How to Know If ESG Strategies Are Right for Your Business

January 24, 2023

You’ve likely heard the acronym ESG mentioned countless times recently, but maybe you aren’t sure that the strategies involved make sense for your business. In this episode of ESG In Focus, Lourenco Miranda and Danielle Barrs discuss ESG strategies, what benefits they offer, and how middle market companies can make the most of these efforts.


Transcript

Joan Michaelson:Hi, welcome to the new EisnerAmper ESG in Focus Podcast. I'm your host, Joan Michaelson. One of the questions we hear a lot is, "How do I know if I need ESG? What does it matter to me?" Let's say you're the CEO, the chief financial officer, or the VP of finance, or a similar role. You've lately been hearing the acronym ESG bandied about, but you're not really sure what it means for your business. You hear it stands for environment, social and governance, maybe you listened to our previous episodes, but you don't really know that it fits with your business, or what it means that you should do, or your business should do.

Let's say, you know you're doing your best to reduce energy use and keep those costs down, like you want to keep all your costs down. But beyond the environmental stuff, it's not really on your radar. You don't really think it applies to you, but frankly, you're not sure, and you're hearing about these reporting requirements coming down the road. Maybe some people on your team are asking you if they should report on these issues. That opens up a whole nother set of issues.

You can read articles and management journals about it, but you don't really know if you need to focus on it, if your business needs to have any real solid focus on it, among all the other pressing things you absolutely do need to do. So, what should you do? What should you look at? Let's find out from two people who work with senior executives on exactly these issues, every single day.

I'd like you to meet Lourenco Miranda, Managing Director of EisnerAmper's ESG and Sustainability Solutions, who brings about 25 years of experience in ESG and related financial issues, including domestic and international, by the way. And Danielle Barrs, Director of EisnerAmper's ESG and Sustainability Solutions Practice, who brings about 15 years of experience in environmental management, sustainable business, corporate social responsibility, ESG, environment, social, and governance. She works with privately held and publicly traded organizations in a variety of industries, especially with manufacturing companies. So, welcome to ESG in Focus, Danielle and Lourenco, thanks for joining us.
Lourenco Miranda:Thank you very much. Thanks for having us.
Danielle Barrs:Thanks so much, Joan.
JM:You're welcome. So, Lourenco, I want to start with you. Let's start with the question that I asked in the introduction. So, let's say you're getting asked to report your carbon emissions or your diversity metrics, et cetera, or you're being asked to include them in a proposal. But if you're the CEO, you're the CFO, or even any other leadership role, people are coming to you and saying, "Hey, I'm hearing about this ESG stuff. Is this something we need to focus on?" How do they know?
LM:So, that's a great question, Joan. So, if we put ourselves in the shoes of the CEO and you mentioned CFO, or any other C-suite person in the company. Let's talk about the CEO first. Let's put ourselves in the shoes of the CEO. And the CEO has so many different challenges that this person faces every single day. And the number one concern that this person has is to keep his or her company afloat in the future, in the long-term. What it means, means that the CEO is very much concerned about keeping steady cash flows, repeatable, reliable, consistent cash flows throughout the time, in not only the short-term, but medium-term, but also long-term. CEO cannot be a short-sighted person, has to have a long-term vision.

So, in order to manage all this, this person has to look at all different stakeholders and all different challenges and manage all these expectations. And today, of course, the CEO has also to manage the company under an inflationary scenario, also a recession scenario that is coming next year, most likely will come next year. So, all of these questions related to, "Okay, how can I be competitive? How can I make my cash flows steady?" So, being competitive means, "How can I manage my cost structure, how can I manage my business so that I can compete in prices, keeping the quality of my product and my services? I cannot lose market share. So, I have to be competitive. I have to be able to find new markets. I have to be able to penetrate these new markets and be able to sell my products and services in those new markets.

In this new economy, in the economy that we have today, it's very uncertain. ESG comes and helps this CEO to manage all of these expectations. Why? So, you mentioned that the CEO doesn't know that this person needs to hire an ESG consultant or needs to implement the ESG, or needs to even think about ESG. But suppose that you're talking about price these days, and the CEO has to be competitive in pricing. So, thinking about price, thinking about your cost structure and your markup. So, how you look at your competitions, how the market is pricing, and then also, you cannot be out of market. You cannot be below market. You want to be at market. What will make the difference is your cost structure.

So, you have to go back and look at your people. You have to look at the processes that you have. You have to look at your value chain, the suppliers. So, all of this brings a bunch of risks that will expose your wanted and so sought after steady cash flows. All of these risks that might potentially impact your ability to generate these steady cash flows in the future, will stem from an environmental, social, and governance nature.
JM:Can you tie price and people and process and value chain into where ... If somebody is not already familiar really with how that works, how would that tie in?
LM:I suppose that my supply chain depends on a raw material that has a huge social impact. So, by understanding my lifecycle or the product lifecycle, my service lifecycle, understanding my supply chain, I can identify this what's called hotspots, and identify and remediate those hotspots, so that I can be more socially responsible, be less negative impact in the society, or exactly the same narrative is valid for environmental. So, if during my supply chain, during my lifecycle, there is something that is harming the environment, is polluting the environment or damaging the society, I can change and be able to change that and make the process leaner, make the process more cost-effective. So, ESG will help you identify these opportunities to change your process, to identify how to do things better, how to do things more efficiently in terms of, you can give examples here, in the energy side.

So, you can have your process being much more energy efficient at the same time you are being good for the environment and you are reducing costs. And if you translate that into a cost base, it's going to be a better pricing, so that you'll be able to be more competitive and have the steady cash flows. So, everything is connected in the end of the day. So, that's where the CEO ... And then you mentioned the CFO, the concern of the CFO is to be able to fund the business in a more cost-effective way. ESG will help the CFO to find these opportunities to fund the business in the most cost-effective way.
JM:Okay, I really love that. So, that's really important. I just want to emphasize this for a second. So, what you're saying is rather than looking at it as, "Oh, ESG is another thing I have to focus on." What you're saying is that ESG, looking at your business through the lens of environments and social and governance impact, can help expose risks and opportunities that you had not thought of, that actually end up protecting your cash flow and protecting your business more broadly? Am I hearing that correctly?
LM:Exactly.
JM:Okay, good.
LM:If you start with the risk management idea, you get to the same place. So, you can start with, "Okay, let's identify risks and opportunities that will impact your cash flow." Now, it's going backwards. So, I want to protect my cash flow, I want to protect my cost of capital, I want to protect the sustainability of my business. What is that I need to look at? Most of the risks that will impact that future cash flow will come from environmental, social, and governance factors. And that's where ESG will give you a structure, it'll give you a process, it'll give a systematic way of managing those risks, and of course, identify opportunities to mitigate those risks, that you'll guarantee your sustainable growth and sustainable cash flows, reducing your cost of capital, reducing your risks.
So, the market will look at you and the capital providers, investors will look at you and say, "Okay, I will invest my money in you. I will invest my capital in you. The capital that I'm investing in you will cost less because you are less exposed to long-term risks. So, you're going to be a much more reliable, much more steady, and it's going to be a good investment." You become a good investment in the long-term by applying ESG practices.
JM:I love that, because it's kind of like it's another way of doing business strategy planning. I really like that angle. So, Danielle, I want to get into which industries make the most sense, and I'll give an example that ties in with Lourenco's example. So, on my show, I interviewed a woman who's the CSO of a giant hotel chain, and she had been CFO, and to Lourenco's exact point, she said, "Wait a minute, our energy costs are crazy, we've got to do something about it." And then she ended up using ESG principles to change how they do this.

So, that's hospitality. I mean, that's just one example of one organization, right? So, what industries are you finding are exploring ESG-related issues or maybe they should be making it a higher priority, because of the benefits Lourenco's talking about of this kind of planning?
DB:Well, ESG and sustainability and corporate social responsibility for that matter, should always be a high priority no matter what industry you're in. But to your point, sometimes, which pillar, let's say, is a priority might depend on the stage of your journey, who your stakeholders are or other factors like hospitality.

So, private market firms for example, should always be incorporating ESG considerations in their due diligence processes and are doing so with increasing frequency. And we've seen some hidden risks when companies are not looking at this kind of thing. Things like impact on local communities, health issues, economic.

In terms of specific industries though, real estate is a great example because real estate and buildings are 40% of the global carbon footprint. So, an industry agnostic example might be even if you're not in real estate, any company I would argue with significant real estate assets, if it's an office, if it's a manufacturing facility, needs to pay attention to this kind of thing.

And if it's not for hospitality purposes or it's not for corporate social responsibility purposes, or due diligence purposes, it can also be to reduce the carbon footprint, to reduce your energy consumption through things like energy efficiency. And that in turn has some great side effects that some people don't see, like reducing operational costs. And so, you can quite literally reduce the energy consumption and utility bill of any real estate asset.

And then, because I mentioned manufacturing, that is one of the highest intensity emission sectors out there. And so, when you're looking at that kind of thing, a high carbon intensity industry, and that means in terms of CO2e, so carbon dioxide equivalence, and it's usually per square footage of floor space, for example, manufacturing and then real estate are two really good examples of industries that definitely should be looking at this and also have the ability to be leaders in this space.

And so, we've talked a lot about in addition to industries, the B2B versus D2C breakout as well. So, when you're looking at working with other businesses, suppliers, distributors, contractors, marketing agencies, are all deciding which companies and organizations to do business with based on some of these ESG factors that we've mentioned. And furthermore, governments are rapidly regulating companies' ESG compliance responsibilities, and that's also industry agnostic.

So, from things like net zero targets, energy efficiency, to things that might not be on your radar like human trafficking diligence, that all falls under ESG and that makes ESG this very central feature of our modern consumer marketplace and enterprise. And all of these growing demands for action by even just the general public or investors, is really increasing the pressure on businesses to develop these very meaningful ESG-related corporate policies and also to credibly disclose results and properly report on it.

And then on the flip side, of course, we also see these ESG being increasingly top priority for consumer-facing businesses. So, while ESG issues first gained a lot of attention from would-be investors and stakeholders in significant projects and things like that, that ESG is now equally important to consumers who are making purchasing decisions for ethical reasons. And so, many consumers are more likely to purchase ethically sourced and sustainable products. Again, really important for anyone in the manufacturing industry, while also actively avoiding companies that score poorly on things like human rights and ethical supply chain metrics.

And that is something that is outside of what we might generally think about in our own supply chain or in our own buildings, but these are all perceived as having negative environmental and social impact. And they're equally, if not more important for both consumers and investors, because these are people that want to see their values in these environmental and social issues come to light.

Some additional examples to close out is, especially in consumer markets, we've talked about carbon emission reduction targets, transitioning to alternative energy sources, to get away from fossil fuels, managing the physical risks of climate change at certain production sites, let's say, resource and waste management is another big one. Water management, supply chain due diligence. We talked about workplace diversity, inclusion, non-discrimination, DE&I, responsible use of customer data is going to be a big one.
Talent attraction and retention is not talked about enough. And so, a lot of these companies are trying to attract these skills necessary to drive ESG from the inside out. I mentioned some industry and some industry agnostic reasons, but all of these fall under some of the reasons why companies should be looking at ESG regardless of their industry.
JM:Yeah, no, that's a good point. So, just a couple quick things before I go back to Lourenco and explore one of the vulnerabilities that you mentioned. But in effect what you're saying is, the issues that dovetail with ESG are the ones that also protect or grow your cash flow, like your market. If your RFPs and your clients or prospects are asking for this data and your talent or potential recruits are asking for your footprint or whatever, or your consumers are asking for this, you have to have the information, you have to know where it is. You have to be able to readily access it.

And so, even though you might have said, "Well, this is something that these other people are doing." It actually, what you're saying is, no matter what industry you're in, if you're not already, you're being more and more asked for this data. And so, that's the driver to protect your business and your cash flow, that Lourenco was talking about. Right?
DB:Absolutely.
JM:Okay, good. And one just quick definition, can you define CO2e for us please?
DB:Carbon dioxide equivalent. And so, it all comes back to carbon. When we talk about greenhouse gas emissions, we are looking the ones that stay in our atmosphere and affect climate change the most. And the common denominator in all of those is carbon. And so, we tend to measure those in CO2e, carbon dioxide equivalent. The E is equivalence.
JM:Lourenco, I want to go back to you because one of the things that Danielle just talked about a lot, and you alluded to, is this idea that the ESG framing can also show the vulnerabilities in your business and the vulnerabilities in your cash flow. Right? So, in many ways, it's a way of doing risk management, to shorten the sentence.

So, keeping your operations and cash flow resistant to both the potential impact of climate change and also how climate change might affect as well. So, you want both financial stability, but also, I mean, just as a basic example, if you're in hurricane country and a massive hurricane hits and your business is closed or wiped out, there goes your cash flow. Right? So, that's an extreme example that everybody can see visually. But what you and Danielle are saying, and I'd love you to expand on this a little bit, is that it's actually again, a business strategy for looking at managing your risk and managing your vulnerabilities.
LM:Exactly, Joan. So, that's the objective of a business manager. So, if I'm running a business and in life is exactly the same thing, we are always constantly managing risks. We have to identify the risks and then manage them and look at the causes, look at the factors that why this is happening, what could go wrong? And try to address those.

In climate risks or ESG risks it's exactly the same thing. So, the comparison analogy is valid. So again, if you put ourselves again in the CEO position, and we have every year or every quarter you have to review your strategy, you have to build your strategy for the short, medium, and long-term, then what is that you do? You have to look at your business drivers. So, your business drivers, you know your business drivers, because you know your business, you know the competition, you know your value chain, you understand economics that are happening today.

You understand what's going on in the political environment, in the sociopolitical environment, in the geopolitical environment. You understand all these elements that are external to your firm. And you try to see, okay, and ask yourself, "What could go wrong? What could happen? What could cause my cash flows not to be stable or predictable in the future, in the short-term, medium-term and long-term? So, risk management is a process of asking ourselves, "What could go wrong?"

And by identifying what could go wrong, we identify the opportunities to mitigate and to address what could go wrong. So, if I went to cross the street, what is that I do? I look one side, I look the other side. I have to think about, "Am I in England? So, I have to look at the other side." So, I look both sides. So, this is you managing risks of crossing the street.

A business person is exactly the same thing. So, you have to identify where the risks are coming from. If it's coming from the left or the right, so that you understand, "Okay, now I can cross the street safely." Exactly the same thing. So, I identify the risks and by putting all these internal controls, I can make sure that at some point you will guarantee these steady cash flows. So, risk management is a process of knowing your objectives, knowing your value drivers of your business, understands the competition, understand what could go wrong and what you're facing outside, and try to internalize them into your business strategies.

Now, you internalize them into business strategies. You have to measure it. You have to identify and assess. So, risk management has to do with assessment. You can do it qualitative or quantitatively. If you want to do it quantitatively, you have to measure the impact, the monetary impact of these different risks. If you don't know, you have to create scenarios, you have to create hypothesis, expectations. But if you know, if you have past history of those events, you can create statistics and start putting some models together and you create a narrative.

Okay. If there is a hurricane in a specific geography and I have my business concentrated there, this will impact my future cash flows. And I know how much I depend on that specific geography for my business. Suppose it is 50% of my business, and I know my EBITDA, and it's 50% of my EBITDA, means that if I lose that geography, if I lose that plant or lose that specific location, that'll impact 50% of my earnings.

So, I know now that if I understand that, I identify it, okay, what can I do in order to address that risk? This is the physical risk, it's a climate risk world, it's a physical risk, a hurricane. So, what did I do? I create a more resilient location or I have a recovery site. So, what is it that I can do in order to manage this risk? So, what are the opportunities that I see in order to make sure that this risk is addressed, identified and assessed and measured and monitored through time?

And the final thing that risk management has to do about is to report. So, I have to report my exposure. I have to report how much potentially be losing if that happens. What are the opportunities that I'm creating in order to mitigate those risks? And one of the interesting and most used measures or metrics in order to measure those climate-related risks is what Danielle was talking about, the CO2 equivalent.
JM:Right. So, this is so interesting because what you're saying is that using ESG to assess your risk and your vulnerabilities to your cash flow. So, if you're even just looking at it as a typical business person from cash flow management, that it will also surface what you can do about it and how you can mitigate it. And that mitigation strategy can become an opportunity in its own. And also, a way to be able to report on the countermeasure if you need to do that reporting in one of the proposals, for example, that Danielle was talking about.
LM:Right. And most of these opportunities, and most likely 100% of these opportunities will be something that will in end of the day have a positive impact in environment and the society. Or, that I have a exposure in fossil fuel energy consumption, I'm using this analogy, and I want to reduce that exposure, what I'm going to do, I'm going to transition from fossil fuel to renewables, to something that is more energy responsible and energy efficiency in terms of moving away from my dependency on carbon to transition to renewables.
By doing so, I'm being more resilient in terms of my cash flow. So, I'm managing the risk, my exposure to any changes in carbon prices, any policy that will change, anything that will have a direct impact on carbon utilization or carbon dependency. And now by changing to renewables, I'm doing good for the environment at the same time. So, I'm benefiting my firm and creating an opportunity for future cash flows, more reliable and less risky. And at the same time, I'm doing good for the environment.
JM:Great. So, Danielle, you're on the front lines of this. Companies are asking you very specific questions. So, talk a little bit about what are some of the questions that they're asking you. So, when they come in, whether it's a manufacturing business or as we said before, maybe a hospitality or a real estate company, how do they approach this? What are the issues that they're asking about, that shows you that they're thinking about this and that they're saying, "Well, I'm thinking I need to focus on this, but I'm not sure."?
DB:The first question they should be asking is, "How important is responsible business to us? To your company? Why is it important? Why are we doing this? What is our purpose? Who are we trying to satisfy? Who wants to know? How do we measure success? How do we communicate this? How do we educate our people?" Those are the questions that companies should be asking, but a lot of the times the first question is, "Where do we start?" So, if you are asking this, the good news is you're in good company.
Some other things that we get in addition to that, when companies are a little bit further down the line, "What specific areas of environmental, social, governance issues should we be focusing on?" Easy way to address that is through a materiality assessment. That's one of the first things that we do when you look at a company. It can be a sector specific materiality assessment, which SASB is great at, the Sustainability Accounting Standards Board.

Or, there are other more sector agnostic ways of looking at this, like the GRI, which is the Global Reporting Initiative. And this is all part of a current state assessment and gap analysis about what kind of things to focus on, so that it's not overwhelming for people.

The next question that people should be asking and often do ask is, "Who do we get involved from our team?" So, within these companies, "Do we bring in finance, do we bring in HR, operations?" And of course the answer is, all of the above, because teams should be working together to integrate ESG in the mission and the fabric of your organization for this to really work.

And then after that, you should be asking, "How do you organize yourselves in order to now mobilize these teams to develop and deliver your ESG and sustainability strategy? How do you work out the structure? How do you work out accountability, the different platforms?" So, this would include things like, "What processes do we develop? What policies do we need to develop? What kind of strategies do we need to put in place? And what is our roadmap to get there?"
Part of the materiality part is, "How do we prioritize these steps? What needs to come first?" And again, it always comes back to, who needs to be involved and who is accountable. If you don't have the accountability piece, it's just simply not going to mobilize. And then once we start getting into the weeds a little bit, some of the more fun questions that we get to ask are things like, "How do we leverage the IRA to their advantage?" So, the Inflation Reduction Act is a great one.

And for anyone who doesn't know, the IRA, the Inflation Reduction Act, basically seeks to reduce GHG emissions by 40% below 2005 levels by 2030. And they are doing this essentially by making very significant investments in climate and environmental programs, providing tax incentives to boost the development and deployment of clean energy. So, a lot of people are asking about that more.

Along those lines, many folks are asking about the SEC climate rule and that's a really important one, because it did get pushed back and this is not a reason to stop paying attention. In fact, what's going to happen essentially is that a lot of these companies that are asking about it now and are maybe pushing it off, there is going to be a spike in demand and not enough of a supply to get your company aligned with SEC climate rules and to get your ESG data aligned with your finances. You cannot do this in three months. This is a six to nine month or more process, if you haven't done it.

And so, some of the things that folks are asking surrounding the SEC climate rule is, "Do I start now? Do I wait?" Absolutely start now. This is not a three-month process. It's not a month process from start to finish, if you are not looking at all of the things that I just mentioned. So, if you don't have a team in place, if you don't know how to mobilize them, if you don't know your risks and opportunities, because we've talked about it before, ESG is a risk management tool. If you don't know who's accountable, if you don't have the strategies in place, if you don't have any of the policies developed yet, if you don't know your roadmap to get there, all of these things are going to come up on you really, really fast. And we need to make sure that our clients and the people that we work with are giving themselves enough time to really address those things.

And so, that's something that's really important and that it is something that we should be considering and that a lot of folks are considering is the timeline of the whole thing also.
JM:Yeah, no, I'm really glad you brought that up. So, what you're saying too is, to Lourenco's point about managing your cash flow and say you want to transition to cleaner energy, you may be thinking, "Oh, that's going to be expensive." But what you're saying, Danielle, is there's financial incentives to do this. There may be even money you can get or tax credits you can get through the new legislation, the Inflation Reduction Act, the Infrastructure Act as well, I would pose it, that can offset your costs and actually make it easier. That's the point of this legislation, is to make it easier for companies of all sizes.
DB:Absolutely.
JM:Especially smaller and middle size companies, to be able to take these mitigation measures and do it sooner rather than waiting for the cash flow to be there.
DB:Absolutely. And the IRA's just one example, there are a ton of great financing opportunities out there for smaller businesses too.
JM:Yeah. So, Lourenco, I want to come back to you on something that she brought up, and again, we can talk about this forever, but is, she alluded to the supply chain. Right? So, a lot of people, especially as the SEC rules come up and people start to say, "Well, maybe I'll wait till they're together, because I don't really know what I'm going to need to do."

What you guys are saying is, A, get started now and B, that it's not just what is going on in your proverbial four walls, it's what's going on that feeds into and out of your business. Right? So, talk about this whole impact on both your supply chain but also thinking about if you are in the supply chain of a larger company, you really need to do this because you may think, "Well, I'm a private company, I'm not publicly traded, I don't have to report to the SEC." But if you are in the supply chain of an IBM or a Walmart, or an Apple or whatever, who obviously has to report, then you have to pay attention to this also.
LM:Absolutely. So, suppose that your are a small company in the US today, and you have your own market and you are very good at that market and you know that market very well, and all of a sudden you want to expand your business and you want to start dealing with larger companies, as you mentioned. Or, if you're already part of that larger company supply chain, you're a supplier or a service provider for that company. Most likely this company, as you mentioned, will have to report to the SEC here in the US, because most likely this company is public or has a branch in Europe that has to report according to European rules. Or, this company is European and has a branch here or a subsidiary here in US and has to report according to European rules, that we are much more advanced in this aspect.

So, if you are a provider for this company, most likely you are already being requested to comply with their procurement rules. Larger companies are creating these new, what's called responsible procurement rules, that if you want to be part of that company, if you want to be business partner of that company and provide to that company, you have to comply with that, otherwise you won't be able to be competitive. And remember about the competition, that being competitive is one of the key objectives of a CEO. CEO wants to become competitive, and being competitive is to be able to look for and penetrate these new markets. You won't be able to do that if you do not have your ESG practice together, because one of the critical elements of these larger companies and this responsible procurement process is to require that their suppliers are also aligned with their ESG practices, which are in a much higher level.
So, we see today, smaller companies, manufacturers, real estate, it's totally industry agnostic, service, iTech, all of them having to go and adapt and align with these higher standards of ESG disclosures, risk identification and assessment, having policies, having procedures in place, otherwise they won't be able to have access to these business or these new markets, or even the government. So, if they want to deal with the government, soon enough, the government will start asking for those requirements, just like the government is asking for cybersecurity. So, those elements will go to the smaller companies. So, now it's a matter of, "Shall we wait and see what's going to happen?" Or, "Shall we get our act together today, so that we prepare ourselves for this new market that is already there, it's already happening?"

So, to Danielle's point, it does not happen overnight. Implementing ESG practice and being at par with those higher standards does not happen overnight. It takes at least nine months, a year, and depending on the level of maturity that you want to get, it can take even longer. So, you should have started two years ago and now be ready for this new market. We know that supply chains are changing or we knew the globalization that we had in the late '90s and beginning of 2000s is changing. More and more, these large companies are turning to domestic markets.

So, the large international companies, they are looking for those smaller providers, smaller suppliers locally. Here in the US it's happening already that smaller manufacturers are becoming part of these larger supply chains that they were not before. So, if you want to become part and you want to compete in this market, and if you're a small or medium enterprise in the US, you should have started thinking about this years ago, if you haven't already. So, that's the urgency of this matter because if you don't do that, you won't become competitive. You won't be able to grow your business in the same way as your competition. And this means in the environment that we operate today, you're out of business very quickly. So, that's the urgency of this matter, because it's happening. It's happening as we speak.
JM:Yeah, I'm really glad you brought up the European component and the supply chain, and it's one of the things that I noticed with the impact of COVID, is that the companies that had higher ESG ratings also did better in COVID, because they had already addressed a lot of these issues, their supply chain wasn't as dependent on China and overseas markets, et cetera. They had more of a diversified supply chain. They had a more responsible supply chain. So, they weren't as vulnerable to it. Right?
But what you're also saying is that there's the opportunity to be in the supply chain of a larger company if you've addressed these issues. I mean, I remember Walmart came out with their sustainability contract like 20 years ago.
LM:Right.
JM:So, today, you can't do business with Walmart if you don't have these issues addressed. Right?
LM:Yeah. Exactly.
JM:So, what you're saying is, another factor to say, "Well, do I need to do this?" Is, if you want to get a contract with a bigger company or you want to be a supplier to a Walmart or whatever, you have to, or you should have already been doing it, but at least start now, right?

So, Danielle, I want to button this up a little bit with ... And you alluded to where it should sit. And so, I want you to talk a little bit about, you mentioned accountability a lot, which is really important. So, I want you to talk about who should be accountable for this, but also, they have all these different departments that should be involved, because it touches really every aspect of their business, either the E part, the S part, or the G part, but how do you determine who is holding it, where it should be housed? How do you know where the responsibility should be? It's a lot of work to put on your people. So, how do you put that together in a way that doesn't just add on a whole nother full-time job to your staff, but also have the accountability?
DB:It's a great question. In terms of accountability, leadership, and ultimately, the CEO is responsible, because ESG really does need to be integrated in the fabric of your business in order for this to truly work. So, leadership ultimately is responsible, but does that mean that they are in charge of developing and executing a strategy on environmental, social, governance issues and sustainability in an industry that can be very overwhelming to people? No, that's why you hire help. And you wouldn't hire a doctor to do your taxes. So, do you dump the ESG and sustainability strategy development on an unsuspecting financial analyst, or do you hire professionals? Right? That's why we're here.
JM:That's what you do.
DB:That's what we do. Exactly. I mean, if you want to talk about numbers, it could come down to things like compliance and fines, if you really want to get into it. Do you hire a consultant for $10,000 to look at local regulations and compliance considerations, or do you risk a $50,000 fine and then upwards and onwards of those?

So, just like anything else, you want to hire professionals to look at the risk and opportunities, because if you don't, the risk is going to be 10 times higher. And we don't want that. We want a competitive advantage. We want our clients to come out as leaders in the industry. We want them to come out as innovators. We want them to be able to stay ahead of the marketplace. And things like carbon pricing and both local and federal regulations, we talked about overseas regulations, that's coming to the US.
So, all of these things are what professionals do every day, and making sure that you're on top of all of those things is just not something that you would necessarily want to put on the financial analyst or an operations manager. But that's what we're here for. Right? And we talked about this before, it's not going to take a month, it's not going to take three months. It's going to take a significant period of time and certain resources to be able to do that. So, how do you tell if you need it? Do you care about the risks to your business? Do you want to reduce operational costs? Do you care about reducing your carbon footprint? Do you care about understanding policies and regulations, like we talked about the Inflation Reduction Act, Local Law 97 in New York. Do you want to understand these things? Do you need help reporting to the SEC, the TCFD, the GRI, Carbon Disclosure Project?

One thing we haven't mentioned, I don't think yet, is the concept of greenwashing. So, right now, if you don't get a third-party verification of some of this data, we call it greenwashing, it basically just means that you're not fully verified of the things that you're telling people that you're doing. But once this SEC climate rule comes out that greenwashing is now fraud. So, let's just keep all of this in perspective here of really how important this is. This is something that is coming to the US and this is something that's coming soon. So, do it now. Don't wait till the last minute.
JM:Wow, that's a hell of a line, once these SEC rules come out, that greenwashing is fraud. Yeah. No, I mean, that really puts it in perspective and it's really true. Just to wrap this up, how do you know you need help? I mean, you just delineated it beautifully, Danielle.

So, in addition to the threats and opportunities that you listed, Danielle, there's also what Lourenco mentioned of it being an overarching strategy that actually can help you manage your business on just basic business metrics. Not even thinking about the do good part of it, but just as a business strategy. Am I right?
LM:You're absolutely right. So, if you can do good at the same time, that's the basic principle of sustainability.
JM:Fabulous. That's the holy grail, right? Well, we could go on forever and ever and ever and ever, but luckily there's other episodes, so we'll be able to go on a little bit longer and people can listen to the other episodes as well.
So, thank you so much, Danielle Barrs and Lourenco Miranda for another great discussion and bringing some clarity here. I know I learned a couple things. So, if you want to talk to Danielle and Lourenco about strategy, whether you should take the ESG strategies and put those in place, if you have some reporting, if you have any questions at all, you can find them on the EisnerAmper website, eisneramper.com. And please listen to previous episodes, as I said, of ESG in Focus by EisnerAmper. Thank you for joining us. I'm Joan Michaelson. See you next time.

Transcribed by Rev.com

About Danielle Barrs

Danielle Barrs is the Director of ESG and Sustainability Solutions in the firm with over 10 years of experience in environmental management, sustainable business, corporate social responsibility (CSR), and environmental, social and governance (ESG).

About Lourenco Miranda

Lourenco Miranda is Managing Director of ESG and Sustainability Solutions. He has experience in the financial industry covering various segments, industries, geographies, including small, middle, and large companies.

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