The Impact Across Business Units with Adam Fishman

Transcription

David Stearns:
Welcome to BSR Insights. I'm your host, David Stearns. We're joined today by Adam Fishman, BSR's Associate Director in the Business Transformation team, where he works with BSR member companies across industries on sustainability management, including stakeholder engagement, materiality, strategy and reporting, and other important topics for sustainable business. So welcome, Adam.

Adam Fishman:
Thanks for having me.

David Stearns:
Really glad to have you here. So it's alphabet soup out there. We see a lot of changes around the most recent EU regulations and standards, but can you help us boil it down for listeners as succinctly as possible? We've got the GRI, the TCFD, SASB, and IFRS, CSRD and ESRS. How are these frameworks distinct and how do they work together?

Adam Fishman:
Sure thing. So I would first describe each of these as tools in a toolbox for a sustainability reporting and taking those in turn, first with GRI, formerly known as the Global Reporting Initiative. They were one of the first sustainability reporting standards and have been around for over 25 years. They request that companies disclose material issues, governance of sustainability, their sustainability strategy, and then material sustainability topics from an impact dimension where companies have an outward impact on the world.

The TCFD, the Task Force on Climate-Related Financial Disclosures was formed of several years after that, but issued their final recommendations in 2017 for company's disclosure of climate-related risks and opportunities, primarily from the financial dimension of materiality. In contrast to GRI's approach.

SASB, the Sustainability Accounting Standards Board, similarly takes a financial dimension and they are a series of metrics on an industry specific basis for companies to disclose financially material topics for their sector that might be valuable information for investors. SASB recently consolidated underneath the IFRS Foundation, that's the International Financial Reporting Standards Foundation, which recently issued two of their own standards, which effectively combine the TCFD recommendations with SASB metrics.

And then lastly, on the EU side, there's the CSRD on the ESRS. That's the Corporate Sustainability Reporting Directive and the European Sustainability Reporting Standards. The CSRD is the European legislation that mandates that companies above certain thresholds for revenue and headcount that they disclose on all of their material sustainability risks and opportunities from the financial dimension as well as their outward impacts. The European Sustainability Reporting Standards themselves, the ESRS, are the actual reporting standards under the law, that is the CSRD. These really do somewhat combine and collate the prior standards that we've seen from GRI, SASB, as well as the TCFD recommendations.

David Stearns:
That's a really helpful explanation to help us decipher these different frameworks and how they work together and how they're distinct. I'm curious to hear from you, from your perspective, why is this such an important time for those in the sustainability function within their company? And what advice would you have for them to help them to more successfully navigate this rapidly evolving landscape?

Adam Fishman:
The increase in importance and visibility that these new sustainability reporting standards have brought, it really puts the spotlight on the sustainability function in a way that it hasn't quite been in the past. First, moving from voluntary disclosure to mandatory disclosure implies changes to the look and feel and location of a company's sustainability reporting. For a US company, that might mean moving from a voluntary standalone sustainability report to embedding some sustainability information in their financial disclosures like their 10K. This is an opportunity for sustainability functions to upskill their peers outside of the sustainability team, showcase the importance of not just the disclosure, but what is being disclosed, using this to drive performance and impact beyond their teams. And then lastly, also just really marshaling more resources for that actual impact because this does seem to imply a greater reporting burden that spread across functions that are newly engaged, but it also does present a risk that sustainability teams limited resources go toward that disclosure alone when they should also be driving performance.

David Stearns:
That's really helpful to understand that beyond understanding what's coming, that practitioners need to be thinking about the impact and the action part of their work. Beyond just understanding the landscape and educating peers and other functions that you just described, what else should sustainability practitioners be preparing for and doing in both the near term and the longer term?

Adam Fishman:
So the tracking element is really critical for sustainability teams themselves. And conveying those implications and requirements to other teams is definitely key, but beyond that, thinking about how the various standards and regulations treat or enter the landscape. Many of these reporting standards put sustainability topics to the materiality test. For example, the EU regulation, that requires double materiality, thinking about how companies are impacting outwardly in the world on the environment and society and disclosing those outward impacts, and also disclosing how the company's business and resilience and strategy is affected by these environmental, social and governance issues.

So a really critical element beyond just the upskilling and kind of shouting from the rooftops with other functions is the sustainability team really driving that understanding of which issues are material and from which perspective. That exercise itself brings with it other opportunities and other engagement elements. So for example, this can be used to build buy-in internally. It can also be used to engage a wider range of external stakeholders. The GRI's perspective on materiality and the outward impact dimension of materiality from the EU side, both of those call for engaging a wider range of stakeholders, including affected stakeholders and rightsholders in line with a more human rights-oriented perspective than what we've seen in the past.

So that's really key to broadening and widening the aperture of what is the understanding of these issues impacts, who are we speaking to, and making sure companies have the full picture. And then leveraging the results themselves, not just using materiality to drive reporting because materiality does have roots in financial disclosure of simply what are the impacts. But this exercise can have more utility than that. So beyond using the materiality results to inform what a company needs to disclose against these new standards, there's also the utilization of materiality to inform strategy, to inform governance.

And using the results once they're in hand to understand based on what we need to disclose for the European standards and others, what are our gaps? What do we have readily available that we simply don't publicly report and need to flip that switch or take a decision internally on it? But where are their key performance indicators or other metrics that we will need to disclose to comply, where we don't even have a process in place and need to establish that? Where are there new policies or programs that need to be built out?

One really critical nuance about a lot of these standards is that they are disclosure regulations. They don't mandate performance. But when putting this back to the company of, "Do we disclose that we don't have something or do we put something in place to disclose that?" That's where the opportunity for impact comes in. And then using that also of course to inform the governance structure and action plans behind all of this.

David Stearns:
So you alluded briefly there to the importance... Not just the importance, but the opportunity for sustainability teams to engage with stakeholders both internally and externally. I want to focus for a few minutes on the impact or the developments that in terms of the internal stakeholders that sustainability leaders will need to be engaging in order to effectively work within these new frameworks. So everyone from the finance teams, legal teams, procurement, the board and C-suite, IT, human resources, even marketing, corporate affairs, we see that these regulations are likely to affect their responsibilities in different ways beyond the responsibility that the sustainability officer. So how do you see these effects coming down? Maybe we can sort of just go through a couple of the functions that I just mentioned and maybe have you talk a little bit about how each of these might need to be prepared to respond. So just to start, you're on the finance team, how is this likely to affect your day-to-day?

Adam Fishman:
First, I think one of the most central implications for finance teams is that sustainability data needs to be held to the same rigor as financial data. So that means establishing internal controls, which typically would fall under the finance team or the internal audit team within finance. And with that data collection process being made more robust to ensure that the company complies with these new regulations and standards, then there's also establishing and enhancing consistency across locations and regions. There's the data verification and approval aspect as well. And there's a risk that some finance teams or their own sets of consultants don't have the right skills for that. So one really critical implication that we're seeing on the finance team as well is either bringing in someone new who has sustainability expertise like an ESG controller, or otherwise, outsourcing this to other audit firms and making sure that their processes, controls and metrics all stand up to external assurance as will be required by regulations like the CSRD.

David Stearns:
How about the legal team?

Adam Fishman:
So the legal team has a really tricky job here because there's understanding the new obligations that these standards and regulations impose. And with that, there's determining which legal entities from the company's structure are in scope for sustainability reporting and where and when. There is also then of course the compliance obligations. What do we need to disclose where and when? What's effective when? And there's understanding the new terminology that's attached to this. So we were just speaking about materiality. The US Securities and Exchange Commission has a definition of materiality. That definition is not identical to the definition of materiality as defined by the European authorities. And so, making sure that legal teams can parse those nuances and also not get tied up in the differences so that companies can still disclose and are not clawing back what they might've disclosed previously, that's really key. And that happens also in coordination with functions like finance to ensure that if something is getting disclosed in financials, that the language being employed is not too jargony or technical or otherwise boilerplate kind of legal language.

David Stearns:
So one of the important elements of this as well, we talk about the importance of scope 3 emissions reduction, and as part of making credible claims around a net-zero commitment, the procurement team. So how will they be faced? Or what challenges will be facing them in terms of these regulations?

Adam Fishman:
Totally. That's a big one. First, there's the broader requirement of understanding not just supplier impacts, but broader value chain impacts both upstream and downstream. Not just what is our supplier performance or what are our supply chain risks, but also for European standards at least, what are the impacts of our products and services. And going beyond that, so there's, from the procurement angle specifically, identifying and disclosing what vendor data might be available and engaging or pushing suppliers to not only provide that data, but also cascade those requirements to their own suppliers. Because the tier one, the immediate supplier for most of these companies, many of them might already have the requisite data available, but they don't have it then further up the chain.

And so that longer tail of visibility is increasing and is necessary for compliance. There are a whole range of other implications there, which might mean more stringent or revised supplier codes of conduct, other consequences for non-compliance, other audits of suppliers. But a really big point here as well as going beyond the environmental due diligence side and understanding scope 3 to bringing in human rights due diligence approaches and understanding the social angle as well, which then also calls for coordination with other teams beyond procurement and sustainability. Some companies have dedicated human rights teams or human rights lawyers. Bringing them into the fold as well, because there are other regulations that also tie to human rights due diligence like the Corporate Custainability Due Diligence Directive and national jurisdictional regulations like the Norwegian Transparency Act and the German Supply Chain Act. And so there's this kind of interconnected web of regulations that yes, maybe start with disclosure but also go beyond that, and have implications, yes, for procurement directly and also for other impacts that also relate to procurement.

David Stearns:
So as someone who works himself in marketing communications, I'm also curious to hear how this is likely to affect marketing teams. I would presume that some of this hinges on the ways that companies are marketing particular products or the way they're discussing their sustainability commitments in public communications. But can you talk a little bit about how this will affect those teams?

Adam Fishman:
I think the biggest takeaway is cross-functional collaboration to align the corporate narrative as a whole. So there is what gets disclosed for a US company in their 10K. In some instances, if you read that same company's sustainability report, you don't even know if you're reading about the same company. So that aligned narrative across the various communications channels, be it the website, the sustainability report, the 10K, other disclosures, that's probably the single largest impact. And aligning that narrative in partnership with the legal and sustainability teams is really critical there.

I think there's also a question of, if we're changing the look or feel or location of our communications or our disclosures, if we're moving from a voluntary sustainability report into the financials, what does that do to our intended target audience? How do we retain some of that storytelling or imagery or case study call-outs that wouldn't go into the financials but do live in a sustainability report? So then there's also an open question of, what might shift to the website or a microsite or another supplemental disclosure versus what moves more into the financial side?

David Stearns:
So we've been talking a lot about what's under the hood, but I want to now bring it back up to the top of the company, the group that sort of sets the overall agenda for a company, the group that is most responsible for fiduciary responsibility to company shareholders and the overall governance of the company. What is the role for the board in specific, but also the C-suite? But let's maybe start talking about the board. We're also going to talk to Christine Diamente more specifically about boards, but curious to hear from your perspective how boards can prepare themselves for this.

Adam Fishman:
I think first it's important to call out that the different reporting regulations and standards require different levels of board engagement. The US SEC's draft rule on climate disclosure, yes, requires disclosure on board oversight of climate issues and disclosure of the frequency of engagement. But the IFRS Foundation's new standards go further than that and the European standards go further than that. And so overall, I think the main takeaway here though is that boards need to provide closer oversight of sustainability issues. And with that comes expanding the board's skills and knowledge, expanding and increasing the frequency with which they receive updates on sustainability issues, potentially updating the board composition or committee structure or board charters to allocate responsibility for the European regulations. It requires signing off on the materiality results and the reporting itself. And overall, this is really a critical opportunity and presents a new need to more closely align sustainability impacts, risks and opportunities with what might be perceived as the core business strategy.

David Stearns:
Thank you for that. You alluded earlier to the societal components of this, and it's climate first, but not climate only. And so I guess the next group I'd like to ask about is how this will affect the human resources team in particular?

Adam Fishman:
Sure thing. As we expect other standards or other bodies like the IFRS Foundation and the SEC to continue beyond climate, because IFRS S2 on climate-related disclosures is just the first climate standard. The SEC's draft rule on climate is early. There's already a new rule on cybersecurity risk governance, and there's an expected rule on human capital management. So when we think about the social dimension, particularly with respect to company's own workforces, on the human resources side, there's a really delicate discussion around how they align regional and national approaches with those of global standards.

So for example, is collecting demographic data about employees in a particular country or region, especially sensitive or even allowed, or doesn't present risks to those employees, should that data get out? That element, I think is a very difficult question to address. There are other aspects on the social side and for human resources teams around how do we provide metrics or targets for hard to quantify elements. If you're on the DEI team, for diversity, equity and inclusion, how do you prepare the inclusion side of that? How do you try to quantify that or otherwise issue an assurable qualitative statement on your inclusion practices?

Another key element here is just on pay equity. We're expecting more disclosure around pay equity, pay gaps and living wages. So I think some of those elements are key in the European standards, and that's typically kind of the entry point for others as well.

David Stearns:
So thank you for that, Adam. That's been really, really helpful and really illuminating to talk about the different roles of different teams within companies and how they need to work together in order to ensure that companies are prepared to successfully disclose and comply with many of the new regulatory requirements. I'm curious though, and to put you on the spot for a minute, do you believe that collectively these new frameworks go far enough in terms of requiring companies report and disclose on elements of their sustainability activities?

Adam Fishman:
I would describe this personally as a necessary, but insufficient start. There is now I think more transparency and will be more transparency beyond what we're currently seeing around not only companies outward impacts, which should in theory move the needle on performance, but also how companies are exposed to risks and opportunities from the business perspective, which in theory moves capital toward more sustainable outcomes.

I think the disclosure regulations on their own though don't go far enough. I think that there is a risk that compliance with these new rules overshadows continuations of making progress toward targets or setting new and more ambitious targets because the resources that would have gone toward a more ambitious target are now maybe being kind of cannibalized by preparations for compliance, like for an assurance budget, for example, or going to consultants to help understand and interpret the implications here and prepare for that.

So I think that there will be some difficult trade-offs in the near future that sustainability functions and others that are impacted by these regulations face as a whole. In theory, companies should be able to do both. I think many of the resources that will drive toward compliance sit in functions that are not sustainability. So it's not always a direct trade-off, assurance budgets sit with finance typically for example. And the pie is growing for sustainability compliance as a whole, but there is still this open question of, where do these resources actually go? Is it to the finance team, the legal team, those two teams, consultants? Or is it to the sustainability team to really drive progress and performance and establish and further build on their current plans? I personally am a bit cynical. I think that in three to five years, we'll better understand the impact of these disclosure regulations, but at present it's a bit too soon to tell.

David Stearns:
So it seems that we are at the beginning of a race here, not the end of the race. And you certainly will have your work cut out for you, particularly some of the work that you do with BSR's Future of Reporting Group. So good luck. I'm sure you have your work cut out for you on that. The last question I'd just love to ask is sort of what do you see coming around the corner on this topic? What new developments are we expecting that have not come forward yet? And what sort of in the near to medium-term should companies be thinking about?

Adam Fishman:
I think what's directly around the corner is the solidification and finalization of the regulations themselves. Beyond that, I think then for the compliance and preparatory elements, there's closer understanding of what exactly we need to do and how do we sequence those actions. And with those actions, I think we'll see companies working more closely in partnership with each other. So we see, for example, within BSR, the future of reporting collaboration. That's 90 companies operating on a pre-competitive basis to talk about the sustainability trends in landscape and how they're preparing.

Going beyond that, I think we'll also see collaboration on the vendor side. We within BSR are not offering legal advice. We have some lawyers, but we don't do legal stuff. And so, partnering with law firms or assurance entities. We've had our materiality assessments now assured for compliance with the CSRD. And so I think we'll also see a drive toward more aligned multi-vendor arrangements where law firms assurance parties and accountancies and nonprofits like BSR are working more closely hand in hand together to help companies meet that moment.

David Stearns:
Well, thank you very much. This has been really illuminating. We appreciate your time and I look forward to chatting with you again.

Adam Fishman:
Thanks so much.

David Stearns:
Thanks for listening. For more in-depth insights and guidance from BSR, please check out our website at bsr.org and be sure to follow us on LinkedIn.