are you making sure that it's all there and that somebody else would come to like a similar conclusion?
• 13:34
  SPEAKER_01: So maybe a little bit of a harder concept to explain.
• 13:38
  SPEAKER_03: But yeah, but also I think it's especially important when we talk about sustainability reporting, because again, if you think to the more voluntary reporting days or otherwise, maybe you don't have the same types of systems in place of where you're getting your information.
• 13:53
  SPEAKER_03: And so again, this is not just for an auditor, but it's for the company as well, to make sure you have the right controls in place as you're preparing this information.
• 14:00
  SPEAKER_01: Yes.
• 14:00
  SPEAKER_01: And I think when we we go into a couple of the next things, especially too, we talk about connectivity with the financial statements.
• 14:07
  SPEAKER_01: I think about, you know, you can see the verifiability and a number of the other principles really coming through, but thinking about, you know, if you're doing forecasts for financial purposes and you're doing forecasts for sustainability purposes, are you using the same assumptions, right?
• 14:21
  SPEAKER_01: And thinking about those different scenarios in the same way.
• 14:24
  SPEAKER_01: Are you thinking about what are your planned investments, what are your planned, you know, capital expenditures and that type of thing, that you're having consistency between how you're thinking about that from a financial perspective or other parts of your business too, right?
• 14:34
  SPEAKER_01: There's lots of different parts of your business and your sustainability that you're not having different assumptions.
• 14:39
  SPEAKER_01: I know we that's an important part of it.
• 14:41
  SPEAKER_03: Yes.
• 14:42
  SPEAKER_03: All right, one more.
• 14:43
  SPEAKER_03: Understandability.
• 14:44
  SPEAKER_03: Clear and concise.
• 14:46
  SPEAKER_01: All right.
• 14:46
  SPEAKER_01: That was very short and concise.
• 14:48
  SPEAKER_01: Yes.
• 14:49
  SPEAKER_01: Okay.
• 14:50
  SPEAKER_01: Maybe one more thing.
• 14:51
  SPEAKER_01: Yeah.
• 14:52
  SPEAKER_01: Thank you.
• 14:52
  SPEAKER_01: It's just that um, I think one thing that comes to mind here is just making sure that you're avoiding like generic or boilerplate information.
• 14:59
  SPEAKER_01: I think, you know, to make like anything, to make them information meaningful to the users and and useful information is making sure that, you know, it's tailored to your entity.
• 15:08
  SPEAKER_01: Every entity has different facts and circumstances.
• 15:10
  SPEAKER_01: And so I think making sure that that is coming through and you're not just, you know, using generic language.
• 15:15
  SPEAKER_03: Yes, very important.
• 15:16
  SPEAKER_03: And again, I think this goes all the way back to some of those points we made at the beginning in terms of completeness, accuracy, neutrality, understandability is a key part and works together.
• 15:26
  SPEAKER_03: So clearly all of these really work together.
• 15:28
  SPEAKER_03: They're all tandem.
• 15:29
  SPEAKER_03: Exactly.
• 15:29
  SPEAKER_03: So you mentioned connectivity with financial statements.
• 15:32
  SPEAKER_03: We've talked about this in prior episodes, but I do think it's something, again, that's fundamental and foundational.
• 15:39
  SPEAKER_03: Right.
• 15:39
  SPEAKER_03: Since we're talking about the foundations to sustainability reporting.
• 15:42
  SPEAKER_03: So what do you think about here and what are the requirements?
• 15:46
  SPEAKER_01: Yeah, so I think, you know, it's interesting in ESRS, they have kind of a distinction that they make too when they talk about direct connectivity with the financial statements where you're using, you know, there's requirements around intensity metrics, you know, maybe where you're using revenue or something like that.
• 16:00
  SPEAKER_01: And that might be something where you're using a direct number from the financial statements.
• 16:04
  SPEAKER_01: There can be other times where, you know, there's requirements around capital expenditures that are being reported in sustainability.
• 16:11
  SPEAKER_01: You may not have that same level.
• 16:12
  SPEAKER_01: It might be a different level of aggregation or disaggregation of financial statements.
• 16:15
  SPEAKER_01: They call that indirect connectivity.
• 16:17
  SPEAKER_01: I also think about, you know, assumptions like that we just talked about that are going into forecasts.
• 16:22
  SPEAKER_01: You know, those might not be as direct, those might be more indirect.
• 16:25
  SPEAKER_01: And so it talks about those different types of information, but making sure that there's a clear connection between those.
• 16:31
  SPEAKER_01: And ISSB doesn't use those exact terms, um, direct and indirect connectivity.
• 16:36
  SPEAKER_01: But I would say when we're thinking about the disclosures, even there's there's some nuances in the different requirements between ESRS and ISSB at a basic level, it's the connection between the two and making sure that there's clear connections.
• 16:51
  SPEAKER_01: So whether that's cross-referencing between the two, if for some reason there's a different level of aggregation or disaggregation, that there's a reconciliation between those amounts, um, for significant assumptions and methodologies, that there's, you know, a connection between those two.
• 17:06
  SPEAKER_01: And so it should be that if you're reading the sustainability report and there's quantitative information in there that would be also reported in your financial statements, a user should be able to clearly understand where in the financial statements that you can find that and be able to read those accompanying disclosures too, which might provide different information, right, about that same quantitative.
• 17:27
  SPEAKER_03: Yeah.
• 17:27
  SPEAKER_03: And I also think, Diana, I always think about this again, going back to emissions, because that's where I spend a lot of my time, and going back to my industry, the power industry.
• 17:36
  SPEAKER_03: But if I'm a company that says, oh, I'm gonna achieve a certain level of emissions reductions by 2030, and I have this like plastered in my sustainability report, but then I own coal-fired power plants, and there's my retirement date is 2040 in the financial statements.
• 17:52
  SPEAKER_03: Okay, well, do those two things reconcile with each other?
• 17:55
  SPEAKER_03: And I really think there is making sure both ways, the assumptions you're making in the financial statements are making their way into the sustainability reporting and vice versa.
• 18:04
  SPEAKER_03: Particularly, I think, when it comes to targets and goals, that's where we can really see some impact.
• 18:09
  SPEAKER_03: Right.
• 18:09
  SPEAKER_01: Yeah.
• 18:09
  SPEAKER_01: And to your point a lot around a lot of these commitments.
• 18:11
  SPEAKER_03: Exactly, exactly.
• 18:12
  SPEAKER_03: Okay, so the next topic is one we've spent a lot of time talking about.
• 18:17
  SPEAKER_03: And again, in a way it's surprising because we use, we measure things for financial reporting, we estimate things for financial reporting, but there definitely are some differences.
• 18:27
  SPEAKER_03: And I do think this has to take us back a little to the basics to understand how we're using these.
• 18:33
  SPEAKER_03: So when you think about measurements, what are the key steps that you would be thinking about?
• 18:38
  SPEAKER_01: We typically think about it in three steps.
• 18:40
  SPEAKER_01: And even you and I were talking about this.
• 18:42
  SPEAKER_01: They're kind of as with everything, they're kind of you know, iterative and stuff.
• 18:46
  SPEAKER_01: But we'll we'll talk about them maybe in three steps, and I think people will maybe appreciate how there's some overlap between the two.
• 18:51
  SPEAKER_01: But I think one is selecting your measurement approach, two is identifying and then collecting the relevant data.
• 18:57
  SPEAKER_01: And then three, which we won't spend much time on because it's pretty straightforward, is then calculating and disclosing.
• 19:03
  SPEAKER_03: All right.
• 19:03
  SPEAKER_03: So then let's start with step one, and it's selecting your measurement approach.
• 19:07
  SPEAKER_03: And there's two techniques, no surprise, direct and indirect.
• 19:11
  SPEAKER_03: And this is where I think the iterative comes in because the technique depends on the data, but then the data depends on the technique you're trying to use.
• 19:20
  SPEAKER_03: But just focusing on technique, what do we mean when we say direct versus indirect?
• 19:25
  SPEAKER_03: And what are some of the considerations?
• 19:27
  SPEAKER_01: Yeah.
• 19:27
  SPEAKER_01: So direct measurement is when you can exactly measure something.
• 19:31
  SPEAKER_01: And so maybe we'll start with like examples.
• 19:33
  SPEAKER_01: Okay, what do you mean by that?
• 19:34
  SPEAKER_01: And then maybe talk a little bit more.
• 19:35
  SPEAKER_01: So this would be if you need payroll information, if you need employment data, if you need energy uses.
• 19:42
  SPEAKER_01: So if you think about things that the company would have in its systems where it's able to get that data and you know, make those calculations based on the data.
• 19:51
  SPEAKER_01: And this is why it goes back to kind of the data um thing too, but that you can you can do the calculation yourself and you can have the primary data that's needed to do those calculations.
• 20:02
  SPEAKER_03: I think before you go on, one key thing you mentioned having the information in your systems.
• 20:07
  SPEAKER_03: And this is an interesting point, right?
• 20:09
  SPEAKER_03: Because you may not have the information in your systems, but if the information exists, so you use energy.
• 20:15
  SPEAKER_03: So I'll pick up on that one.
• 20:17
  SPEAKER_03: And I I was listening to one of our colleagues speak on a client presentation last week that we were both presenting, and he was giving an example of a company that was trying to gather energy usage.
• 20:28
  SPEAKER_03: So the one you gave, and it was talking about how when they logged their utility bills, they did like the period, um, obviously the entity that they were buying from, and then the payment amount, but they weren't capturing usage.
• 20:42
  SPEAKER_03: And so they had to then add a field and also capture that.
• 20:46
  SPEAKER_03: But that information existed, it just wasn't being captured.
• 20:49
  SPEAKER_03: So I think that's where there has been some need for change as companies are adapting to this reporting.
• 20:55
  SPEAKER_01: That's what I was just gonna say is because a lot of the sustainability reporting and the metrics or the data that's needed may be different than historically what's been used for any type of reporting.
• 21:06
  SPEAKER_01: I think, you know, for somebody early in their sustainability reporting or reporting maybe new information that they hadn't uh reported previously.
• 21:13
  SPEAKER_01: I think understanding the types of measure, the types of data that are available, do you have the data that's maybe just not captured in the system today?
• 21:21
  SPEAKER_01: And so how do you think about maybe, I think one is understanding if you have it and then what modifications do you need to make so that you can?
• 21:27
  SPEAKER_01: Because obviously using primary data, being able to directly measure it is going to give you the best information, right?
• 21:33
  SPEAKER_01: When we go back to some of those qualitative characteristics, I think that gives you the most accurate information, but appreciating that's not always possible, especially when we're talking about value chain or things that are outside your own operations, it can be more challenging.
• 21:47
  SPEAKER_01: So maybe should we talk a little bit about indirect measurement then?
• 21:50
  SPEAKER_01: Yes.
• 21:50
  SPEAKER_01: So then to the extent that primary data is not available, or another thing is not just available, but timely, right?
• 21:56
  SPEAKER_01: As we talked about a lot of this stuff, uh the sustainability report.
• 22:00
  SPEAKER_01: Is going to be need to be in the management report or issued at the same time as the financial statements.
• 22:04
  SPEAKER_01: And I think when we think about the voluntary reporting environment, a lot of the sustainability reporting, often historically in a voluntary space, has lagged, right?
• 22:13
  SPEAKER_01: The financial statement information.
• 22:15
  SPEAKER_01: And so, you know, things will need to happen more quickly with reporting under than some of these new sustainability mandatory timelines.
• 22:22
  SPEAKER_01: So I think in this, when we're thinking about indirect measurement, I think then you kind of naturally get into the use of estimates and estimation uncertainty.
• 22:32
  SPEAKER_01: And so I think it's thinking about, you know, what information do you need to collect?
• 22:36
  SPEAKER_01: And then what kind of estimation techniques are you going to need to use when you're thinking about that?
• 22:41
  SPEAKER_01: You know, because as we said, an inf an entity may or may not be able to collect all the information they need from their upstream and downstream value chain.
• 22:48
  SPEAKER_01: And so I don't know if we want to move to step two to kind of talk about maybe what are some of those sources of data.
• 22:55
  SPEAKER_03: Yeah, and then we can come back, I think, to talking about when you use estimation, but let's go through the sources of data.
• 23:00
  SPEAKER_03: So you already mentioned this that you have primary data and secondary data.
• 23:04
  SPEAKER_03: Let's start with primary.
• 23:05
  SPEAKER_03: What do we mean when we talk about primary data?
• 23:08
  SPEAKER_01: For primary data, um, you know, that's data that's directly collected from the source.
• 23:13
  SPEAKER_01: And you could directly collect it from your suppliers or your customers or that thing, but you're getting direct information.
• 23:19
  SPEAKER_01: This does often depend on, you know, well-maintained systems, continuous monitoring systems that are frequently calibrated, that it be verified, that you can be confident that the information is accurate and consistent and that it's providing reliable data.
• 23:36
  SPEAKER_01: So I think maybe using different words, but you know, the same concepts that we're thinking about.
• 23:42
  SPEAKER_01: And so again, you know, this would be data from employee records, payroll information, invoices, as you mentioned, like maybe energy usage, that type of thing.
• 23:51
  SPEAKER_01: Um, so I think to the extent that it's available, I think we think that that, you know, direct met or that primary data is the best.
• 23:58
  SPEAKER_01: But even still, like sometimes that could be direct measurement, but you might also be using some of that primary data in estimates as well.
• 24:04
  SPEAKER_01: You're right.
• 24:04
  SPEAKER_03: Because again, I Marchin and I were actually talking about this, that inherently almost always for emissions, not always, but even if you have primary data for say usage, you likely are still applying emissions factors or otherwise.
• 24:17
  SPEAKER_03: So it's then combining those two sort of sources.
• 24:21
  SPEAKER_03: But let's go on.
• 24:21
  SPEAKER_03: So secondary.
• 24:22
  SPEAKER_03: Yeah, what do we mean?
• 24:23
  SPEAKER_01: So secondary data is data that's collected from other sources.
• 24:26
  SPEAKER_01: So that could be industry estimates, it could be from government databases or other published sources.
• 24:32
  SPEAKER_01: I know I had worked in historically uh with financial services company, and a lot of times for doing their different like loss estimations or stuff like that.
• 24:40
  SPEAKER_01: You know, a lot of times they'll have to purchase whether that's economic data, loss data from other companies or industry averages and stuff.
• 24:47
  SPEAKER_01: So I think there's also purchase data.
• 24:49
  SPEAKER_01: Um, and it that doesn't mean that you have to purchase data, but you know, there's other data sources available kind of depending on.
• 24:55
  SPEAKER_03: Yes, IG2 says that you do not have to purchase data.
• 24:58
  SPEAKER_03: Purchase, yes.
• 24:59
  SPEAKER_03: Yes.
• 24:59
  SPEAKER_03: But nonetheless, it can be helpful and they give some other sources.
• 25:03
  SPEAKER_01: Um, so this is really when um secondary data is going to be when like direct measurement is not possible, where you don't have direct access to that information.
• 25:11
  SPEAKER_01: Um, so yeah, so internal, external data, publicly available report, sector process, newspaper articles.
• 25:19
  SPEAKER_01: Sometimes there's other publicly available databases.
• 25:22
  SPEAKER_01: Um, I do think this brings in, which I don't think we'll get into all of the details on around reasonable and supportable information and like undue cost and effort, which are two concepts too, which apply here, which kind of goes back to our talking about the value chain too and the extent of the value chain and that type of thing.
• 25:40
  SPEAKER_03: But yeah, and I I mean I think this is a good point.
• 25:43
  SPEAKER_03: First, I need to correct myself because I always correct my guess.
• 25:46
  SPEAKER_03: I said IG2 with no reference, with no explanation or anything else.
• 25:50
  SPEAKER_03: So for our listeners' benefit, that is FRAG IG2, implementation guidance too on value chain.
• 25:55
  SPEAKER_03: And if you haven't used the implementation guidance, I definitely encourage you to check it out.
• 25:59
  SPEAKER_03: We have it both for materiality.
• 26:01
  SPEAKER_03: So that goes with the episode we did last week.
• 26:03
  SPEAKER_03: And then as well, there's value chain information and gives a lot more guidance.
• 26:07
  SPEAKER_03: But I think I don't want to go too deep into reasonable and supportable and um you know undue effort.
• 26:13
  SPEAKER_03: Yeah.
• 26:14
  SPEAKER_03: But I do think, Diana, this is an important point because it's almost like how do you know that you've done enough?
• 26:21
  SPEAKER_03: And what may be helpful here is when we were talking about uh when you use an estimate versus using you know direct measurement.
• 26:30
  SPEAKER_03: Uh, we said there's some circumstances where maybe um sorry, I'm getting ahead of myself.
• 26:36
  SPEAKER_03: There's some circumstances where an estimate or indirect measurement would make more sense.
• 26:40
  SPEAKER_03: And I think this also interplays with the undue effort.
• 26:43
  SPEAKER_03: So maybe we can just quickly go back, hit on a few of those just now that we've kind of covered it.
• 26:49
  SPEAKER_03: I think we'll have more meaning.
• 26:50
  SPEAKER_01: Yeah.
• 26:51
  SPEAKER_01: So one, which we've talked a little bit about, is the lack of availability of data.
• 26:55
  SPEAKER_01: So this, you know, the entity just doesn't have access to the data.
• 26:59
  SPEAKER_01: Um, and and again, we've highlighted a lot of times this is when the information is outside of your own operations.
• 27:04
  SPEAKER_01: Maybe you're, you know, would need it from a third party or somebody else in your value chain.
• 27:08
  SPEAKER_01: And the timeliness aspect comes in here as well.
• 27:11
  SPEAKER_01: And then the next one is the nature of the metrics.
• 27:14
  SPEAKER_01: So depending on what you're trying to measure, there may or may not be that data available.
• 27:19
  SPEAKER_01: And I think you gave the great example of greenhouse gas emissions, where there's lots of times where you're using a combination maybe of secondary and primary data, like industry averages, um, that type of thing.
• 27:31
  SPEAKER_01: And then the last one that I think is common is forward-looking information, right?
• 27:34
  SPEAKER_01: No has to be.
• 27:36
  SPEAKER_01: There's no other way.
• 27:38
  SPEAKER_01: So, you know, that when you're thinking about, you know, your anticipated financial effects, your scenario analysis, sensitivity analysis that you might be performing, you're obviously gonna need to use estimations there because there isn't primary data, right?
• 27:50
  SPEAKER_01: You'll be using forecasts and other things.
• 27:51
  SPEAKER_03: Yeah.
• 27:52
  SPEAKER_03: And I think maybe then looping this or tying in the uh the reasonable and supportable information and the undue cost and effort, I do think there's a couple points here.
• 28:01
  SPEAKER_03: One is this isn't just to say you can throw up your hands and say, oh, I don't have it.
• 28:05
  SPEAKER_03: Right.
• 28:05
  SPEAKER_03: So I'm just gonna go use these estimates.
• 28:07
  SPEAKER_03: Um, but the other hand is it doesn't mean you have to go to like the nth degree.
• 28:11
  SPEAKER_03: So I do think there's some judgment from management and figuring out what to do.
• 28:15
  SPEAKER_03: But I also think where I've really seen this come to life is that if you have targets as a company, and so you have the metrics to report on your targets and you're using lots of estimates, then you it's going to be very difficult to accurately report progress on your targets.
• 28:31
  SPEAKER_03: And so, you know, that's a good example of, I mean, always you want to use the best information you can, but I think that really shows that you really do need to the extent possible get that primary data and use direct measurement where you can, or at least refine your measurements for that primary.
• 28:46
  SPEAKER_03: I think that's a great example.
• 28:48
  SPEAKER_03: Yeah.
• 28:48
  SPEAKER_03: Last step, I think uh you can cover very quickly.
• 28:52
  SPEAKER_03: What do you have to say about calculating and preparing the disclosures?
• 28:56
  SPEAKER_01: Well, you calculate and disclose.
• 28:57
  SPEAKER_01: I think when we're thinking about disclosures, though, I think we we come back to some of like this, I guess reminds me of some of those concepts we talked about when we talked about the qualitative characteristics of information.
• 29:06
  SPEAKER_01: So I think when you're having those disclosures, making sure that they're they're clearly labeled as such that you're disclosing the significant judgments that you've made, the level of measurement uncertainty that might be inherent in that estimate, um, your assumptions, your approximations, and the methodologies that you're using.
• 29:22
  SPEAKER_03: All right.
• 29:22
  SPEAKER_03: And then obviously there's very specific disclosure requirements as well.
• 29:25
  SPEAKER_03: So don't just go off what Diana just tells you in this podcast for what you need to disclose.
• 29:30
  SPEAKER_03: Right.
• 29:31
  SPEAKER_03: So, Diana, this next section then is really getting into the report, the report structure, what needs to go there.
• 29:38
  SPEAKER_03: Again, this is just intended to be a few highlights.
• 29:41
  SPEAKER_03: So I highly encourage our listeners to check out SRG5, uh, which is the related chapter, but general disclosure requirements, what what's the background there?
• 29:53
  SPEAKER_01: Yeah, so what this is doing is it's um kind of forming the basis for the disclosures.
• 29:59
  SPEAKER_01: And this is going to be across all industries.
• 30:01
  SPEAKER_01: These are required disclosures.
• 30:03
  SPEAKER_01: Some of these disclosures, which you'll have to look at, are required kind of irregardless of materiality.
• 30:08
  SPEAKER_01: It just kind of goes into the basis preparation when you think about like what time horizons are you're using and things like that.
• 30:14
  SPEAKER_01: Um, but maybe some of the points, maybe some of the things to highlight from here is one is there is clear discussion around the what we call the obligations to disclose.
• 30:24
  SPEAKER_01: So when an entity is required to disclose information or when they can voluntarily disclose information.
• 30:29
  SPEAKER_01: So if you're reading the requirements and it says you shall disclose something, that means that you're required to disclose that.
• 30:37
  SPEAKER_01: Typically it is subject to um materiality of information, but there are some nuances with that that maybe we'll we'll get into all those in another podcast.
• 30:46
  SPEAKER_01: But if it says may, then that is a voluntary, but it's really meant to encourage um good practice and it's information that they think that is would be helpful to um the reader.
• 30:58
  SPEAKER_01: And um the ISSB has something similar.
• 31:01
  SPEAKER_01: They use instead of shall disclose, they use shall include or may include, but they have those same degrees of obligation.
• 31:07
  SPEAKER_01: So that's kind of their voluntary mandatory and their voluntary.
• 31:11
  SPEAKER_01: So shall is mandatory, may is voluntary.
• 31:14
  SPEAKER_03: Yes, again, this is where I feel like the English isn't quite as clear as it could be, you could just say must, but that's fine.
• 31:20
  SPEAKER_03: And I do think a key point here is that the disclosure requirements and ESRS II, which are the general disclosures, those are required irrespective of materiality.
• 31:30
  SPEAKER_03: Uh, one question though, because both of them use both both of them, both the ISSB and um FRAG and the ESRS standards, use the shall consider or may consider.
• 31:42
  SPEAKER_03: And I think that's something new to us from, you know, that's unlike financial reporting.
• 31:48
  SPEAKER_03: And so how do you think about these may and shall consider?
• 31:51
  SPEAKER_01: So I think if we if it says shall consider, we think this is an area where the uh entity is required to look at that information, whatever it's saying, you shall that like shall should have that same kind of required and that the may would follow the same, that you, you know, it's voluntary as to whether or not you want to consider that.
• 32:11
  SPEAKER_01: But I know another nuance that's introduced to make it more complicated.
• 32:14
  SPEAKER_03: Exactly.
• 32:15
  SPEAKER_03: Well, and again, I think it's interesting because it shows the fact that these standards then do kind of rely on another base because some of the things that you shall consider, GHG protocol or the for the ISSB, you you shall consider the SASB standards.
• 32:29
  SPEAKER_03: Right.
• 32:29
  SPEAKER_03: It doesn't mean the case of the SASB standards in particular, they explicitly say that you can conclude it's not applicable to you, right?
• 32:36
  SPEAKER_03: But you still do need to go through the process.
• 32:39
  SPEAKER_03: And then so if I'm listening and thinking about documentation, that means you should be documenting what you do for any of these shell considerers.
• 32:47
  SPEAKER_03: Right, right.
• 32:48
  SPEAKER_03: Right.
• 32:48
  SPEAKER_03: Okay.
• 32:49
  SPEAKER_03: So then the other thing that I think is surprising to people that are new to this, particularly coming from the US, where we're used to very, I'll say flexible structure of financial reporting, is that ESTRS in particular has a very prescribed structure of the sustainability report.
• 33:06
  SPEAKER_03: There's a lot to that again, but can you give us the highlights?
• 33:09
  SPEAKER_01: Yeah, maybe I'll just give the highlight.
• 33:10
  SPEAKER_01: So it's required to have four different sections and only four sections.
• 33:15
  SPEAKER_01: And one is the general information section, and then you have an environmental section, a social section, and a governance section.
• 33:21
  SPEAKER_01: So there's five different environmental standards.
• 33:23
  SPEAKER_01: Those would all go in the environmental section.
• 33:25
  SPEAKER_01: Uh, the social standard, there's four different social standards for ESRS that go there, and then the governance standard would go.
• 33:31
  SPEAKER_01: I think the thing that makes this even a little bit more complicated.
• 33:33
  SPEAKER_01: So then you have your general section.
• 33:35
  SPEAKER_01: This includes the basis of presentation, um, disclosures that we've touched on lightly, and then includes a lot of general requirements.
• 33:42
  SPEAKER_01: And these are the disclosures that are required across all of the sustainability matters, kind of regardless of materiality.
• 33:50
  SPEAKER_01: But then you also get into some of the topical standards, and they also have requirements that are required in the general section that kind of supplement some of these uh requirements that are contained in ESRS II, which is the general requirement standard.
• 34:06
  SPEAKER_01: So a little bit of navigation through the standards and determining where the information should go.
• 34:11
  SPEAKER_01: But the general information section is really going to be those base um disclosures which cover, you know, the entity's governance strategy, um, impact, risk, and opportunity management.
• 34:22
  SPEAKER_01: And then you'll see more of kind of those metrics and targets that are specific to, you know, environmental, social, or governance, then those you'll see more so with some other disclosures as well.
• 34:35
  SPEAKER_01: Um, but but it it is very prescriptive on where the location of the disclosures are and where they can, where the topical standards, where they need to be in the general section or where they can be in the topical.
• 34:46
  SPEAKER_01: So I do think this is different from, you know, traditionally, at least how we think about the structure of reporting.
• 34:53
  SPEAKER_01: And so it's important to make sure you're paying attention.
• 34:55
  SPEAKER_03: Yeah, and again, I like as I said earlier, I think this is a bit of surprise because you mentioned the disclosures going from the topical standards to the general section, but you also actually have a few of those general disclosures that you could optimally put in the other sections.
• 35:11
  SPEAKER_03: And I think if you really dig into it, and once you're, you know, as I said, really into it and preparing a report, I do think there's a lot of logic to what they've done.
• 35:21
  SPEAKER_03: And I think getting your head around to your point, sort of the the general section is the background.
• 35:26
  SPEAKER_03: It's about your processes, about your policies and things like that.
• 35:30
  SPEAKER_03: And then some of the um other disclosures, these minimum disclosures, then together with the topical disclosures, we'll go in the other sections, but it's definitely different.
• 35:41
  SPEAKER_03: But I guess this makes up for the fact you don't have the uh statement.
• 35:44
  SPEAKER_03: So it gives you way to navigate.
• 35:46
  SPEAKER_03: Um, how about anything from an ISSB perspective?
• 35:49
  SPEAKER_01: So the ISSB allows a lot of flexibility.
• 35:52
  SPEAKER_01: So there isn't like as much of a prescribed like you have to have four parts, that type of thing.
• 35:56
  SPEAKER_01: I think we still think that you have something similar of kind of like a core content that would be similar to the general section of um the ESRS that you'd have something similar with the ISSB.
• 36:08
  SPEAKER_01: Um, but there is no explicit requirement that it must follow a certain format.
• 36:12
  SPEAKER_03: All right, very helpful.
• 36:14
  SPEAKER_03: And so then maybe I know both of ESRS and the ISSB standards have other types of requirements.
• 36:21
  SPEAKER_03: And I don't want to go into all the detail, but any other kind of last things that you would highlight on that?
• 36:26
  SPEAKER_01: Maybe just a couple of things to highlight.
• 36:28
  SPEAKER_01: You are able to incorporate by reference.
• 36:30
  SPEAKER_01: So we've talked a lot about, you know, connectivity with the financial statements and that type of thing.
• 36:34
  SPEAKER_01: So there are specific requirements around when you can incorporate for reference and how that information has to be labeled and identified and the timing.
• 36:43
  SPEAKER_01: And so we won't go through all of that because if somebody wants to do it, you know, they need to make sure they're following the very prescriptive requirements, but just to know that you are allowed to incorporate by reference.
• 36:51
  SPEAKER_01: Maybe one other point.
• 36:53
  SPEAKER_01: Also within the report, even within ESRS, there is cross-referencing that's available too.
• 36:58
  SPEAKER_01: So you don't need to put information, duplicate information.
• 37:02
  SPEAKER_01: Um, and then lastly, is uh a company can omit material information, even information that they've uh determined is material.
• 37:10
  SPEAKER_01: It is in very specific circumstances when you can do that.
• 37:14
  SPEAKER_01: Um, so not, you know, really blocked.
• 37:17
  SPEAKER_01: We would think it would be, at least in my mind, very limited as to when you would meet those requirements.
• 37:23
  SPEAKER_01: And ESRS and the ISSB each have different requirements around when uh material information is allowed to be omitted.
• 37:30
  SPEAKER_01: So if if an entity thinks that for some reason they shouldn't, they should, you know, look very closely at those requirements.
• 37:36
  SPEAKER_03: All right, very helpful.
• 37:37
  SPEAKER_03: So as always, I like to wrap up these episodes asking for some practical advice.
• 37:42
  SPEAKER_03: So from your perspective, specifically thinking about this aspect of things and really bringing your reporting to life, what recommendations would you have?
• 37:51
  SPEAKER_01: Yeah, I think that um starting with maybe going to looking at the detailed requirements around um, you know, what are some of these basic disclosures, what is the basis of preparation?
• 38:03
  SPEAKER_01: I do think it interacts a lot with like what is the overall structure of your reporting going to be.
• 38:08
  SPEAKER_01: And so starting with that, and then you can kind of like layer on all these other concepts, I think is a good starting point, especially if you're reporting for the first time, is maybe starting with some of this basic structure will then I think allow you to have a little bit more of an outline as to how to move forward.
• 38:23
  SPEAKER_03: Yeah, and I think it's interesting, you made this point, Diana, but even though ISSB doesn't have the same exact, like rigid structure as ESRS, the standards actually are structured the same way that you have sort of the, I'll call it background information and then your more detailed information on metrics and targets and the like.
• 38:42
  SPEAKER_03: And so uh definitely something, I think understanding how the standards all fit together as well is is extremely helpful and important.
• 38:50
  SPEAKER_01: And I know we spent a lot of time trying to make sure we understood how they all fit together because it is a little given that these some of these disclosure requirements reside in the gen in these kind of gen more general standards, and then there's some in the topical, I think understanding how that all fits together is is important to help you think through your process.
• 39:06
  SPEAKER_03: All right.
• 39:07
  SPEAKER_03: Well, Diana, it's always such a pleasure to talk to you.
• 39:09
  SPEAKER_03: Thanks so much for joining me today.
• 39:11
  SPEAKER_03: And we'll miss you next week.
• 39:13
  SPEAKER_03: But for our listeners, want you to know that next week we will be talking about what we call the pillars of reporting.
• 39:19
  SPEAKER_03: And those of you familiar with TCFD reporting, Task Force on Climate Related Financial Disclosure, so I won't use the acronym.
• 39:26
  SPEAKER_03: Uh they they are TCFD had this concept of the four pillars, and that was brought in to both ESRS and the ISSB standards.
• 39:36
  SPEAKER_03: So we will be talking about those next week and going into more detail on what's required and really will fit in with what Diana and I spoke about today.
• 39:44
  SPEAKER_03: And definitely, if you want to look for old episodes, you can look for those on Viewpoint.
• 39:50
  SPEAKER_03: So I highly encourage you to check that out.
• 39:51
  SPEAKER_03: And thanks again for joining us today.
• 39:54
  SPEAKER_02: That's our show for today.
• 39:56
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  SPEAKER_02: From Thought Leadership at PwC, I'm Heather Horton.
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