Putting the G in ESG

Pierre Taillefer:

So, for me, ESG, regardless, take away the regulatory requirement. It is reviewing how you operate as an organization and implementing, again, ESG factors to be better off as an entity and to ensure sustainability. So, it just makes sense to already integrate those concepts into how you manage.

Narrator:

Welcome to Accounting for the Future: A BDO Canada podcast for financial leaders to navigate change and achieve business growth. We'll uncover the challenges financial leaders may not have dealt with yesterday but will definitely have to manage for the future.

Armand Capisciolto:

Hello and welcome to Accounting for the Future. I'm Armand Capisciolto, your current host. This season we're switching things up a little bit. We're introducing a co-host to our roster of fantastic guests and topics. As some of our listeners might already know, I'll be with BDO only for a few more months before I become chair of the Accounting Standards Board on a full-time basis. So it is with pleasure that I welcome Anne-Marie Henson, my co-host for season three and future host of accounting for the future. Anne-Marie, welcome back.

Anne-Marie Henson:

Thanks so much, Armand. Pleasure to be here again.

Armand Capisciolto:

Yes, and for those of you who've been listening, and which is everybody, our loyal listeners, Anne-Marie should not be a stranger as she has been my only repeat guest. And in fact, the first episode she was on 'Accounting for Scale Up' is our most listened to episode.

Anne-Marie Henson:

Well, I'm so happy to be here and a really excited to co-host with you next season. I have to say, doing these podcasts with you have been my highlight of 2022, so it's really fun for me to be able to take on the job as co-host and eventually the host of Accounting for the Future. Although a little bit bittersweet I have to say because I'm sad to see you go Armand, you've been really fantastic just as a colleague but also a really amazing host.

Armand Capisciolto:

Well, thank you. I'm just thrilled to have someone take over the hosting duties and Accounting for the Future lives on and I will become a loyal listener in the future. On today's episode, we're joined by Pierre Taillefer. Pierre is BDO Canada's Sustainability Leader. In this role, he is responsible for moving both BDO Canada's internally ESG strategy forward, as well as leading BDO's sustainability service offerings. Pierre, welcome to Accounting for the Future.

Pierre Taillefer:

Thanks a lot, Armand. I'm thrilled to be here to talk about ESG. BDO Canada is implementing its program and it is heavily committed to being a more sustainable organization and we're seeing a lot of activity in the market as well in terms of organizations of all size, different industries asking what is ESG and what should we do? And so, happy to be here to talk about that today.

Anne-Marie Henson:

So, Pierre, when people ask us about sustainability or ESG, oftentimes these days we're talking a lot about climate change as well as with the equity, inclusion and diversity portions of ESG, but those are only portions of ESG and not the whole thing. We don't get as many questions about the G in ESG being governance. So, we wanted to start by asking you to define what is actually covered by the governance element of ESG.

Pierre Taillefer:

So, I'll talk about governance, but I'll also talk about ESG as we haven't yet defined it. So, governance is really how does an organization manage different aspects of internal, so looking at ethics, adherence to laws and regulations, what processes are in place related to anti-corruption, anti-bribery, also looking at supply chain management, lobbying. One control that we have seen under governance, it's been around for a while now, since the early 2000s. It's whistleblower, implementing a whistleblower policy and a whistleblower line where individuals can report issues that they see within the organization. And I would add to the governance piece, reporting overall, that includes financial reporting as well as ESG reporting and climate. So ESG, G is governance, E is environment, and S is social. So, as you rightly said, Anne-Marie, we see a lot in the market. We see a lot in the media related to climate, greenhouse gas emissions under the S, equity, inclusion and diversity. And I would say supply chain as well. And we hear a lot less about G and I would say that we hear a lot less about ethics or anti-corruption or whistleblower because it's the smallest lift I would say for organizations today in the ESG world, I would say a number have been doing G activities or have implemented G programs for a number of years now, whereas S is a lift, a bigger lift, and I would say E is the biggest lift of all.

Anne-Marie Henson:

Oh, that's interesting. It sounds like although the concept of ESG seems to be something that's relatively new and just talked about a lot more today than several years ago, it sounds like a lot of companies might have already been implementing a lot of governance related policies in the past. So perhaps like you said, although it seems like a lot and could be overwhelming for some companies to try to implement likely maybe they're already doing some of these things, they already have those in place.

Pierre Taillefer:

Absolutely, and I would say not only from a governance perspective but from an environmental, social and governance. And for the most part when we are talking to clients about ESG, starting point is to understand what they already do. What do you do under environmental? So, depending on the industry, I would also say how the organization is held, whether it's private, public, and certain industries are more touched by environmental regulation, but most, if not all organizations, not-for-profit, publicly traded private companies have already implemented some E, some S and some G programs. So, nobody is starting from scratch. Most organizations are not going to be starting from scratch. Some that are very small may be starting to implement governance processes, but for the most part this has been in place. And actually, ESG in terms of terminology is new.

We have seen it evolve over the last five years, but the concepts are not new. I have been delivering ESG type engagements for 15 years now. It has always been under the umbrella of sustainability and 15 years ago defined more as corporate social responsibility or corporate responsibility reporting. And that was qualitative in nature for the most part. ESG has more corporate social responsibility into programs with objectives, performance indicators, and a real push towards monitoring performance and reporting on that performance. So, none of this is new. It has changed in terms of how we're talking about it. And like I say, for most organizations, implementing ESG is not starting from scratch and implementing a full program. There are already a number of processes, controls, policies, procedures already in place.

Armand Capisciolto:

Pierre and apologize there, Anne-Marie and I, it's our first-time co-hosting and you're exciting us both. So, we're jumping over each other here to ask you questions. But it was interesting when you were talking about what is encompassed by the G and also just talking about companies have been doing this for a while and maybe not without knowing it because as you were talking about the G and your background is not just sustainability, you come from a risk advisory background. And as you were talking about this, especially when you brought up whistleblower, the first thing that kind of pops in my head is, wow, are we talking about control environment considerations and the COSO framework? And for those of in the public company environment will remember the implementation of the Sarbanes Oxley Act in the US and 52-109 in Canada and in the early 2000s as a result of the whole Enron debacle. Is this going to be something similar to that? Is this move towards mandatory sustainability reporting, is this going to be similar to the mandatory internal control reporting that we went through 20 some years ago now?

Pierre Taillefer:

So first of all, I'm no stranger to Sarbanes Oxley or 52-109 have done a number of engagements for publicly traded companies reporting under either 52-109 Canada, 52-109 Canada and SOX, or only under SOX. And so that implementation for publicly traded companies of an internal control framework that was part of in the US a fully integrated audit of financial statements and internal control structure, in Canada, a separate engagement. So, we still have financial statement audit in Canada, and it was management reporting on its internal controls under 52-109. There was still some integration that was seen between financial statements and the internal control structure that generates those financial statements. And I would say what we're expecting, it's going to start with publicly traded companies, but it's going to be a further integrated audit of both financial and non-financial information. So financial statements. And in the US, we will add on to the integrated audit of financial statements internal controls, reporting or an integrated audit of non-financial information that's going to be related to climate as well as non-climate.

So, there will be specific and actually the International Sustainability Standards Board, so IFRS Foundation, looking at integrated audit standards has issued two audit exposure drafts, one on climate, one on non-climate, expected to be finalized in 2023 with implementation likely starting in 2024. That will be an integrated audit. So, the US will have SOX, they will add on non-financial information in Canada, there will be financial statements that will be audited, and then non-financial information related, again, as I said before, to climate as well as non-climate. So, I'm thinking objectives like under IE&D as well as programs like whistleblower, code of ethics, code of conduct, et cetera.

Armand Capisciolto:

Yeah, and it's interesting, Pierre, when you talk about the integration and even in the Canadian environment where we don't know if there's going to be an audit requirement yet over sustainability reporting.

Pierre Taillefer:

Right

Armand Capisciolto:

The way I look at it is it doesn't really matter because the decisions you're making related to sustainability and the risks and opportunities that a company faces due to sustainability has an impact on financial statements. So, you can't think of these things in isolation. You have to be thinking about sustainability reporting and financial reporting as a package.

Pierre Taillefer:

I couldn't agree more. And actually, when we're out talking to our clients or organizations thinking about this, I don't frame it under an integrated audit, I frame it under an operational review. It's looking at how you manage your organization and integrating ESG factors into those operational decisions. So, an organization is going to invest in assets, integrate now the concepts of energy efficiency and economies in how the machinery, if you're buying machinery, in how it consumes energy. Also look at the greenhouse gas emissions. Canada has committed to net zero by 2050, which means all of the players in the business world are going to have a role to play in achieving that net zero, while in addition to help achieve the net zero, you also help your operations. You look at cost effective ways to make decisions by integrating E into investment decisions. That's one example of fixed assets.

I would say you integrate ESG into your organization because you have people that you want to attract and that you want to retain. And for them it's important to act for a reasonable or a responsible organization. And then there are governance processes that help manage your company or your entity to be more profitable. And so, if that is your objective for profit and helps you with your impact, if you are a not-for-profit organization. So, for me, ESG, regardless, take away the regulatory requirement. It is reviewing how you operate as an organization and implementing, again, ESG factors to be better off as an entity and to ensure sustainability. So, it just makes sense to already integrate those concepts into how you manage.

Anne-Marie Henson:

So, Pierre talking a little bit more about that and building on the similarities from the reporting on internal controls that you've discussed. And I heard you say before, the importance of not just setting qualitative factors or objectives but finding a way to capture that information and then report on it whether or not that needs to be audited or not. But what sort of considerations would the governance element of a company have to take into account to make sure that they're comfortable with the quality and accuracy of the information that they're capturing and ultimately reporting on relating to ESG?

Pierre Taillefer:

Right. So, it is similar to financial reporting, quality of data, garbage in, garbage out. And so how do you manage your processes, financial reporting processes and also the processes that feed into financial reporting. Where are the risks? What are the controls? How do you manage that process? And then IT is a big piece of that. These systems, financial reporting systems, that you use to prepare financial statements also have to be properly controlled from an IT perspective, from an access perspective to ensure the quality of the data that's reported. So, take that example, that is financial reporting systems and apply that to environmental information, social information as well as governance and overall governance talks about reporting and quality of data. And so, ensuring or having the right systems in place to track your greenhouse gas emissions, to track your environmental impact, to look at waste, to look at water, under IE&D, inclusion, equity, diversity. What are the metrics that you have identified as being important and what systems do you have in place to be either to be able to gather that data is very important.

And so, the objective to be able to report, and what I would say is, what we're seeing from a regulatory perspective is that the ISSB is first going to touch publicly traded companies and they are going to have to report on their greenhouse gas emissions. In the greenhouse gas reporting world, we talk about scope one, scope two, and scope three. Scope one is what you burn, the greenhouse gas emissions that are the result of what you burn. Scope two is what you buy. And so, any office space that you rent, or any indirect emissions are under scope two. And then scope three is your entire value chain. And so publicly traded companies are going to need to report on scope one, scope two, and eventually scope three. And when that happens, it's going to touch their entire value chain, which means small organizations, medium-sized organizations, and private entities because they're part of a broader value chain.

So, tying that back to governance and reporting, it is going to have an impact or ESG reporting and integrated audits are going to have an impact on the entire value chain of a publicly traded companies. So, what that means is being able to have systems in place within private companies to be able to track your greenhouse gas emissions, to track the expenses that result in emissions so that you can convert that into greenhouse gas and be able to report to your value chain. So, it's very important I think right now for all organizations to think about where they sit in the value chain of a publicly traded company, to understand how fast is ESG going to impact them and to talk to that value chain, to talk to their stakeholders, to understand what type of information they want.

And that's showing appropriate governance and proper governance in how you manage your company or your entity, engaging with stakeholders, doing an appropriate risk assessment of when is ESG going to touch me? And then building a plan to be able to comply. And part of that is going to be systems that are going to be required to track the data, report on the data and also having quality processes and controls around those systems.

Sorry, that was a lot of information. I'm going to stop talking now. Did that make any sense?

Armand Capisciolto:

It's really interesting, Pierre, because you use the scope one, two and three example, but again, that's just the E, right? So, when we talk with the G, it's about having at the public company standpoint that's driving a lot of this is going to be having that governance that controls even over how you choose suppliers and that sort of thing. But that's only one element, right? Because also, they're going to need information about what a company's doing from equity, inclusion and diversity. They're going to need a whole bunch of information which is somewhat overwhelming. Which is why we've spent a number of episodes of this podcast talking about sustainability, ESG.

And recently I had Kristyn Annis, a partner from BLG as a guest, and we discussed the board's responsibility for climate related risk specifically. And I think all our episodes are absolutely fabulous, but this one's right up there. It's a great episode. And so, for our listeners, you haven't checked it out, please do so.

In your role, you spend a lot of time talking to boards, whether it's the board at BDO, our internal board or board of the companies that we provide services to. When you're talking to boards, what advice do you give the directors about their governance role over all things ESG?

Pierre Taillefer:

So, I would say there are two ways that I approach it. One is firstly, boards have the responsibility. So, a publicly traded company board has the responsibility to ensure that management has implemented an appropriate risk management program. And depending on where climate is and how much it impacts an organization, that risk is likely already, if it is important, should be part of what directors are looking at management to report on. And it can be in a management discussion and analysis. It could also be evaluating the impact, what is the impact of climate on the financial statements, understanding that risk and appropriately disclosing that is already part of a board's role, but I bring it up a level to board's responsibility is to appropriately manage or to ensure that management has appropriately managed, has a process in place to identify and manage risks. Then I tie climate into it saying, "okay, if it is important to the organization, that is part of the overall risk assessment and directors need to be comfortable that that risk is being properly managed."

There is going to be required disclosure on climate that is currently out there in Canada for publicly traded companies. There are requirements being discussed specific to climate, which will also be part of what boards will need to ensure management is appropriately evaluating and disclosing. So, the board needs to understand its responsibilities specific to ESG. Right now, it's principally on E, and I would say climate. I would also say on G, in terms of governance and quality reporting, that management has sufficient and appropriate systems in place to prepare quality financial statements. So, it touches both the E and the G. And we expect that the S will come as is ISSB is implemented, and certain disclosures need to cover inclusion, equity, diversity, and may also cover supply chain.

So, the board needs to understand its specific responsibility in terms of risk, ensuring that management has a process in place to identify and appropriately managed and then to the extent required report on those risks. So, the board has to ensure that there are reporting systems in place and directors are also responsible for reviewing any environmental compliance reports that are provided by the organization.

Armand Capisciolto:

So really just expanding what they already do, but still that oversight role of making sure management is doing what they're supposed to be doing.

Pierre Taillefer:

And effectively a duty of care, that each director is exercising in its role around how management is evaluating the risks, the significant risks of the organization and reporting as required on those risks and in this case, specific to climate.

Anne-Marie Henson:

So, Pierre, I would just want to end talking a little bit about scale. And I know we talked about it just earlier. A lot of our listeners may come from smaller or medium-sized businesses and don't have a board or board is the same as management, which is the same as the shareholders. And a lot of them may be wondering how this applies to them and where to start. You talked about the scope three, which is interesting talking about the value chain. And although you may not be a public company yourself or a large organization that's yet responsible for applying some of these disclosure requirements, you could have your largest customer being a public company and that scopes you in pretty quickly in having to report a lot of ESG related matters. So, for clients that are just wondering, where do I start? What can I do? Do you have any recommendation or advice for them?

Pierre Taillefer:

I certainly do. So, first of all, a couple other factors that I want to add to the equation. We are seeing financial providers of capital looking at ESG. And so, they are asking clients regardless of whether public or private for information on certain E, S and G factors. People, I mentioned it before, employees, team members want to work for a responsible organization, and they want to see how their employer... And will make a decision on whether to accept employment or not and to stay with an organization depending on how that organization works in a responsible way. So also, second point to take into consideration, Canada, I talked about it before, net zero by 2050, 50% reduction by 2030, which is pretty much tomorrow. Now there's no transition plan that has been identified yet, but players within the business world in Canada need to be part of that net or will be required to participate and engage in that net zero commitment.

And finally, there is the regulatory piece. So, what I would say is in terms of starting an initiative, it's really understanding who your stakeholders are, who your important stakeholders are, both internal and external. What do your internal, your board, what do your employees want from ESG? What does your financial institution want to see? Are they asking for this type of information? If you have private equity, are they asking for this type of information? We're starting to see some ESG gain momentum in the private equity market. So, what do your stakeholders want? Where are you in the value chain of a publicly traded company to start thinking about how ESG impacts your organization, and when you will likely be asked for that type of information as an organization.

And the other point that I would make is talk to your stakeholders. Understand what's important. ESG can be very broad. It doesn't have to be everything. We call it the ESG journey. Where do you start? What do your stakeholders want? What do you already do? What don't you do? And over what period of time will you implement actions to respond to what you don't do when your stakeholders want to see that information? And so, it's really understanding your ecosystem, if I can say now, where are you? How does it touch your organization? And it doesn't all have to be done at once. I would say that the two or three important pieces that we see of ESG now in the market are greenhouse gas emissions. It is pervasive, I would say inclusion, equity and diversity being a very key element. And then under all of E, S and G is supply chain.

So, understanding your supply chain, risk assessment of supply chain. What is the potential or the risk of child labor, forced labor? What is the carbon footprint or what is the greenhouse gas emissions footprint of your supply chain? Start with small pieces but have a full picture of where you eventually want to go based on who your stakeholders are. So, if my recommendation would be, it doesn't have to be broad, it is big, it's implementing ESG into how you operate. And then also understanding again, who do you do business with or who are you in relationships with and what do they want? And slowly over time respond to those needs. It's a journey.

Armand Capisciolto:

Pierre, it's interesting you're very focused on the stakeholders and finding out what they want. And I often think if you the company, you need to reach out to your stakeholders because if you wait for your stakeholders to reach out to you to ask for the information, it's too late.

Pierre Taillefer:

You're too late. And we've done that. We've seen it. We have asked some of our stakeholders for information and they can't respond. And then actually one final point is that there are also going to be, we think at some point, standards for integrated audit, financial, non-financial information for public companies. In Canada, we are looking at that and eventually it will come. So, in terms of regulation, starting with publicly traded, it will, we think, touch private companies later on. But really as you said, Armand, and I've said this in many conversations that we've had before, it's all based on your stakeholders because there is no one framework that needs to be used now. There is no one standard. So, you build what you do based on who your stakeholders are and when they're going to want that type of E, S, and G information. And it doesn't have to be all of it.

Anne-Marie Henson:

And I like the fact that you're saying that a lot of times companies are already doing something, maybe it needs to be a little bit more formalized, writing policies around it, having some stronger controls. But a lot of companies, although they think this is a pretty insurmountable task, are probably already doing things internally so they're not starting with nothing.

Pierre Taillefer:

Absolutely. And we often talk about ESG reporting. It doesn't have to be a report. One final point is that it can be information on an organization's website. It sometimes scares people when we talk about an ESG report. It doesn't have to be a report. It can be, like I said, a webpage, some information on your website, very limited information in a report. But the objective is really to start the conversation to disclose information that's relevant and go over time or over a period of time through your ESG journey.

Anne-Marie Henson:

That's great. Well, Pierre, thanks a lot for your insights and your recommendations, and I hope that the listeners have found this topic to be really helpful and at least provide some guidance in terms of where to start their journey. As Pierre said, I like the use of that word in this ESG environment, so we really appreciate your time and expertise. And I'd also like to thank our listeners for tuning in today. I'm Anne-Marie Henson and this has been BDO's Accounting for the Future. Please let us know if you found the topic interesting and useful, and remember to subscribe if you liked it, and we'll see you next time.