Latest / PwC's accounting podcast / Talking ESG: Building effective sustainability reporting governance

Transcript

Talking ESG: Building effective sustainability reporting governance · PwC's accounting podcast

0:06
SPEAKER_03: I would say I'd come back to this concept of governance being the scaffolding around which you're going to build your organization, and then it's ultimately going to become the superstructure that holds it up.
0:18
SPEAKER_03: And so it's one my best word of wisdom is to not overlook the importance of getting the governance right for your organization up front rather than trying to add it in at the back end.
0:30
SPEAKER_03: Um, and really thinking about governance as the foundation, the scaffolding that it that you're gonna use.
0:37
SPEAKER_01: Today we're back talking ESG.
0:40
SPEAKER_01: This is PWC's Accounting Podcast.
0:47
SPEAKER_01: I'm Heather Horn, and thanks so much for joining us today.
0:51
SPEAKER_01: In today's episode, we're focusing on the role of the board and specifically honing in on how management can help them execute on their oversight responsibilities.
1:00
SPEAKER_01: This is a very dynamic and broad conversation, and I'm happy to welcome to the podcast Stephen Parker and Matt Dijzeppi, both of PwC's Governance Insight Center.
1:10
SPEAKER_01: Stephen and Matt have been in continual dialogue with corporate directors as they work through the challenges of today's dynamic sustainability reporting landscape, and they have some very interesting statistics to share with you during the podcast.
1:24
SPEAKER_01: In addition, they have a lot of perspective based on their own experience and these conversations.
1:30
SPEAKER_01: With that, here's my conversation with Steven and Matt.
1:33
SPEAKER_01: So, Steve and Matt, so nice to have you both back on the podcast.
1:36
SPEAKER_01: And it's an exciting time for companies.
1:39
SPEAKER_01: I think we've been talking about sustainability.
1:41
SPEAKER_01: We've been talking about the SEC role coming, but now it's finally here.
1:45
SPEAKER_01: So I think this has made it kind of real for many senior managements and boards, and uh definitely, you know, a lot for them to think about.
1:54
SPEAKER_01: With that, let's start things off and maybe just start with kind of from a reactions point of view.
1:59
SPEAKER_01: What are you hearing?
2:00
SPEAKER_01: It's been almost some months since the rules come out when we're recording this.
2:04
SPEAKER_01: So maybe Steven, starting with you, what are you hearing?
2:06
SPEAKER_01: Are you hearing surprise?
2:07
SPEAKER_01: You're hearing what are you hearing?
2:09
SPEAKER_02: Yeah, I I don't know that surprise is um maybe the right thing.
2:14
SPEAKER_02: I I think we're hearing a lot of questions.
2:16
SPEAKER_02: You know, so yeah, now the rule's out.
2:19
SPEAKER_02: Some of the questions are what what's really in it, you know, what got taken out.
2:23
SPEAKER_02: But what what does it mean?
2:25
SPEAKER_02: I I liked your comment about so there's a there's a reality element to it now, because you could have taken aside, I wouldn't have recommended it, but that you know, you know, who knows when and we're not gonna invest all that stuff, but it's here.
2:38
SPEAKER_02: And uh I do think it's important to say it's here.
2:41
SPEAKER_02: Of course, there's still a lot of noise around it as well.
2:44
SPEAKER_02: And that's one of the questions that directors are asking.
2:46
SPEAKER_02: So, what do we do with all this noise?
2:49
SPEAKER_02: And I think the key there is that it's noise, and and that management teams really need to look past that um to think about what their perspective is, you know, in inside of all that and how do they move forward.
3:04
SPEAKER_02: So, you know, a lot of questions for directors today.
3:07
SPEAKER_02: I think there's a lot of opportunities for clearly here for management teams to step up and and inform um the directors of their view.
3:15
SPEAKER_02: I also think that it's a great place um and management teams can even recommend it where additional training can be had.
3:23
SPEAKER_02: You know, how can how can directors here, not just for management, and I think that'd be key.
3:27
SPEAKER_02: If I were in a director chair, I would I'd want to know management's perspective for sure.
3:31
SPEAKER_02: But I'd probably, maybe it's the auditor in me, I'd also want to validate that with some outside perspectives.
3:37
SPEAKER_01: And Matt.
3:38
SPEAKER_03: Yeah, I think you you hit it on sort of what the reality is.
3:41
SPEAKER_03: And there's been a lot of work that's been done to prepare to have the conversation over the past two years, right?
3:47
SPEAKER_03: We've engaged in a lot of that dialogue, but now it's how do you move from preparing to have the conversation to actually having the conversations and figuring out really sort of where do you start, if you will.
3:59
SPEAKER_03: I think that that's a lot of what we're hearing from board members.
4:01
SPEAKER_03: Okay, there's a lot of twalk, there's a lot of noise going on, but really, okay, now where do we start?
4:06
SPEAKER_03: How do we start thinking about compliance, what our role is as a board, what's management's role in supporting us, and sort of how do we interact as we move from that conceptual idea to the reality that is today?
4:19
SPEAKER_02: And and Matt, I'm just curious if you'd agree with this.
4:22
SPEAKER_02: I don't I don't think the directors are showing up with uh the confidence that they know what the right answer is.
4:30
SPEAKER_02: So I really see this as an opportunity for our audience to equip them, to educate them more so than they have been.
4:38
SPEAKER_02: Some folks in our audience have been educating their boards for the last two years, but but probably most have not.
4:44
SPEAKER_02: And we've got some data that suggests there's a lot more opportunity for education.
4:48
SPEAKER_03: Yeah, and our most recent survey, we definitely heard from boards that still around half of them didn't feel really confident yet in sort of what it meant to oversee climate-related risks and how to have that dialogue.
4:59
SPEAKER_03: And I think the finance function is going to play a really important role in connecting that sort of theoretical concepts and sort of efforts that have been taken to the reality of how do these come back and actually impact the business and operations and really closing the answer, if you will, from just sort of not what's out there, but then how does that actually come back through the organization, impact buying decisions, what are consumers saying about their decisions versus what are they actually doing?
5:27
SPEAKER_03: Right?
5:27
SPEAKER_03: Because that that's an important concept here in terms of you know, not just necessarily skating to where the puck is going, but understanding, you know, where is it actually going.
5:37
SPEAKER_01: So I think you guys were reading over my shoulder because the the note I had jotted down was the knowledge level of boards, and you answered that without without me asking.
5:46
SPEAKER_01: But I do think it's an interesting question, maybe rewinding all the way.
5:51
SPEAKER_01: I'm gonna start with the noise, Stephen.
5:53
SPEAKER_01: Now I think that is something that most companies are saying, okay, we're just gonna going to get on with things.
6:01
SPEAKER_01: We don't know what's going to happen.
6:03
SPEAKER_01: But I do know at least some companies are saying, oh, throw up their hands, we're just going to wait.
6:08
SPEAKER_01: And so for either one of you, if you're getting that question, what is your response right now?
6:15
SPEAKER_03: So I think it it's more about, you know, we're just gonna wait and recognizing that there are some elements that you can wait to a degree on.
6:23
SPEAKER_03: Some additional clarity may be helpful.
6:25
SPEAKER_03: But actually, when you think about what it will take to comply with the rule, both in the US and the SEC rule, but also thinking about what's happening globally, it really involves marshaling the entire organization.
6:38
SPEAKER_03: And so you can't do that quickly, uh, especially finding out where the different pockets are of activity around the organization, bringing home that dialogue and making sure that you have a holistic view.
6:50
SPEAKER_03: And so one of the things that we see companies struggling with is even if we're gonna wait, we need to have the governance model in place and the scaffolding and structure around the organization so we know who to involve, when to involve them, and how to involve them to be able to comply when it becomes time, but more so just to get that baseline understanding.
7:12
SPEAKER_03: We talked about sort of the education and you know, management teams have been doing a lot of good work around educating the board around some of the things that they're doing, but not necessarily taking that holistic approach of here is everything that's happening throughout the organization, how we're thinking it from a business perspective, here's where it's showing up in RFPs, here's where it's showing up in buying decisions, and really what that means as you start to move to that question around sort of defining materiality and making some key decisions that are gonna lead to that, that the board is gonna need to know not just sort of the highlights, but really more of the totality.
7:46
SPEAKER_03: And how do you even begin to answer that question?
7:49
SPEAKER_02: And I think your your response speaks to how broad the considerations are that management has to make.
7:56
SPEAKER_02: If if I was talking to a management team and they told me that that was gonna be their strategy, I'd ask why.
8:02
SPEAKER_02: And and I would really try to listen to what are the reasons.
8:07
SPEAKER_02: Not not that there can't be any, but you know, some some reasons may be associated with cost or resources.
8:14
SPEAKER_02: And and while those are those are valid, um, guess what?
8:18
SPEAKER_02: The cost is not gonna get any less.
8:20
SPEAKER_02: Um resources are gonna be really hard to come by.
8:24
SPEAKER_02: And you know, Heather, I'm old enough to go back to the implementation of SOX.
8:28
SPEAKER_01: Me too.
8:29
SPEAKER_02: And and for some of the management team members I may be sitting across the table from, you know, they they don't remember that.
8:36
SPEAKER_02: Um they're much younger than me.
8:38
SPEAKER_02: But but if there was a lesson learned, it was one, that whole process was more complicated, um, more comprehensive, uh, more involved than anybody thought it was.
8:50
SPEAKER_02: And so if there's, you know, we we ought to be learning from those kind of lessons.
8:54
SPEAKER_02: And not that I'm not saying this all has to be socks focused, but I mean this is a significant effort.
9:00
SPEAKER_02: And let's keep in mind that the goal is is complete and accurate and consistent reporting and and there's trust in the marketplace that's at stake here.
9:10
SPEAKER_02: So if I was a director, you know, if I if I'm sitting there and I put myself in a director's shoes, I think they're gonna ask a lot of questions.
9:18
SPEAKER_02: So for our audience, if that is your strategy, then you really need to be prepared to lay that out.
9:22
SPEAKER_02: And there may be some reasons, there may be some good reasons.
9:25
SPEAKER_02: I'm not gonna say there aren't, but it's it's not gonna be the norm to have that be your strategy.
9:32
SPEAKER_02: So be prepared.
9:33
SPEAKER_03: And I think there's also some recognition that very few companies, if at any, there's nothing being done.
9:39
SPEAKER_03: Right?
9:39
SPEAKER_03: You can take sort of a wait and see approach, but even still, there's that element of what's already happening because a lot of the effort has really been undertaken organically, right?
9:49
SPEAKER_03: It's not necessarily a top-down direction that's led to what companies are doing today.
9:54
SPEAKER_03: And so even if you are in that sort of element of I'd like to just let the noise calm down, understand what the direction is forward, it doesn't mean that that's gonna stop what's happening throughout the organization.
10:07
SPEAKER_03: So you still have to start taking that step of getting that complete picture and sort of what are the governance structures that'll make sure that you know sort of what that picture looks like.
10:16
SPEAKER_01: Well, and I think to the point Stephen made earlier, and it's kind of following on what you were just saying, if I take a step back and think about accounting and even SOX, so most companies are dealing with one set of accounting, right?
10:29
SPEAKER_01: So some might have subsidiaries that are reporting maybe under another standard, but for the most part, you're following US Gap, you're following IFRS or otherwise.
10:38
SPEAKER_01: And then now this is infinitely more complex because you potentially have multiple different frameworks you're following.
10:46
SPEAKER_01: And then within the frameworks, it's not things like cash and receivables that even a board member that maybe doesn't come from an audit or accounting background can get their head around fairly quickly.
10:58
SPEAKER_01: These are concepts that are new for a lot of people.
11:01
SPEAKER_01: And so if I think about your point then, Stephen, about education, how much education does a board member really need to follow their fiduciary responsibility related to all these different frameworks and all the different requirements and otherwise?
11:15
SPEAKER_01: How do you guys think about that?
11:18
SPEAKER_02: Well, as as we've talked, you know, in the Governance Insights Center, there's certainly a uh there is a compliance element, if you will, and then there's really a strategic um business continuity element and a value in the marketplace kind of element to all of this.
11:38
SPEAKER_02: And and so the board needs to understand the strategy part.
11:44
SPEAKER_02: They need to understand those judgments that management is making as they think through whether compliance is required or not, or or whether processes, you know, is is how significant is the risk and or the opportunity to us as a result of um climate matters to our business.
12:05
SPEAKER_02: And and I and I think you just kind of trickle down from that element.
12:10
SPEAKER_02: I I don't think that that the let's say the audit committee needs to understand every control process, but they they need to understand where in the business things are getting more focused.
12:24
SPEAKER_02: And that what where's internal audit going to spend time?
12:28
SPEAKER_02: You know, that's something that we don't see a whole lot written about.
12:30
SPEAKER_02: But like internal audit can be an incredible asset for the audit committee.
12:35
SPEAKER_02: I doubt there's a whole lot of sustainability audits.
12:40
SPEAKER_02: I mean, there's there's some companies where they're doing them, but to me this is additive to an internal audits plan.
12:46
SPEAKER_02: And um and so internal audit can handle a lot of that stuff, but the the audit committee slash board should understand uh where are processes and controls impacted, who's accountable for those things, and and just ultimately, what does all this mean from a strategic perspective?
13:03
SPEAKER_02: And and that's why I think it's so business focused specific.
13:08
SPEAKER_02: I mean it's it's it's certainly sector specific.
13:11
SPEAKER_02: Sectors are dealing with it different differently, but but then within a sector, it can be very different by business.
13:17
SPEAKER_02: And that's why when a director shows up, I don't know that they have uh a recipe in their head about how this should play out.
13:24
SPEAKER_02: They're really going to be looking to management to kind of guide them through that.
13:28
SPEAKER_03: I think too, one of the elements when you think about sort of you've got the noise, where do you start and those questions you're hearing?
13:34
SPEAKER_03: Some of it is just having that conversation you just described, Stephen, which is how are we going to decide as a management team and work with the board what information needs to come up to the board level?
13:44
SPEAKER_03: What information is dealt with as more of a compliance purpose, where you need to understand as an audit committee that the work is being done, but you don't need that huge volume of information.
13:54
SPEAKER_03: How do you keep the conversation focused on that strategic element of what you're doing versus getting bogged down in the numbers in the different frameworks where that's really not the highest and best use of the individual's time they're sitting around that room?
14:10
SPEAKER_03: They can really sort of help, but management and the board need to have that dialogue, right?
14:15
SPEAKER_03: So everybody is in the same, on the same page, understands what this issue means for your particular business, and then how does that inform the way that you build the dialogue over time so that when it comes down to a brass tax and you're sort of, you know, everybody's gonna be racing at the end of the line, right?
14:32
SPEAKER_03: To to get things out the door and understand it, you you can feel confident that as a board and as a management team, your relationship around responsibilities is strong.
14:42
SPEAKER_03: When you think about a lot of the sort of traditional governance matters, there's a long history of dialogue that's led to the way that boards and management teams interact today.
14:52
SPEAKER_03: This is a, you know, for a lot of companies, a net new element of the dialogue, right?
14:57
SPEAKER_03: And one where you don't get a lot of at-bats because you got to put right there in your first disclosure some of these governance practices, right?
15:04
SPEAKER_03: And so the more that you spend time sort of building out exactly what you want to be able to say, are we able to say it?
15:11
SPEAKER_03: How do we need to evolve our practices so that we can say it, the more prepared you are down the line.
15:16
SPEAKER_03: And that's you know, not necessarily a bad thing when you're talking about a large volume of new information.
15:22
SPEAKER_01: And who then are you seeing from a board perspective should be taking the lead, right?
15:27
SPEAKER_01: Because there's so many aspects to this.
15:30
SPEAKER_01: You both mentioned strategy, but there are controls, there are you know the detailed reporting.
15:36
SPEAKER_01: So what are you seeing, or what would you think from a best practice, maybe starting Matt, with you?
15:41
SPEAKER_03: Yeah, and this actually leads into something that we've had a dialogue with boards around for a long time, which is it's not necessarily one board committee or one board member or one sort of individual body that can take responsibilities.
15:54
SPEAKER_03: You really have to think about aligning the responsibilities with the core competencies of that committee and those individuals.
16:02
SPEAKER_03: So when it comes to regulated reporting, that is very much in the audit committee's serve wheelhouse, right?
16:08
SPEAKER_03: That's a very strong opportunity for them to leverage the skills that they already have.
16:12
SPEAKER_03: Nam and Gov committees have been spending a lot of time thinking about communications and sort of that strategy link, if you will.
16:20
SPEAKER_03: And there's no not necessarily a need to necessarily yank that out of that committee because they've developed the skills and they've had the FATS and they understand it.
16:28
SPEAKER_03: And then the full board does need to get involved when we're starting to talk about strategy and potentially disclosing how these issues impact capital allocation, right?
16:36
SPEAKER_03: Those are very much full board related discussions.
16:39
SPEAKER_03: And I think for a lot of boards, if you sit reflectively and you look at how you've had these discussions around, say, capital allocation strategy in the past, you can draw some of those threads and start answering those questions about how do these things sort of connect back into our business decision making.
16:56
SPEAKER_03: So you really want to sort of center the responsibility and the activity with where it belongs versus trying to shoehorn it into any one specific committee or individual.
17:06
SPEAKER_02: But that still exists.
17:07
SPEAKER_02: And and so I think our perspective is clearly that that each committee has a you know a role to play here.
17:16
SPEAKER_02: But I I mean, just reading proxies in the last couple weeks, I still see discussion about sustainability, climate-related things sitting at like NomGov, including reporting.
17:28
SPEAKER_02: And I just ask myself, okay, is that is that something they're looking at, or are they determined that that's where that's going to be?
17:36
SPEAKER_02: And then you know what I would challenge them on is if you think about it, so now you have sustainability reporting in your 10K with your financial reporting.
17:46
SPEAKER_02: And so does the disclosure committee kind of report into both committees about how they've considered the appropriateness, the adequacy of disclosures?
17:56
SPEAKER_02: Does internal audit report into both?
17:58
SPEAKER_02: You've got assurance potentially several years down the road reporting into one, and and of course, financial reporting, assurance, you know, external auditors reporting into the audit committee.
18:09
SPEAKER_02: So I gotta believe that we're gonna kind of end up in this place that we think makes sense, but there's still a lot of transition to happen.
18:17
SPEAKER_01: But then, Steven, one of the things we've talked about on sort of our annual audit committee episode is just the packed agenda for the audit committee, but for the board more broadly.
18:27
SPEAKER_01: And so, you know, if I think you have this, you have cyber, you have, you know, just the list kind of goes on and on of things that keep getting added from a board perspective.
18:36
SPEAKER_01: How then does management help the board prioritize where they should be spending their time?
18:42
SPEAKER_02: Well, that that's certainly the$64 million question.
18:46
SPEAKER_02: And um and and you know, when we have uh when we meet with audit committee members and little peer exchanges packed agenda and how do we navigate that, I think is um is really their concern.
18:58
SPEAKER_02: Um and I wish there was the silver bullet.
19:01
SPEAKER_02: But I I do think um one is to re-evaluate uh every year whether you've got risk allocated, overs oversight of the right risks allocated appropriately amongst the committees.
19:13
SPEAKER_02: Do you have the right um capacity at the committee?
19:17
SPEAKER_02: And and do you have the right competencies to deal with the issue?
19:20
SPEAKER_02: So so if if sustainability reporting, I mean it's that's different than financial reporting.
19:26
SPEAKER_02: You know, you made a comment like a lot of folks have experience with financial reporting.
19:30
SPEAKER_02: I I I wouldn't be surprised um if if there are some directors who maybe haven't even really you know done much more than flip a corporate sustainability report of of their company.
19:42
SPEAKER_02: But it's it's more of a marketing kind of document than really a reporting document.
19:47
SPEAKER_02: And um and so I think there's gonna have to be some upskilling on the part of presumably audit committee members to be able to handle that.
19:54
SPEAKER_02: Um I think management's gotta kind of rethink the prioritization of agenda topics.
20:03
SPEAKER_02: And and for the for the first year or so, I think there has to be a willingness to invest some more time.
20:11
SPEAKER_02: You know, it's we just gotta get we gotta get this kind of under our belt.
20:15
SPEAKER_02: We've all got to kind of get comfortable with it, and that's gonna require a little bit of investment of time, just like management's gonna invest in processes and controls and such.
20:25
SPEAKER_02: And um and I I think directors are willing to do that.
20:29
SPEAKER_02: Uh they they really are.
20:30
SPEAKER_02: As if it's well thought out and well communicated, I think they're willing to do that.
20:35
SPEAKER_02: And and then you get up, you know, to where you're not too far off from where you were before, and there's probably some efficiency to be gained about some of these compliance, pure compliance kind of matters that don't create a whole lot of risk.
20:48
SPEAKER_01: Yeah, so one of the points you made there is competency.
20:51
SPEAKER_01: And so are you seeing obviously the original SEC rule, you had to name someone by name who had, you know, the the right area of expertise.
21:01
SPEAKER_01: We we don't have that in the final rule.
21:03
SPEAKER_01: But nonetheless, if I'm a board, I am thinking, you know, are there people who have at least enough understanding?
21:11
SPEAKER_01: So are you starting to see that this type of knowledge is being considered in the selection of board members, or is it still a little too early for that?
21:20
SPEAKER_03: You know, it is interesting.
21:22
SPEAKER_03: Um, I think it's definitely being it's been considered for a long time, right?
21:26
SPEAKER_03: The concept of sustainability, climate-related risk, these sorts of elements is not something that's new now that we've got the final rule, right?
21:33
SPEAKER_03: This is something that boards have been dealing with for really, you know, better part of decade at this point in terms of understanding how do we as a board exercise our oversight responsibilities out of this growing area.
21:47
SPEAKER_03: What I do think is is changing is boards are upskilling on climate specifically and being able to go deeper rather than sort of just at that surface level sort of oversight responsibility level.
21:59
SPEAKER_03: And we see that.
22:00
SPEAKER_03: In the response rate to our annual corporate directors survey, in terms of the percentage of directors that feel comfortable engaging around climate-related risks, I think it was up 50% year over year.
22:11
SPEAKER_03: So it's definitely somewhere where board members are reporting that they're upskilling themselves, even if it's not a core competency that they're looking for in new members.
22:19
SPEAKER_03: It's definitely something they've been considering over the past decade as they've been going through that refresh.
22:24
SPEAKER_03: How do we as a team add that element of expertise without losing sort of what we hear is the core functionality or core expectations of new board members, which is finance, operations, strategy, and sort of in the context of these other areas that we'd like to have expertise around?
22:44
SPEAKER_01: Although it is interesting because obviously, you know, we're focused here on climate, but for many multinationals who are listening, they are also going to be subject to the rules in the EU, potentially some of the IFRS sustainability disclosure standards.
22:58
SPEAKER_01: And so it's so far beyond climate, right?
23:01
SPEAKER_01: Because we're talking pollution, biodiversity, social issues, all of these different types of issues.
23:06
SPEAKER_01: Maybe the one they might feel more comfortable with is governance.
23:09
SPEAKER_01: So, you know, it's almost that climate is just the tip of this deeper amount of knowledge.
23:15
SPEAKER_01: And again, I just keep going back to upskilling and the level of knowledge.
23:20
SPEAKER_01: If you think from a well-prepared board perspective, then are they really needing to know all these different topics, or are they more needing to understand what management has in place to make sure they understand these topics?
23:34
SPEAKER_02: I mean, that's what I think.
23:36
SPEAKER_02: I I think you've got to be trained and able to ask the right question, the right open-ended question to probe to uh to some extent there are the you know, these are the audit skills.
23:48
SPEAKER_02: Exactly.
23:49
SPEAKER_02: Just to validate what I've spent my whole career on.
23:52
SPEAKER_02: Um so I don't think they have to be the expert in all of those things, but they certainly need to be able to understand man, you know, hear, hear a uh a well-thought-through perspective by management, and then look for the places to ask the right probing questions, and then ultimately get comfortable that they feel like management's position is well supported and uh and and that they're appropriately addressing the risks and opportunities that those things provide.
24:20
SPEAKER_02: I I don't see us getting specialists in all those kinds of things at all.
24:24
SPEAKER_03: No, but I do think climate is one area where you hear about boards upskilling more than other areas.
24:29
SPEAKER_03: Most board members, if not all, have been people managers at some point in their career.
24:33
SPEAKER_03: Most board members have dealt with supply chains or thinking through sort of they've led a large business, if not been a CEO, and so have dealt with a lot of those sort of traditional business matters that are being elevated as you think about through the various different rules.
24:50
SPEAKER_03: And the dialogue has become much more external than it has been in the past.
24:54
SPEAKER_03: Climate is is probably one of the more net new areas where throughout their business careers it wasn't something that was necessarily front and center in their in their discussions and and thinking.
25:04
SPEAKER_03: And so that's why I think you hear about climate upskilling a little bit more than you do some of those other areas that sort of fall under the sustainability umbrella.
25:12
SPEAKER_01: Yeah, I think that definitely makes sense.
25:14
SPEAKER_01: You know, you made a comment earlier that I want to loop back with, and you were we're talking about the impact on strategy and understanding, it kind of fits in with what we're talking about here, understanding the impact on a company's strategy and perhaps the difference between what consumers are saying and what consumers are actually doing.
25:32
SPEAKER_01: And that applies more, you know, broadly, right?
25:34
SPEAKER_01: It's on the social issues, it's on all different issues that there can be sort of an uproar, but then, you know, what actually happens.
25:42
SPEAKER_01: And so again, how do you see boards dealing with management's response to thinking through all say climate-related risks, but then let's say sustainability risks more broadly?
25:54
SPEAKER_03: So I think that's where Steven's point on sort of asking those probing questions and pushing management to sort of finish their answer to the question is one area that we're going to see boards spending a lot of time, right?
26:06
SPEAKER_03: And looking to different places inside the organization to answer those questions.
26:10
SPEAKER_03: We mentioned sort of the what consumers say versus what they do.
26:13
SPEAKER_03: But it's also sort of where is this part of your RFP process, right?
26:17
SPEAKER_03: If you, if you, if this is a gating criteria to responding to critical, you know, RFPs or winning business, that changes the way that you have to approach the issue.
26:26
SPEAKER_03: Coming back to sort of our discussion on, you know, what are the targets, how do organizations think about their role, you know, this is the area where you have to figure out where does this show up in the business by asking those probing questions.
26:38
SPEAKER_03: And I think that will cause a little bit of an evolution in the way that businesses and management teams inform the board, but also think about communicating amongst each other, right?
26:49
SPEAKER_03: Because, you know, what shows up in the sustainability report is is incredibly important.
26:53
SPEAKER_03: It's an incredibly uh important tool to share with the marketplace.
26:57
SPEAKER_03: But you also have to understand how those topic areas are showing up in other areas of the business, because that's how you understand the strategic impact rather than just sort of understand what's our what's the message that we're providing to the market, but how are these issues actually sort of playing out in our our day-to-day operations?
27:14
SPEAKER_02: Yeah, like it it reminds me, we talked a lot about this early on, but I I don't know that it's been top of mind lately.
27:21
SPEAKER_02: You know, you mentioned RFPs and made me think about just lenders.
27:25
SPEAKER_02: And so from a f you know, uh a capital markets perspective, what information are we gonna be asked to provide to potential lenders because they've got their own requirements and and how can we be sure that the data we're giving them is trusted data?
27:41
SPEAKER_01: Yeah, and I guess to the point you guys were both just making, you know, we touched on metrics and targets and companies reevaluating.
27:50
SPEAKER_01: Are these really metrics and targets that are fit for purpose for the future?
27:55
SPEAKER_01: But as boards look at management's actions, are there particular parts of the company that they think should be involved in this, or are they really looking for this cross-functional response?
28:07
SPEAKER_03: I think it's really about the cross-functional response, but I think pressing the issue around are you actually looking across all of the functions?
28:17
SPEAKER_03: Right?
28:18
SPEAKER_03: Not just the the uh organizations that have been previously involved in sustainability work, right?
28:23
SPEAKER_03: The sustainability office, increasingly the finance function, the communications function.
28:28
SPEAKER_03: But sometimes you you can see a disconnect between that work and what's happening operationally, right?
28:34
SPEAKER_03: If you're going to be using low power antennas, does your consumer on the other side, you know, suffer as a result of that, right?
28:42
SPEAKER_03: Sort of and having that type of dialogue as it um connects to whether or not you're going to achieve those targets and metrics, right?
28:50
SPEAKER_03: Because to your point, as you look and you reevaluate and you consider it, there are the what you want to be able to say, but then there's the practical reality of connecting that back to sort of what are you going to do as a business.
29:01
SPEAKER_03: And I think that's where a lot of that dialogue is going to start to emerge, especially when you think about going back to our dialogue around what's board level, those types of decisions and and sort of considerations are definitely the right area to maybe get the board involved in rather than sort of the ticky tack of how do you collect the data.
29:19
SPEAKER_02: So, Matt, as we think about, I mean, we're talking to finance folks, and as we think about having these conversations, um you you and I were were kicking around earlier the timing and you know, we're gonna come up on Q1 kind of board meetings and audit, you know, committee meetings.
29:37
SPEAKER_02: So we were we were thinking that that's no better time than you know the immediate shoot, if if if management can kind of work through their process, because they have a process to get through.
29:46
SPEAKER_02: But I think they've gotta they've gotta begin to put some pieces together, I think, before these Q1 meetings.
29:51
SPEAKER_02: I just wanna I want to build off of your current response.
29:54
SPEAKER_02: I'm interested in your thought here.
29:56
SPEAKER_02: So for this first meeting, do you think do you think it's one member of C of the C suite that's that's delivering this message to the board or a committee?
30:05
SPEAKER_02: Or do you think you invest and you bring several of the members of management team that are involved in this to show that how it is kind of a cross-functional effort and give the the committee or the board a chance to feel really good about that because they can question three or four different members of management and walk away saying, Yeah, I get they're all on the same page.
30:29
SPEAKER_02: They they clearly they all agree, or I can tell somebody may not be fully, you know, on board yet.
30:36
SPEAKER_02: What do you think about that opportunity?
30:38
SPEAKER_03: So I know the one thing that we hear from board members consistently is that they'd like to meet with more members of management.
30:44
SPEAKER_03: Yeah.
30:44
SPEAKER_03: So I I'm partial to your concept of, you know, this is an opportunity to bring more members of management to the to the fold and really demonstrate that you're working together as a team of senior leaders to address this issue.
30:57
SPEAKER_03: Um, I also know that governance is a very personal matter for each and every organization.
31:02
SPEAKER_03: And that might not always be possible, just the way that an organization operates.
31:07
SPEAKER_03: And when you're building a governance structure and you're thinking about sort of, you know, how do we start sketching this out, right?
31:14
SPEAKER_03: You do have to be conscious of what works inside of the organization.
31:17
SPEAKER_03: If you try to just slap on sort of a, this is what we'd like to do, you know, approach to managing this, and you don't do it in the context of what works for your organization, you might create some pitfalls in the future and some, you know, tech debt for lack of a better term.
31:35
SPEAKER_03: And so I think it's a matter of balancing that.
31:37
SPEAKER_03: I think you want to show up as a senior leadership team, whether that's through an individual, because that's the way governance works at your organization, or you take advantage.
31:45
SPEAKER_03: And I do think it's a great opportunity to take advantage to get more management team exposure to the board, um, which we also know from our executive survey that the more management gets exposure to the board, the more confident they are in the board and its oversight responsibilities.
32:02
SPEAKER_03: So there's a lot of opportunity created here.
32:04
SPEAKER_02: So I think the key is this is an opportunity.
32:07
SPEAKER_02: You're exactly right, Matt.
32:08
SPEAKER_02: I I've been told by some board chairs that they only want to hear from the CEO.
32:13
SPEAKER_02: And, you know, I get I get that.
32:15
SPEAKER_02: That's what works in their organization.
32:17
SPEAKER_02: So be sensitive to that.
32:19
SPEAKER_02: But this could be an opportunity to show how well management's working together and and how focused they are and and how well they understand the issues and opportunities.
32:28
SPEAKER_01: Yeah.
32:28
SPEAKER_01: So then again, if I'm the finance person that's listening and I'm thinking this rule came out March 6th, I'm still getting my hands around it.
32:36
SPEAKER_01: I'm also still trying to figure out how it fits into all my other reporting responsibilities.
32:40
SPEAKER_01: The Q1 audit committee meeting and board meetings are like right here.
32:46
SPEAKER_01: And so and uh I like what if I just am thinking I don't have time to make the robust presentation that I normally would want to on an emerging issue.
32:55
SPEAKER_01: How do you respond to that question?
32:58
SPEAKER_02: Well, my answer is you give them the best that you can give them.
33:01
SPEAKER_02: I I think you've got to start having the conversation.
33:04
SPEAKER_02: And and if we go back to kind of where we started this whole conversation of where our directors they are sitting around, I mean, they're asking questions, you know, amongst themselves and they're they're wanting to be fed information.
33:18
SPEAKER_02: And if if a management team doesn't give it to them, then they're gonna read it or listen to it somewhere else.
33:23
SPEAKER_02: They're gonna be going, you know, down a rabbit hole where they shouldn't be going.
33:28
SPEAKER_02: And and so I think it's a chance to to provide some you know credibility.
33:34
SPEAKER_02: And it doesn't you don't have to have all the answers.
33:36
SPEAKER_02: But I think that transparency of just where are we and what can you expect, what are we doing?
33:41
SPEAKER_02: Um, when when I'll get back with you, that kind of stuff at a minimum, I think should be happening in Q1.
33:46
SPEAKER_02: And I get that, yeah, the timing's horrible.
33:48
SPEAKER_02: Uh, but but I think it it's not they didn't just start on March 6th.
33:52
SPEAKER_02: No.
33:52
SPEAKER_02: You know, so we I'd come back to that one with them too.
33:55
SPEAKER_03: So I think too, you said it.
33:57
SPEAKER_03: This is a journey that that companies are going on, that management teams are going to go on with their boards, and the best possible outcome will come when everybody's transparent and open around that journey, where you are.
34:07
SPEAKER_03: And to your point, Stephen, around sort of what decisions are you making, why are you making them at this time?
34:13
SPEAKER_03: And you know, what are you what are the guideposts and what are you looking towards towards a future, right?
34:18
SPEAKER_03: So rather rather than treating it as a you know one and done approach, it really needs to be viewed as we're on a journey towards you know compliance, whether it's with the SEC or CSRD or you know, any of the other frameworks out there, we're on our journey and this is where uh us as an organization fit.
34:36
SPEAKER_01: So I think this point on the journey is so important because again, if I think about dealing, I'll focus here on the audit committee for a moment.
34:45
SPEAKER_01: Anyone who's either been an auditor, dealt with the audit committee, been in one of those roles within the organization knows sort of the anxiety that's created by the summary of potential misstatements, or what if you have a restatement or otherwise.
35:01
SPEAKER_01: And this is after, to Stephen's point at the very beginning, 20 plus years of SOCS, where we saw a lot of sort of cleanup type of items.
35:10
SPEAKER_01: And one of the parts of this journey is the journey on the data and improving data and otherwise.
35:18
SPEAKER_01: And so again, if you're giving advice to people in finance, thinking about, hey, I may have reported information, let's say I report in 2024, but then in 2025, I realized, hey, there's a source of GHG missing, or I realized my definition of an employee in one country was wrong.
35:36
SPEAKER_01: I mean, there's a lot of places you can find issues.
35:39
SPEAKER_01: How is everyone going to calibrate their sensitivity around something that again, historically is just a huge point of stress?
35:49
SPEAKER_02: It's gonna be stressful.
35:51
SPEAKER_01: That was not the answer I was looking for, Stephen.
35:54
SPEAKER_02: Well, I mean, when when you ask how are we gonna you know gauge things, all I can think about, Heather, is like in those 20 years of Sarbanes Oxley and how we've evaluated stuff, um the goalposts have moved.
36:08
SPEAKER_02: We've continued to to rethink things, the winds have changed, and so I suspect something similar will happen in this area.
36:17
SPEAKER_02: I I think the key is that um accountability, so someone, some group has got to own different elements of this process and it's gotta be clear who owns what.
36:29
SPEAKER_02: And then when if you're the one who owns it, then you've got to get invested in it.
36:34
SPEAKER_02: And and it won't always be perfect.
36:36
SPEAKER_02: And when it's not perfect, when you identify that issue, you gotta be quick to figure out, you know, how do you get it reported.
36:43
SPEAKER_02: I don't think we've thought through uh yet.
36:45
SPEAKER_02: I don't think there's rules on on how you're gonna do that, but it's not gonna be what it was under voluntary type disclosures.
36:52
SPEAKER_02: You know, I I'm sure the rules are gonna change.
36:55
SPEAKER_02: The bar will be raised.
36:57
SPEAKER_02: And um and then it gets back to that trust.
37:01
SPEAKER_02: There there is an element of trust that can be earned in this with stakeholders through this, and then there's trust that can be lost if you, you know, if you don't, if you're not focused on it enough.
37:10
SPEAKER_02: And so this is a great opportunity to build trust with stakeholders.
37:14
SPEAKER_03: And I think that's actually one of the reasons why governance is so important here, not just sort of at the management to the board level, but throughout the organization, because governance creates accountability.
37:24
SPEAKER_03: You understand, and as you move from sort of an organic approach, like I said, to the voluntary reporting, to a the much more structured approach that you need in order to meet uh regulated requirements, the governance will create that accountability throughout the organization so people know where they need to roll up their sleeves and really look for that information and start that process towards, you know, the miscategorization, like you said, of an employee.
37:49
SPEAKER_03: Okay, who's responsible inside of the organization for knowing that information and how does that flow up so that when you reach those senior levels, you're confident?
37:58
SPEAKER_03: And I think also, to your point, um, the under a voluntary regime, there's been understandings and there's estimates involved, right?
38:06
SPEAKER_03: There have to be.
38:07
SPEAKER_03: Um, there's still going to be estimates involved under the current regulatory environment.
38:11
SPEAKER_03: So I think clarity and transparency around that is also one of those ways that you bring down stress in terms of you know making sure that people understand where they can look for assurance that information is correct.
38:24
SPEAKER_01: Yeah.
38:24
SPEAKER_01: And I do think that point on transparency and making sure people understand what are the processes and controls in place, where are the judgments being made, and those other things, because the more you know management sort of holds that very close, then I think that's where there is the potential to create issues later.
38:41
SPEAKER_01: And that's the exact same thing, you know.
38:43
SPEAKER_01: I'm looking at Stephen, because Steven and I work together on audits.
38:46
SPEAKER_01: That's the same thing you would see in an audit, is if management is holding things too tightly, then that is where issues can be magnified.
38:54
SPEAKER_01: Exactly.
38:55
SPEAKER_02: Yeah, they they just get worse.
38:56
SPEAKER_02: Right.
38:57
SPEAKER_01: Yeah.
38:57
SPEAKER_01: And I do think, you know, if we think then, and and Matt, you alluded to this sort of governance at different levels, including within the organization, and then at the board level.
39:07
SPEAKER_01: So I'll ask each of you, maybe Matt, you can do board and Stephen, you can do management.
39:11
SPEAKER_01: So what is sort of like a best practice if you start to think about governance over sustainability matters at the board level?
39:19
SPEAKER_03: I think at the board level, it really looks like understanding what the board is overseeing and why first, right?
39:26
SPEAKER_03: Not every sustainability factor that you could write under the heading will be the most important issue for the organization.
39:34
SPEAKER_03: So they need to understand what their responsibility is because these issues have raised to the top.
39:39
SPEAKER_03: Then they need to understand how that oversight is organized across the board.
39:44
SPEAKER_03: We talked about this a little bit, right?
39:46
SPEAKER_03: Aligning responsibilities with the core competencies of individual directors or committees and those elements, but also understanding how that information then comes back together, right?
39:57
SPEAKER_03: Because it's very easy to say Nam and Gov owns sustainability and so they're going to do all of it.
40:02
SPEAKER_03: But as we talked about, that might not be fit for purpose under sort of the emerging model.
40:06
SPEAKER_03: And so as you do that, you need to dialogue, have a dialogue not just about sort of where things fall, but then how they come back together.
40:13
SPEAKER_03: So that as an organization, you're thinking about sustainability topics as strategic matters rather than compliance or sort of um, you know, side-of-the-desk opportunities.
40:25
SPEAKER_03: But really, how are these issues understood in a way that we know how they impact the business and flow through into the financial statements?
40:33
SPEAKER_03: I think that if that would be the ideal governance structure, if you would.
40:36
SPEAKER_01: And then, Stephen, I know I gave you a very broad question, so you can focus, if you'd like, on the interaction with the board, because obviously, more broadly, thinking about governance within an organization is quite a big topic, although I welcome any thoughts on that.
40:51
SPEAKER_02: Well, maybe I'll start there because it is something that we think about.
40:55
SPEAKER_02: And I just reflect on kind of where we've come over the last several years in terms of management or accountability at management in terms of climate or other sustainability kind of reporting.
41:08
SPEAKER_02: You know, it often would sit with engineering folks or marketing folks or general counsel's office.
41:17
SPEAKER_02: Um early on in the finance organization, the county was not involved at all.
41:22
SPEAKER_02: I mean, in fact, they probably had a strategy for staying away from it.
41:27
SPEAKER_02: And uh and I just think coming back to our kind of uh cross-function discussion earlier, I think the governance model is that there's a role for everybody to play.
41:39
SPEAKER_02: And and the the finance accounting folks who have competency in process and control, I mean real process and control.
41:47
SPEAKER_02: You know, they've been doing this um as part of their business for at least 20 plus years.
41:53
SPEAKER_02: They they can learn a lot from the engineering folks uh or the operations folks, and and and those folks who have probably a bunch of spreadsheets and you know, they can benefit from what does it really look like to have a good process and control, one that is designed appropriately and and gets tested for operating effectiveness.
42:12
SPEAKER_02: Um so I think it takes everybody.
42:14
SPEAKER_02: Well now, one of the things that I found interesting, so recently um some of us have been on a couple of little tours, you know, talking to uh small, small groups, um, or and even large kind of you know, continuing education days.
42:29
SPEAKER_02: And one of the questions that get gets asked of the audience, and the audience is our audience today, finance folks, accounting folks, you know, if there's a an error in some sustainability reporting, it's identified in the subsequent year, who do they think is going to be accountable?
42:46
SPEAKER_02: And it's a multiple choice question.
42:48
SPEAKER_02: You know, there's another, and I was shocked that like 90 plus percent say it's the chief accounting officer.
42:53
SPEAKER_01: Oh, that's interesting.
42:55
SPEAKER_02: So I mean, you know, I just and and these are all account mostly accounting, finance, internal audit folks.
43:02
SPEAKER_02: I mean, it'd be funny if it was all general counsel kind of pointing the finger.
43:06
SPEAKER_02: But like this is them saying, yeah, we think people are gonna be looking at us.
43:11
SPEAKER_02: And I think that's probably true.
43:13
SPEAKER_02: I don't know that it's right, but it what it tells me is that if you're not involved in your company and you don't have a voice, then you better interject yourself because um again, uh and it's a decent sized sample, most of them are pointing the finger at the chief accounting officer and that organization, you know, and that's where the competency lies with process and controls.
43:35
SPEAKER_01: Yeah.
43:35
SPEAKER_01: And I mean, I think we even see that internally within our own working groups and the firm on some of these topics where you have the auditors slash accountants working with the engineers and others who have been, again, helping clients for years on sustainability.
43:48
SPEAKER_01: You're definitely coming at things from different perspectives.
43:51
SPEAKER_01: But I think most auditors and accountants would say at the end of the day, we are the ones that would know, you know, investor grade information and otherwise, really what that really looks like.
44:03
SPEAKER_01: So I think it's a really key point.
44:05
SPEAKER_01: So we've obviously hit a lot of ground, and you may have already given your best words to wisdom, but I always like to ask if you have any final words to wisdom for our audience.
44:13
SPEAKER_01: So Matt.
44:14
SPEAKER_03: I would say I'd come back to this uh concept of governance being the scaffolding around which you're going to build your organization, and then it's ultimately gonna become the superstructure that holds it up.
44:26
SPEAKER_03: And so it's one my best word of wisdom is to not overlook the importance of getting the governance right for your organization up front rather than trying to add it in at the back end.
44:38
SPEAKER_03: Um, and really thinking about governance as the foundation, the scaffolding that that you're gonna use.
44:44
SPEAKER_01: All right, great advice, Steven.
44:46
SPEAKER_02: And and I I couldn't agree more with that.
44:48
SPEAKER_02: I think, and maybe maybe one step before that is making sure that the that management has invested time to to be able to um think through and then and then describe for the board what is the real strategy here in terms of risks and opportunities.
45:07
SPEAKER_02: And so where are you focused and why?
45:11
SPEAKER_02: And and then, you know, just one thing if I could add, which is work through the noise.
45:16
SPEAKER_02: Don't, you know, this is my personal opinion, don't don't let the noise kind of get you off track.
45:22
SPEAKER_02: Um we're because we're losing some time.
45:25
SPEAKER_02: And I say that kind of from experience, really.
45:28
SPEAKER_01: Yeah, and I guess maybe the one thing I would add is to your point, I still hear companies talking about, oh, California, wait, are those rules gonna apply to us?
45:37
SPEAKER_01: Or, you know, yeah, we have some operations in the EU, but we haven't finished looking at it.
45:41
SPEAKER_01: And if you haven't, you can't do any of these things without understanding what your responsibilities are.
45:47
SPEAKER_01: And so I think making sure you know that, building your strategy, building your governance, all those pieces are gonna work together.
45:54
SPEAKER_01: But gentlemen, it's always such a pleasure to talk to you.
45:57
SPEAKER_01: Thank you so much for joining me today.
45:59
SPEAKER_03: Thanks, Heather.
46:00
SPEAKER_03: Of course.
46:01
SPEAKER_01: That's our show for today.
46:03
SPEAKER_01: Tune in next week for more fresh episodes so that you never miss any of our audio content from all the PWC Accounting Podcast, wherever you listen to your podcasts.
46:14
SPEAKER_01: And to stay up to date on all our latest accounting and reporting news, sign up for our newsletter at viewpoint.pwc.com.
46:23
SPEAKER_01: From Thought Leadership at PwC, I'm Heather Horn.
46:28
SPEAKER_01: Thanks for tuning in.
46:39
SPEAKER_00: PwC refers to the U.S.
46:41
SPEAKER_00: member firm or one of its subsidiaries or affiliates, and they sometimes refer to the PwC network.
46:47
SPEAKER_00: Each member firm is a separate legal entity.
46:49
SPEAKER_00: Please see www.pwc.com slash structure for further details.
46:56
SPEAKER_00: This podcast is for general information purposes only and should not be used as a substitute for consultation with professional advisors, including accountants and lawyers.