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How the evolving ESG regulatory landscape is impacting finance
In this episode, Myles Corson welcomes Marc Siegel, EY Americas Corporate and ESG Reporting Leader, and Brian Tomlinson, ESG Managing Director at Ernst & Young LLP.
Their conversation focuses on the rapidly changing environmental, social and governance, or ESG, reporting landscape, and how the advancement of the regulatory agendas in the US and the EU are expected to have meaningful ramifications. Therefore, it’s critical that finance professionals stay current on emerging ESG topics to maintain relevancy and develop high-quality, enhanced reporting for key stakeholders.
Now that the Sustainability Accounting Standards Board (SASB) has fully merged with the IFRS Foundation, the SASB standards have become the intellectual property of the International Sustainability Standards Board (ISSB.) They plan to build upon those SASB standards, which, while not being mandated anywhere, have been widely adopted. Investors suggest that the SASB and Taskforce on Climate-Related Financial Disclosures, or TCFD, are probably the most useful frameworks they have found, and both are incorporated heavily into what the ISSB is leveraging.
To prepare for expected changes, companies should consider applying the skill sets and rigor of finance professionals to ESG data. According to a recent EY poll with the Corporate Controllership Leadership Network, around 75% of corporate controllers say they were very interested or already recruiting for an ESG controller, someone within the finance function to oversee the processes, controls and governance around ESG data.
To ensure our listeners are engaged with these topics, we are launching a new subseries within the Better Finance podcast series. This subseries will cover the movement of different regulatory and voluntary standard-setting processes, and how the investor community is engaging with and using ESG information.
Key takeaways:
Evolving ESG reporting standards are pushing CFOs to stay relevant.
Over 60% of the global S&P 1200 companies have voluntarily decided to adopt some or all of the SASB standards.
The ISSB is hoping to be a foundational building block for an investor audience for globally consistent standards to be applied.
However, with the Securities and Exchange Commission (SEC) putting forth a climate standard proposal, the risk of regulatory fragmentation globally is still significant.
For your convenience, full text transcript of this podcast is also available.
“The SASB standards aren’t required anywhere. Yet despite it not being mandated, there are over 60& of the global S&P 1200 companies have voluntarily decided to adopt some or all of the SASB standards. It’s really been an amazing show of what the market can drive toward if allowed.”
Myles Corson
That was Marc Siegel, EY Corporate and ESG Reporting Thought Leader, sharing his reflections on the impact of the Sustainability Accounting Standards Board, or SASB.Marc served as a SASB member and recently ended his tenure with the board’s transition to the International Sustainability Standards Board, or ISSB.
I’m Myles Corson from Ernst & Young, host of the Better Finance podcast, a series that explores the changing dynamics of the business world and what it means to the finance leaders of today and tomorrow.
The reporting landscape around environmental, social and governance, or ESG, is rapidly changing.The advancement in the regulatory agendas in both the US and the EU are expected to have meaningful ramifications for US-based companies.It is critical that finance professionals stay current on emerging ESG topics to maintain relevancy and develop high-quality, enhanced reporting for key stakeholders including the board, audit committee and investors.
I’m pleased to invite Marc back along with another past guest, our colleague, Brian Tomlinson.Brian is currently a managing director with Ernst & Young, focused on ESG reporting and was formerly director of Research for Chief Executives for Corporate Purpose.Together they share how SASB has helped evolve the ESG reporting landscape and where the regulatory fragmentation in the US and EU could get in the way of truly global sustainability reporting standards.They also provide an overview of the current state and what financial professionals can expect over the coming months as the US Securities and Exchange Commission reviews the 8,000 plus comment letters it received during its comment window.
This episode serves as a stepping-off point for a new subseries of the Better Finance podcast focused on what finance professionals should know around ESG issues and reporting.Stay tuned until the end for more details on what you can expect from these ESG-themed episodes.
Corson
Marc and Brian, it’s great to have you back on the podcast. Since we last spoke, obviously some things have changed, it would be great if you could just reacquaint yourselves with our listeners, in terms of your current roles and what you’re focused on. Marc, if I start with you.
Marc Siegel
Sure. Thanks so much for having me. I’m currently the EY Americas ESG and Corporate Reporting Thought Leader. My background is kind of circuitous and serpentine. I’ve been an auditor. I’ve been an investor. I’ve been a standard setter, and now I’m a consultant with EY. I’m currently a Sustainability Accounting Standards Board (SASB) member after being a Financial Accounting Standards Board (FASB) member for ten years.
Corson
And Brian?
Brian Tomlinson
Great to be with you, Myles. Thanks for asking me back. My name is Brian Tomlinson. I’m a managing director in EY Financial Accounting Advisory Services practice, focused on environmental, social and governance (ESG). I spent the last decade or so advising companies on ESG reporting strategies, long-termism and corporate purpose, and that’s the role I’m continuing with at EY. My deep background is that I’m a recovering corporate finance attorney.
Corson
Great to have you both back. Marc, you mentioned your roles with FASB and SASB. Are there any reflections you can share with the audience on your time as a standard setter and takeaways, and what you got out of that process?
Siegel
It’s really a fascinating way to learn and engage with stakeholders. It really has rounded me out as a professional, frankly, because what you have learned to do is to try to balance the costs and benefits of giving the right information to the capital markets to be making investment decisions on, and really trying to enhance the dialogue between companies and their investors and broader stakeholders as well.
One of the things that is really interesting to me about the FASB is that there’s an anchor. You have financial statements. You’ve got a balance sheet. You’ve got an income statement of the cashflow, and then you’ve got footnotes that are integral to the understanding of those financial statements. With sustainability disclosures, though, you don’t have an anchor. Since you don’t have a balance sheet and an income statement and a cashflow statement, the disclosures in sustainability reporting have to stand on their own.
At SASB, what they did to try to create that anchor is focus on the business model and the impacts and the material items in ESG reporting that actually intersect with that business model, and that’s why they created 77 different industry standards, as opposed to doing topical standards. That’s definitely a big difference.
Corson
Let’s maybe get a little bit of an update from you in terms of what SASB has been focused on. Are there any updates you want to provide and recent changes that have gone into effect?
Siegel
The SASB is fully merged with the International Financial Reporting Standards (IFRS) Foundation on 1 August. The whole alphabet soup of nongovernmental organizations putting forth voluntary standards is really starting to converge into what the ISSB, the International Sustainability Standards Board, is looking to do. The SASB standards themselves will become the intellectual property of the ISSB. They are also integral within the proposals that the ISSB has put out to the market, but they’ll always be available on the SASB website — on sasb.org.
The hope is, and what the ISSB is planning to do and they’ve committed to do is build upon those SASB standards rather than starting from scratch, and they have committed to doing industry-based requirements as part of their standard-setting organization. It’s really an amazing time where you’ve really finally gotten some convergence of all the different alphabet soup of standard setters.
Corson
That really is great progress. To your point about the way ISSB is going to build on what SASB has done, are there any particular things you’re proudest about in terms of what SASB has achieved during your time that will be moved forward under ISSB?
Siegel
I think what’s really amazing is that the SASB standards aren’t required anywhere. So, it’s really a market-driven initiative, what the investors are looking for and what the companies are willing to report. Yet, despite it not being mandated, there are over 60% of the global S&P 1200 companies that have voluntarily decided to adopt some or all of the SASB standards — even more in the western hemisphere, as compared with the eastern hemisphere. It’s really been an amazing show of what the market can drive toward, if allowed.
It’s definitely a bumpy ride when there’s market-driven activity, but that’s something that I’m very proud of.SASB didn’t codify their standards until late 2018, and since 2020, there have been over 1,800 companies that have volunteered to report that information. So, they must have done something right, and investors have seemed to coalesce around suggesting that for their information, SASB and the Taskforce on Climate-Related Financial Disclosures, TCFD, are probably the most useful frameworks that they have found, and both of those are incorporated heavily into what the ISSB is leveraging and going forward with.
Corson
Voluntary adoption and standards aren’t necessarily things you put together. So, you must be doing something right to get to that point. You’ve talked about this convergence and the simplification of the alphabet soup. Talk to us about your views on, are we getting to truly global standards? What does the path look like?
Siegel
There definitely has been some convergence, not down to one, mind you, because you have the ISSB. The TCFD is still out there, but what ISSB is hoping to do is be a foundational building block for an investor audience for globally consistent standards to be applied. But on top of that, you will then be able to have information that’s useful for other stakeholders, like Global Reporting Initiative (GRI) or other jurisdictions, like the EU might add on top of that for a broader audience. I think what you’re getting to, at least in the voluntary standard settings space, is getting it down and winnowing it down from seven to five to two standard setters, which I think is great.
The thing that we all have to watch out for is that now the regulators are coming in, and while you’re getting some convergence on the voluntary standards, there’s still a very significant risk of regulatory fragmentation. In other words, you might have some regulators in the US, the Securities and Exchange Commission (SEC), putting forth a climate standard or a proposal, which they have done, and the ISSB and the EU similarly wanting to get involved in climate. Those standards are similar but not the same and that creates a different kind of headache for preparers, who are looking to comply with all the different rules and the different jurisdictions. There’s still a sense of fragmentation potential. It’s now unfortunately in the regulatory realm instead of the voluntary realm.
Corson
That transition period that we’re going through, there’s a lot of companies that have voluntarily adopted the SASB standards. What’s your advice to them as we go through the transition, in terms of what they should be doing and how they should be thinking?
Siegel
The companies should still continue to use the SASB standards for now. They’ll be very, very helpful. One of the proposals that the ISSB put forth is their general proposal standard, which basically says companies should report all material ESG information, and they said that the companies should consider all the SASB standards for their industry in order to figure out what’s the most material information for them.
They’re an integral part of what the ISSB is doing, so continuing to use the SASB standards, make use of the materiality map that’s on the SASB website and will continue to be on the SASB website, those will be very helpful for companies to be looking through and thinking about, as they are looking for more global standards to be put in place by the ISSB and others.
Corson
Brian, perhaps I can bring you in at this point.Some of the changes Marc has alluded to with the various standard setter and regulatory authorities are ongoing. Can you provide a bit of an overview on the current state and what else we should expect to see in the next few months?
Tomlinson
Very briefly, I just wanted to pick up on Marc’s comments just about the influential nature of the Sustainability Accounting Standards Board’s work over the last few years. I think when many issuers first started to engage with the ESG issue space, ESG issues often seemed to be everything.You’re asking us to report and engage with everything, whereas I think what SASB did and did so efficiently was to say actually ESG issues are very systematically by sector. You can narrow them down to a high minimum baseline of financially material issues, and that can really focus management attention on the issues that really matter for driving value and the issues that investors are genuinely interested in, given the way in which investors tend to follow companies on a sector-specific basis. I think it’s been hugely influential work that has bled into lots of other frameworks and, indeed, the work of the regulators.
On that regulatory side, I mean yes, the macro position is that ESG is moving from the voluntarily space into the mandatory space. And, ultimately, what we’re seeing this year is an unprecedented amount of regulatory rulemaking activity across jurisdictions on ESG issues. Obviously in the US, we have the Securities and Exchange Commission’s climate proposal.
Now, I just wanted to emphasize just how long a road there was for the SEC to get to that proposal. Climate issues have been part of the SEC’s framework, or at least environmental issues, since the 1970s as a result of those early environmental acts. In 2010, you had the interpreted guidance that was issued by the SEC, talking about how, where climate is a material issue, it ought to be part of the continuous disclosure framework. Then over the last year, you had the SEC clearly building up to issuing this proposal, asking with a request for comment and then also comment letters to issuers talking about the structure and start of their disclosure between the voluntarily and the mandatory space.
The SEC proposal, I think many aspects of it are very welcome, and there are certain aspects of it, which issuers and industry groups and, indeed, some investors are pushing back on. It uses TCFD and the greenhouse gas (GHG) Protocol as its basic analytical architecture to provide the structured aspects of the rule, but there are many technical concerns that issuers have around the implementation of those proposals and the timing. There are also proposed changes which were rather unexpected aspects of the proposal around footnotes to the financial statements, where the concerns there are less about perhaps in macro adjusting the terms of the proposal and more about pushing back on the very idea of including footnotes to the financial statements.
The SEC received over 8,000 letters. Those numbers are slightly skewed, because a number of those are form letters from individuals rather than from large issuers and industry groups but, nonetheless, it does indicate just the amount of attention that this has received. The SEC has quite a job to convert its proposal into a final rule on the basis of the comments received.
At the same time, of course, without going too much into the detail, while the SEC is proposing these narrow ESG-themed proposals, first on climate, scheduled on human capital, later on board diversity, you then have Europe with a huge, ambitious, sustainable finance agenda building out toward its corporate reporting directive. That’s a huge piece of legislation that builds off the back of the Non-Financial Reporting Directive (NFRD) and has some key features that just expands the existing reporting envelope in Europe.
It takes it to Corporate Sustainability Directive, which I think everyone agrees is a rather more appropriate title, but it’s going to scope in around five times more companies. It involves assurance. It involves a comprehensive set of sustainability reporting standards. It involves reporting on two different types of materiality, both investor-focused and impact —very extensive, lots of building for issuers in response to that, and that also is going through its file-on process with the EU right now. Lots of activity and lots of things that companies need to do to respond.
Corson
Great summary there, Brian. I suspect a lot of listeners have been involved in preparing comment letters or have been following the process closely to see what’s happening next.What are the recommendations you’re making to the finance leaders that you’re speaking to, and to how best to prepare for the changes?
Tomlinson
A few things going on there. I think essentially what’s happening, if you think about it in meta, is that ESG is moving closer to finance, and finance is moving closer to ESG, and the movement of ESG into the mandatory space is kind of compelling that journey.
I think there are a few things that companies need to do. One, for instance, is to think about applying the skill set of finance professionals to ESG data. Very often, ESG data has not been engaged with by finance professionals to any meaningful degree. Often that ESG information is scattered across different spreadsheets, different technology platforms in a way that your average finance person with a grip on the numbers is not going to be happy with. Imposing some of that rigor of finance professionals onto ESG numbers is what needs to happen.
A number of companies are starting to build out their finance function and including an ESG element in that.We convened the Corporate Controller Leadership Network in a recent poll. Around about 75% of that group said that they were very interested in or already recruiting for this idea of an ESG controller — essentially someone within the finance function to oversee and fold some of that process around ESG information.
Necessarily, ESG information requires a lot of cross-functional collaboration. It’s about putting the corporate ecosystem in the room, understanding where the data is, how it’s controlled, who owns it, and really bringing the whole corporation to bear to understand the implications of ESG data and where it is.
One of the pieces that we’re helping companies with is this idea of SEC or regulatory readiness. What are the gaps that you’re going to need to plug, in terms of what you're disclosing, and then what do you need to build at the backend to enable that disclosure? Perhaps, more broadly, how can you ensure that ESG isn’t just a source of compliance, but it’s a source of business insights? I think that’s ultimately why we want the ESG space today.
Corson
And Marc, anything you’d add to that?
Siegel
The thing that I would add is a couple of tactical steps that companies could take. I think that what we recommend often is that companies are already doing a lot of this information and providing some of this information outside the financial statements.
We found that it’s really helpful to actually do a deep and full inventory of what they’re already providing, understanding where the information is coming from, who the data owner is. Is that data that you’re already providing in a system? Is it not in a system? If it's in a system, is that system Sarbanes-Oxley compliant, or does it have any controls around it whatsoever? And just having that deep database of ESG information that you already are doing as an organization, and understanding where that data resides, as Brian said, will help bring in everybody that needs to be part of the conversation. And from that inventory and understanding of the current state, you have a much easier idea of coming to the roadmap that Brian was talking about of where you might want to go and how far you want to go.
We have found that the combination of the current state inventory and the aspirational goals where you want to get to, and even combined with if a company has done a materiality assessment, that gives them a running start as to the priorities of the ESG issues that are most relevant for them, and then you could prioritize, because this is not going to be a sprint. This is going to be more of a marathon. Those are some tactical steps that seem to be working for many companies, although every company is different.
Corson
I think we’ve covered a lot of ground here. There’s clearly a lot going on in the standard setting and regulatory environment. You very clearly articulated the role of finance in making this happen. I’m very excited to be announcing and working with the two of you to create a new subseries focused on ESG as part of the Better Finance podcast to make sure that our listeners stay engaged and connected with these topics as they continue to evolve. Marc, as we launch the series, interested to get your objectives and what you want to achieve for our listeners as part of this program.
Siegel
I think this conversation alone has indicated why we need to have a series just dedicated to this, right? I think there’s a number of themes that we’re seeing resonate with our clients. There are probably four of them, and one is just the ESG reporting vision. What’s happening in being able to keep a line of sight on all these different moving parts and how they’re going to affect you? Certainly, we’re going to hit on in the series the things you’re going to need to know as these different regulatory and voluntary standard-setting processes move on.
Second, a question that we get all the time is, how are investors or are investors even using this information?Being able to provide real life investor use cases of this information is going to be really helpful to understand the why. Once the finance function understands the why, it’s much easier to get around the how do we get at and what could be most useful for the investor conversation?
The third is US-unique perspectives. Brian talked about a lot of the global landscape or especially around the regulatory aspects of this. There are sometimes some US-unique perspectives that we need to keep in mind, particularly around that EU regulation and Brian mentioned the two different kinds of materiality that is part of that EU regulation. There are some US-unique lenses that we want to provide to our clients around how to be thinking about the context of what’s going on around the world and how it actually impacts them.
And the fourth area is really what this was all about, which is how do you shape the finance function to accommodate the things that are going on and understanding where this is likely to go? And then you could be planning yourself and your teams to be getting there ahead of that. Those four areas are really the kinds of themes that we’re going to be hitting on in this series. We can’t thank you enough for allowing us to borrow your platform from time to time to be able to keep your listeners up to date.
Corson
You’re very welcome. That’s a great intro to what we can expect. Brian, perhaps you can touch on the kind of guests you’re expecting to be able to talk to. And I know you’ve already recorded the first episode, so maybe just give a sense of what’s to come.
Tomlinson
Thanks so much, Myles. It’s great to be part of the Better Finance platform. We’ll be picking up many of the themes that Marc described. Our first recording is with NYU Stern’s Center for Sustainable Business. We pick up on some really key issues in the ESG space. The first is, how do you account for the way in which ESG investments affect the bottom line? NYU Stern have come up with this really interesting concept called the return on sustainability investments. Essentially, it’s a way to allow management teams to think in a broad and imaginative way over the short, medium and long term about how investing in the E and the S of ESG can help you in really conventional business terms, whether it’s resilience, customer loyalty or enhanced margins.
The second is to look at some of the meta studies around ESG integration. I think there’s been a lot of commentary around those ESG techniques, varied as they are across different strategies and models, can they help with your financial returns? And many of the meta studies suggest that they do. It’s nuanced in technical work, but NYU Stern will take us through that.
And then the additional piece is then how do you talk about ESG to the capital markets? This is work that I in my prior role did with NYU Stern, talking about, how do you think about integrating ESG themes into something like the earnings call? If you think about it, the earnings call is incredibly important. It’s part of the course of theater of how you talk about valuations, but also, arguably, the least auspicious of any of the forums to talk about ESG, because it exists on a 90-day frequency.
So how do you talk about ESG in that context? To me, the kind of discipline of trying to impose that frequency on ESG allows us to think about how we can improve ESG reporting generally and really tie it to financial values. Hopefully, that indicates quite how closely ESG and Better Finance align as we go forward.
Corson
I really look forward to working with both of you on the new series and, again, very topical. I think this intersect between corporate sustainability reporting and finance is going to be such an important trend over the next couple of years, and more and more, I suspect, of our listeners are going to be very interested to find out more. I’d also be remiss not to mention our sister podcast, Sustainability Matters, for those that want to get into even more detail around the sustainability topics, focus more on the sustainability audience. We’ll post links to that as well for those that are interested.
Marc and Brian, fascinating as always to talk to you. Really appreciate you simplifying and distilling down an awful lot of activity that’s been happening over the last few months and can’t wait for our audience to benefit from your insights on a more regular basis going forward.
Tomlinson
Thanks so much, Myles.
Siegel
Thank you.
(END OF TAPE)
Corson
Thanks again to Marc and Brian for joining me for this episode and for agreeing to take the lead on sharing ESG insights, updates and perspectives with our finance listeners.ESG reporting is a shared responsibility across the organization with the Finance function set to play a key role.So, I hope you will continue with us on this Better Finance journey as we take a deeper dive into the world of ESG, and for ESG-focused professionals, don’t forget to check out our sister podcast, Sustainability Matters.
If you’ve enjoyed this or any episode, please remember to subscribe to the series or leave a rating or review, and if you’d like to find out more about the topic, we’ll post related links at EY.com/BetterFinance.As a reminder, watch out for upcoming episodes of our new ESG subseries of the Better Finance podcast.
