EY Americas corporate and ESG reporting thought leader Marc Siegel dives into the recent SEC proposals around climate disclosures amid the broader context of the rise of ESG reporting.
Transcription:
Dan Hood: (
Welcome to On the Air with Accounting Today. I'm editor-in-chief Dan Hood. You know, interest in reporting around environmental sustainability and governance or ESG issues has been on the rise for some time now. And it recently hit the headlines in a big way with some proposals from the Securities and Exchange Commission about potentially requiring disclosures around climate issues.
With all that going on, it seemed like a good time to take stock of what's going on in ESG reporting, and here to help us with all that is Marc Siegel from Ernst & Young. He's the EY America's corporate and ESG reporting thought leader. And he's also been a board member of the Sustainability Accounting Standards Board since 2019. I sort of slurred that cause I always just wanna go straight into SASB, but he's been there, obviously been covering these issues, paying attention to them, for a long time, deeply involved. Marc, thanks for joining us.
Marc Siegel: (
Thanks for having me, Dan.
Dan Hood: (
Maybe we can start with, like I said, sort of the headlines Can you give us a quick overview of those SEC proposals that came out a couple of weeks ago?
Marc Siegel: (
Sure. The SEC proposals pretty much a sea change in how to think about ESG reporting. It will require new things in the actual 10-K themselves, the regulatory islands. There's a lot of narrative disclosures that would be required around how companies are managing then and identifying their climate-related risks and opportunities. There would also be some quantitative disclosures in the 10-K, such as your Scope One and Two, and potentially even Scope Three, which are different kinds of climate emissions and carbon, greenhouse gas emissions. And then interestingly, and a little bit of a surprise to me, there was some proposed rules of a new footnote disclosure in the financial statement, footnotes that we could talk about as well. And then lastly, there are some new potential assurance requirements around the greenhouse gas emissions that were part of the proposal.
Dan Hood: (
Now, like I said, this has been a big in headlines, but there's, uh, ESG reporting has been growing, uh, both in terms of its complexity and sophistication, uh, and a take up in the market from companies and, and also, uh, uh, in interest among accounting firms, as they've getting interest, we wanna talk about all that. Maybe we can start knowing that about those, the, the broad outline of those proposals. Can you give us a sense of how important are in the broader context of all that other activity that's going on around ESG reporting? Uh, and I should mention that it's all around the world. It's not just in the us, uh, it's sort of everywhere. Can you give us set that, give us a little context there.
Marc Siegel: (
Sure. The market has been fragmented for quite some time around ESG and reporting. And what I mean by that is there's no requirements in the us for, uh, specific environmental governance or social, uh, disclosures. So a lot of different non-governmental organizations and charitable organizations have been sort of competing to provide voluntary recommendations for this area. And there are so many different acronyms of parties that are recommending certain disclosures that it's sort of called an alphabet soup, and nobody really knows what to do, whether companies or auditors or investors. And so the SCC jumping in here is potentially a way to start to try to standardize what the actual requirements will be. It will also obviously change the location of some of those disclosures from now somewhere else on the website to potentially in a regulatory filing, which ups the ante for everybody. And as you said, Dan, the sec is not the only player in this game, the EU and, and others around the world have been also promulgating new proposals for regulated, potentially regulated ESG disclosures to, and so companies that are based in the us and investors that are based in the us also need to have things around the world on their radar to kind of see where this space is playing out.
Marc Siegel: (
So that as, as things are evolving, they could potentially weigh in and try to influence this, um, and, and try to eliminate the alphabet soup in a way that makes sense for everybody in the markets.
Dan Hood: (
Uh, yeah, and this, uh, the, it sort brings me to my next question, because, uh, you talk about that alphabet soup and some of the, some of the cause of that alphabet soup is right, is this is a little bit of a wild west area, right? I, I say it's been going on for some time. It's, you know, these concept are, I'm gonna say 15 years old at least, but they've been growing talked about the alphabet soup comes from enormous number of people providing different frameworks around it. There's been some consolidate validation there, but it's still only just happened over the past year. So do you have a sense of how you would characterize the current state of reporting? You know, is it the, is it the beginning of ESG reporting? Are we the end of the beginning? Uh, you know, are we still in a wild west phase? Any thoughts you have on that would be interesting.
Marc Siegel: (
Sure. I guess I'll use the baseball analogy. It's, we're probably in the third inning, maybe closer to the end of the beginning, you know, and, and sort of where we are now is almost the professionalization of, of ESG reporting. So, you know, the, the good news is there, hasn't been a whole lot of regulated ESG reporting and, and, and so the market has to come together and sort of decide on what, what makes good ESG reporting the bad news is there aren't any standards for regulations on what ESG reporting is, so everybody's gotta decide. And so it's a little bit of a good news, bad news thing. And so now where we're getting with all the different entities and regulators who are trying to, to, to eliminate the alphabet soup and, and try to get to some more specific requirements and building on the frameworks that are already out there and try to get some convert in this space at the same time you are, you're having to see information that's being reported. The anti's been raised. And so the finance function needs to be involved. The reliability and the accuracy of the data needs to improve, to be ready for primetime, um, location disclosure within regulated filings. And so that's why I sort of say we're at the end of the beginning, we're in the third inning, as we're starting to professionalize all these different aspects of it to get to reporting that's, um, you know, that's robust and, and ready for prime time, uh, alongside financial reporting,
Dan Hood: (
Right? Well, cause it's interesting and I'm not sure where, where, which in this would fall in, but at the very, very beginning, there was some concern about some of these reporting that it was really, it wasn't the finance department, it was marketing department that was doing it. There was a, in the very things I think the, the phrase people use was greenwash. You would say you, you had, you'd done all these things for the environment or for, uh, your governance or anything like that, but it was purely a marketing exercise. There were no, there was the reporting wasn't there, uh, the frameworks weren't there. So it sounds like we're, we're approaching an error. Well, like you said, where it's, it's, uh, it can be much more professionalized and reliable. And I guess that's probably the, one of the, the key things about it that people can look at it reliable and comparable, I guess maybe another one
Marc Siegel: (
Comparability a, a, a great one to mention Dan, you know, I mean, what investors are asking for maybe 90% of investors in the EY latest survey would like to see consistent reporting across the different companies that they're looking at. And, and frankly, the same thing for the companies too, the companies wanna know the rules of the road. So if they're, if they're being asked by multiple different organizations to report on slightly different frameworks, all over the place, it just becomes untenable and forgive the pun unsustainable for them to report on all these different frameworks. And so the more we can try, try to rationalize and converge these different spaces, the better it'll be for the markets to be able to make, you know, better informed decisions about this, and frankly, the companies themselves to make better informed decisions on what their goals and priorities are.
Dan Hood: (
Gotcha. I wanna dive more deeply into what investors want from it. What, what, uh, uh, companies want from our, for it. But before we do that, I want, I talk a little bit about who's driving this. I mean, uh, I, I have heard in the past people talk about, well, it's, it's, uh, it's investors or investor, uh, organizations that are interested that have a particular interest in sustainability issues or environmental issues. And they wanna see that reporting because that's an issue they care about. I've heard other people saying it's coming from more of a, a regulatory standpoint. Do you have a sense of what's really the current issue? You know, why it's being pushed beyond just that sort of that beginning phase.
Marc Siegel: (
So Dan it's really both of those and everybody else. Who's also interested in moving this forward. So certainly investors are very interested in ESG reporting. You are also seeing regulators, uh, getting involved in ESG from both policy reasons, as well as because of the investor interest in ESG. Thirdly, you're seeing employees interested in ESG in this area that we're in right now, employees wanna work at companies and not only just earn a living, but they wanna work at a company that, um, they believe is achieving a better purpose. And then the communities at large in which companies live, work and operate are also interested in the companies that are occupying their space. So you really are seeing confluence of different stakeholder groups that are all sort of pushing for information beyond just the financial information that's been out there in the past.
Dan Hood: (
And obviously they're all pushing. I think we started for slightly different things, right? They all wanna know a slightly different thing and that's gonna be an issue, but hopefully less of one as we get the standards, uh, more straightened out, more universalized. And as, as, as I said again, as accounting firms coming in, aren't, uh, I don't say enforcing them, but, but attesting to them, looking at them and saying, yes, you're all doing, uh, reporting in the same ways in the, in the right way. Uh, I'm gonna dive more deeply into that, but we're gonna take a quick break first. And we're back with mark Siegel talking about, uh, the rise in ESG reporting. We talked about the, the recent S E proposals around climate disclosures, but we're talking more broadly about, uh, where this is going, what stage it's at, uh, and where it's going towards. We talked before the break about investors being part of the many different players who are driving this. Maybe talk a little bit more detail about what they want from ESG reporting. You know, what, uh, what are they hoping to achieve from it? What details do they wanna know?
Marc Siegel: (
So that really varies by industry. But if you start to think about it, broadly, investors are looking for information to help them with their asset allocation decisions. If you pick on climate for a second, there are many investors. Um, I won't say a hundred percent of them, but there are many investors that believe that over the next 20 or 30 years, the world will have to transition to an economy that has less carbon in it. And they wanna invest in companies that are preparing for that transition. And they don't wanna be caught up owning companies that do not do a good job of transitioning and will therefore potentially go away. And we all know stories of companies that did not adapt and, and ultimately ended up gone. And so investors are trying to think about long term investing and make sure that they are investing in companies that are understanding the key ESG issues that are actually material for their business.
Marc Siegel: (
So it's not about all ESG issues. It's about the ones that are material for that company's business. And that's gonna be different in, in different industries, which is why Sabi has been such a, um, a forefront on industry based standard setting, quite different from the FASBI, but that's what the Sabi is doing. So investors are looking to try to get information beyond just the financial that helps them understand where the company's going over the long term. And one more thing I'll add there is just, if you think about the valuation of a business and what goes into the multiple of a company, you certainly can understand how, you know, I, I mentioned the environmental, but also the governance, certainly how a management team operates is going to be a key com part that's caught up in the multiple. And if you think about S social, um, human capital is such a huge element to, to, to companies these days in their evaluation. And so companies that do a good job reporting on the climate reporting on how their management team is functioning well, and reporting on what they're doing with their human capital will do a good job in all those areas and maximize them multiple.
Dan Hood: (
And that's, uh, and I think this is worth maybe bringing up, but it's, that's a clear distinction. Some of the very earliest of, uh, environmentally conscious investment funds, for instance, we're driven to a certain extent by moral concerns, right? It was a, we wanna encourage businesses to, to act on these issues, to be aware of them and so on. But this is what you're describing is much more of an issue of will this business last, this is a key component of whether a business will be successful over the next 20 years. Not whether it's a more a business. I feel comfortable investing in from a moral point of view.
Marc Siegel: (
That's a great distinction, Dan, and I'm not, I can't big for all investors. And, and there's certainly different. Um, you know, investors are not, monolithic is probably the best way to put it. There are absolutely funds that are out there that are investing in their prospectus, talks about how they are not going to invest in companies, um, that are doing things that are against their morals. So I, I don't wanna say that that type of investing doesn't exist anymore because it quite, it quite does. However, the reason it's become more mainstream is because of this long term factor that I'm talking about and how it actually builds into the thought process around making sure that the invests gonna be there for a long time, especially around passive investing. You think a lot of people are investing in the index funds, that company is gonna be in the index forever, unless the company does something to get itself out of the index. Right? And so if they're not focused on the long term, they're not gonna be a member of the index. And therefore the index funds, the largest of the passive investing funds are all in on this area of ESG.
Dan Hood: (
Now we've about, uh, the role that investors are playing, you mentioned earlier, or we both mentioned earlier the, the role that regulators are playing and from what they want, what are, what do companies want from this, or do companies want from this, or is it primarily they're being, being pushed by investors, regulators and society at large? Or is there, do they see benefits from this?
Marc Siegel: (
It's a great question. And I think more and more companies are trying to integrate ESG strategy into their corporate strategy, right? And not have this siloed in, in, in an EY survey, 84% of us CEOs say that they believe ESG investment is a major strategic driver for growth. And, and so that is something that companies are going to be looking at more and more because most companies, if you think about their mission statement or their purpose state, it's not about just increasing the revenue target, it's a purpose that goes beyond just the financial goals. And, and so to be tracking your progress toward this broader, not thinking about the non-financial information or the ESG information that goes along with it, again, it comes down to making sure that you're not focused on ESG broad oddly, but you're focused on those ESG issues that are intersect directly with your business.
Marc Siegel: (
For example, if you think about a business where people, uh, like an accounting firm, where people are the biggest asset in the business, you need to be focusing on attracting and retaining the right talent for your business to succeed in the short, medium and long term. And frankly, people is issues or an ESG issue. You might not realize it, but people fall under the S and, and so it's making sure you understand where those ESG issues intersect with your business issues and focusing in on them so that you can grow your business over the long term.
Dan Hood: (
And I'm glad you corrected me. I said, uh, ESG was sustainability. The S is, but it's not, it's actually social. So, uh, at which speaking to, to people, um, but let's dive a little bit more into what's going on at companies. How are you seeing like boards of directors and controllership functions react to this, this growth and the importance of, uh, the focus on ESG reporting?
Marc Siegel: (
So we mentioned earlier the professionalization of, of the ESG topic, and, and this is exactly what we're starting to see. So boards have been thinking about ESG on and off in the past. And, and, and again, there's no one answer here, but we're starting to see boards evolve to incorporate ESG into the various committees, which makes sense. So to the extent that you might have ESG targets, as part of the executive comp, the comp committee would be looking at that, to the extent you start to have more and more ESG reporting, the audit committee typically, uh, takes a look at that and making sure that the finance function is being involved in ESG reporting. And so let's P pivot to the finance function, which was the other part of your question. So the finance function now is historically been, not so involved much at all in ESG reporting, but we're starting to see now more and more companies involving their finance function, because who better than the finance team to collect data, process data control data, and build an infrastructure to report data at cadence than the file finance function. So we're starting to see the finance function under the tutelage of the CFO and reporting up to the audit committee, starting to take a much more active role in ESG reporting, irrespective of the location of that reporting. But that's only gonna be accelerated with this new SCC proposal if it goes through when more and more of it goes into the 10 K. Right.
Dan Hood: (
Uh, you know, it's interesting. Cause I also had heard someone describe, you know, all this data is technically non-financial, uh, but it described it as sort of pre-financial right. These are the, a lot of these as, as companies, uh, uh, build these into their corporate strategies, right. They're gonna become this sort of pre-financial data will eventually translate into stuff that, uh, that goes on to the, um, onto the balance sheet becomes a, a, an issue there.
Marc Siegel: (
Yeah, it's a great point again, but if you just pick on human capital again for a second it's pre-final, but it's very quickly becomes financial. Again, you think about retention of your people. EY, because again, you know, accounting firms are so focused on their people and people are such a huge part of their business. Like we actually know, you know, the impact of, uh, 100 basis point up or down move on retention is on our business. And, and that would be, you know, a financial metric, but it's really dealing with people. And, and so it becomes indirectly, um, financial. And so again, if you think about it, as, you know, to, to the extent you take care of your people, make sure that they're, uh, excelling and they wanna stay that relates to a lower cost of, of, of your labor over time, because there's less training, less, less recruiting and hiring new people. Um, and you're able to get higher productivity and drive. Uh, you put a multiple on that and you're driving value for your business,
Dan Hood: (
You know, since we we're using, focusing on accounting firms, I know we're just using as an example, but since we're focused on, and I wanna pivot to talk a little bit about accounting firm's role in this. Uh, I think a lot of people obviously look to, uh, say accounting firms might be involved in this or, or will probably be involved in this as, uh, in, in AEST function. Uh, some other people, there's some, there's a lot of consulting and pat perhaps advisory work and how businesses might build their, uh, their ESG reporting. But, uh, uh, a key role will clearly be for, uh, for, for the attest function. How do see, uh, how do you think firms should be thinking about this and if they want to get into it as a service area, what do they need to bear in mind?
Marc Siegel: (
Sure. Thanks, Dan. I think people should understand that this is new, but it's also not that new, right? Because when you think about new accounting standards that come out from time, time, we had a new, huge revenue recognition standard that come out from time to time. Um, in the last few years, the accounting firms are geared toward training, uh, a large number of people in MOS at scale. And so if you think about ESG as just a new area that we have to train the, um, the attest people on, we couldn't certainly do that. And audit firms are geared up to doing that. It's not like it's a brand new, entirely new thought processors around a test. It's just a new kind of calculation that the attest people don't need to know how to do the prepare the calculations themselves. They need to be able to attest to the management teams calculations of these things.
Marc Siegel: (
So, so I think it's certainly gonna be new. It's certainly gonna require a lot of training. We're certainly going to need to add and supplement our teams, but the S E C proposal provides time in order to ramp that up and has some phase in accordingly for that, that I'm sure the SCC will get feedback on whether that's enough phase in and transition time. But that is something that, um, you know, is gotta be the, into the system, this transition period for the test function, uh, at, at all the different accounting firms to make sure they're, you know, they're ready for, uh, when the companies are right.
Dan Hood: (
But as you say, right, a lot of the skills that, that accounting firms and auditing firms already have naturally applied professional skepticism can be applied to anything. Risk assessment skills can be applied to anything testing and sample skills can be applied to, to anything. And it's one of this, this is way beyond the scope of today's podcast. But what I think I think is really interesting about ESG reporting is it's potential for sort of opening the door to, to a testing on just a huge range of other things beyond the, the accounting profess, but largely focused on financial statements, not entirely, but, but largely focused. It seems like this opens up each huge range of, of possible areas, uh, for firms to, to offer assurance around.
Marc Siegel: (
It does. And again, think about like, uh, the, what the accounting requirements require, fair value, a lot of valuation stuff that auditors need to be involved in. And so they've had to expand their skills beyond just pure audit into valuation pension, footnote, and pension audits, uh, actuarial skills that that auditors need to have. And, and, and so this would just be another example, uh, on that, um, line of examples of, of things where auditors can expand their, their knowledge base of gotcha.
Dan Hood: (
Speaking of, uh, knowledge basis and so on. It's, uh, a final, uh, question about young accountants, young auditors, uh, who are looking at, uh, this is an area they wanna get involved in. We talked about, you know, younger staff in, in, uh, businesses of all kinds are pushing a little bit for this, cuz they're interested in this topic, they care about these issues. Uh, do you have any advice for young young accountants who are looking to, to get into this area? Things they should be, maybe things they should be preparing for or things they should be learning about?
Marc Siegel: (
Yeah. My advice is just to lean in, because if you think about this area and anything that's fairly new and evolving fast, you know, even if you're, if you're new and have an interest in it, you can very quickly be as up to speed as anybody that's been in the field for 20 or 30 years. Right. Because it's so new and evolving there can't be somebody who's a 30 year expert on the S E reporting requirements of ESG because it's only been out for their, and so you can be an expert very, very quickly, even if you just lean in. And so don't be scared of it, dive in, you know, follow your intellectual curiosity and, and you could very, very quickly be one of the leading, um, practitioners in this, in this newly evolving space that has so much attention.
Dan Hood: (
That is that's fantastic advice because it really is a very young area, even though it's been around for a little bit, uh, we're only in the third inning. So that's a, that's a, a great point and a great area for young accountants to, uh, to dive in and make themselves experts and, and help lead the way. All right. Mark Eagle of EY. I wanna thank you so much. It was a great conversation, a lot of input to stuff for firms to think about.
Marc Siegel: (
Thanks for having me, Dan. I really appreciate it.
Dan Hood: (
All right. And thank you all for listening. This episode of on air was produced by Accounting Today with audio production, by Kellie Malone. Rate or review us on your favorite podcast platform and see the rest of our content on Accountingtoday.com. Thanks again to our guest, and thank you for listening.
Dan Hood: (
Welcome to on air with Accounting Today. I'm editor in chief Dan Hood. You know, interest in reporting around environmental sustainability and governance or ESG issues has been on the rise for some time now. And it recently hit the headlines in a big way with some proposals from the securities and exchange commission about potentially requiring disclosures around climate issues. Uh, with all that going on a, it seemed like a good time to take stock of what's going on in ESG reporting and here to help us with all that is Marc Siegel from Ernst & Young. He's the EY America's corporate and ESG reporting thought leader. And he's also been a board member of the, the sustainability accounting standards board since 2019. I sort of slurred that cause I always just wanna go straight into Sabi, but, uh, , he's, he's been there. Uh, so obviously been covering these issues, paying attention to them, uh, for a long time, deeply involved with the mark. Thanks for joining us.
Marc Siegel: (
Thanks for having me, Dan.
Dan Hood: (
Uh, maybe we can start with, like I said, sort of the headlines, uh, can you give us a quick overview of those S E proposals that came out a couple of weeks ago?
Marc Siegel: (
Sure. The S E proposals pretty much a C change in how to think about ESG reporting. It will require new things in the actual 10 K themselves, the regulatory islands. There's a lot of narrative disclosures that would be, uh, required around how companies are managing then and identifying their climate related risks and opportunities. There would also be some quantitative disclosures in the 10 K uh, such as your scope one and two, and potentially even scope three, which are different kinds of climate emissions and carbon, um, uh, greenhouse gas emissions. Uh, and then interestingly, and a little bit of a surprise to me, there was some proposed rules of a new footnote disclosure in the financial statement, footnotes that we could talk about as well. And then lastly, there are some new potential assurance requirements around the greenhouse gas emissions that were part of the proposal.
Dan Hood: (
Now, like I said, this has been a big in headlines, but there's, uh, ESG reporting has been growing, uh, both in terms of its complexity and sophistication, uh, and a take up in the market from companies and, and also, uh, uh, in interest among accounting firms, as they've getting interest, we wanna talk about all that. Maybe we can start knowing that about those, the, the broad outline of those proposals. Can you give us a sense of how important are in the broader context of all that other activity that's going on around ESG reporting? Uh, and I should mention that it's all around the world. It's not just in the us, uh, it's sort of everywhere. Can you give us set that, give us a little context there.
Marc Siegel: (
Sure. The market has been fragmented for quite some time around ESG and reporting. And what I mean by that is there's no requirements in the us for, uh, specific environmental governance or social, uh, disclosures. So a lot of different non-governmental organizations and charitable organizations have been sort of competing to provide voluntary recommendations for this area. And there are so many different acronyms of parties that are recommending certain disclosures that it's sort of called an alphabet soup, and nobody really knows what to do, whether companies or auditors or investors. And so the SCC jumping in here is potentially a way to start to try to standardize what the actual requirements will be. It will also obviously change the location of some of those disclosures from now somewhere else on the website to potentially in a regulatory filing, which ups the ante for everybody. And as you said, Dan, the sec is not the only player in this game, the EU and, and others around the world have been also promulgating new proposals for regulated, potentially regulated ESG disclosures to, and so companies that are based in the us and investors that are based in the us also need to have things around the world on their radar to kind of see where this space is playing out.
Marc Siegel: (
So that as, as things are evolving, they could potentially weigh in and try to influence this, um, and, and try to eliminate the alphabet soup in a way that makes sense for everybody in the markets.
Dan Hood: (
Uh, yeah, and this, uh, the, it sort brings me to my next question, because, uh, you talk about that alphabet soup and some of the, some of the cause of that alphabet soup is right, is this is a little bit of a wild west area, right? I, I say it's been going on for some time. It's, you know, these concept are, I'm gonna say 15 years old at least, but they've been growing talked about the alphabet soup comes from enormous number of people providing different frameworks around it. There's been some consolidate validation there, but it's still only just happened over the past year. So do you have a sense of how you would characterize the current state of reporting? You know, is it the, is it the beginning of ESG reporting? Are we the end of the beginning? Uh, you know, are we still in a wild west phase? Any thoughts you have on that would be interesting.
Marc Siegel: (
Sure. I guess I'll use the baseball analogy. It's, we're probably in the third inning, maybe closer to the end of the beginning, you know, and, and sort of where we are now is almost the professionalization of, of ESG reporting. So, you know, the, the good news is there, hasn't been a whole lot of regulated ESG reporting and, and, and so the market has to come together and sort of decide on what, what makes good ESG reporting the bad news is there aren't any standards for regulations on what ESG reporting is, so everybody's gotta decide. And so it's a little bit of a good news, bad news thing. And so now where we're getting with all the different entities and regulators who are trying to, to, to eliminate the alphabet soup and, and try to get to some more specific requirements and building on the frameworks that are already out there and try to get some convert in this space at the same time you are, you're having to see information that's being reported. The anti's been raised. And so the finance function needs to be involved. The reliability and the accuracy of the data needs to improve, to be ready for primetime, um, location disclosure within regulated filings. And so that's why I sort of say we're at the end of the beginning, we're in the third inning, as we're starting to professionalize all these different aspects of it to get to reporting that's, um, you know, that's robust and, and ready for prime time, uh, alongside financial reporting,
Dan Hood: (
Right? Well, cause it's interesting and I'm not sure where, where, which in this would fall in, but at the very, very beginning, there was some concern about some of these reporting that it was really, it wasn't the finance department, it was marketing department that was doing it. There was a, in the very things I think the, the phrase people use was greenwash. You would say you, you had, you'd done all these things for the environment or for, uh, your governance or anything like that, but it was purely a marketing exercise. There were no, there was the reporting wasn't there, uh, the frameworks weren't there. So it sounds like we're, we're approaching an error. Well, like you said, where it's, it's, uh, it can be much more professionalized and reliable. And I guess that's probably the, one of the, the key things about it that people can look at it reliable and comparable, I guess maybe another one
Marc Siegel: (
Comparability a, a, a great one to mention Dan, you know, I mean, what investors are asking for maybe 90% of investors in the EY latest survey would like to see consistent reporting across the different companies that they're looking at. And, and frankly, the same thing for the companies too, the companies wanna know the rules of the road. So if they're, if they're being asked by multiple different organizations to report on slightly different frameworks, all over the place, it just becomes untenable and forgive the pun unsustainable for them to report on all these different frameworks. And so the more we can try, try to rationalize and converge these different spaces, the better it'll be for the markets to be able to make, you know, better informed decisions about this, and frankly, the companies themselves to make better informed decisions on what their goals and priorities are.
Dan Hood: (
Gotcha. I wanna dive more deeply into what investors want from it. What, what, uh, uh, companies want from our, for it. But before we do that, I want, I talk a little bit about who's driving this. I mean, uh, I, I have heard in the past people talk about, well, it's, it's, uh, it's investors or investor, uh, organizations that are interested that have a particular interest in sustainability issues or environmental issues. And they wanna see that reporting because that's an issue they care about. I've heard other people saying it's coming from more of a, a regulatory standpoint. Do you have a sense of what's really the current issue? You know, why it's being pushed beyond just that sort of that beginning phase.
Marc Siegel: (
So Dan it's really both of those and everybody else. Who's also interested in moving this forward. So certainly investors are very interested in ESG reporting. You are also seeing regulators, uh, getting involved in ESG from both policy reasons, as well as because of the investor interest in ESG. Thirdly, you're seeing employees interested in ESG in this area that we're in right now, employees wanna work at companies and not only just earn a living, but they wanna work at a company that, um, they believe is achieving a better purpose. And then the communities at large in which companies live, work and operate are also interested in the companies that are occupying their space. So you really are seeing confluence of different stakeholder groups that are all sort of pushing for information beyond just the financial information that's been out there in the past.
Dan Hood: (
And obviously they're all pushing. I think we started for slightly different things, right? They all wanna know a slightly different thing and that's gonna be an issue, but hopefully less of one as we get the standards, uh, more straightened out, more universalized. And as, as, as I said again, as accounting firms coming in, aren't, uh, I don't say enforcing them, but, but attesting to them, looking at them and saying, yes, you're all doing, uh, reporting in the same ways in the, in the right way. Uh, I'm gonna dive more deeply into that, but we're gonna take a quick break first. And we're back with mark Siegel talking about, uh, the rise in ESG reporting. We talked about the, the recent S E proposals around climate disclosures, but we're talking more broadly about, uh, where this is going, what stage it's at, uh, and where it's going towards. We talked before the break about investors being part of the many different players who are driving this. Maybe talk a little bit more detail about what they want from ESG reporting. You know, what, uh, what are they hoping to achieve from it? What details do they wanna know?
Marc Siegel: (
So that really varies by industry. But if you start to think about it, broadly, investors are looking for information to help them with their asset allocation decisions. If you pick on climate for a second, there are many investors. Um, I won't say a hundred percent of them, but there are many investors that believe that over the next 20 or 30 years, the world will have to transition to an economy that has less carbon in it. And they wanna invest in companies that are preparing for that transition. And they don't wanna be caught up owning companies that do not do a good job of transitioning and will therefore potentially go away. And we all know stories of companies that did not adapt and, and ultimately ended up gone. And so investors are trying to think about long term investing and make sure that they are investing in companies that are understanding the key ESG issues that are actually material for their business.
Marc Siegel: (
So it's not about all ESG issues. It's about the ones that are material for that company's business. And that's gonna be different in, in different industries, which is why Sabi has been such a, um, a forefront on industry based standard setting, quite different from the FASBI, but that's what the Sabi is doing. So investors are looking to try to get information beyond just the financial that helps them understand where the company's going over the long term. And one more thing I'll add there is just, if you think about the valuation of a business and what goes into the multiple of a company, you certainly can understand how, you know, I, I mentioned the environmental, but also the governance, certainly how a management team operates is going to be a key com part that's caught up in the multiple. And if you think about S social, um, human capital is such a huge element to, to, to companies these days in their evaluation. And so companies that do a good job reporting on the climate reporting on how their management team is functioning well, and reporting on what they're doing with their human capital will do a good job in all those areas and maximize them multiple.
Dan Hood: (
And that's, uh, and I think this is worth maybe bringing up, but it's, that's a clear distinction. Some of the very earliest of, uh, environmentally conscious investment funds, for instance, we're driven to a certain extent by moral concerns, right? It was a, we wanna encourage businesses to, to act on these issues, to be aware of them and so on. But this is what you're describing is much more of an issue of will this business last, this is a key component of whether a business will be successful over the next 20 years. Not whether it's a more a business. I feel comfortable investing in from a moral point of view.
Marc Siegel: (
That's a great distinction, Dan, and I'm not, I can't big for all investors. And, and there's certainly different. Um, you know, investors are not, monolithic is probably the best way to put it. There are absolutely funds that are out there that are investing in their prospectus, talks about how they are not going to invest in companies, um, that are doing things that are against their morals. So I, I don't wanna say that that type of investing doesn't exist anymore because it quite, it quite does. However, the reason it's become more mainstream is because of this long term factor that I'm talking about and how it actually builds into the thought process around making sure that the invests gonna be there for a long time, especially around passive investing. You think a lot of people are investing in the index funds, that company is gonna be in the index forever, unless the company does something to get itself out of the index. Right? And so if they're not focused on the long term, they're not gonna be a member of the index. And therefore the index funds, the largest of the passive investing funds are all in on this area of ESG.
Dan Hood: (
Now we've about, uh, the role that investors are playing, you mentioned earlier, or we both mentioned earlier the, the role that regulators are playing and from what they want, what are, what do companies want from this, or do companies want from this, or is it primarily they're being, being pushed by investors, regulators and society at large? Or is there, do they see benefits from this?
Marc Siegel: (
It's a great question. And I think more and more companies are trying to integrate ESG strategy into their corporate strategy, right? And not have this siloed in, in, in an EY survey, 84% of us CEOs say that they believe ESG investment is a major strategic driver for growth. And, and so that is something that companies are going to be looking at more and more because most companies, if you think about their mission statement or their purpose state, it's not about just increasing the revenue target, it's a purpose that goes beyond just the financial goals. And, and so to be tracking your progress toward this broader, not thinking about the non-financial information or the ESG information that goes along with it, again, it comes down to making sure that you're not focused on ESG broad oddly, but you're focused on those ESG issues that are intersect directly with your business.
Marc Siegel: (
For example, if you think about a business where people, uh, like an accounting firm, where people are the biggest asset in the business, you need to be focusing on attracting and retaining the right talent for your business to succeed in the short, medium and long term. And frankly, people is issues or an ESG issue. You might not realize it, but people fall under the S and, and so it's making sure you understand where those ESG issues intersect with your business issues and focusing in on them so that you can grow your business over the long term.
Dan Hood: (
And I'm glad you corrected me. I said, uh, ESG was sustainability. The S is, but it's not, it's actually social. So, uh, at which speaking to, to people, um, but let's dive a little bit more into what's going on at companies. How are you seeing like boards of directors and controllership functions react to this, this growth and the importance of, uh, the focus on ESG reporting?
Marc Siegel: (
So we mentioned earlier the professionalization of, of the ESG topic, and, and this is exactly what we're starting to see. So boards have been thinking about ESG on and off in the past. And, and, and again, there's no one answer here, but we're starting to see boards evolve to incorporate ESG into the various committees, which makes sense. So to the extent that you might have ESG targets, as part of the executive comp, the comp committee would be looking at that, to the extent you start to have more and more ESG reporting, the audit committee typically, uh, takes a look at that and making sure that the finance function is being involved in ESG reporting. And so let's P pivot to the finance function, which was the other part of your question. So the finance function now is historically been, not so involved much at all in ESG reporting, but we're starting to see now more and more companies involving their finance function, because who better than the finance team to collect data, process data control data, and build an infrastructure to report data at cadence than the file finance function. So we're starting to see the finance function under the tutelage of the CFO and reporting up to the audit committee, starting to take a much more active role in ESG reporting, irrespective of the location of that reporting. But that's only gonna be accelerated with this new SCC proposal if it goes through when more and more of it goes into the 10 K. Right.
Dan Hood: (
Uh, you know, it's interesting. Cause I also had heard someone describe, you know, all this data is technically non-financial, uh, but it described it as sort of pre-financial right. These are the, a lot of these as, as companies, uh, uh, build these into their corporate strategies, right. They're gonna become this sort of pre-financial data will eventually translate into stuff that, uh, that goes on to the, um, onto the balance sheet becomes a, a, an issue there.
Marc Siegel: (
Yeah, it's a great point again, but if you just pick on human capital again for a second it's pre-final, but it's very quickly becomes financial. Again, you think about retention of your people. EY, because again, you know, accounting firms are so focused on their people and people are such a huge part of their business. Like we actually know, you know, the impact of, uh, 100 basis point up or down move on retention is on our business. And, and that would be, you know, a financial metric, but it's really dealing with people. And, and so it becomes indirectly, um, financial. And so again, if you think about it, as, you know, to, to the extent you take care of your people, make sure that they're, uh, excelling and they wanna stay that relates to a lower cost of, of, of your labor over time, because there's less training, less, less recruiting and hiring new people. Um, and you're able to get higher productivity and drive. Uh, you put a multiple on that and you're driving value for your business,
Dan Hood: (
You know, since we we're using, focusing on accounting firms, I know we're just using as an example, but since we're focused on, and I wanna pivot to talk a little bit about accounting firm's role in this. Uh, I think a lot of people obviously look to, uh, say accounting firms might be involved in this or, or will probably be involved in this as, uh, in, in AEST function. Uh, some other people, there's some, there's a lot of consulting and pat perhaps advisory work and how businesses might build their, uh, their ESG reporting. But, uh, uh, a key role will clearly be for, uh, for, for the attest function. How do see, uh, how do you think firms should be thinking about this and if they want to get into it as a service area, what do they need to bear in mind?
Marc Siegel: (
Sure. Thanks, Dan. I think people should understand that this is new, but it's also not that new, right? Because when you think about new accounting standards that come out from time, time, we had a new, huge revenue recognition standard that come out from time to time. Um, in the last few years, the accounting firms are geared toward training, uh, a large number of people in MOS at scale. And so if you think about ESG as just a new area that we have to train the, um, the attest people on, we couldn't certainly do that. And audit firms are geared up to doing that. It's not like it's a brand new, entirely new thought processors around a test. It's just a new kind of calculation that the attest people don't need to know how to do the prepare the calculations themselves. They need to be able to attest to the management teams calculations of these things.
Marc Siegel: (
So, so I think it's certainly gonna be new. It's certainly gonna require a lot of training. We're certainly going to need to add and supplement our teams, but the S E C proposal provides time in order to ramp that up and has some phase in accordingly for that, that I'm sure the SCC will get feedback on whether that's enough phase in and transition time. But that is something that, um, you know, is gotta be the, into the system, this transition period for the test function, uh, at, at all the different accounting firms to make sure they're, you know, they're ready for, uh, when the companies are right.
Dan Hood: (
But as you say, right, a lot of the skills that, that accounting firms and auditing firms already have naturally applied professional skepticism can be applied to anything. Risk assessment skills can be applied to anything testing and sample skills can be applied to, to anything. And it's one of this, this is way beyond the scope of today's podcast. But what I think I think is really interesting about ESG reporting is it's potential for sort of opening the door to, to a testing on just a huge range of other things beyond the, the accounting profess, but largely focused on financial statements, not entirely, but, but largely focused. It seems like this opens up each huge range of, of possible areas, uh, for firms to, to offer assurance around.
Marc Siegel: (
It does. And again, think about like, uh, the, what the accounting requirements require, fair value, a lot of valuation stuff that auditors need to be involved in. And so they've had to expand their skills beyond just pure audit into valuation pension, footnote, and pension audits, uh, actuarial skills that that auditors need to have. And, and, and so this would just be another example, uh, on that, um, line of examples of, of things where auditors can expand their, their knowledge base of gotcha.
Dan Hood: (
Speaking of, uh, knowledge basis and so on. It's, uh, a final, uh, question about young accountants, young auditors, uh, who are looking at, uh, this is an area they wanna get involved in. We talked about, you know, younger staff in, in, uh, businesses of all kinds are pushing a little bit for this, cuz they're interested in this topic, they care about these issues. Uh, do you have any advice for young young accountants who are looking to, to get into this area? Things they should be, maybe things they should be preparing for or things they should be learning about?
Marc Siegel: (
Yeah. My advice is just to lean in, because if you think about this area and anything that's fairly new and evolving fast, you know, even if you're, if you're new and have an interest in it, you can very quickly be as up to speed as anybody that's been in the field for 20 or 30 years. Right. Because it's so new and evolving there can't be somebody who's a 30 year expert on the S E reporting requirements of ESG because it's only been out for their, and so you can be an expert very, very quickly, even if you just lean in. And so don't be scared of it, dive in, you know, follow your intellectual curiosity and, and you could very, very quickly be one of the leading, um, practitioners in this, in this newly evolving space that has so much attention.
Dan Hood: (
That is that's fantastic advice because it really is a very young area, even though it's been around for a little bit, uh, we're only in the third inning. So that's a, that's a, a great point and a great area for young accountants to, uh, to dive in and make themselves experts and, and help lead the way. All right. Mark Eagle of EY. I wanna thank you so much. It was a great conversation, a lot of input to stuff for firms to think about.
Marc Siegel: (
Thanks for having me, Dan. I really appreciate it.
Dan Hood: (
All right. And thank you all for listening. This episode of on air was produced by Accounting Today with audio production, by Kellie Malone. Rate or review us on your favorite podcast platform and see the rest of our content on Accountingtoday.com. Thanks again to our guest, and thank you for listening.