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Sustainability now: Materiality matters · PwC's accounting podcast

• 0:00
  SPEAKER_00: Thought Leadership from PWC's National Office.
• 0:07
  SPEAKER_03: Hello, and welcome back to today's next episode in our new video podcast series on sustainability reporting.
• 0:14
  SPEAKER_03: I'm Heather Horn, PwC's U.S.
• 0:16
  SPEAKER_03: sustainability technical leader, and I'm so happy you decided to join us today.
• 0:20
  SPEAKER_03: Now, if you're a regular listener to the podcast and you're listening to us on one of your regular stations, I highly encourage you to check out our video podcast so you can actually see us recording if you're interested in seeing that.
• 0:34
  SPEAKER_03: All right, with all that said, as I said, this is the next episode.
• 0:37
  SPEAKER_03: So we have already recorded several episodes.
• 0:40
  SPEAKER_03: And if you haven't already, I also encourage you to check those episodes out.
• 0:44
  SPEAKER_03: However, this is probably one of the most, if not the entire cornerstone of sustainability reporting.
• 0:52
  SPEAKER_03: And the topic today is materiality.
• 0:54
  SPEAKER_03: I'm happy to welcome for this episode Diana Stolzwiss, who is our US resident specialist and probably one of the firm's top most knowledgeable people on this topic, author and lead editor of our materiality chapter of our sustainability guide.
• 1:10
  SPEAKER_03: So definitely the right person to come to.
• 1:12
  SPEAKER_03: A lot of pressure now.
• 1:13
  SPEAKER_03: Exactly, exactly.
• 1:15
  SPEAKER_03: I'm really trying to pump you up.
• 1:17
  SPEAKER_03: Well, as I said, this might, if not one of, it is the most important topic, Diana.
• 1:23
  SPEAKER_03: So, because if you don't get this right, you can't get your sustainability report.
• 1:26
  SPEAKER_03: Right, right.
• 1:27
  SPEAKER_03: Right.
• 1:28
  SPEAKER_03: Yes.
• 1:28
  SPEAKER_03: So um, and for the listener's benefit, we will be covering today both ESRS and the ISRS sustainability disclosure standards.
• 1:37
  SPEAKER_03: Now, if you're interested in California, definitely go check out.
• 1:41
  SPEAKER_03: We have a separate episode covering California and we'll also talk about the states.
• 1:45
  SPEAKER_03: But for today, I'm all about ESRS and the ISSB standards with Diana.
• 1:50
  SPEAKER_03: So, Diana, it's interesting because for some of our episodes, obviously, we've integrated ISSB and ESRS and kind of highlighted differences as we go along.
• 1:58
  SPEAKER_03: And for materiality, even though there's so many similarities, because the process actually is different, we're going to cover them sequentially.
• 2:06
  SPEAKER_03: And then I think at the end, maybe hit a bit of interoperability.
• 2:09
  SPEAKER_03: Yes, yes.
• 2:10
  SPEAKER_03: That's the goal.
• 2:10
  SPEAKER_03: That's the goal.
• 2:11
  SPEAKER_03: Okay, perfect.
• 2:12
  SPEAKER_03: So then let's get going.
• 2:13
  SPEAKER_03: So let's start with ESRS.
• 2:14
  SPEAKER_03: And hopefully our listeners will know that this the sort of underpinning of this is a concept of double materiality, which probably two years ago most people had never heard of.
• 2:26
  SPEAKER_03: Right.
• 2:26
  SPEAKER_03: But now I think most people would be familiar with.
• 2:29
  SPEAKER_03: But can you explain that concept to us?
• 2:31
  SPEAKER_01: Yeah, so let's let's start with double materiality.
• 2:33
  SPEAKER_01: So ESRS requires an entity to identify their material sustainability related impacts and material sustainability related risks and opportunities.
• 2:42
  SPEAKER_01: And that's both in your own operations as well as your upstream and downstream value chain.
• 2:46
  SPEAKER_01: We'll kind of touch on that as we go through.
• 2:48
  SPEAKER_01: But so what they typically call the double materiality perspective is your impact materiality and your financial materiality.
• 2:55
  SPEAKER_01: So maybe we'll start with talking through impacts and then we'll turn to risks and opportunities, which is what's covered in your financial materiality.
• 3:02
  SPEAKER_01: So what is an impact?
• 3:04
  SPEAKER_01: I think if we're coming from a financial reporting perspective, this might be a little bit of a different concept that we're thinking about for materiality.
• 3:10
  SPEAKER_01: And so the impact is really how does the company impact people and the environment?
• 3:16
  SPEAKER_01: So the company impacting those things.
• 3:19
  SPEAKER_01: So we can think about examples could be a company's emission of greenhouse gases into the atmosphere, the discharge of pollutants into a river, gender pay disparity among its employees, human rights abuses in the value chain.
• 3:35
  SPEAKER_01: So impacts can be positive and negative, although I just are all negative.
• 3:43
  SPEAKER_01: Some of the things that I think about are maybe, you know, a company providing specialized job training to its employees that has a positive impact on those employees and the skills that they've developed, their future opportunities for career development.
• 3:55
  SPEAKER_01: And you can also have actual impacts and potential impacts.
• 3:59
  SPEAKER_01: So there's a lot to think through when we're thinking about impacts.
• 4:03
  SPEAKER_01: And so when we talk about impacts being related to your own operations as well as throughout your value chain, we've touched a little bit on value chain and thinking about your value chain, but maybe thinking about there's when we're talking about it, we kind of think about in three different ways around how an entity can be connected to an impact.
• 4:21
  SPEAKER_01: So you can directly cause impact, which I think was more some of the ones, some of those examples that we went through are, you know, a direct result of the entity's products, operations, services.
• 4:31
  SPEAKER_01: They can also contribute to an impact.
• 4:33
  SPEAKER_01: So, you know, with maybe with through their what supplier they use, what and kind of thinking about as we talked about in a previous podcast, what were called your first tier, kind of those direct contractual relationships you have with the, you know, your suppliers, your distributors, you can think about that you're together contributing to some impact on people in the environment.
• 4:54
  SPEAKER_01: And then we have, you know, once we get beyond that first tier where you're directly linked through your products and services.
• 5:00
  SPEAKER_01: And so an example that we used recently in a discussion that we had was talking about, you know, a tobacco farmer.
• 5:07
  SPEAKER_01: So the tobacco farmer is the reporting entity, they sell their tobacco to a cigarette manufacturer, and then that cigarette manufacturer sells cigarettes to customers, and that has a negative impact on those consumers that use that product.
• 5:20
  SPEAKER_01: So it's not directly from the reporting entity, but it's directly linked to them through their growing of that tobacco and their sale of that.
• 5:27
  SPEAKER_01: So that's kind of how I think about those different layers and thinking about how you think about an impact both in your own operations and then throughout.
• 5:36
  SPEAKER_01: And then when we think about risks and opportunities, that is the financial effect on a company from its sustainability-related activities.
• 5:46
  SPEAKER_01: And so whether that impacts, you know, their cash flows, their ability to generate value over the short, medium, and long term.
• 5:54
  SPEAKER_01: And when we think about cash flows, you know, we think about, you know, their business, access to finance, the cost of capital, those types of things.
• 6:03
  SPEAKER_01: And similar to how we think about like impacts, you can also think about risks and opportunities.
• 6:09
  SPEAKER_01: And a source of risks and opportunities is that impact.
• 6:12
  SPEAKER_01: So, you know, some of that, like we talked about, you know, people using tobacco products, potentially that could result in in lawsuits or other things that could create risks.
• 6:23
  SPEAKER_01: Um, but there's also dependencies.
• 6:25
  SPEAKER_01: So dependencies on natural resources, dependencies on people, on those social resources that will influence a company and generate those risks and opportunities as well.
• 6:36
  SPEAKER_03: Yeah, and I think actually dependencies is something we've talked about in past podcasts, really focused particularly on nature, because and I think one of the examples that was given in that podcast was that company that was using its particularly specialized type of cotton or from some special sheep.
• 6:54
  SPEAKER_03: And when they compared their projected sales to the availability of this very specialized resource, it they actually would not be able to achieve these sales without making changes.
• 7:04
  SPEAKER_03: And so I do think it's interesting where people think about sustainability and sometimes it feels like, oh, this is just an obligation.
• 7:13
  SPEAKER_03: But on the other hand, if you really do integrate it, it is important from a business management perspective as well.
• 7:19
  SPEAKER_03: Right.
• 7:19
  SPEAKER_01: I think water, I think is another great example where we see, you know, if your operations are located in a certain area and access to fresh water and water is becoming scarce in that, or you know, we've seen like a lot of things with the Colorado River, right?
• 7:33
  SPEAKER_01: We see that very much here in the US where the Colorado River is drying up and that's impacting, you know, farmers across multiple states, right?
• 7:40
  SPEAKER_01: And operations and things.
• 7:41
  SPEAKER_01: So you think about, you know, availability of natural resources is definitely creates, you know, risk to companies.
• 7:47
  SPEAKER_03: Well, and I guess we're gonna get later to stakeholders, but nature's like a silent stakeholder here, right?
• 7:52
  SPEAKER_01: You gotta getting ahead of the case.
• 7:53
  SPEAKER_01: I'm sorry, I'm sorry.
• 7:54
  SPEAKER_03: Well, I have so many questions.
• 7:56
  SPEAKER_03: But let me ask you one question, and this is a bit jumping ahead, but I think it's important.
• 8:00
  SPEAKER_03: So if we think about impacts and then we think about risks and opportunities, I think sometimes there's this tendency, they're separate.
• 8:07
  SPEAKER_03: But that's not the case.
• 8:09
  SPEAKER_03: They're very interrelated.
• 8:10
  SPEAKER_03: They're not always interrelated, but they there is an interrelationship.
• 8:15
  SPEAKER_03: And so if I'm jumping too far ahead, you can tell me.
• 8:18
  SPEAKER_03: But I think it's an important point that you know we kind of explain why you can't completely think about them in a vacuum.
• 8:26
  SPEAKER_01: Yeah, I mean, I I think that's it's a great point to make.
• 8:29
  SPEAKER_01: And I think one of the things there's a million examples, but I do think examples always help me to bring that up.
• 8:36
  SPEAKER_01: And so, you know, one example that that we talked through is an oil spill, right?
• 8:41
  SPEAKER_01: So an oil spill has a major impact on the environment and many other things.
• 8:47
  SPEAKER_01: Yeah, the people.
• 8:48
  SPEAKER_01: And people, right?
• 8:49
  SPEAKER_01: But then you also think about the cost to clean up, you know, the repairing of whatever caused the oil spill, you know, and all of those things.
• 8:59
  SPEAKER_01: Those are significant financial effects to the company and also risks of other spills, risks of litigation, right?
• 9:05
  SPEAKER_01: These other things.
• 9:06
  SPEAKER_01: So you can think about, you know, that's an example where you have an impact and then it creates risks too.
• 9:11
  SPEAKER_01: And also, I mean, workers too.
• 9:13
  SPEAKER_01: We talk a lot about natural, yes, but you think about workers, right?
• 9:16
  SPEAKER_01: That if you're not providing um, you know, safe working conditions, right, that that creates risk that your you know employees could be in dangerous conditions, that you could have lawsuits or, you know, other terrible things.
• 9:28
  SPEAKER_01: So um, so I think there is a lot of connection too between the impacts that the the company has on nature and the environment, and you know, you think consumers, that type of thing, too, who's using their products.
• 9:39
  SPEAKER_01: So I think there's a lot of weight.
• 9:40
  SPEAKER_01: I mean, they're definitely connected.
• 9:42
  SPEAKER_01: Yeah, and your tobacco example was a good one too, probably.
• 9:45
  SPEAKER_03: But so I also wanted to talk a little bit, you made the point about actual and potential, which I think is one of the most complicated things here, but I know that we are getting to.
• 9:53
  SPEAKER_03: So I will hold my question there.
• 9:55
  SPEAKER_03: Um, and maybe just focus first, then is you know, we talked in our last episode about this spider web, but if you think about all of your value chain.
• 10:04
  SPEAKER_03: And I think, in a way, thinking about impacts, risks, and opportunities also can become a bit of a spider web because there's so many potential different ones to think about.
• 10:13
  SPEAKER_03: And it almost is mind-boggling when you start to get into it.
• 10:16
  SPEAKER_03: So, how do you really focus in on the ones that are material and that are required then to be reported?
• 10:22
  SPEAKER_01: Yeah, and I think that goes back to a little bit about like how do you assess the impacts, risks, and opportunities.
• 10:28
  SPEAKER_01: And I think for the ESRS, this is a little bit more prescriptive than when we think about the ISSB and into the way, especially too for impact.
• 10:36
  SPEAKER_01: So for an impact, an entity is required to assess the severity, and we'll talk about you know the different components of severity.
• 10:44
  SPEAKER_01: And I think the thing that's important is when we're thinking about impacts, is it is from the perspective of the stakeholder.
• 10:49
  SPEAKER_01: So whether, and we'll talk more about stakeholders, but whether that stakeholder is uh, you know, people, um, you know, what group of people that is, or if it's the environment.
• 10:58
  SPEAKER_01: So it's from that perspective of like what is the impact versus, you know, the the company, which I think is how we typically think about it is like what's the impact on the company.
• 11:07
  SPEAKER_01: Um, and then you also, and we'll talk a little bit more about this, this actual and potential, but the potential, you also need to think about what is the likelihood that that that event will occur.
• 11:18
  SPEAKER_01: And so going a little bit deeper on severity, and then we can talk the actual potential.
• 11:22
  SPEAKER_01: Um, a lot of different components here to talk about.
• 11:25
  SPEAKER_01: But severity is decomposed into its scale and scope, and then for negative impacts, also the irremediable character.
• 11:33
  SPEAKER_01: And so when we we're talking about scale, we're thinking about how grave is the impact, how important, how significant is it to those affected, you know, whether it's people or the environment.
• 11:42
  SPEAKER_01: And then scope is like how widespread is it?
• 11:45
  SPEAKER_01: And that could be in terms of environmental damage, geographical, the number of people affected.
• 11:51
  SPEAKER_01: Um, so those are a couple of different considerations.
• 11:54
  SPEAKER_01: And then irremediable character is can the impact be remediated?
• 11:58
  SPEAKER_01: And so when we think about negative impacts, I think a good example is if there is like pollutants that go into a river and they cause a species to become extinct, you can't fix that, right?
• 12:11
  SPEAKER_01: You can't bring back a species that no longer exists.
• 12:14
  SPEAKER_01: So that really is gonna affect the severity, right?
• 12:17
  SPEAKER_01: If it, if and and it's an inherent characteristic of whatever that impact is, right?
• 12:22
  SPEAKER_01: And so when we talk about actual impacts, when we talk about potential impacts, actual impacts is something that's occurred.
• 12:27
  SPEAKER_01: So if we go back to kind of the oil spill example that we talked about, like if the oil spill has actually happened, you have to think about what that is.
• 12:34
  SPEAKER_01: Um, we'll also get into time horizons too.
• 12:37
  SPEAKER_01: These are there, all the concepts are so interrelated, it's a little hard to try to isolate.
• 12:41
  SPEAKER_01: But so that's something that happened.
• 12:43
  SPEAKER_01: But I think then if you are the company that um, you know, is transporting oil or extracting oil, um, you know, depending on your type of operations where the oil spill happened, you need to think about not only that operation where it happened, but then what are your other operations?
• 12:58
  SPEAKER_01: And, you know, are they using the same equipment?
• 13:01
  SPEAKER_01: Are you using the same process to do the extraction?
• 13:04
  SPEAKER_01: And so what is the risk then that you would have a potential oil spill somewhere else in your operations and that impact?
• 13:11
  SPEAKER_01: And so thinking about, okay, well, it was this faulty part.
• 13:14
  SPEAKER_01: We use that faulty part throughout our organization.
• 13:17
  SPEAKER_01: We're gonna need to replace this.
• 13:18
  SPEAKER_01: It also goes back to right, if that creates a risk that you have oil spills and you have and you're gonna have to invest money to change your infrastructure.
• 13:25
  SPEAKER_03: But I guess, Diana, in that case, then it's not only in the example that oh, the oil spill occurred.
• 13:31
  SPEAKER_03: So let's say you've never had a big oil spill.
• 13:34
  SPEAKER_03: Yes, you still could have a potential.
• 13:37
  SPEAKER_01: And I think that's why it's really important to thinking about like what are your operations, your suppliers, your customers, and those types of things, to thinking about like, how are my operations and what are the risks that are are there?
• 13:48
  SPEAKER_01: And then how does that interact?
• 13:50
  SPEAKER_01: And I think that's why these risks and impacts are so interrelated to thinking about that.
• 13:54
  SPEAKER_03: Yeah, and I think the other thing that's interesting, and we're gonna, again, I'm jumping ahead because we're gonna talk about this more in our next episode.
• 14:01
  SPEAKER_03: But this idea that we're using words, like even impact, severity, some of these words, but the actual true meaning that you need to ascribe when you're going through and doing your evaluation is not necessarily sort of the superficial level.
• 14:16
  SPEAKER_03: So if I think of something severe, yes, the definition you give aligns with severity, but there's very important components there that you wouldn't get just if you said, Oh, I know what severity is.
• 14:26
  SPEAKER_01: Okay, I can go do this evaluation, thinking about the scale, the scope, and the irremediable character.
• 14:32
  SPEAKER_01: And I think another point that's important too is when we're talking about things that impact people and we're talking about potential things that happen, severity takes precedence over likelihood, right?
• 14:41
  SPEAKER_01: Like if we're having, if there's risks that we have, we operate in kind, maybe we're a clothing manufacturer and we source our fabric from countries where we know there's a a risk of child labor or forced labor.
• 14:53
  SPEAKER_01: That is, you know, that that risk is really gonna, our impact using that, using those child labor is really gonna take precedence over the likelihood that it's in your operations.
• 15:04
  SPEAKER_01: And that's not to say every single clothing manufacturer, no matter where your fabric is, but it's that's why it's this tie of, okay, well, where where are the sources of you know the materials that I'm using in my operations coming from?
• 15:16
  SPEAKER_03: Well, and I think then, Diana, this is also a good illustration of why you really can't evaluate every single solitary thing, but you have to focus in on you talked about hotspots in our last episode, or focus in on where the impacts, risks, and opportunities really are going to meet these criteria we just talked about with severity and irredeemable nature, et cetera.
• 15:37
  SPEAKER_01: So yeah, and I think it does always go back to focusing on like what is your business, what is your strategy, and what is your long-term plan.
• 15:43
  SPEAKER_01: We haven't really talked about this, but you know, as companies are maybe transitioning to not using carbon-intensive products or trying to make choices to um, you know, have better sustainability outcomes, that that that's really part of their strategy too.
• 15:59
  SPEAKER_01: And so I think thinking about that and how those generate different risks and opportunities too.
• 16:03
  SPEAKER_03: Good.
• 16:04
  SPEAKER_03: So then we touched a bit, but I just want to make sure we specifically address how you assess the materiality for risks and opportunities.
• 16:11
  SPEAKER_03: Yes.
• 16:11
  SPEAKER_01: So risks and opportunities are based on the likelihood that that the risk or opportunity will occur and then the magnitude of the financial effect.
• 16:20
  SPEAKER_01: And I think one of the things is like when we think about financial effects, at least coming from a financial statement background, is oh, that that has to be a number.
• 16:27
  SPEAKER_01: It has to be like a precise calculation.
• 16:30
  SPEAKER_01: And I think especially, well, anywhere, but in in sustainability reporting, and when we're thinking about risks that are over the short, medium, and long term, and we'll probably talk a little bit more about this too, that that time horizon is probably a little bit longer when we're talking about sustainability reporting than financial reporting, is that, you know, there is the use of estimates and scenario analysis and thinking about what are maybe a range of possible outcomes that could occur.
• 16:56
  SPEAKER_01: And so that um, you know, it's not going to be a precise amount, probably most likely.
• 17:01
  SPEAKER_01: And there's also, as we know, always qualitative information.
• 17:06
  SPEAKER_01: It's always really important when we're doing our materiality assessment.
• 17:09
  SPEAKER_01: And that obviously is true for both an impact perspective and a financial perspective.
• 17:13
  SPEAKER_01: But I think historically we probably think about having precise measurements when we're thinking about a financial uh materiality assessment.
• 17:21
  SPEAKER_01: And I think in this area, there's going to be a little bit more estimation, a little bit more of that quantitative and qualitative characteristics that need to be evaluated.
• 17:29
  SPEAKER_03: Yeah, and I think again, coming from a financial reporting background, you're used to materiality being a metric and something you can really measure.
• 17:37
  SPEAKER_03: And then maybe you still put the qualitative characteristics on top, but you at least have this starting point.
• 17:42
  SPEAKER_03: And I think here, not only do you maybe not have a starting point, but you may not even have exact numbers to compare to.
• 17:49
  SPEAKER_03: So I think there is this uncomfortableness to that.
• 17:53
  SPEAKER_03: That said, I know there are still some similarities with how we think about this from financial reporting.
• 17:58
  SPEAKER_03: So, what where do you see the overlap then, particularly obviously on the risks and opportunities?
• 18:04
  SPEAKER_01: Yeah, and I do think with risks and opportunities, I mean, I think now when we think about financial reporting and you think about what people are um reporting in their financial statements.
• 18:13
  SPEAKER_01: I mean, companies are thinking about like what is their strategy, what investments are they gonna be making?
• 18:17
  SPEAKER_01: Um, you know, we have uh assets that are recorded on our balance sheet and those types of things.
• 18:22
  SPEAKER_01: And I think there is an interaction between all of those things and what we think about from sustainability reporting.
• 18:29
  SPEAKER_01: Um, I think some of the things that um are maybe not captured in the financial statements, but that are in sustainability reporting is sometimes when we think about things like um, you know, the brand, the company's brand, and if that has like a, you know, could potentially impact like negative sales or that type of thing, like I think that's less so maybe captured currently in financial statements, but from sustainability reporting, something that needs to at least be considered if that would be.
• 18:54
  SPEAKER_01: So um I definitely think, and and I think even when we talk about time horizons, I think when we think over the short and medium time horizons, companies are thinking about that from a financial reporting perspective.
• 19:05
  SPEAKER_01: Um, and it's probably more these longer-term time horizons where there might be a little bit more of a disconnect.
• 19:10
  SPEAKER_03: So it's a perfect segue because my next question is around time horizons.
• 19:13
  SPEAKER_03: And I mean, we talked about this again in the last episode, but if you think about short, medium, and long term, now sometimes your time horizon, you know, could be out 2050, even hot 2075.
• 19:25
  SPEAKER_03: You know, there's it's there's not like an end limit there.
• 19:28
  SPEAKER_03: And so if I think of one where I've been more focused, which is from climate impact.
• 19:33
  SPEAKER_03: And if you start looking at, for example, oh, well, you can see where the water levels are changing because of climate.
• 19:39
  SPEAKER_03: And then now I'm a company, I'm saying, oh, well, on this particular map, maybe my factory is gonna be underwater.
• 19:46
  SPEAKER_03: This other one, it's not.
• 19:47
  SPEAKER_03: I mean, it's a lot to think about because there is so much uncertainty.
• 19:52
  SPEAKER_03: And so, how do you think about that uncertainty as you look into the future?
• 19:56
  SPEAKER_01: And I think that's a good point, is like both sets of standards, you know, ESRS, and we'll talk about ISSP, but you know, have a concept of like reasonably likely to have a material effect on the financial, you know, a material effect from a financial perspective.
• 20:10
  SPEAKER_01: And so I think it isn't supposed to be, as we said, every single scenario, but I think that's why we hear a lot about scenario analysis and resilience analysis in some of these different things, because it is very uncertain what's gonna happen.
• 20:23
  SPEAKER_01: I mean, I think we've we can start to obviously already see evidence and there's lots of scientific information out there, but nobody knows exactly where it's gonna go or how quickly.
• 20:31
  SPEAKER_01: And there's obviously technology and lots of things, what can change, like how how um what the impact is.
• 20:38
  SPEAKER_01: Yes.
• 20:39
  SPEAKER_01: Um, and so I do think there is a need to kind of consider this range of possibilities, especially when you're when you're thinking out over the long term.
• 20:47
  SPEAKER_01: Just bringing it back a little bit too, I think one of the other things, and and not that this isn't true for financial savings, but I think it I it the concept maybe comes more to life when I'm thinking about sustainability reporting is that you also have to think about things that already happened in the past and how those are continuing.
• 21:04
  SPEAKER_01: So, like if we kind of stick with our oil spill example, you know, the oil spill, you know, as we've seen, some of the most, you know, some catastrophic events that have happened from an environmental damage perspective, that can have a lasting effect and take companies and continue to have an effect on companies for years of, you know, remediation and cleanup and you know, changing their operations and all these different things.
• 21:26
  SPEAKER_01: And so I think, and continuing to have an impact on the environment and people over many, many years.
• 21:31
  SPEAKER_01: So I think it's also thinking about it's what are all the ongoing impacts and risks and opportunities that are happening in the report.
• 21:38
  SPEAKER_01: And I think really when we think, you know, impacts is one where you have something that's kind of like actual and current in the period.
• 21:44
  SPEAKER_01: And so that's I think more so where you think about you have to consider all these past events and then what's happened in the current period as well.
• 21:51
  SPEAKER_03: Yeah, but I guess Diana, and just thinking that through, even if I go back to your tobacco example, it's not like I sell my tobacco.
• 22:00
  SPEAKER_03: And then yeah, and then like the next day something happens.
• 22:04
  SPEAKER_03: And this is again years of time.
• 22:06
  SPEAKER_03: And in some cases, for some different companies, you may not even be fully aware of all the future events that could occur.
• 22:15
  SPEAKER_01: Yeah, I think another great example to that point too is like fertilizer.
• 22:19
  SPEAKER_01: Like we've seen that maybe in the current reporting period, the amount of fertilizer that's being sold or being, you know, put into the environment isn't dangerous in that current reporting period.
• 22:28
  SPEAKER_01: But the buildup over that fertilizer over periods of time, because it doesn't, you know, dissipate or um go away and just persists in the environment over years, that that buildup, and then even maybe you stop selling the fertilizer, but you had sold it and it continues to be in the environment.
• 22:45
  SPEAKER_01: So you could even have changes in your business, but that the impact is still out there.
• 22:50
  SPEAKER_01: So I think there are it is very complicated, I think, when we start thinking about these time horizons about going back and then going into the future, and that there's like could be this cumulative effect that's happening.
• 23:01
  SPEAKER_03: And I guess I don't want to totally distract us with the issues, and this one might make you laugh, but I know one question that comes up is okay, I'm looking at something that's not going to happen until 2050.
• 23:12
  SPEAKER_03: So far in the future, the financial impact, if I think about it today, is practically zero.
• 23:17
  SPEAKER_03: So why do I need to worry about that now?
• 23:19
  SPEAKER_03: Like, why can't I just say, I'm gonna discount this and discount the fact that it's gonna happen 25 years from now?
• 23:26
  SPEAKER_01: I mean, I I think we think it's it, like if you think that you're gonna have a material impact in 2050, of I think we think that's important for sustainability reporting today.
• 23:34
  SPEAKER_01: I don't think we think this like discount of trying to say, well, what would that dollar amount be today makes sense?
• 23:39
  SPEAKER_01: Like if you know that you have a material risk in the future, that that reporting of that is important.
• 23:45
  SPEAKER_01: All right, that's good.
• 23:46
  SPEAKER_03: You answered that without getting us into a deep philosophical discussion.
• 23:49
  SPEAKER_03: So now I want to go back.
• 23:51
  SPEAKER_03: We talked early on, because I jumped ahead about the interrelationship between impacts, risks, and opportunities.
• 23:57
  SPEAKER_03: And you gave a few examples, but just wanted to go a little future, uh a little deeper and talk about the interrelationship and the fact that you really can't look at the two of them in the vacuum.
• 24:07
  SPEAKER_03: So I don't know if there's some other examples you want to give or just dig a little deeper into the ones we talked about.
• 24:12
  SPEAKER_01: It's almost hard to talk about like an impact without thinking about what the risk is.
• 24:17
  SPEAKER_01: I think the one other piece, which we talked about as well, is dependencies on you know, natural human and social resources.
• 24:25
  SPEAKER_01: But I think like when you think about a company, I mean, basically all of the actions that they take have some sort of impact.
• 24:32
  unknown: Yeah.
• 24:32
  SPEAKER_01: Like I mean, inherently everybody has workers, so you have impacts on your workforce.
• 24:37
  SPEAKER_01: You have customers, you have consumers, you have suppliers and distributors.
• 24:42
  SPEAKER_01: So throughout all those interactions, there's gonna be impacts and whether you know those are positive or negative.
• 24:48
  SPEAKER_01: And those relationships are gonna generate risks and opportunities.
• 24:52
  SPEAKER_01: Um, so I just think the interconnectedness between the whole ecosystem really is it doesn't really allow it to be disconnected.
• 25:01
  SPEAKER_01: I think the one area where we can see that sometimes there's external things that aren't necessarily related to um impacts that happen and maybe impacts from a different time, but um like regulatory developments, right?
• 25:15
  SPEAKER_01: That could be kind of something that's an external factor that the company doesn't really have.
• 25:20
  SPEAKER_01: Well, we could always talk about that, but you know, that that that the the company um you know has some regulatory changes related to their products or services or the way that they can operate their business that could create, you know, a risk or opportunity for them.
• 25:33
  SPEAKER_03: And then I guess another potentially controversial thing to discuss is what if I have a plan to mitigate these uh, you know, the future uh risk or opportunity that, well, risk, I guess I'm mitigating my opportunities.
• 25:46
  SPEAKER_03: Okay, I'm planning to mitigate a future risk.
• 25:48
  SPEAKER_03: Right.
• 25:49
  SPEAKER_03: And so how do I think about that then?
• 25:51
  SPEAKER_03: So I have the factory, it's in the flood zone, but I'm planning to move it.
• 25:55
  SPEAKER_03: And it's not gonna happen anyway for some time.
• 25:58
  SPEAKER_01: So yeah, I think if if the action has not happened, like you haven't taken the action to actually move the factory, then that shouldn't be considered.
• 26:07
  SPEAKER_01: So I think we try to make the clear distinction between things that have actually taken place, like maybe you stopped using a certain hazardous chemical or you moved your operation away from, you know, the flood zone or or or wherever it was.
• 26:20
  SPEAKER_01: Um, but if it's plans to or things that you're gonna do in the future or actions that you would need to take in the future, then those shouldn't be considered.
• 26:28
  SPEAKER_01: But, you know, the ESRS is very clear around uh ability to disclose those things, right?
• 26:34
  SPEAKER_01: It asks you to disclose what are your actions that you're planning to do or your processes that you have in place.
• 26:39
  SPEAKER_03: All right.
• 26:39
  SPEAKER_03: Well, that's probably a good lead-in because I should ask you then what are how are you deciding or what do you need to disclose then?
• 26:45
  SPEAKER_03: So now I've gone through this process, and definitely someone performing your double material analysis will have to dig much deeper than we did today, but hopefully we gave people flavor.
• 26:55
  SPEAKER_03: So now I've gone through and I've done my assessment.
• 26:58
  SPEAKER_03: Now, how do I think about disclosure?
• 27:00
  SPEAKER_01: So we'll get into a little bit of a technical thing and then we'll get to it.
• 27:04
  SPEAKER_01: But so I think what the ESRS does is once you've identified what are my material IROs, then there's a list of topics, subtopics, and subsubtopics within um ESRS, which covers, you know, a wide range of environmental, social, and governance topics.
• 27:22
  SPEAKER_01: And so you uh you identify your IROs, you map those to those different topics, and then you can determine which of those topics, subtopics, subsubtopics are are in scope.
• 27:32
  SPEAKER_01: And each of those have detailed disclosure requirements that are associated with them.
• 27:36
  SPEAKER_01: If you have IROs that don't map to any of those, then you'll need to decide what other information you should provide about those.
• 27:42
  SPEAKER_01: It doesn't mean, oh, I don't have anything to disclose because it didn't line up.
• 27:45
  SPEAKER_01: Um, they're what's called entity specific, but we'll get into more on entity-specific disclosures later, but um they still would require disclosure.
• 27:52
  SPEAKER_01: And then then the company goes through and applies a concept of what's called materiality of information.
• 27:58
  SPEAKER_01: And so that's thinking about um is the information relevant?
• 28:03
  SPEAKER_01: And we'll talk about relevance in another uh when we think about that.
• 28:06
  SPEAKER_01: That's one of the qualitative characteristics of information.
• 28:09
  SPEAKER_01: Um so when you think about relevance, it's really um does the information meet the needs of the users and is it significant to the users?
• 28:17
  SPEAKER_01: One of the definitions that they use is that if the information um was not included, so if it's omitted, misstated, or obscuring information that would reasonably be expected to influence the decisions of the users, then that information is considered material.
• 28:34
  SPEAKER_03: All right.
• 28:34
  SPEAKER_03: So, and we're gonna get more into materiality of information when we talk about ISSB, because that's also an important concept there.
• 28:41
  SPEAKER_03: One thing though, before we start to get into, or it's deeper into materiality of information, I do think we both tried to jump ahead to stakeholders.
• 28:51
  SPEAKER_03: And I think this is a very important part of the process because again, from financial materiality perspective, if we think about the financial statements, there always is this idea of you know what is important to the users of the financial statements and you think about SAP 99 and otherwise, but it's much different, I think, when we come, or it is much different when you come at it from a double materiality lens.
• 29:16
  SPEAKER_03: So can you explain what's required from stakeholder perspective?
• 29:19
  SPEAKER_01: Yeah, and I think that even maybe ties into our last discussion, which I should have highlighted, is when we think about the users, you know, to your point, when you think about users of financial statements, we think of like investors, is at least the number one group that comes to my mind.
• 29:32
  SPEAKER_01: Um, and so, you know, when even when we think about users of sustainability reporting and when we think about stakeholders, it's a much broader group.
• 29:38
  SPEAKER_01: And also when we're thinking of For ESRS.
• 29:40
  SPEAKER_01: For ESRS, yes.
• 29:42
  SPEAKER_01: Well, since we're in the ESRS, yes, exactly.
• 29:44
  SPEAKER_03: I just want to remind if case someone jumped in right here.
• 29:47
  SPEAKER_03: It's a very important point.
• 29:49
  SPEAKER_01: And so um ESRS uses the term stakeholders, really, throughout their standards.
• 29:54
  SPEAKER_01: And it considers really a broad range of stakeholders because we're thinking about it from an impact perspective.
• 29:59
  SPEAKER_01: And when we talked about the uh performing the impact materiality assessment, that is from the point of view of the affected stakeholder.
• 30:06
  SPEAKER_01: So whether that's people or the environment.
• 30:08
  SPEAKER_01: And then you also think you also have other users because you also have bring in the financial materiality perspective.
• 30:13
  SPEAKER_01: And so then you have kind of our traditional users that you think about, whether that's, you know, investors that we talked about, lenders, those types of things.
• 30:20
  SPEAKER_01: And then you have just other stakeholders that are in the ecosystem as well, whether we think about, you know, labor unions, non-governmental organizations, public authorities, your business partners.
• 30:30
  SPEAKER_01: I think we've seen um more and more too that people are trying to affect, you know, whether they're suppliers or distributors or other things that they're using in their value chain to help with their own sustainability.
• 30:41
  SPEAKER_01: So there's other people too that are using the sustainability information.
• 30:45
  SPEAKER_01: And I think one thing that's important to note is you had mentioned earlier that the environment is an important stakeholder and sometimes sometimes called the silent stakeholder.
• 30:55
  SPEAKER_01: So I think it's important to think about it's not only, you know, people that you need to interact, not that, but there is also scientific information, right?
• 31:04
  SPEAKER_01: And representatives for the environment that's important to talk about that as well.
• 31:11
  SPEAKER_03: Well, and even for people, it I feel like it's really laid out in the ESRSs because if you look at the social standards, you have your own workforce, you have the workers in your value chain, but then also the affected communities and your customers and end users.
• 31:24
  SPEAKER_03: And so instead of this sort of amalgam uh, you know, amalgamation of people, you actually have these different groups, and you made the point there's more.
• 31:33
  SPEAKER_03: But I think really looking at it through each of those lenses is helpful.
• 31:37
  SPEAKER_03: Like what does the factory do to that community?
• 31:39
  SPEAKER_03: What happens if you move out of that flood zone?
• 31:41
  SPEAKER_03: But now what happens to the community left behind?
• 31:43
  SPEAKER_03: Right.
• 31:44
  SPEAKER_03: And so there's always some things can be positive and negative at the same time, too.
• 31:49
  SPEAKER_03: And that's where I think making sure you're considering all these stakeholders is very important.
• 31:53
  SPEAKER_01: Yeah, I totally agree.
• 31:54
  SPEAKER_01: And I think that's, you know, we've talked about before kind of mapping the value chain, mapping it.
• 31:58
  SPEAKER_01: I think that layering on too, then of then how do you interact with the stakeholders that are affected, you know, to your point, whether that's communities, your um, you know, your workforce, those types of things.
• 32:09
  SPEAKER_01: And I think it's important too for companies to think about like what are my existing processes where I already have a lot of dialogue with these different, maybe that's through, you know, your due diligence processes, your risk management processes, employee surveys, your investor relations where you're interacting.
• 32:25
  SPEAKER_01: And so I think it's it's thinking about what are what are the what are my risks and opportunities, who am I impacting and affecting in a material way, and then how am I getting that information, whether that's through direct dialogue or through research or scientific information or proxies or you know, exist like surveys or or direct communication as well.
• 32:44
  SPEAKER_03: Yeah, and I guess you kind of anticipated my question there, because I think there's a myth that you always have to speak to all of these different groups, like direct to your point, direct communication.
• 32:55
  SPEAKER_03: But again, we said, well, environment's silent, so you so you can't go talk to the trees and say, what do you think about what we're doing?
• 33:03
  SPEAKER_03: But not to make light of it, because it is a very important stakeholder.
• 33:07
  SPEAKER_03: So what how do you think about and if you're assessing whether someone has done sufficient work in the area of stakeholder interaction, what's sort of some minimum bars that you would put in place if you there are any you can highlight?
• 33:21
  SPEAKER_01: Yeah, I mean, I think it is hard because it isn't prescriptive into how you how you're required to engage with stakeholders.
• 33:27
  SPEAKER_01: But I think throughout, you know, ESRS, it it emphasizes the importance of stakeholders.
• 33:33
  SPEAKER_01: And so I I think that, you know, to perform your due diligence and to think about um, you know, what are my risks and opportunities, I think there needs to be some level of engagement or at least obtaining information around the views of those individuals.
• 33:48
  SPEAKER_01: So thinking about, okay, what are the community, if you have significant operations in a community, thinking about how do you interact with that community and getting information.
• 33:57
  SPEAKER_01: And so, you know, whether that's directly interacting with leaders in the community or, you know, somehow understanding what your economic impact is in that community, your um, you know, depending on it depends on your type of operations, right?
• 34:09
  SPEAKER_01: So I think it is a um an integrated approach of thinking through what is your operations versus um, you know, how do I get that information to help inform?
• 34:19
  SPEAKER_03: All right, definitely a lot.
• 34:20
  SPEAKER_03: We went through a huge, huge amount of information there.
• 34:24
  SPEAKER_03: I think probably a hundred pages of the materiality chapter.
• 34:27
  SPEAKER_03: And any final thoughts on ESRS?
• 34:29
  SPEAKER_03: Otherwise, let's move to ISSB and then we can do a bit of a comparison.
• 34:33
  SPEAKER_01: You know, I think this impact thing seems like impact perspective seems really new and different to at least people coming from a financial reporting perspective.
• 34:41
  SPEAKER_01: But I think once you get into it, and we've tried to highlight that throughout our discussion, is this interconnectedness between impacts, risks, and opportunities is I don't, I'm not sure it really is any different than how we've thought about it previously.
• 34:52
  SPEAKER_01: I think we've thought of, I think companies and preparers have thought about their impacts and then how that creates risks and opportunities because it is so interconnected.
• 35:00
  SPEAKER_01: I don't think that you can just do one or the other.
• 35:03
  SPEAKER_03: Yeah, and I think in some ways it's intuitive.
• 35:05
  SPEAKER_03: You can think about your actions and how they are impacting.
• 35:08
  SPEAKER_03: That is one place maybe the word is helpful in terms of the common meaning, like what is the impact that you're having.
• 35:14
  SPEAKER_03: But your comment, I think, is a great lead-in then, because this is obviously the key, key difference between uh the ESRS and the ISSB standards is the fact that they are focused on financial materiality and specifically, and I'll let you read the definition, but that would be information that is important to its investors and the the users of the general purpose financial statement is so much different than what we're talking about in terms of stakeholders.
• 35:42
  SPEAKER_03: But I'll let you give the real definition there of materiality from an ISSB perspective.
• 35:47
  SPEAKER_01: Yeah, and so I think I think that's a great point, right?
• 35:50
  SPEAKER_01: It's it's the concept is that under the ISSB standards that you're providing material information about uh sustainability-related risks and opportunities.
• 35:58
  SPEAKER_01: And so I think it's a little bit of a flip of the discussion we kind of went through just now on ESRS, where we talk about, okay, identifying your uh risks and your impacts, risks, and opportunities, which of those are material, and then determining material information.
• 36:11
  SPEAKER_01: It's kind of all together in the ISSB standards around identifying the risks and opportunities, not this kind of two-step and thinking about what is the information that you need to provide about that.
• 36:21
  SPEAKER_01: And so we kind of start with information is material when it's useful to the decision-making of the primary users.
• 36:27
  SPEAKER_01: And when we think about primary users, it is different under the ISSB standard.
• 36:32
  SPEAKER_01: So we think about that, it's consistent with the existing uh primary users.
• 36:36
  SPEAKER_01: You'd also think about from a financial reporting perspective.
• 36:39
  SPEAKER_01: So existing and potential investors, lenders, creditors of the entity.
• 36:44
  SPEAKER_01: And so when we think about like what kinds of decisions could be impacted, you know, it'd be investing or selling equity or debt, exercising voting rights, providing different forms of credit to an entity.
• 36:54
  SPEAKER_01: So really our traditional kind of financial statement perspective, I think that at least, you know, when I think about like a user of a financial statement.
• 37:03
  SPEAKER_01: And so I think that's that's a little bit of a different perspective.
• 37:06
  SPEAKER_01: I think one other thing to think about is, you know, I think when we're talking about invest and needs of investors or what our creditors want is like we kind of talk about them like they're this uniform group and that every single creditor and investor has the exact same information needs.
• 37:23
  SPEAKER_01: And I think, you know, we've seen that over time that there are different needs and people want different pieces of information.
• 37:28
  SPEAKER_01: So I do think it's important just because you got asked for one piece of information, it may or may not be material.
• 37:34
  SPEAKER_01: So, you know, I don't think a one-off.
• 37:35
  SPEAKER_01: So I think it is, you know, thinking about what are the common information needs kind of across the broad base of users.
• 37:42
  SPEAKER_03: Yeah, and I think again, that's an important point you highlighted because if we go through our ESRS process, we go through, we identify our impacts, risks, and opportunities, then we go through your process of mapping them to subtopics and subsubtopics and then or entity specific.
• 37:58
  SPEAKER_03: And then all the way at the end, you get to material information from a metrics perspective.
• 38:03
  SPEAKER_03: And we won't get into detail about how there are some differences there.
• 38:07
  SPEAKER_03: But from ISSB perspective, you're actually jumping straight to material information.
• 38:11
  SPEAKER_03: Right.
• 38:12
  SPEAKER_03: However, you have to step back and say, well, I can't decide what's material unless I identify my risks and opportunities.
• 38:18
  SPEAKER_03: So it's a bit in a different order.
• 38:20
  SPEAKER_03: And at the end, there are some distinctions, but you still have to go back and find those risks and opportunities.
• 38:26
  SPEAKER_03: So what is the process then from an ISSB perspective?
• 38:29
  SPEAKER_01: Yeah.
• 38:30
  SPEAKER_01: And I think the one thing too that is similar across uh, and there's others we'll talk about, but ISSB and ESRS is they both include this concept of your own operations and your entire value chain.
• 38:41
  SPEAKER_01: And so you're gonna have to kind of go through the same process around thinking through your entire operations and your entire value chain.
• 38:48
  SPEAKER_01: And there also is not limited to direct contractual relationships, as we talked about, kind of the second tier indirect um relationships, that those are those are also really important.
• 38:59
  SPEAKER_01: But I think they also bring through this concept that we spent a lot of time talking about and highlighting under the ESRS.
• 39:06
  SPEAKER_01: And um I'll just I do like this sentence, like ESRS, um, sorry, whoo, IFRS, S1, paragraph two, states that an entity and the resources and relationships throughout its value chain form an interdependent system in which the entity operates.
• 39:22
  SPEAKER_01: And I I just I that's one of my thoughts.
• 39:24
  SPEAKER_01: I obviously really like it because you used it in our last, but I just feel that that does such a good job of capturing this relationship that we've talked about kind of throughout our discussion at ESRS.
• 39:35
  SPEAKER_01: And so it comes in here too, and there's a real focus on these relationships and interactions between stakeholders, the society, the economy, the natural environment, and how that affects an entity's ability to generate cash flows over the short, medium, and long term.
• 39:51
  SPEAKER_01: And, you know, as we've talked about, those resources can be financial, manufactured, intellectual, human resources.
• 39:58
  SPEAKER_01: So, you know, really thinking through what is the broad range and how do those create risks and opportunities for the company?
• 40:04
  SPEAKER_01: Because the company obviously depends on those for successful execution of its strategy.
• 40:09
  SPEAKER_03: I keep um thinking in the back of my mind, like if your kids ask you your favorite quote, would you say, I have process one, paragraph two?
• 40:20
  SPEAKER_03: Exactly.
• 40:20
  SPEAKER_03: All right, so sorry for that moment of levity, but let's can I know we already gave through, we already went through some examples, but I love these examples of interdependent relationships or yes, interdependent interdependent relationships.
• 40:33
  SPEAKER_03: So can you go through a few?
• 40:34
  SPEAKER_01: And I think this is good too, because uh I and we've talked about it, but I do I do like this example.
• 40:38
  SPEAKER_01: So we'll we'll talk through.
• 40:40
  SPEAKER_01: So we think about like a farm company in the agricultural sector that uses pesticides to protect its crops from disease.
• 40:47
  SPEAKER_01: And then there's scientific evidence that suggests that the pesticides that it uses are detrimental to the pollinator population, like bees.
• 40:54
  SPEAKER_01: And so the farmer is relying on this surrounding bee population to pollinate its crops and its ability then to, you know, generate cash flows from the sales of those crops.
• 41:05
  SPEAKER_01: So there's a real connection between the crop production and the health of the bee population.
• 41:11
  SPEAKER_01: And so, how would the farm company think about that?
• 41:13
  SPEAKER_01: Like, is that potentially a risk?
• 41:15
  SPEAKER_01: And we would say, yes, that needs to be assessed as part of their materiality process because if they're using pesticides and it's hurting the local bee population, this could result in their crops not being pollinated.
• 41:27
  SPEAKER_01: So maybe they need to have bees, you know, purchase bees bought in, or maybe they're gonna have to relocate their operations, or it's gonna affect the yield of their crops and they're not gonna be as profitable.
• 41:38
  SPEAKER_01: So that's a risk to the entity.
• 41:40
  SPEAKER_01: So I think that shows the real connection between the impact on the um the health of the bee population and how that can directly impact their, so they have an impact on the bee population, then the bee population, you know, affects their financial performance or could affect their financial performance.
• 41:55
  SPEAKER_03: So again, that inner relationship is really key there.
• 41:57
  SPEAKER_03: But I guess so.
• 41:58
  SPEAKER_03: If we're thinking then about that scenario, or just more broadly, if we're thinking about risks and opportunities, again, going back to yes or ask, because I think it's helpful to uh to do these comparisons.
• 42:09
  SPEAKER_03: We went through and we said, here's all these risks and opportunities, here's the material ones, and then I figured out what information to disclose.
• 42:17
  SPEAKER_03: Now we've just identified all these risks and opportunities.
• 42:20
  SPEAKER_03: Do I do I filter again down to the material ones or do I jump straight to what information is material?
• 42:26
  SPEAKER_01: It's really filtering to like directly like what information is material to the users.
• 42:30
  SPEAKER_01: And I think this is a little bit of a distinction that is important because you kind of start with this risk and opportunities, then what are the material ones, then what are material information?
• 42:39
  SPEAKER_01: Whereas we're thinking, what is material information to the users about my risk and opportunities?
• 42:43
  SPEAKER_01: And I think there are instances that's highlighted specifically in the ISSB materiality.
• 42:51
  SPEAKER_01: I may not use the right word guidance, but that's fine for here.
• 42:55
  SPEAKER_01: But they specifically highlight, you know, there could be instances where you might, and you're bringing in this perspective from the users.
• 43:02
  SPEAKER_01: And so, you know, your users could think, okay, you're in this industry where a risk is extremely pervasive based on your industry.
• 43:10
  SPEAKER_01: However, for your company, your operations are different.
• 43:13
  SPEAKER_01: And so you don't have that risk.
• 43:15
  SPEAKER_01: But there's an expectation from the users that you do have this risk.
• 43:19
  SPEAKER_01: So it's a reasonable expectation that that risk applies to your company.
• 43:22
  SPEAKER_01: And so the ISSB standards would expect that there would be disclosure around how your company is different, how that risk doesn't apply to you.
• 43:29
  SPEAKER_01: So that is a little bit different because under the ESRS, if it wasn't a material risk, it would get filtered out.
• 43:34
  SPEAKER_01: So, but because you bring in this user perspective and the information and um you go straight to materiality of information, like that is material information to the users that your operations are different from the rest of the industry.
• 43:45
  SPEAKER_01: And there could get picked up in other ways in ESRS best, but just from a starting point.
• 43:50
  SPEAKER_03: Yes, yes, to go through that.
• 43:51
  SPEAKER_03: So if we then kind of say, okay, now I've identified my risk opportunities, and we would expect those to overlap with.
• 44:00
  SPEAKER_03: ones we've identified risks and opportunities in ESTRS.
• 44:03
  SPEAKER_03: Now I've identified my material information, but uh that's obviously you know in ESRS, you have some points you're starting from.
• 44:11
  SPEAKER_03: Here, I know there's a relationship then with the SASB standards where you need to refer to and consider them.
• 44:16
  SPEAKER_03: We've talked about that a bit in past podcasts, but can you explain the role of the SASB standards and then how we would think about them in this evaluation?
• 44:25
  SPEAKER_01: Yeah, and I think um, you know, as we've talked about, so IFRS S1 is um principles-based and applies to sustainability risks and opportunities related to any matter, right?
• 44:37
  SPEAKER_01: They have S2, which is specific to climate, but if you're reporting under the IFRS sustainability standards, you're still required to identify all of your sustainability risks and opportunities.
• 44:46
  SPEAKER_01: And so I think the SASB standards is um they're organized by industry.
• 44:50
  SPEAKER_01: So there's 77 different industries.
• 44:52
  SPEAKER_01: And then I believe there's like 11 different no, 20, yeah, 11.
• 44:57
  SPEAKER_01: I don't know.
• 44:58
  SPEAKER_01: There's a number of different disclosures.
• 45:02
  SPEAKER_01: There's a number of different disclosure um topics that are related to those.
• 45:06
  SPEAKER_01: And so when an entity is identifying its risks and opportunities, it can look to those to think about, and and it's similar to ESRS when you're looking at the different topics, subtopics, sub-subtopics to help you identify your um impacts, risks, and opportunities, but that those can help you identify your risks and opportunities.
• 45:23
  SPEAKER_01: So I think it's it's really a good starting point.
• 45:26
  SPEAKER_01: You know, I think people can look to their own industry, but I don't think that only looking at your industry makes sense.
• 45:32
  SPEAKER_01: I think if you're thinking about what risks are out that are related to your business, that like thinking kind of across these different industries or related industries can be important too.
• 45:41
  SPEAKER_01: Because I think as we've dug into the SASB standards and looked at them, is you can see a lot of similarities that cut across a number of different industries or that are common across different industries.
• 45:53
  SPEAKER_01: So I think there's a lot of good information in there.
• 45:56
  SPEAKER_01: So your second guess was much closer.
• 45:58
  SPEAKER_01: There are 26.
• 45:59
  SPEAKER_01: I don't know.
• 46:00
  SPEAKER_01: I was like, there's something with 11, but there's something with 26.
• 46:03
  SPEAKER_03: That's what I was like.
• 46:04
  SPEAKER_03: I think 11, you're thinking about TCFG.
• 46:07
  SPEAKER_03: There's 11 recommendations.
• 46:08
  SPEAKER_03: Too many of these frameworks.
• 46:10
  SPEAKER_03: Too many frameworks, too many numbers.
• 46:11
  SPEAKER_03: But no, I think, and not to take away from again the discussion, because I do think looking, you made the point in one of our earlier episodes that actually looking at your industry is helpful, but you know, you can kind of look across.
• 46:25
  SPEAKER_03: And so this is definitely a case where the one I opened is apparel, accessories, and footwear.
• 46:29
  SPEAKER_03: They actually have three listed.
• 46:31
  SPEAKER_03: Clearly, there are more than three of these topics applicable, but then I might look to some of the other industries for that.
• 46:39
  SPEAKER_03: And um, I definitely would encourage people, the IFRS Foundation on their website has a great lookup that you can use to find these topics, which would be really helpful.
• 46:48
  SPEAKER_03: Right.
• 46:48
  SPEAKER_03: But then I guess Santa, what if I'm the company that says, okay, well, I checked, but these are not applicable to me.
• 46:54
  SPEAKER_03: Like I'm a very unique apparel accessories and footwear manufacturer.
• 46:59
  SPEAKER_01: Yeah, I mean, I think that the the ISSB also recognizes that looking to other existing frameworks that are out there, it doesn't.
• 47:07
  SPEAKER_01: So I think the difference between SASB and then some of these other sources of guidance that it refers to is you're required to refer to and consider the SASB, but then these other sources of guidance are listed as other areas where to your point, uh, there's a lot of great voluntary frameworks out there.
• 47:22
  SPEAKER_01: We talk about those in a different episode.
• 47:24
  SPEAKER_01: Even it says you can look to other existing frameworks, which could be the ESRS too, to look at like what are the different topics that are covered and how does that interact with your business.
• 47:34
  SPEAKER_03: Yeah.
• 47:34
  SPEAKER_03: And I mean, the one caution with the ESRS is that for materiality, because ESRS is talking about impacts, then it doesn't specifically reference that.
• 47:44
  SPEAKER_03: That said, in practice, yes, I think from a practical point of view, you just have to be careful that you're focused from financial reporting perspective.
• 47:52
  SPEAKER_03: All right.
• 47:52
  SPEAKER_03: I think we probably hit all of these while we were going through, but any other uh interrelationships or comparison that you'd want to give on interoperability between ESRS and IFRS, sustainability disclosure standards, one that comes to mind that we probably could have hit a bit more is I it was implied throughout our discussion, but the definitions I was just yeah are the same.
• 48:16
  SPEAKER_03: So I'll let you go ahead if you were about to say that.
• 48:39
  SPEAKER_01: And so I think that like when we're thinking about material information, especially from a financial materiality perspective, even though we highlighted a couple of nuances, I think in the vast majority of cases, we would expect that the disclosures and the information would be similar.
• 48:52
  SPEAKER_01: ESRS is very prescriptive in the actual disclosure points, but when we're thinking about risks and opportunities from a financial materiality perspective, I think we would expect it.
• 49:01
  SPEAKER_03: And the definitions of financial materiality are aligned between the two.
• 49:04
  SPEAKER_03: Yes.
• 49:05
  SPEAKER_03: So definitely I think that is such a cornerstone implied throughout our conversation.
• 49:12
  SPEAKER_03: Any other ones that you I I think we covered the rest, the main rest of them.
• 49:18
  SPEAKER_03: Yeah.
• 49:18
  SPEAKER_03: Yeah.
• 49:18
  SPEAKER_03: Yeah.
• 49:19
  SPEAKER_03: And I think, you know, throughout this series, we're highlighting very specific items related to ESRES or related to the ISSB standards.
• 49:27
  SPEAKER_03: And yes, the reports may look different, but if you have some huge risk opportunities, you're disclosing a one.
• 49:34
  SPEAKER_03: I mean, I would be very surprised if it's not in the right.
• 49:37
  SPEAKER_01: Extremely surprising.
• 49:38
  SPEAKER_01: And I think we think about that kind of across all the frameworks, right?
• 49:42
  SPEAKER_01: If you think that there's material information for one and then it's not going into another, I think that the company should really evaluate why.
• 49:49
  SPEAKER_01: Exactly.
• 49:50
  SPEAKER_01: Exactly.
• 49:50
  SPEAKER_03: All right, well, and that could be the answer to this next question.
• 49:53
  SPEAKER_03: What practical advice do you have for people as they're thinking through uh their materiality process?
• 49:59
  SPEAKER_01: I think it kind of goes back to this really important point that we've made under all of it is in and companies do this is like understanding your business and all your operations.
• 50:07
  SPEAKER_01: And I think it's just this expansion of it to your entire value chain.
• 50:12
  SPEAKER_01: And that's not to say you have to identify each and every actor, but really thinking about where are those hotspots in your value chain and you know, identifying those and thinking about where are these risks and opportunities.
• 50:22
  SPEAKER_01: All right.
• 50:22
  SPEAKER_03: I thought you were gonna say call me, but perhaps you don't have time for that.
• 50:27
  SPEAKER_03: So all right.
• 50:28
  SPEAKER_03: Well, as always, Diana, it's such a pleasure to talk to you.
• 50:31
  SPEAKER_03: Thanks for joining me today.
• 50:32
  SPEAKER_03: Thanks so much, Heather.
• 50:33
  SPEAKER_03: All right, and then to our listeners, thank you as well for listening to us today.
• 50:37
  SPEAKER_03: And if you want to hear more from Diana, I definitely encourage you to check out last week's episode uh where we were talking about reporting boundaries.
• 50:45
  SPEAKER_03: And next week's episode, we're going to be talking about foundations of reporting.
• 50:50
  SPEAKER_03: And when we say foundations, that's really when we're actually starting to get into the disclosures themselves and what's required in the uh sustainability uh reports and including these qualitative characteristics of information that Diana and I have continued to bring up throughout the series.
• 51:06
  SPEAKER_03: So, anyway, thank you again and look forward to seeing you again next week.
• 51:10
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• 51:12
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• 51:32
  SPEAKER_02: From thought leadership at PWC, I'm Heather Horn.
• 51:37
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