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Talking ESG: Role of the C-suite in sustainability reporting · PwC's accounting podcast

• 0:00
  SPEAKER_00: Thought Leadership from PwC's National Office.
• 0:06
  SPEAKER_01: From a voluntary standpoint, I think it's important to note that last year, 99% of the SP 500 voluntarily disclosed ESG information.
• 0:15
  SPEAKER_01: 90% of the Russell 1000 voluntarily disclosed ESG information.
• 0:19
  SPEAKER_01: So if you think about it, really the market's kind of spoken already around this whole topic of ESG reporting.
• 0:26
  SPEAKER_01: It is going to be out there not necessarily because regulators demand it, but because the market has already sort of said this is this is table stakes for what needs to be done.
• 0:35
  SPEAKER_03: Today we're back talking ESG.
• 0:38
  SPEAKER_03: This is PWC's Accounting Podcast.
• 0:57
  SPEAKER_03: Companies in their C-suites are still faced with a myriad of sustainability reporting requirements, which may include requirements in the EU, California, these SEC rules, and potentially reporting under the IFRS sustainability disclosure standards.
• 1:14
  SPEAKER_03: They have to grapple with all this while still continuing to achieve their business objectives in spite of all the uncertainty.
• 1:21
  SPEAKER_03: So, what should CEOs and CFOs be focused on now?
• 1:25
  SPEAKER_03: To help us answer this question, I'm happy to be joined today by National Office partner Mark Siegel.
• 1:30
  SPEAKER_03: Mark comes from an investor and standard setting background, so he brings a lot of perspective to the reporting conversation.
• 1:37
  SPEAKER_03: With that, here's my conversation with Mark.
• 1:40
  SPEAKER_03: Mark, welcome to the podcast.
• 1:41
  SPEAKER_03: So nice to have you on.
• 1:42
  SPEAKER_03: And this is a topic that I think will be helpful to all of our listeners because it's really going to be focused in on the new SEC climate role, but looking at it from more of a C-suite perspective.
• 1:54
  SPEAKER_03: And so when I say we'll help all of our listeners, it's because obviously either our listeners would be themselves in the C-suite or they're interacting with people in the C-suite.
• 2:04
  SPEAKER_03: So hopefully either way, they will take something away.
• 2:07
  SPEAKER_03: But I know you've been having already a lot of these conversations where about a month after, almost exactly a month after the rule has been issued when we're recording.
• 2:16
  SPEAKER_03: So what are some of the things that you are focused on in those conversations?
• 2:21
  SPEAKER_01: Thanks, Heather.
• 2:22
  SPEAKER_01: It's great to be here.
• 2:23
  SPEAKER_01: I think the first thing that I usually talk about with companies and their management teams is really stepping back and looking at the voluntary market for ESG reporting.
• 2:32
  SPEAKER_01: If you think about it, it's really amazing.
• 2:34
  SPEAKER_01: Three years ago there was no regulations and there was a lot of voluntary frameworks and there was an alphabet soup, and everybody was sort of saying we're in a tough spot, we don't know how to deal with all these different frameworks that are out there.
• 2:47
  SPEAKER_01: Now they're in a little bit of a tougher position because now you're in a fragmented regulatory framework.
• 2:52
  SPEAKER_01: But from a voluntary standpoint, I think it's important to note that last year, 99% of the SP 500 voluntarily disclosed ESG information.
• 3:01
  SPEAKER_01: 90% of the Russell 1000 voluntarily disclosed ESG information.
• 3:05
  SPEAKER_01: Nobody's requiring them to do that.
• 3:07
  SPEAKER_01: And of the S P 500 that voluntarily disclosed ESG information, 65% of them actually got some voluntary assurance associated with some of the data that they put out there.
• 3:18
  SPEAKER_01: So if you think about it, really the market's kind of spoken already around this whole topic of ESG reporting.
• 3:24
  SPEAKER_01: It is going to be out there not necessarily because regulators demand it, but because the market has already sort of said this is this is table stakes for what needs to be done.
• 3:33
  SPEAKER_01: So I think it's important to sort of understand from that standpoint that the direction of travel is kind of clear.
• 3:39
  SPEAKER_01: Irrespective of what happens with lawsuits and everything else, this information is getting more and more important.
• 3:46
  SPEAKER_01: It's getting closer and closer to, if not in the 10K.
• 3:49
  SPEAKER_01: And I don't see that changing irrespective of what happens with all these different um noise in the system around these regulatory frameworks.
• 3:55
  SPEAKER_03: So it's really interesting you mentioned uh, you know, that we went from sort of this voluntary reporting with the alphabet soup and everything else.
• 4:03
  SPEAKER_03: And then there was, I think, a brief period people thought, oh, the alphabet soup is consolidating.
• 4:09
  SPEAKER_03: And it did consolidate.
• 4:10
  SPEAKER_03: We saw that.
• 4:11
  SPEAKER_03: And yet we're actually now in a position with for some companies, they may be reporting even under potentially four frameworks, right?
• 4:18
  SPEAKER_03: Because you may need to report in California for GHG, TCFD, maybe the SEC rule, CSRD in the EU.
• 4:26
  SPEAKER_03: And then if you're in a jurisdiction where the IFRS sustainability disclosure standards are required, you have four.
• 4:32
  SPEAKER_03: So people already thought we had one too many with US GAP and IFRS.
• 4:36
  SPEAKER_03: So maybe even before you we talk about just how companies should think about this, I guess from your perspective, coming from that accounting background, are you surprised this is where we wound up?
• 4:47
  SPEAKER_03: Or just given it was all moving so fast and everyone moving at the same time, it's not that much of a surprise.
• 4:54
  SPEAKER_03: It's worse than I thought.
• 4:55
  SPEAKER_03: Me too.
• 4:56
  SPEAKER_03: That's why I asked the question.
• 4:57
  SPEAKER_01: It's worse than I thought because with the ISSB and the country by country reporting that's going on, as you've noted in other podcasts, there's different flavors of it.
• 5:07
  SPEAKER_01: Right.
• 5:07
  SPEAKER_01: And so Australia might be doing one thing with the ISSB as they think about adopting it.
• 5:11
  SPEAKER_01: Brazil might be going a different way.
• 5:13
  SPEAKER_01: And so you have all these different dialects.
• 5:15
  SPEAKER_01: And I think this is all growing pains, and ultimately you will settle down, not to what everybody wants, which is one system we've never gotten there in financial, and I don't see why we would get there in this.
• 5:26
  SPEAKER_01: No.
• 5:26
  SPEAKER_01: Um, but the way that I'm seeing it is at the end of the day, it just seems to me inevitable that you'll end up with four different dialects of corporate reporting.
• 5:35
  SPEAKER_01: You'll have gap, you'll have non-gap, you'll have required ESG, which might be, as you pointed out, a number of different them.
• 5:41
  SPEAKER_01: And then you'll have voluntary ESG, because invariably whatever's required will not tell the unique story that the company wants to be told.
• 5:50
  SPEAKER_01: So they will do voluntary ESG reporting.
• 5:52
  SPEAKER_01: And so you'll have four different flavors of corporate reporting, four different dialects of reporting language being put out into the markets.
• 6:00
  SPEAKER_03: So that is challenging both from a user perspective, but then since this podcast is focused from the preparer lens, again, if I'm sitting in the C-suite and I'm thinking, okay, I basically have my head around gap reporting.
• 6:13
  SPEAKER_03: I understand why non-gap is important to me, but now I'm layering in, and maybe I have done some voluntary ESG, but it's perhaps been more of a sideline than a center part of my conversation.
• 6:24
  SPEAKER_03: So how do you think about bringing these four things together and figuring out then what focus to put on these different frameworks?
• 6:33
  SPEAKER_01: It becomes critical for the C-suite to try to take ownership of the narratives plural that are going on, because what's happening now is you have all these different channels of communication that might be having slightly different or inconsistent stories to the market.
• 6:51
  SPEAKER_01: And as a C-suite, you want to make sure that at least all the narratives are singing from the same songbook and are consistent, um, even if not exactly the same.
• 7:01
  SPEAKER_01: They want to at least be part of the story so that when you put them all together, you get the story that you want to be told to the street.
• 7:08
  SPEAKER_01: And it gets harder and harder for management teams to do that the more you have these different frameworks that you must comply with in different parts of your system that might be in different parts of your website.
• 7:19
  SPEAKER_01: The California rules are gonna have two different channels through which you're going to have to communicate, a database for the emissions piece and the website for the narrative piece.
• 7:31
  SPEAKER_01: Um, the CSRD is going to have reporting associated with the management report, which could be done at the local level.
• 7:39
  SPEAKER_01: It could be done at an artificial consolidation level Europe wide, or it could be done at the consolidated level.
• 7:44
  SPEAKER_01: This is going to make it especially challenging for the C-suite to try to take control and have some kind of communications committee that's at least looking at it and making sure that IR and communications and the web team and the marketing team are all sort of at least getting together once in a while to make sure that those different narratives are at least all coalescing around one central theme that the company is trying to put out to the street.
• 8:09
  SPEAKER_03: Yeah, and I think again, you mentioned these four, and then within sustainability reporting required, there's multiple.
• 8:16
  SPEAKER_03: And because the differences in those frameworks, you might actually wind up reporting, for example, GHG for your same company, you could be reporting more than one GHG number.
• 8:26
  SPEAKER_03: And if I take a step back and I think about the boards and you know, senior executives I've worked with, I'm from the utility industry.
• 8:33
  SPEAKER_03: All our regular listeners know that.
• 8:35
  SPEAKER_03: And so there's a few key differences between IFRS and US GAAP.
• 8:39
  SPEAKER_03: A big one right now is the fact that US GAAP has regulatory accounting, IFRS doesn't, that's underway.
• 8:46
  SPEAKER_03: But the reason I'm bringing that up is not because of that specific example, but I think because again, let's say you were either reporting both IFRS and GAAP or at least needed to be knowledgeable in in two languages.
• 8:58
  SPEAKER_03: There were some big differences you could get your head around, but for the most part, things mostly lined up.
• 9:04
  SPEAKER_03: Now, again, if I use this example of GHG reporting, a lot of focus on that number, you may wind up reporting a few different numbers.
• 9:12
  SPEAKER_03: What do you say to the chief executives who's going to have to answer questions from analysts about, well, wait, is your GHG up?
• 9:18
  SPEAKER_03: Is it down?
• 9:19
  SPEAKER_03: Why are you reporting these two different numbers?
• 9:21
  SPEAKER_01: Yeah, and I think it's it's even more complicated than that too, right?
• 9:25
  SPEAKER_01: Because we're just talking about GHG.
• 9:27
  SPEAKER_03: Right, exactly.
• 9:28
  SPEAKER_03: That's where I've been most focused.
• 9:30
  SPEAKER_03: But yes, exactly.
• 9:31
  SPEAKER_01: Yeah.
• 9:31
  SPEAKER_01: So so yeah, I mean I think and and and and you're right to point it out.
• 9:34
  SPEAKER_01: I think uh the C-suite is gonna have to have very, very um detailed briefings before they get to the street and potentially gonna have to put out a lot of supplemental information to the street so that they can understand how to interpret these different slices of the GHG emissions that are coming out, or even if if if they're on the same reporting boundaries, or most likely if they're not on the same reporting boundaries, as you have different slices coming from different subsidiaries or different ways of calculating it, et cetera.
• 10:04
  SPEAKER_01: Um, so so I foresee a bunch of voluntary disclosures around these different GHG emissions to kind of try to tell the story.
• 10:12
  SPEAKER_01: But this is gonna be a bumpy ride because these inconsistencies are gonna come out and and and people are going to notice them and they're gonna ask questions, and then management teams are gonna have to um are going to have to respond to them and try to figure out what the best way to start putting it out proactively and and and and craft the right way for people to be interpreting the information that's coming out.
• 10:33
  SPEAKER_03: Well, and I think you started to allude to this point earlier that you see some information again at CC registrants.
• 10:39
  SPEAKER_03: We can talk about lawsuits at the tail end, but assuming those rules move forward, registrants are going to have some mandatory reporting in their 10K now.
• 10:49
  SPEAKER_03: The timing and scope will depend on type of filer, because obviously not all filers will be uh reporting GHG.
• 10:56
  SPEAKER_03: But then again, let's assume these same multinationals that are also subject to the GHG rules in California.
• 11:03
  SPEAKER_03: And they're maybe doing, as I gave all these examples before.
• 11:07
  SPEAKER_03: So how are also users and preparers, including senior management, dealing with the fact that maybe the information going in the K has a certain set of procedures that are applied versus maybe voluntary reporting have been doing something different?
• 11:23
  SPEAKER_03: Like how are you talking to you know senior level executives of what they should understand about these different places information's being reported?
• 11:32
  SPEAKER_01: Yeah, this is probably the biggest question that I'm getting from preparers in the last month or two as they're starting to think through how to report under the CSRD, for example.
• 11:43
  SPEAKER_01: Um, and many of them are going through the machinations of trying to figure out what's the most efficient way to report under CSRD.
• 11:49
  SPEAKER_01: And for many of them that have dozens of subsidiaries, you naturally start to think from an efficiency standpoint of doing it on a consolidated basis.
• 11:56
  SPEAKER_01: But I'm telling you that some companies are actually hesitating around that conclusion because they don't necessarily want to have or they're afraid of having a consolidated CSRD report in a PDF file on their website, and then they're worried about the regulatory scrutiny of an SEC or some other regulator looking at it and saying, well, how come and how did you decide what to report in that PDF file versus what you actually reported in the 10K?
• 12:23
  SPEAKER_01: And so some companies are actually thinking about whether or not to do a consolidated level CSRD just to avoid the regulatory risk and scrutiny of having that out there for the SEC to potentially ask questions upon.
• 12:35
  SPEAKER_01: We think that that's manageable and we think that there are processes and procedures you could put in place to try to answer the questions of how we came up with different materiality conclusions for different filings, et cetera.
• 12:46
  SPEAKER_01: But we think that that's something that companies, while they're working on the compliance today, should also be thinking about over the next year or so of if they're doing all this different reporting, how are they making those materiality judgments between those different communication channels?
• 13:00
  SPEAKER_01: That's not something to wait till the last minute if you're a C-suite person to try to explain to your audit committee.
• 13:06
  SPEAKER_01: Um, or worse yet, don't worry about it.
• 13:09
  SPEAKER_01: And then all of a sudden you get an SEC comment letter later in the fact saying, how come you put all this human capital information in your CSRD report and you have not so much quantitative information at all in your 10K?
• 13:20
  SPEAKER_01: To have a process and procedure put in place now that ties to your risk strategy and your materiality judgments, and that you've run by your audit committee, you've run by your financial auditors, you've run by your external counsel ahead of time to make those judgments about what you're going to put in to the compliance filing for the CSRD versus what you're going to put into your 10K.
• 13:40
  SPEAKER_01: It's super, super critical.
• 13:42
  SPEAKER_03: Yeah.
• 13:42
  SPEAKER_03: And I think a key point there, Mark, it's not, I don't want someone to take away from this that we're saying, okay, because it's out there in another filing, it has to go into the SEC filing, because that's not the point you're making.
• 13:54
  SPEAKER_03: What you're more saying is, again, understand what information is being reported where and what controls are over that information.
• 14:01
  SPEAKER_01: Aaron Powell 100%.
• 14:02
  SPEAKER_01: Great clarification because just because it's in the CSRD report, which we know is on a double materiality assessment, it need not necessarily at all be in the 10K.
• 14:11
  SPEAKER_01: However, there are going to be some that are obviously things that don't need to be in the 10K, and there are going to be things that obviously do need to be in the 10K, and then there's going to be everything in between.
• 14:20
  SPEAKER_01: So what's going to be the judgment framework around those in-between things?
• 14:25
  SPEAKER_01: And thinking about that now in the next year or two is going to be pretty important.
• 14:30
  SPEAKER_03: So then as you think about this and sort of a key takeaway.
• 14:34
  SPEAKER_03: So now, you know, I'm the executive, I am focused on this, on the audit committee that's asking questions.
• 14:40
  SPEAKER_03: Then what are some of the sort of key takeaways that you're focused on in terms of, okay, fine, I know I need to do something, but sort of what do I do first?
• 14:49
  SPEAKER_03: When do I need to be focused on these different pieces?
• 14:52
  SPEAKER_01: Yeah, I think importantly, a lot of the content in the SEC rule may not be new because of all the voluntary disclosures that we talked about earlier.
• 15:02
  SPEAKER_01: However, timeliness is probably the first thing that an um C-suite person needs to be aware of.
• 15:09
  SPEAKER_01: There were no deadlines before when you did that voluntary report.
• 15:12
  SPEAKER_01: Now most of the disclosures in the SEC, the emissions-specific disclosures notwithstanding, will have to be done in time for your 10K filing.
• 15:20
  SPEAKER_01: Um so that's a significant acceleration.
• 15:22
  SPEAKER_01: So that's first and foremost.
• 15:24
  SPEAKER_01: You get a two-quarter um reprieve for your scope one and scope two if you're if you're scoped into having to do that at all, large accelerated and accelerator filers.
• 15:34
  SPEAKER_01: But everything else will have to be in your will have to be in your 10K, and there's actually footnote disclosures that will have to be audited as well.
• 15:40
  SPEAKER_01: So the timeliness is the is the first and foremost thing.
• 15:43
  SPEAKER_01: The second thing, which is probably the biggest and heaviest lift, is going to be the disclosure controls and processes around, procedures around getting the information.
• 15:50
  SPEAKER_01: If you think about all the voluntary disclosures that are being done today, those are not coming through the same kind of plumbing and pipes that the financial information is going through.
• 16:02
  SPEAKER_01: Those the financial information comes through pipes and plumbing that is reinforced with Sarbanes oxalylevel controls.
• 16:07
  SPEAKER_01: The sustainability information is not anywhere near that for the most part today.
• 16:12
  SPEAKER_01: And so anybody that's had to do plumbing work knows that it's it's it's expensive and it's it's it's torturous and it takes a lot of time to try to get that right.
• 16:22
  SPEAKER_01: And you're going to have to go through things with systems potentially and setting up disclosure controls and procedures and asking those kinds of questions about management level controls and all the things and the footnote disclosures that are required by the SUC rule will have to be compliant with ICFR.
• 16:37
  SPEAKER_01: Basically, at the end of the day, what the C-suite has to understand is that you need to have sufficient disclosure controls and procedures in place to be comfortable yourself and with the audit committee to put this into a 10K filing or an annual report.
• 16:50
  SPEAKER_01: And keep in mind also that even though most of this isn't in the actual financial statement portion, Section 302 certifications cover this stuff too.
• 17:00
  SPEAKER_01: So when you sign the certification for the annual report saying that there's no material misstatements in here, you're now going to be including all this climate level information too.
• 17:09
  SPEAKER_01: So that just ratchets up all the scrutiny around this.
• 17:12
  SPEAKER_01: And so focusing on those kinds of things, even if the content is mostly not new, if you're in the lucky position that most of the content's not new, you still have all these things to do to try to make sure that you're ready for the time when this is going to have to be implemented.
• 17:27
  SPEAKER_03: So you made a good point there around the footnote and the fact some of this information now in the SEC filing will be in the footnotes.
• 17:35
  SPEAKER_03: And so again, I know a question I'm getting is well, so then that information must be more important or I need to spend more time on it or more attention.
• 17:43
  SPEAKER_03: But you raised the point, well, if I'm the executive signing off on this, I'm I'm signing off on both.
• 17:48
  SPEAKER_03: So relative importance, would you even want to go there, or would you say it's all in your filing and you need to make sure you have the right controls over all of it?
• 17:58
  SPEAKER_01: Yeah, I mean, I think it's the latter, right?
• 17:59
  SPEAKER_01: I mean, I think you need to um make sure that you're comfortable with all the information.
• 18:03
  SPEAKER_01: I think there are additional processes that you need to put in place for the footnote disclosure to get it ready for internal control and financial reporting and that kind of assessment that your financial audit team is going to do.
• 18:14
  SPEAKER_01: But basically it's the same kind of idea.
• 18:16
  SPEAKER_01: You need to be comfortable, irrespective of the location.
• 18:19
  SPEAKER_01: This is kind of like real estate.
• 18:20
  SPEAKER_01: It's location, location, location.
• 18:22
  SPEAKER_01: And and, you know, irrespective of the real estate of where it sits, you need to be comfortable with it getting in there in the first place.
• 18:27
  SPEAKER_01: And that's the heaviest lift for most of the companies that we're seeing today.
• 18:30
  SPEAKER_03: Yes.
• 18:31
  SPEAKER_03: So then as you think about that, you talked about sort of this plumbing or the controls over it.
• 18:36
  SPEAKER_03: And I think a lot of voluntary reporting is manual controls.
• 18:40
  SPEAKER_03: You know, you see spreadsheets being emailed around, and um, you know, I've heard observation people use.
• 18:46
  SPEAKER_03: Like there's just all these methods that you wouldn't you would not cross if you were performing an audit or preparing financial information.
• 18:54
  SPEAKER_03: And so when you're thinking about this, how do you go from a manual system without maybe strong robust controls around it to something more automated?
• 19:04
  SPEAKER_03: Because it's not like there's turnkey solutions just waiting to like plug and play for you.
• 19:09
  SPEAKER_01: Yeah, and that kind of gets to one of the first things that I think somebody should focus in on as a management team.
• 19:15
  SPEAKER_01: And that's getting a cross-functional team in place.
• 19:17
  SPEAKER_01: There's no one department that can own all of this, right?
• 19:20
  SPEAKER_01: And so the sustainability team that's been doing all the voluntary disclosures and historically, if you've been doing them, is a great team.
• 19:27
  SPEAKER_01: And you know, they understand this information, they have good context around the information, and they're experts in in, say, GHG emissions.
• 19:34
  SPEAKER_01: But who better than the finance team to figure out how to collect data, analyze data, process data, and build a reporting infrastructure at scale?
• 19:42
  SPEAKER_01: Right?
• 19:42
  SPEAKER_01: So you have to get a cross-functional team in place to try to allocate all these different lifts to get ready for this.
• 19:50
  SPEAKER_01: And so you're gonna want to have finance, not because they're experts in GHG or to make them experts in GHG, but to have them use their expertise in data collection and processing to lend their hand to build this out.
• 20:03
  SPEAKER_01: Internal audit, similarly, sustainability, information technology, legal, investor relations for what we said before, right?
• 20:11
  SPEAKER_01: And communications.
• 20:12
  SPEAKER_01: Um, and depending on how you are set up as a company in terms of whether you're centralized, decentralized, all that needs to be taken into account as you're setting up your governance procedure, no pun intended, for this particular aspect of what you're trying to do.
• 20:28
  SPEAKER_01: So setting up that cross-functional team should be extremely important, one of the first couple of steps that you take in order to try to get from where you are now with the manual controls that you have in place to trying to get to a point where you feel like the company is aligned on being ready for the this in the 10K.
• 20:46
  SPEAKER_03: Well, and this is another question where I feel a little like I'm gonna be leading the witness here.
• 20:51
  SPEAKER_03: But obviously, some of this information is subject to audit.
• 20:55
  SPEAKER_03: So either you have separate GHG attest report on different timelines.
• 20:59
  SPEAKER_03: If you're in California, that would apply to anyone who's in the rules, again, on different timelines, but nonetheless.
• 21:05
  SPEAKER_03: Uh in CSRD, you also have mandatory assurance over that, again, starting with limited, moving to reasonable, IFRS, for not sure yet, you know, remains to be seen.
• 21:15
  SPEAKER_03: And then SEC, you have various flavors because you have a test and you have the footnotes.
• 21:20
  SPEAKER_03: So again, if I'm thinking about that, is it different processes depending on which information I'm reporting, or do you just produce it all at that same sort of, I'll use the words investor grade?
• 21:33
  SPEAKER_01: Yeah.
• 21:33
  SPEAKER_01: I mean, again, that's kind of why I start out the conversation with where the voluntary landscape is and and just direction of travel being fairly clear that ultimately all this information is going to need to be investor grade.
• 21:47
  SPEAKER_01: Um, either because a regulator demands it or you have to have assurance upon it, or because the market kind of expects it.
• 21:55
  SPEAKER_01: And frankly, because you are putting a lot of this information out in various communication channels, and if You have different flavors of it, and some of it's ready and some of it's not, you're going to have the same kind of inconsistencies that you were pointing out earlier, where you have investors on the market or the regulator looking at it and saying, I don't understand why I came up with this answer and this communication channel and this answer in this communication channel.
• 22:16
  SPEAKER_01: And the answer can't be because I've got different levels of controls and processes around it.
• 22:20
  SPEAKER_01: So you, you know, it's it's it's really gearing up to having all of it get to the point where you're comfortable with it.
• 22:26
  SPEAKER_01: Just like today, the financial information, not all of it is compliant with ICFR.
• 22:30
  SPEAKER_01: When you do your earnings calls, um you're still pretty darn comfortable with the information that you're getting, even though none of it went through necessarily needed to go through those same levels of controls and procedures.
• 22:42
  SPEAKER_03: So I think that leads then to the next question that we've spent some time talking about, which is this idea that there is, I think you even said this, there's going to be some growing pains here, right?
• 22:53
  SPEAKER_03: So we're going through extremely rapid transition.
• 22:56
  SPEAKER_03: Companies are some of this information will be reported for the first time, even for people who are far ahead.
• 23:02
  SPEAKER_03: And one thing that any financial statement accountant just immediate cringe is error, misstatement, change, you know, oh, I'm making a revision.
• 23:13
  SPEAKER_03: I realize I need to do something different.
• 23:15
  SPEAKER_03: Like all of those similar types of words, I think are words we may be seeing more of from a uh sustainability reporting perspective, again, just given sort of the evolution there.
• 23:29
  SPEAKER_03: And that is also something that people don't like to use or hear those words.
• 23:33
  SPEAKER_03: So how do you talk to management and you know the board about how do you deal then when you find that, oh, maybe I don't want to say did it wrong, but I could have done it better.
• 23:44
  SPEAKER_03: I identified another source of information, you know, whatever the case may be.
• 23:47
  SPEAKER_01: Talk to them very delicately, which I'm sure you do too.
• 23:51
  SPEAKER_01: Yeah.
• 23:51
  SPEAKER_01: Um, you know, I think as you start to get into this um area, I almost said box.
• 23:56
  SPEAKER_01: And because as you were talking, I was thinking about the checkbox on the front of the 10K also, where if you make some kind of error within the financial statement footnote, you know, then you're at risk of potentially having to check that box on the front of the 10K.
• 24:09
  SPEAKER_01: So I mean, I think what we've seen a lot of companies do is get audit readiness assessments done ahead of time.
• 24:18
  SPEAKER_01: And and, you know, when they as they're building this out, they're bringing in um either their own auditor or other consultants to try to get a sense of A, the materiality assessment.
• 24:27
  SPEAKER_01: And then, you know, usually they're they're having their own financial statement auditor or another firm come in and do an audit readiness assessment because you want to try to get it right on the first time.
• 24:36
  SPEAKER_01: You do not want to then go back later and find out, well, you know, I probably didn't do it the exact right way uh last year and then go back and have it change it and have to start to think about big R and little R and E and S and G.
• 24:49
  SPEAKER_01: Like it's just, it's, it's, uh, it's a lot.
• 24:52
  SPEAKER_01: So there are some efforts going on to try to think about that ahead of time and get that audit readiness test done early to try to avoid getting in the situation where you're um where you're too far into it and then having to look back and risk restatements.
• 25:07
  SPEAKER_03: Yeah, and I think, Mark, I was gonna ask you at the end, but maybe I'll fast forward at least for this one portion.
• 25:11
  SPEAKER_03: I know you have investor background, you look at a lot of things, talk to a lot of investors.
• 25:16
  SPEAKER_03: So what is your expectation then from an investor perspective if they do see that I'll just call it like a continual improvement in the information, at least over those first few years?
• 25:27
  SPEAKER_01: I think that's what most investors expect.
• 25:30
  SPEAKER_01: Um I think over the last number of years, investors have have been educated to understand that this is not um information that companies have at the flip of a switch.
• 25:41
  SPEAKER_01: And so I think they're they're trying to um underst they are they are understanding that this is going to be a continuum and not everybody's in the same part of their journey and it's going to take some time.
• 25:53
  SPEAKER_01: And I also think that what's what makes this even more tricky is is that uh it's hard for the C-suite to get a good read on what the investors are looking for.
• 26:02
  SPEAKER_01: Because the most transparent investors that they have contact with every quarter, every 12 weeks, are the sell-side analysts on the earnings calls.
• 26:11
  SPEAKER_01: And by history um and by necessity, and because it's their job, those questions are often related to what's gonna happen in the next 12 weeks, next 13 weeks, and the next year, and it's mostly on financial, what's gonna happen with earnings.
• 26:26
  SPEAKER_01: They're not asking questions about what's gonna happen over the next 10 years in a carbon transition.
• 26:31
  SPEAKER_01: On the other hand, you've got stewardship investors who have a 30-year timeline and might be a pension fund, and they're talking about voting the proxies, and they're by necessity not at all really worried about the financial aspects of things that are going on from quarter to quarter, but they're worried about are you going to be in the actual exchange, you know, in the actual index over the next 10, 30 years.
• 26:50
  SPEAKER_01: Yes.
• 26:51
  SPEAKER_01: So you're not getting a good read on really what the real mainstream normal investors are actually after by looking at what comes up in the earnings call or by what comes up in your proxy statement.
• 27:04
  SPEAKER_01: And so, you know, what we're hearing when we talk to investors sort of one-on-one is that many investors, not all, think that over the next number of years there's going to be a transition to a lower carbon economy.
• 27:17
  SPEAKER_01: And in some industries more than others, that's going to have major impacts.
• 27:22
  SPEAKER_01: Not all industries, but in some.
• 27:24
  SPEAKER_01: So in those cases, investors want to understand is management or the board thinking about that?
• 27:31
  SPEAKER_01: What are they going to need to do in their business to change to be ready for a lower carbon economy?
• 27:37
  SPEAKER_01: Are they going to change their goods and services that they offer?
• 27:40
  SPEAKER_01: Are they going to change processes?
• 27:41
  SPEAKER_01: Are they going to have to change suppliers?
• 27:43
  SPEAKER_01: What are they going to have to do?
• 27:45
  SPEAKER_01: Are they thinking about it?
• 27:46
  SPEAKER_01: What steps are they taking to be ready for it?
• 27:48
  SPEAKER_01: And where are they on that?
• 27:50
  SPEAKER_01: And and and having those kind of conversations with investors and thinking about your climate disclosures in relation to that kind of middle-of-the-road investor that's just trying to understand is the company going to be able to survive a longer-term transition to a lower carbon economy?
• 28:07
  SPEAKER_01: Getting information to that investor and having that kind of dialogue, that's kind of what I think the main street investor is really trying to understand.
• 28:16
  SPEAKER_01: And if a management team and a board can engage in that kind of dialogue, it would be really fruitful.
• 28:21
  SPEAKER_03: And so I think you raised a really good point there on time horizons, because obviously the filings include forward-looking information.
• 28:29
  SPEAKER_03: Companies have always had some aspect of long-term planning.
• 28:33
  SPEAKER_03: But now, depending on your framework, you're either over the short and long term or short, medium, and long term.
• 28:38
  SPEAKER_03: But either way, a lot of these goals and targets go to 2050, they might go beyond 2040.
• 28:44
  SPEAKER_03: You know, there's all these much different horizons than what we're used to talking about from a reporting point of view.
• 28:51
  SPEAKER_03: So again, if I go back to the analogy you made at the beginning that we have these sort of four languages we're reporting in or four types of reporting we're doing, how do you bring all that messaging together?
• 29:00
  SPEAKER_03: Because if your sustainability reporting is focused on what's going to happen in 2050, and then your financial reporting is like the very short term, and your strategy is not going to seem very joined.
• 29:13
  SPEAKER_03: And so how do you see companies starting to approach that?
• 29:17
  SPEAKER_03: Or is it still, oh, we know we need to do that, or sort of probably both?
• 29:20
  SPEAKER_01: Yeah, that's a great, great question.
• 29:22
  SPEAKER_01: And I think some companies have realized that sooner than others.
• 29:26
  SPEAKER_01: Most companies think that they're undervalued in the market.
• 29:30
  SPEAKER_01: And this is a main reason.
• 29:32
  SPEAKER_01: Because the best way to get your handle on getting your arms around all of that is to make sure that you've got a very clear vision and strategy where you, as the company, define the horizon that you're looking at.
• 29:46
  SPEAKER_01: So that everybody sort of knows on the street what what's the end game that we're looking at, how far out are we looking, what are the financial and non-financial things that are going to need to happen in that time frame for us to meet the vision that we've set out.
• 30:01
  SPEAKER_01: And so that you understand as an investor, okay, the company's looking 10 years out.
• 30:07
  SPEAKER_01: And it's interesting, right?
• 30:08
  SPEAKER_01: Because we saw in the CEO survey that came out that I think 45% of the CEOs said that they're not sure their company will be viable in the next 10 years.
• 30:17
  SPEAKER_01: Right?
• 30:17
  SPEAKER_01: And so this is really interesting.
• 30:20
  SPEAKER_01: And it it just showcases how important exactly the question that you asked is.
• 30:25
  SPEAKER_01: Because if the companies don't set out the time horizon that they're looking at, I don't expect investors are gonna coalesce around a common time frame and you're going to have all these different investors thinking about it with their own time horizons and not understanding where the company's reporting fits in.
• 30:41
  SPEAKER_01: And you know what?
• 30:41
  SPEAKER_01: You're gonna get discounted in your in your valuation because of it.
• 30:45
  SPEAKER_01: And so the better companies have a good do a good job of putting together all the different drivers, the financial drivers and the indirectly financial drivers of success.
• 30:56
  SPEAKER_01: And they sort of have a vision about what those are and where they're going to go.
• 31:00
  SPEAKER_01: And, you know, I won't call them targets and goals for each because that that's now loaded because of the SEC rule, but they have plans to try to progress along each of those, each of those value drivers.
• 31:11
  SPEAKER_01: And to the extent that you're able to communicate to the street about those drivers, where you think you're going, when do you think you're going to get there, then you could have a much better dialogue about it.
• 31:20
  SPEAKER_03: Well, and I do think to your point, targets and goals, to use that word, or transition plans, as part of all of this, you want to make sure what those plans are or what those targets and goals are are integrated into your strategy and not something that someone did because it was for marketing or because there was a push at one time to do it.
• 31:39
  SPEAKER_03: And and now, if you are going to re-examine those, now would be a good time to do that, not after you've started all of this mandatory reporting.
• 31:47
  SPEAKER_01: I 100% agree.
• 31:48
  SPEAKER_01: Um, to the extent these things are one-offs and and they're sort of sitting on the outside of your vision and your strategy overall, that's going to be obvious.
• 31:57
  SPEAKER_01: Um and so if it's not aligned with your strategy, then basically the sense that investors would get is that it's not a priority.
• 32:06
  SPEAKER_01: Um, if it is aligned with your strategy, then investors are going to think that it's part of your strategy, and therefore you're going to try to progress to make those targets because it it's integrated with your overall strategy.
• 32:16
  SPEAKER_01: And so, again, how this all fits in, not from a compliance um mandate, but from a communication um approach is extremely important as to how well this will all fit together for the for your communications with the street.
• 32:30
  SPEAKER_03: Well, and so that leads into then you referenced industries that some are more impacted than others, and then this is sort of integrating targets and goals.
• 32:39
  SPEAKER_03: And a few years ago, TCFD reporting became mandatory in the UK for certain size companies, and it's being phased in.
• 32:47
  SPEAKER_03: And our colleagues in the UK, led by Marcus Sullivan, did some great benchmarking on the TCFD reporting that was done.
• 32:55
  SPEAKER_03: And I've talked to Mark a few times about this.
• 32:57
  SPEAKER_03: Highly recommend the podcast to our listeners.
• 32:59
  SPEAKER_03: But one of the things that has stuck with me is that one of their findings was that they had some companies that really weren't that impacted by climate change that maybe added 50 pages or more.
• 33:11
  SPEAKER_03: And then other companies that really were in these, let's say, very intensive types of industries, which maybe didn't quite calibrate.
• 33:20
  SPEAKER_03: And so there was kind of a miscalibration of disclosure levels to the actual risk to the companies.
• 33:26
  SPEAKER_03: And like I said, that really stuck with me because kind of makes sense.
• 33:29
  SPEAKER_03: Not all industries are impacted the same.
• 33:31
  SPEAKER_03: You just said that.
• 33:32
  SPEAKER_03: And so again, as you're sort of thinking, you're you're in the C-suite, you're thinking about risk, you're thinking everyone's focused on this.
• 33:40
  SPEAKER_03: But then either, yes, this is huge for me, or well, yes, there's some things I need to do, but I'm located in a place without a lot of risk.
• 33:48
  SPEAKER_03: My business doesn't have a lot of emissions.
• 33:51
  SPEAKER_03: You know, there are some industries that are not really impacted.
• 33:55
  SPEAKER_03: So how do you think about that then?
• 33:57
  SPEAKER_01: Yeah, I mean, I think that that's exactly right.
• 33:59
  SPEAKER_01: At SASB, the Sustainability Accounting Standards Board, we actually um did separate standards for every separate industry because they're not all impacted the same.
• 34:07
  SPEAKER_01: And and so, you know, what's going to be material and relevant and important to different industries is going to vary across.
• 34:16
  SPEAKER_01: And I just think that ESG and climate change should be thought about in the same way that you think about other business risks over time.
• 34:24
  SPEAKER_01: Um, and to the extent that any business risk is important to your business, is central to your business, then you're gonna want to give more transparency around it.
• 34:32
  SPEAKER_01: And it's a continuum.
• 34:33
  SPEAKER_01: The less important it is, the less relevant it is, the less you talk about it as a management team over the long run.
• 34:39
  SPEAKER_01: You probably don't need to spend so much time in compliance disclosures around it either.
• 34:44
  SPEAKER_01: Again, a bumpy ride because in the in the beginning, you know that there's gonna be regulatory focus on it, and there's all these different regulators putting out all these different rules.
• 34:54
  SPEAKER_01: So you might end up leaning in heavier.
• 34:57
  SPEAKER_01: Um, but over time, I would expect that industries will start to benchmark against each other and you'll end up in a semi-negotiated medium, right?
• 35:08
  SPEAKER_01: Where you'll have sort of the right level of disclosure uh associated with it.
• 35:12
  SPEAKER_03: Yeah, I think that's helpful.
• 35:13
  SPEAKER_03: And I do think some level of expectation will become mutual between preparers and investors.
• 35:19
  SPEAKER_03: Um, and I do think looking to others in your industry can be very helpful there.
• 35:23
  SPEAKER_03: So a couple other questions, then you've alluded to this, but I do want to hit it head on, which is engagement with those charged with governance.
• 35:30
  SPEAKER_03: So now suddenly governance is a specific disclosure.
• 35:34
  SPEAKER_03: They they the SEC backed away from some of what was required, but nonetheless, you there are disclosures for both the board and for management.
• 35:43
  SPEAKER_03: So are you seeing changes or are you how are you seeing management teams start to think about these requirements?
• 35:50
  SPEAKER_01: Yeah, in terms of governance at the board level, start there.
• 35:54
  SPEAKER_01: Um it's been maturing over the last number of years.
• 35:58
  SPEAKER_01: And you know, it and so there's no one right answer.
• 36:01
  SPEAKER_01: Um there are some companies that set up an ESG board committee that just deals with all ESG issues.
• 36:06
  SPEAKER_01: In some places it all sits under the Nomgov committee.
• 36:10
  SPEAKER_01: Um again, I think over time, as this becomes more ingrained and more natural to what a company is doing, um, you'll probably have different board committees take over their aspects of it.
• 36:22
  SPEAKER_01: So, what does that mean?
• 36:23
  SPEAKER_01: The audit committee will probably take over the reporting aspect of it.
• 36:27
  SPEAKER_01: How are you putting together the controls and procedures around getting this information ready if you have to have assurance?
• 36:32
  SPEAKER_01: How are you choosing the assurance provider and so on and so forth?
• 36:35
  SPEAKER_01: The things that the audit committee naturally does for financial reporting, they'll do for climate reporting and other ESG reporting.
• 36:42
  SPEAKER_01: To the extent that you have any executive compensation metrics that are targeted with ESG or climate specifically, I would suspect that whoever does executive comp, whatever committee does that, will take on that aspect of it.
• 36:57
  SPEAKER_01: The risk committee, again, if you're looking at climate risk completely separate from your ERM system, your enterprise risk management, you're gonna end up having to disclose that fact in your 10K.
• 37:08
  SPEAKER_01: And so pretty soon you're gonna end up having it integrated one way or another, and your risk committee is gonna want to do it.
• 37:12
  SPEAKER_01: So I think that again, over time as this matures, you're going to naturally have the board set up in a way that makes sense for however that board is set up for financial reporting.
• 37:22
  SPEAKER_01: Management teams, similarly, there's no one way to do it.
• 37:26
  SPEAKER_01: In some cases, the sustainability team reports directly up to the CEO, in some cases it reports up through legal, in some places it reports up through communications or public policy, even.
• 37:39
  SPEAKER_01: And again, no one is is is right.
• 37:41
  SPEAKER_01: However, I am seeing an understanding that these cross-functional teams are going to have to come out.
• 37:47
  SPEAKER_01: Right.
• 37:47
  SPEAKER_01: And it's gonna have to be cross-functional because it's it's really kind of pervasive, especially at the beginning when you're just trying to get you know all um elements of the business lifted to get ready for this.
• 37:59
  SPEAKER_03: So, Mark, the other thing we've alluded to a few times in the podcast, and we would be remiss if we didn't at least touch on is I know you're getting the same question I am, which is well, there's lawsuits, there's litigation.
• 38:10
  SPEAKER_03: I don't need to really be worried right now about the SEC and uh those other regimes, you know, I I've got other things to focus on.
• 38:18
  SPEAKER_03: And so how are you responding to those types of questions?
• 38:21
  SPEAKER_01: Yeah, I've heard other members of the PWC team say uh hope is not a strategy.
• 38:25
  SPEAKER_01: That is a good quote.
• 38:27
  SPEAKER_01: And and um, you know, and I and I agree with that, right?
• 38:30
  SPEAKER_01: And that's partly why I started out by talking about the voluntary landscape.
• 38:33
  SPEAKER_01: And and again, this is going to be, if not already, table stakes in terms of information that is already getting out to the market.
• 38:40
  SPEAKER_01: It's voluntary today, 99% of the S P 500 do it, 90% of the Russell 1000 do it.
• 38:47
  SPEAKER_01: So now we're talking about location and level of effort to get there.
• 38:51
  SPEAKER_01: And the direction of travel is clear.
• 38:53
  SPEAKER_01: So while there is all this noise around the lawsuits, et cetera, and and there's no way you or I could predict where those are all going to fall out.
• 39:01
  SPEAKER_01: Um, however, the direction of travel over time is pretty clear that it's getting closer and closer to, if not in the 10K.
• 39:08
  SPEAKER_01: Um, some of this information is going to be required to be in the footnote if it goes through.
• 39:13
  SPEAKER_01: And that would mean uh you need to be ready fairly quickly if that ends up happening.
• 39:19
  SPEAKER_01: And so what I'm suggesting to companies is you lean in, um, do your materiality assessment, do take a look at the gap analysis, uh, do get your cross-functional team in place, and just start the process while all this other stuff is going on on the outside, these externalities, because you're gonna ultimately have to be in the same place, almost irrespective of the regulations because the market is already moving there anyway.
• 39:42
  SPEAKER_03: And I guess maybe the one thing I would add, I give my own pitch where I'm still getting questions of California, what's that?
• 39:50
  SPEAKER_03: Am I am I in those rules?
• 39:53
  SPEAKER_03: Or same a little less so, but nonetheless, still with some of the um EU reporting requirements.
• 39:59
  SPEAKER_03: And if that is, you just have to have that nailed down.
• 40:03
  SPEAKER_03: Like that that needs to be, you know, top of mind if it's not already done.
• 40:07
  SPEAKER_03: Because I think once you know your landscape of reporting, then you can start to put in place all of these things you're talking about.
• 40:14
  SPEAKER_03: But if if you're only focused on the SEC or what may or may not happen, you're you're not going to be able to progress.
• 40:21
  SPEAKER_01: No, 100%.
• 40:22
  SPEAKER_01: Um, you need to think about this holistically, and I probably haven't hit that point directly either.
• 40:27
  SPEAKER_01: Um, you can't just be thinking about one of these regulations uh in isolation.
• 40:32
  SPEAKER_01: You really need to be thinking about your holistic plan because um at any given point in time, they're changing so frequently.
• 40:39
  SPEAKER_01: And that's the other piece of this, right?
• 40:41
  SPEAKER_01: You need to have a process in place to understand these changing regulations because not a not a week or two goes by where we are not hearing about something new going on in some part of the world where where that's gonna have an impact on companies and their reporting.
• 40:58
  SPEAKER_01: And so having that process in place is not a one-time look and see what I'm scoped into today.
• 41:03
  SPEAKER_01: It's it's an ongoing process of trying to monitor what's happening around the world.
• 41:07
  SPEAKER_03: Yeah, and that may be actually the answer to the question, my last question, which is just again, sort of final words of advice that you have for management in terms of what they should be focused on right now.
• 41:20
  SPEAKER_01: Yeah, I mean, uh I would get started.
• 41:22
  SPEAKER_01: Um there are a lot of people that uh especially in the smaller company levels that think this is too overwhelming to even start.
• 41:30
  SPEAKER_01: Um and it's like procrastinating on your high school homework.
• 41:35
  SPEAKER_01: Yeah, and and and yet our kids procrastinated on our high school homework.
• 41:40
  SPEAKER_01: Um and so, you know, really it's it's it's it's just get started.
• 41:44
  SPEAKER_01: Take those first couple of steps.
• 41:45
  SPEAKER_01: Um, you know, get to the treadmill and just turn it on and and just let's get let's get the ball moving.
• 41:51
  SPEAKER_01: Uh and then things will start to fall into place.
• 41:54
  SPEAKER_01: You get the right team together, cross-functional team, and and things will start to happen of their own um of their own accord, and and and that's how you do it.
• 42:02
  SPEAKER_01: So, so really it's get started with that cross-functional team.
• 42:04
  SPEAKER_03: All right.
• 42:05
  SPEAKER_03: Well, definitely some good words of wisdom.
• 42:07
  SPEAKER_03: Appreciate all your perspective, and thanks so much for joining me today.
• 42:10
  SPEAKER_01: Thank you.
• 42:12
  SPEAKER_03: That's our show for today.
• 42:14
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• 42:17
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• 42:25
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• 42:34
  SPEAKER_03: From thought leadership at PWC, I'm Heather Horn.
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