Maximizing Your Accounting Firm for ESG

JM:You're welcome. You're welcome. Let's start with a little vocabulary lesson. I'll say some definitions for people because not everybody really is familiar with these terms. Danielle, can you please explain ESG and the difference between ESG and sustainability? It gets kind of confusing.
DB:It does, and that is always a great place to start. The simplest answer is that ESG, which for anyone who doesn't know stands for environmental, social, governance, again. It's a risk management tool, first and foremost. The goal with ESG is that it's used as a tool to inform investors about the risks to their investments, essentially so that they can make more effective and inform decisions. An effective ESG program manages these risks and measures the impact that environmental and social issues have on their business and how to create an effective governance to address all of these risks.

For example, investors and lenders may rely on ESG data or ESG scores or ratings to assess affirmed risk exposure and also assess its possible future financial performance. All of these things are financial tied. And then while ESG disclosures are subject to very specific regulatory standards, or at least they will be, and we'll get into the SEC proposed rule a little bit later, but they are based on a standardized framework. For example, the SEC uses the TCFD, which is the Task Force on Climate-Related Financial Disclosures.

While that is under the ESG umbrella, sustainability and CSR, which often go hand-in-hand, CSR being corporate social responsibility, these programs focus more on voluntary initiatives as part of a broader strategy. And that's usually for the purpose of having a more positive impact on our environment and communities. This is the truest definition of responsible business, which is doing well by doing good.
JM:Danielle, I want to get into... I love what you said about the risk management issue here and ESG. You talked about how ESG can be used to manage risks for helping investors make more informed decisions. It also reduces the risk to the company writ large, right? It's financial risk and it's also operational risk, which is a lot of the work that you've done, right?
DB:Absolutely. The idea is that it is becoming increasingly obvious that these ESG KPIs are always going to be related to a company's financial performance. Investors are understanding that more and more and they are expecting the managers of their investments to look at these risks also. Because as the old adage goes, what gets measured gets managed, and it is truer here than it could ever be.
JM:Yeah, absolutely. There's all kinds of exposures that people don't know about. Charles, pivoting off of that and Danielle's comment about governance and the fact that the SEC is going to make this mandatory and no longer voluntary, can you explain a little bit, kind of give us a short version of the SEC rules that are coming down the pike in case anybody who didn't send in their comments, they weren't among the 14,000 comments that the SEC got? Can you talk a little bit about what those climate risk disclosure rules probably will require and what type of companies they might apply to?
CW:Sure. And also for those folks that didn't read the 510 pages from the SEC, it essentially breaks it down into three areas. Because it's an SEC required element here, this is for public companies, and we'll get into that in a moment here, but for the rule is applying to public companies. The SEC is looking for companies to include in their disclosure really into three buckets right up related to climate related risks for the company. And that goes into multiple different tiers as it relates to what is the governance and risk management program that a company has related to climate related risks, identification of the management of that through a transition plan.

As an organization identifies those risks and what is the company putting in place to address those risks over a short, medium, and long term time horizon there, as well as what does that mean to a company's financial statements related to, if I have to make a transition in my business model because of these climate related risks, what does that mean from dollars and cents perspective? That breaks into business model and business model assumptions that would impact a company's financials there. That's the first piece. The second piece relates to greenhouse gas emissions.

I think the terms Scope 1, 2, and 3 greenhouse gas emissions, Scope 1 and 2 are the ones that related to the direct activities of the organization and Scope 2 is the ones that relate to the source of energy that the organization uses and acquires. And then Scope 3 relates to the value chain basically, the sourcing of any materials, and then also delivering of that end product to their ultimate consumer here. The SEC has stated that there's a requirement for organizations to disclose their Scope 1 and 2. And then if it's material, then Scope 3 would also be required. The SEC has not really identified what constitutes materiality.

That is a little bit of one of the open questions that's out there. And then the last piece is details related to any publicly set climate related goals. If a company indicates that we're going to be neutral by 2030, 2040, whatever it might be, or if they're having other specific elements that are out there, the SEC said, "We need to see what are your specific details around that? Are we talking just Scope 1, scope 2 emissions, excluding Scope 3? What is the elements that go along into that? Do you have interim targets? What is your progress against those targets?" And really trying to bring more transparency to the market beyond what some companies have said as more of just those headlining stories there.

The SEC's saying, "We need to see data behind that." That's kind of the gist of the proposed rule and the specific companies it relates to. That falls into based upon the size of a publicly traded company. The largest organizations, the largest public companies, as everything stands right now, if this rule gets adopted by 2022, by the end of this year, then the largest public companies would be required to include this information in their 10-K filings for fiscal '23. Kind of fast forward, most companies have a 1231 '23 year end and they file their 10-K 60 days after that year ends. This would be included in the 10-K that's filed essentially February of '24.
JM:They would have to be tracking all this of next year. There's a lot in there I'd love to unpack, but I want to highlight a couple things. One is just to stress, when you talk about the direct impact of the company and also on their goals, that's what they do with their operations. If you have a plant in my Miami and your subject to sea level rise, you've got to account for that in. If that's part of your transition plan to address that, you've got to show in the financials how that might change your business model, and therefore trickle through your financials, et cetera. Am I hearing that correctly?
CW:Right. If you have significant operations in one of those areas that is more subject to climate really issues such as sea level issues or severe storms or wildfires and you are then looking to address that risk by relocating facilities, that's clearly a dollars and cents impact there, that would have an effect on the business model or the operations of the entity.
JM:To use your word, that has a material impact. For example, there's storms in Texas this week. There are companies that are losing their business. That has a material impact on the financials, right? Speaking of that, Danielle, you've been helping companies actually do this, do the work to reduce their carbon footprint and collect the data. One of the push backs on the SEC regulations is, "Oh my god! My eyes glaze over. This is expensive. This is crazy. I have to set up whole new," blah, blah, blah, seeing it is pretty daunting. They don't know where to find the information. They don't know who in the organization might have it, et cetera.

Can you help us understand how to make it easier? Where they might be able to find the data? You worked in manufacturing companies, so maybe that's a good place to start, but you decide. Where can they get these information in ways that they may already have and people on their team who may already have it, they just haven't gathered it from them yet?
DB:It's a valid concern. It can be overwhelming if you've never looked at these things before. Many companies have been looking at financial data, I mean, since day one. They're not normally looking at this kind of environmental, social, governance data. They might not be looking at diversity, equity, and inclusion, their board diversity, their greenhouse gas emissions, cybersecurity issues. They should be, but they might not be doing that quite yet and not fully understand where to get that information. This is where the ESG program building comes in.

It's a valid concern to not want to be overwhelmed by this very new landscape, but we are in a global economic transition to decarbonizing our economy, so it's important for companies to get on board before they need to scramble. We've talked about this a little bit before, even if your company may not be subjected to the SEC's rule and might not need to consider the SEC's proposed climate rule, you also need to look at your partners and the companies in your value chain and supply chain. Because if they need to report this information to the SEC, they're going to be turning around to their partners and other companies within their value chain to get that information.

This is important to all companies, big and small, to get this done beforehand. It takes longer than you think if you haven't looked at it. For example, take emissions data, greenhouse gas or GHG emissions data is measured in something called CO2e, which is carbon dioxide equivalent, and it's specifically measured in metric tons of CO2e. Most people don't really know what that means right now. The question to ask is, do you or your company's leadership know how to measure that? Have you done that before? Where do you get that information? Most people, if they haven't looked at it, would be surprised to find out that they need to retrieve that information through their electricity bill.

First, you need to gather those utility bills, then you need to find the electricity consumption, determine the energy mix, which by the way is different for each location, and then convert that information into CO2e using a set of predefined criteria like Global Warming Potential, which a lot of people also don't know how to do that conversion. Now, we're kind of getting into the science of it. The Global Warming Potential essentially marks the ability for any gas to trap heat, including how long it lingers in the atmosphere before breaking down.

Both methane and carbon dioxide, which are common examples, contain carbon, but methane is 25 times better than carbon at trapping heat and stays in the atmosphere much longer, meaning it's contributing to global warming a lot more than CO2 is. It's not just about reading off of the utility bill and getting a number. There are very specific calculations that go into all of this, which is why it's so important to have support when you're doing that. In the US, for example, the greatest methane source comes from agriculture, comes from livestock and manure. If you want to reduce your impact on climate change and are looking for ways to do it, on a personal level, cutting out meat is a great start.

But when it comes to companies, they need to look at bigger things. For example, natural gas and petroleum together are the second largest source in the US. Tell me how many folks in leadership have actually looked at these things, have started retrieving their utility bills, have looked at global warming potential, have looked at the sources for their energy mix, have talked to their utilities and asked about ways that they can reduce their emissions or reduced their carbon. Most people haven't done this. What's the solution to all of this?

It's to find support, so folks like EisnerAmper, that can help your company create what's called a GHG or greenhouse gas inventory and start beginning carbon accounting for your company. This is how to set yourself up for the most possible success so that you're not scrambling at the last minute to get all of this information. Because to your point, a lot of folks do find it overwhelming and need that support.
JM:That's such a great point. It's so interesting. People think about accountants, they don't think about accounting metric tons of carbon dioxide, do they? But with the SEC new rules, they're going to have to. I've spent many years working in accounting firms, as you guys know, and most people don't think of their accountants as being able to help with this stuff, but this is why there's different parts of an accounting firm, right? One quick thing to pull on that thread a little bit, Danielle, is they have to get this data from other people in their teams and they have to train those other people on where to find it and how to find it, whether it's on their electric bill or somewhere else.

Can you talk a little bit about incentivizing people to actually... Because a lot of it is employee behavior. You can ask them for it, but they don't give it to you, it's not going to be helpful. How do you incentivize them and train them to give you this data?
DB:Sure. Well, incentivizing and training, slightly different angles to look at it, but first and foremost, leadership needs to be on board with this. You need to find out and determine and kind of dig deep sometimes to figure out where you want to go as a company and what kind of company do you want to be. Do you want to be a leader, or do you want to be a laggard? Because like I just said, this does not happen overnight. A GHG inventory is a type of accounting. But instead of accounting for financials, you are accounting for your greenhouse gas emissions. If leadership isn't on board and this isn't at least in part a top down initiative, there's no why.

The leadership has to come up with the why. And if, for no other reason, being a leader in the industry and not being a laggard and falling behind your competition is one of the best reasons and best incentives that these companies have. And that's even in addition to all of the rules and regulations that we're seeing. If SEC compliance isn't a reason enough, if some of the incentives that we're going to see with the recent Inflation Reduction Act isn't enough, then a huge part of it is getting ahead of the competition, because this is where the global economy is going and you don't want to be the last one there.

You want to be a first mover and make sure that this data isn't only there, it's not just getting managed or collected and then being put in a box somewhere, but that you are actively managing your risk. Because again, ESG disclosures is a risk management tool. Investors, customers, partners, all sorts of stakeholders want to know that companies are doing their due diligence to manage their risk. Developing a robust ESG program is another way to manage risk. That garners trust in your company to say, "I do manage my risk. I am looking at my opportunities for everything. I am paying attention to where the global economy is going, and this stuff matters to the organization."
JM:Yes. And it matters financially.
DB:Absolutely.
JM:It trickles down through the whole system. Charles, you're on the front lines working with clients on their financials. To Danielle's point, what are some of the primary issues? You have this interesting intersection between assurance and ESG, and that's a lot of what the SEC rules are going to be about, right? That's the other point we haven't mentioned, which is that those numbers have to be verified. If it's an audit, a financial statement has to be verified. Can you talk about the kinds of issues that clients are bringing up to you, including Danielle's point that most companies want to win?

They want competitive advantage. They want to be the good guys. They want to be the best performers. What are the kinds of issues they're bringing to you and how do they think maybe they can maximize ESG to do that?
CW:Right. It echos many of the things that any type of new requirement or pronouncement that a company has to follow, they go through this whole process. One, it's determining is it applicable to them and win, because that has a determination on how they're going to approach it, and then also from a standpoint of, what's the level of effort that goes along with it? There's many companies that I talk to, they want to be the best in class. They're looking at ways to get out in front of it. They might be impacted by more specifically from a standpoint of how it's going to apply to them sooner.

They're looking to get out and undertake these efforts that Danielle just articulated about what is the level of effort that's going to go into this, where is all this information. This information typically hasn't had an auditor's lens on it before. If they're required to follow the SEC proposed rule, it will have to go through an auditor's lens. It's part of a 10-K or registration statement. They're trying to go through that and make that determination. But at the same time, not every client is always looking to be best in class. They might just be looking to do what is the best based upon their limited resources and business objectives.

They might be more of the wait and see a aspect. Once it's firmed up or if there's a specific requirement, maybe they're not public, they'll look to address it then. The challenge though, as Danielle mentioned, this is a large effort. Even if you don't think that this is necessarily directed at you specifically as an organization in the near term, it's going to impact you at some point. The question is, are you going to wait for that most important customer or stakeholder or investor come to you and say, "Hey, where is this information, or I need this because I'm required to report it?" What's the level of effort that goes along with that?

The conversation that we're having with our clients is, if nothing else, that this is the cost of doing business on a go forward basis. The more that an organization resists, they put themselves at risk for future business with their customers and stakeholders that this is part of their business objective. This is really an aspect of, do you want to use it as a best in class, a competitive advantage? Or if nothing else, do you want to... I mean, this is just part of what the cost of doing business is going forward.
When you frame it into that discussion, that starts to get a lot of people's attentions. And then it starts to go into, okay, how do I go about doing this? What are those steps that we need to take to wrap our arms around it and then enhance our processes?
JM:Just to emphasize one point that has gotten a little bit buried here is, and you both brought it up, is even if you're not publicly traded, if you do business with a company that's publicly traded, or the government for that matter, you have to report this stuff because you have to report it off. That's the whole value chain part. You might be a small woman owned or minority owned or veteran owned business. But if you want to do business with IBM or P&G or something, they're publicly traded and they're going to ask you for this data. I mean, Walmart's been asking for supplier sustainability criteria for decades.

I love what you said, it's the cost of doing business today going forward. I think that's also good for the planet. There you have it. I also think that it actually helps with employee retention. I wonder how many of these companies that you guys work with maybe are getting some of these demands internally from some of their clients. Danielle, just kind of expanding on what Charles said, what do you think are some of the questions that you think executives could ask their accounting firms in this? Because you're really at this interesting intersection of doing it and being in an accounting firm and understanding how you have to account for this and how that reporting has to pull up, right?
What are the kinds of questions that you think a company might ask of their accounting firm to help them leverage ESG as a competitive advantage?
DB:EisnerAmper has an amazing business model where we are a CPA firm, first and foremost, but we're also an advisory firm. If you're looking to your accounting firm to provide internal controls or provide audit and insurance, that is very different than asking an accounting firm that also has an advisory branch that already knows you, that already knows your company, to also provide advisory services within the umbrella of ESG and sustainability. One of the amazing things about what is EisnerAmper does is that it has it under the same roof. As opposed to going somewhere else and having to get that elsewhere, you can get that in the same company.

With accounting, and I'm not a CPA, but there are some gray areas surrounding independence. Similar to financial audits, you can't audit your own work. The questions, I mean, really it's to go back to everything else, is there anyone in your value chain at all, regardless of what industry you're in, that is going to be either disclosing to the SEC where their personal goals are surrounding ESG or sustainability? Because that is going to come to your firm very shortly. In order to perform an audit, you have to have something to audit. These firms a lot are only at a place where they're still developing those internal controls for ESG.

They're still setting up those strategies. But imagine getting to the point where you are getting audited for your ESG disclosures and you haven't set up those internal controls properly. One of the great things about CPAs is their commitment to quality control and setting up a firm for success in that matter. This is one of the amazing things and why CPAs are really kind of up and coming in the quality control ESG arena.

That's a huge one is to kind of have all of those under one roof, to set yourself up for success, and to kind of develop those in internal controls, so that if and for some companies when they get audited on this ESG disclosures, especially as we're watching how the SEC climate rule is going, that's going to become more and more important to make sure that you are getting set up for success. Charles can definitely speak better to this than I can, but that's one of the many reasons why this is an amazing kind of industry to be in, even with and especially with CPAs.
JM:Yeah, no, that's good. It's where is it in your value chain or who in your value chain might be reporting to the SEC, what kinds of internal controls do I need, and how do I set them up so that they'll be reflected in the financials, right?
DB:And who's your audience.
JM:Easily, and who's your audience. Right, exactly. Great. That's really, really helpful. In closing, in my experience working with accounting firms, one of the things I love is that they're getting... Danielle, you sort of alluded to this, but they're getting a full picture of your whole financial picture, where all the money is coming from anywhere in your organization, where it's going out anywhere in your organization. You can see some of the risks and what's growing, right? You might not see opportunities down the pike necessarily without bringing in outside information, but you're seeing how the company is doing, a snapshot of it at least.

I'd like each of you in closing to comment on how the different vantage points that an accounting firm or unique vantage point that an accounting firm has can help companies leverage ESG. I mean, what might you be seeing as you look at the picture to be able to say, "You might want to maximize this. You might want to reduce that. You might want to do more of this. You might want to do less of that," for example, or talk about the kind of perspective that you get by looking at all of their financials in one place.
CW:What I would say is that, as you've alluded to, your accountant, your auditor, we look at ourselves as a trusted business advisor to our clients. We have a holistic, yet also detailed perspective on what's going on with that organization. We're typically servicing other clients in similar industries. We have an industry focus as well. I mean, we're obviously not disclosing any client sense information, but we can talk through the trends and the risks that we're seeing in an industry.

If we're having a conversation with one of our clients, be it a manufacturer or real estate company, we can talk through some of those things that we're either seeing as, "Hey, you know what? These are things to avoid, those risk factors that you want to get ahead of, if this is applicable to you." Also, we can talk through about things that are starting to be that best in class in the industry. By having that perspective around what's going on with our clients, what's going on in an industry, we can bring that to the forefront with our clients.

What's great about our firm, with the addition of Danielle and others in our ESG practice, we can bring that perspective to them. Even for an audit client, we can answer questions that they might have just about what's going on in the industry and use that as another value add for our clients to navigate this evolving field here that many of our clients are still trying to wrap their arms around.
JM:Yeah, I love that. You're seeing, in effect, benchmarking, right? That's another metric, but you're helping them see around the corner and maybe you're seeing what other companies are doing in the industry and you can say, "Well, you could try. Have you thought of this? Have you thought of that? Or, I see your numbers here are cattywampus. You might want to try another way that some others in the industry are doing and kind of leave it without identifying them." Right?
CW:Right. One of the other components I often get is if there's a CFO or a CEO or even an audit committee chair that says, "Hey, do you have any other clients that are facing this challenge? Could you put me in touch with them?" We often are kind of that informal networker, and obviously we seek the permission for our clients. But nine times out of 10, I'd say that most clients are willing to at least have a high level conversation with another, especially if they're not seen as direct competitors or in the same market or have you.

But oftentimes, many clients are very heads down on trying to tackle specific issues and they look to us as a resource to make those connections, either direct connection or answer some of those questions that they're facing.
JM:Yeah, they're in the trees and you can take them out to the forest. Danielle, what kind of perspective can... I mean, you talked a little bit about this, but expand on this in terms of what the unique perspective that an accounting firm can bring to reducing their carbon footprint, et cetera, in this ESG paradigm.
DB:I'm a strategic planner by nature. That's just how my brain works. I just happen to be in sustainability. But the best way to set this up is to understand that there are two parts to all of this. First and foremost, you need to disclose everything that you're doing. You need to manage those risks. That is the foundation on which to build this program. It's transparency. First and foremost, you need to get the data. You need to find out how to measure it. You need to find your metrics, what your targets are, how it integrates in your overall business objectives, and then find a robust, reliable way to collect that data for customers, partners, anyone else in your supply chain, investors, whoever it is.

Now, at the moment, investors are being a little more relaxed with the actual implementation portion for the most part. And same as the SEC rule, companies will get a little bit of a leeway at least a year or so before they're really kind of going to get to a point where they have to crack down on the strategy portion. But it's important to note that eventually companies will have to show progress towards these goals. It's not just about gathering the data, saying that you have it, saying that you've looked at risks. You need to continuously manage those risks. There's an entire strategy portion here that's extraordinarily important that eventually you are going to have to show progress toward those goals.

You're going to have to show transparency. You don't want to get caught greenwashing. You really, really don't want that to happen. Again, when it comes down to it, CPAs are known for their quality control. If you happen to have support from a company that has both advisory and the audit under one roof, you have the entire life cycle soup to nuts that you can address pretty much every aspect of ESG and sustainability disclosures, strategic planning, execution implementation reporting. I think that's a very, We talk about best practices, that is a very good tool to have in your toolkit.
JM:Oh, that's great. Yeah, they're getting the numbers anyway. I love to emphasize that point. CPAs are known for quality control. That's why they're considered the verifiers of your financial data. It's like, duh. That's like the perfect point, right? This is great. Any quick closing thoughts before I let you get back to your day?
CW:Just thanks for the opportunity to discuss this with you. It's very compelling topic and many of our clients are asking about this almost every time we're popping in on them.
JM:Oh, that's great to know. That's really good to know. Thank you so much, Charles Waring and Danielle Barrs of the EisnerAmper ESG practice. We're so excited for what you're doing. I really appreciate it, and you are definitely on the forefront. Thank you for your insights today. Stay tuned, everybody, for our next episodes on maximizing ESG for your business, the ESG in Focus Podcast. If you have any questions about ESG or interested in exploring support for your own ESG reporting, please reach out to Danielle or Charles at EisnerAmper through the firm's website, EisnerAmper.com. Thanks for joining us today on this episode of ESG in Focus. I'm Joan Michelson. See you next time.

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