Host

Philippa Lamb

Guests

• Richard Spencer, Director, Sustainability, ICAEW
• Marie-Josée Privyk, ESG coach and adviser
• David Wray, Founder, DWG; IESBA Ethics Board member

Transcript 

Philippa Lamb: Welcome to Behind the Numbers. I’m Philippa Lamb, and this time we’re talking about sustainability reporting. We’ve seen a lot of push and pull on sustainability disclosures in financial reports over the years, but now that it’s increasingly mandated for large organisations, quality is a key issue. Ideally, it should match the quality of their financial information. But how do they make that happen?

Marie-Josée Privyk: When you’re generating negative impact, you are cannibalising the very environment on which you depend to survive.

Richard Spencer: I think that we as a professional body have a massive role to play in building the capacity of our members around sustainability. So we’re in the business, I believe, of creating accountancy experts who are professionally competent in sustainability.

PL: To give us the ICAEW take on that, Head of Sustainability Richard Spencer is with me in the studio. Hi, Richard.

RS: Hello.

PL: Joining from New York, David Wray is an IESBA Ethics Board member and ESG chair and founder of DW Group. And in Toronto, we have Marie-Josée (MJ) Privyk, who’s an ESG adviser and coach. Now David and MJ have just written a paper on this subject, published by ICAEW, so this discussion could not be more timely. Hello, everyone.

MJ: Hello.

David Wray: Hello.

PL: Richard, do you want to start us off with a brief overview of where we are with sustainability reporting right now?

RS: There’s a huge amount happening in sustainability reporting, and I know you said that it’s increasingly mandated at large companies, but of course, that hits all of businesses because it trickles down through the supply chain…

PL: Absolutely.

RS: … so nobody is immune from that. But I kind of would like just to take one step back, because if we want good disclosure into markets and we want good reporting of the supply chain, then what we have to have is good decisions being made in organisations. That’s where it starts. If you’re not making informed decisions, if you’re kind of making rubbish decisions from the point of view of sustainability, that’s just going to be fed up, and it’s going to be disclosed into markets, going to be poor information, and the providers of capital in those markets are then going to have poor information to make decisions, and that’s just suboptimal. We need businesses to make money: that creates the prosperity that gives us thriving societies. So none of this is about not doing that, and they do that through the provision of products and services, so that could be called produced capital, right? But in order for them to do that, those organisations depend upon and impact social capital, human capital and natural capital. And to give you a kind of very high level of why that’s so important, there aren’t any jobs on a dead planet, right?

PL: Okay.

 

RS: And the converse is equally true. If we can maintain – this is capital maintenance, this is something all professional accountants know about – if we can maintain those other capitals, they provide the flows of benefit, which could be clean water, fibre, food, happy, engaged people, the rule of law, that then provides all those things that enable businesses to make the prosperity that we want. Now in order to do that they need this vast new array of information to make those decisions. And that’s where this profession sits. That’s what you guys, you professional accountants out there do. You create information that goes through the system, and the better that information is, the better the system works.

PL: How engaged do you feel? You consult, you coach. How engaged do you feel businesses are this concept of the sustainable organisation in the round?

MJ: I think companies are all over the spectrum. I think some companies are quite mature in their disclosures, reporting disclosures, have been doing it for years and understand what this is about. And I think other companies, many other companies, especially the smaller ones and the private ones, haven’t even started yet, and pretty much don’t know where to start. So I think, you know, every company, it’s a journey for every company individually. I would perhaps mention that definitely companies, a lot of companies, come to the sustainability space through disclosures, reporting and disclosures. And for many, it has been a separate activity for a very long time, separate from managing the business, strategy, risk management, governance and everything else. And of course, ultimately, that’s the goal. The goal is to deeply embed sustainability considerations into business decisions, to manage those capitals, as we were mentioning a few moments ago. And that’s going to require some significant changes within organisations, mindset changes, managerial changes, as well, in terms of, you know, processes and intentions and objectives. But this is where regulations come in. Regulations will drive that change at scale.

PL: I want to get into the how in a bit. But let’s talk about standards and regulations first. David, for non-experts, can you just run us through the existing standards? What are they? Who exactly do they apply to?

DW: Maybe I won’t take a couple of days to explain it, because that’s about how long it would take to really get into the detail.

PL: I know, there’s a lot.

DW: There’s a dynamic environment around the world, and you’ve got jurisdictions moving at various speeds, and you’ve got bodies within that moving at various speeds. So it’s actually a really unusual environment relative to what we’re used to seeing. So I’ll give you a couple of examples. If you look at what’s happening in Europe, you’ve got the CSRD, which is basically the Corporate Sustainability Reporting Directive, and requires a number of companies, thousands of companies, actually, but on a transitional basis, to really start disclosing a lot more information about their environmental impacts, the impacts of the environment on them as well, and similarly, on the social side, as Richard mentioned earlier, with human capital and aspects around there, and then governance.

PL: And this is listed companies, is that right?

DW: It’s primarily listed companies, but it’s also what they call public interest companies. So companies that might be private, but they have a significant impact on the country in which they’re operating. So you’ve got a bit of a hybrid in that sense. If you pivot over, for example, to the US, you know, the US is in a very different environment. So there was some traction to move towards climate-related disclosures, but now there’s some question as to what will happen with the incoming administration. That said, that doesn’t mean that companies are waiting, which is why this environment’s so interesting. Companies are still getting engaged and looking at what they need to do when it comes to reporting, because they’re operating internationally. So what’s really interesting is not withstanding any particular jurisdiction, companies are really looking at this holistically, because they know, to Richard’s earlier point, if you want long-term revenue, long-term profit and a long-term business, you have to start thinking in a more dynamic environment.

PL: Yeah, because Richard, as David says, you know, the regulations are what they are. They’re subject to … they’re evolving, they’re subject to political dynamics. Is the shift you’re looking for here, mindset before that, because the standards will be in flux for a considerable … well, they’re always going to be in flux, aren’t they? So it’s not that, is it? That’s not the starting point.

RS: It can be. I mean, it’s a mixture of things, isn’t it? It’s, you know, often, the reflex is to say disclosure, that’s a tool in the box. And there are many tools in the box there: there are taxes, there are subsidies, there are fines. There’s government purchasing; the government represents half the economy. The government could drive a sustainable agenda that way. But mindset, and I know MJ mentioned this before, a mindset is incredibly important, because we talk about the transition to net zero, which is an economy in which we aren’t dependent upon hydrocarbons, a transition to nature positive, in other words, we’re not destroying nature. One that’s just … all of this, I think, also is predicated upon what you say, a mindset shift. It’s not just the provision of information, but is it well used?

PL: David, MJ, I mean, the standards are the standards. How well understood are they by business? I mean, what needs to happen to the standards to make them easier for businesses to contend with?

MJ: I can kick us off, and I’d like to maybe bounce off of something that Richard, you know, just said, and maybe also for the benefit of our audience, to mention that we are blending conversations and comments about what companies are expected to do and what companies are expected to disclose, and we’re blending disclosure regulations in terms of telling companies this is the information you need to provide, primarily capital markets and other stakeholders, because they’re making their decisions. We haven’t talked about the why. We’re assuming that everybody understands the why. But in a dynamic of companies being profit-driven, as Richard mentioned in the introduction, there is potentially a fundamental misalignment or contradiction between the profit maximisation objective and the mindset shift required to understand that companies need to manage those capitals and manage their impact in order to succeed over the long term and to maybe generate some of those opportunities that David is talking about. And that’s where it gets muddy, when we have these kinds of conversations. So I just want to maybe let the audience know that we get it, and we can maybe unpack that and maybe split those out a little bit. In terms of the standards, are they misunderstood? I mean, it’s new. It’s going to take some time. It’s complex, but not complicated. It requires time investment resources which companies are, for the most part, very reluctant to invest. Hence, regulations.

DW: When you think about this, just logically, so even forget the disclosures for a minute and just think about this logically. We live on a planet that has finite resources. It’s not an infinite resource-based planet, and we operate as if it were infinite. And when you sit back and you think about it like that, you realise, actually, no pun intended, that’s not sustainable. So a big part of what we’re talking about is how do you transition a historical paradigm that’s been around for more than a century, that everyone is used to, everyone’s comfortable, regardless of the actor in the ecosystem, to fundamentally drive a substantial change to sustainable profit, which means that everybody operates within a more limited sphere, because the resources are limited, so therefore we need to behave differently.

So a lot of what we’re talking about now with the legislature, and the requirements is almost a drive in that direction, because it will bring forth how companies are operating, and there will be a time, perhaps it might take several years, perhaps it might take a couple of decades, where stakeholders and actors within this environment are asking the question around, well, actually, is the company behaving responsibly, and is it a good citizen in the context of this broader community environment? That’s what’s going to be interesting. So these requirements are a drive towards a fundamentally different model. It’s just we’re not talking about that long-term model, because I think that the environment today, we’re just not ready to hear that. So if you start talking to businesses about sustainable profit, as opposed to profit maximisation, or even governments who measure themselves in GDP, they’re not ready for the kind of change we’re talking about. But we have to start somewhere, and I think these, as MJ quite rightly said, and Richard as well, are a lever to move us in that direction without hopefully scaring everyone.

PL: David, MJ, your paper, it’s about connecting finance and sustainability reporting, isn’t it? Thinking of this from the point of view of accountants, what is needed to make that understandable and doable from their point of view? Presumably, a common language would be a good start.

DW: It would be a huge start. I think if everyone could just speak with each other, rather than to each other, that might be a helpful place to start. Maybe I can give an example, because sometimes examples are the easiest way to explain what we’re talking about. So, if there’s an ice-cream brand that we all love, and the ice-cream brand depends …

PL: Naming no names.

DW: Naming no names, but they’re a fabulous ice-cream brand, and they depend on almonds as one of the ingredients into their ice cream. So whether it’s raw almonds that they end up using whole or its extract, I mean, it’s a pretty significant ingredient into the production of ice cream, among others. And if you think about, now just coming back to what Richard said earlier when he talked about the environment, think about how almonds are created. They’re a plant. They end up coming from a plant-based product, and those plants need to be pollinated. Well, pollination happens with honeybees. We all know that the honeybee population has been dramatically affected by changes in climate and other related aspects. So what this ice-cream company was realising is that, “Hey, if I don’t have enough of this naturally occurring product for my ice cream, I’m going to have an issue with my revenue. I’m not going to have as many units of ice cream that I can sell, and so on and so forth, my costs will go up,” etc. So it’s the realisation of, if you start to take a product and you deconstruct that product and understanding what goes into that product, and then thinking about, okay, you know, as I break all of this back down to its raw elements, what can I influence? What am I influenced by? So the ice-cream company realised, “Hey, I’m influenced significantly by the honeybee population.” So they actually invested in creating hedgerows next to almond trees and orchards, and basically tried to create an environment where the honeybees could live in a system that worked for them all year round. And in turn, there was a natural symbiotic relationship where they went and pollinated the almond plants, and that ended up increasing production of almonds, which ended up benefiting the ice-cream company. But that investment was one that, when you start to think about it, well why invest in creating hedgerows that end up benefiting an insect? But there was a very direct correlation for them on the financial impact of not doing so. So I think when we talk about the connectivity between finance and between sustainability matters, it’s really important to understand at a very detailed level what is it that influences what, and therefore what are the levers I can and should move, and that’s what starts to drive natural change, irrespective even of regulation. So hopefully that example gives a real-life example of how this stuff comes together.

PL: I mean, just to extend your example, am I not right in thinking that almonds are a particularly water-hungry crop as well?

DW: Indeed.

PL: So there’s layer upon layer of complexity, if you’re trying to be sustainable.

DW: Absolutely.

PL: But yeah, as you say, it’s a great way of explaining it. Coming back to accountants again, I mean, I’m thinking from their point of view, aligning terminology and language and clarity on standards is all good, isn’t it. But what else are we looking for from them? I’m guessing it’s this idea of thinking like a finance leader, isn’t it?

MJ: I think totally on the vocabulary. I think that people use the same words to mean different things, or different words to mean the same things. We see it all the time, absolutely, but maybe before that, or at the same time, is understanding the why? Why are we talking about this? Why is this important? Why are companies being asked to do this? Why are governments putting regulations in place, either to disclose or also to do business differently, to do due diligence on human rights violations in your entire value chain or supply chain, to have plans for adapting to climate change, not just mitigating the effects of it if you are a polluting or high-emitter company. So understanding the why, I think, and it goes back to our earlier conversation about, you know, generating negative impacts. And I mean, when you’re generating negative impacts, you are cannibalising the very environment on which you depend to survive. Again, unsustainable, right? And collectively unsustainable and bad for people, period. And this idea of profit maximisation, we have to come to grips with the fact that it’s not okay to generate profits at any cost, because we’re hurting ourselves, right?

So, where do the accountants come in, and where does the finance come in? Well, you can’t run a business without finance, without money, without accountants. You can’t do those projects that David was talking about, you know. The underlying thread to David’s example is, well, in determining the risks, assessing the risks, determining the projects to address the risks and the capital required to invest in trying to mitigate the risks. The accountants are involved and so the accountants are deeply embedded in any kind of strategic or risk management decision making, therefore they should be involved. However, it’s not about shifting all responsibility to the accountants and the finance department within the organisation. It’s not something anybody can do alone.

So it’s really about breaking down the silos, reaching out to the colleagues, and on both ends, the sustainability colleagues, having to learn how to speak to their finance counterparts, and vice versa, finance understanding what sustainability really is all about for their business, how it affects their business, and then come together on the disclosure front, because the ultimate goal is to get not only to sustainability disclosures that are on par with financial disclosures, so the same level of quality and reliability and usefulness, but they actually form a cohesive set. They’re not separate any more. Corporate disclosures, a full set of corporate disclosures includes your immediate financial performance according to existing financial accounting standards and your sustainability-related performance according to sustainability disclosure standards, because that gives you a much fuller picture. So it’s not about one or the other. It’s not about shifting responsibility, or all of a sudden the accountants are the only ones who are going to be doing this. Really they have to work as a team, not just with their sustainability counterparts actually, but with all the other counterparts who are actually managing those issues that live throughout the organisation.

DW: And maybe I’ll just add one tiny, tiny piece on to what MJ has said, when you talk about common language, for example, and common vocabulary, I mean, that’s a basic. What I would say is probably the most important thing is for finance professionals in this dialogue, as we’ve been talking about, to speak simply, to not use technical accounting terms, because we’re very good as a profession about speaking among each other and using terminology where people can literally look at us and think we come from an alien planet. So I think it’s really like …

PL: Like all professions.

DW: Absolutely. So I think it’s really important that we recognise that and that as we’re bringing these various actors together in this conversation, as MJ said, that we’re using a language that’s accessible and understood by everyone, and therefore we’re having meaningful dialogue around what needs to be done, how it needs to be done, and we can set strategies. So that, I would just want to emphasise that this, being able to speak with each other is really, really important.

RS: I think all that’s absolutely true. And I think if we were going to say, how do we see the role of the CFO evolving, it’s evolving away from just being a chief financial officer to being a chief value officer. How are you creating value? And I talked about the capitals before and I always find this useful, because think about these different resources. It’s not just how am I creating financial value, which just lets you kind of almost metabolise the rest into cash, but how am I creating value across all of these. And I think that we as a professional body have a massive role to play in building the capacity of our members around sustainability. So we’re not in the business of qualifying sustainability experts, never will be, we’re in the business, I believe, of creating accountancy experts who are professionally competent in sustainability. And that’s where our focus is right now, and our sibling professional bodies across the globe will be too. And, just as MJ pointed to, there’s another piece of capacity building, which is on the other side to help people understand how the financial capital works.

PL: And helpfully, the existing financial reporting standards, they do provide guidance, don’t they, for companies to think about financial implications of sustainability issues?

RS: Yeah, yeah. There’s a lot of very good guidance out there. We were recently involved in the transition plan task force framework, which is, I would say this, wouldn’t I, but is a fabulous framework, and the guidance that goes with it is really brilliant. So there is a lot out there. I think probably the challenge is how do we help curate that? Because you can just be overwhelmed by this wall of information.

PL: Yeah.

RS: The thing, I think, is, how do we curate that? And that’s one of the things we’re trying to do.

PL: And, as you say, it’s hearts and minds. We don’t want to think about sticks and carrots, but I mean that there is the potential for giving rise to future liability, isn’t there, if organisations don’t address this now?

RS: And huge opportunity. You often hear massive numbers that are so big they’re meaningless about what the transition will cost, but those always ignore the new markets that will be created, the new value propositions that will appear. So it’s very important to think also about, in re-engineering your business, what will be the opportunities.

MJ: Obviously agree with Richard, but I can maybe bring a little bit of nuance to your earlier question. I think what’s important for companies to realise, maybe, is that there are a lot of things that already exist within their organisation, within their current management processes, that they can leverage. They’re not specific to sustainability, and it’s not about creating new processes and tools and systems for sustainability. It’s about embedding sustainability considerations into those tools and processes, whether that’s governance, risk management, strategy, setting performance policies, action items, action plans and processes. And then performance measures to understand, are we doing a good job at what it is we decided that we wanted to do –that’s basic management. Those are basically the four pillars of the TCFD recommendations.

By the way, there’s a reason why they were so widely adopted, because they basically map out a traditional, well-known, well-understood management process. And I would, I know we need to talk about opportunities, but I think we also need to underline the risks and the risk management if, and I think risk is something that businesses understand, boards understand, C suites understand, and we don’t spend enough time valuing risk avoidance because it’s hard, it’s hard to put a dollar amount on things you’re going to avoid, problems you’re going to avoid having, and that’s why we’re all so collectively poor at preventing rather than curing. We don’t want to invest in the dollars of prevention, because it’s not tangible. Yet we all know, the studies all show, that it’s much less expensive than actually solving the problem once it occurs, or curing the problem. So I think risk identification, risk management, resiliency to risk, because there are a lot of risks coming the business’s way.

And again, this is business language, so I’m just maybe trying to suggest doorways through which sustainability considerations can be integrated, you know, internal control process when you go more specifically to the disclosure side of things and the data collection, data management side of things, and the fact that sustainability disclosures are going to need to be externally assured or audited, internal control processes already exist, don’t reinvent the wheel. But it’s about expanding the scope of the data you’re collecting to make sure that you’re including that “non-financial”, “pre-financial”, “non-monetary” performance measures or data that you need to manage more holistically.

PL: So are you feeling that’s the most useful first step for a finance team that’s trying to improve, or indeed embed in the first place, sustainability reporting, to do that exercise, because then they can explain it in terms that a business will understand?

MJ: Which exercise in particular?

PL: This idea of embedding sustainability in all your core functions, looking at everything you do, and then assessing risk and the potential for risk before you even start to think about wins.

MJ: I mean, the starting point to any process in terms of sustainability, even if you’re looking at disclosures, is identify the issues that are material to your business, material in the meaning that they matter and they can affect your operating financial performance. And then if you’re expanding the scope to impact issues that you will have a positive or negative impact on environmentally or socially, that’s the starting point. Materiality assessment is another word for it. It doesn’t have to be super complicated, depending: go with it with an approach that’s commensurate with your capabilities, but because you need to know what it is that you need to manage that matters to your business, not all sustainability related issues matter to all companies. That’s definitely a good starting point. Interestingly, that’s also why companies come to this through reporting or disclosures, because that’s what they’re being asked to do. The first thing they’re being asked to do is put out a report. It’s been like that for years, by the way, put out a report. So that’s how they come to the space. So it is a good starting point, for sure, and then, you know, expanding into the whole embedded into your processes, ideally, absolutely. But I’ll stop here, but would love to hear David and Richard.

PL: Yeah, David, starting points.

DW: I probably would start a little bit differently, because I think that this starts from the finance professionals understanding their business. And that’s not a new concept under sustainability. It’s been a financial concept for decades. And what I find is there is even a spectrum or continuum of how well the profession understands the business, the economic, commercial environment within which they genuinely operate. So that’s a skill set that needs to be, I think, enhanced and emphasised as we go forward. Then when you understand the business, and you understand how you’re operating, you understand your products, you understand your services, as I mentioned earlier, almost the deconstruction. You really understand what it means.

Then I think to Richard’s earlier point, it’s where the profession comes in. Because the profession needs to enhance what we need to think about. If you think about what we do as a profession, we teach students, we teach, you know, individuals who become members, how to do capital budgeting, how to think about capital management on projects. We teach this skill. This is not a skill we inherently assume that people understand. We don’t, we teach them how to think about it, how to think about risks, opportunities, connections, what matters. Sustainability, inclusion and embedding in this space is no different. What do we need the individuals in the finance function to think about? So when you’re doing, for example, a capital budgeting project, how are you thinking about the natural extension into emissions, the natural extension into the use of natural capitals, to Richard’s earlier examples, or the impact it’s going to have within the community in which we operate, and so on and so on. So these are not natural ways of thinking, and I think this is where the profession can really help teach individuals how to do this and therefore it gets embedded, and then it grows from there. So I think just starting with one, understand the business, and then two, the profession starting to expanding to think.

PL: Richard, good plan?

MJ: Sorry. I think, I think we’re, we’re saying the, interestingly, the same thing, David. I love what you’re saying, and I love how you’re presenting it, but it’s really the same thing as what I was mentioning, which is, identify the issues that are material to your business. Understand your business in a broader lens, though, draw out the value chain, draw out the lifecycle analysis of your products and services, and figure out where do the resources come from? What are the resources that go into my products and services? Where do they come from, geographically, and how are they? Are they at risk? Are they abundant? Are they at risk? And then on the other, on the flip side, what’s the outcome with the customers, but also product end of life, and potentially waste or pollution and definitely understand your business with that added lens and the added lens of the value chain, you’d be surprised how many companies do not have a clear picture. And I don’t know about the accounting profession, but the sustainability profession do not have a clear picture yet of what their value chain looks like.

DW: To answer that question, MJ, depending on whose study you look at, anywhere between 80 and 90% of organisations around the world cannot map out their end-to-end supply chain, which is dramatically significant.

PL: That’s a pretty shocking statistic. Richard, what I’m hearing here, we need to wrap this up, but what I’m hearing is accountants are really central to this.

RS: Yeah, they are. Please don’t say accountants going to save the world, though…

PL: I wouldn’t dream of it.

RS: … because they they’re not going to do it alone, and the way they are going to do it is by doing their job. You know, because it’s to David and MJ’s point, professional accountants have all the skills they need. There’s one sort of thing I’d add, which is you’ve got to start thinking in systems, because you’ve got to understand the connectivity. That’s almost a little bit of the mindset, but they’ve got the skills, they perhaps don’t have enough of the knowledge, and that’s where we come in, and that’s what we’re doing. And we’re just about to launch our sustainability accelerator, which has about 50 hours of learning around this. And we didn’t come at it saying, what does biodiversity loss mean? what is water stress? We came at it from, how do you build sustainability strategy? How do you build it into management information? …

PL: Okay.

RS: … How do you build it into planning? So coming from the functions that you do, and I think that the message we always give our members is think about this as just another economic event. You do this all the time. You just need to get your arms around the topic and apply the skills you’ve got and you can do this.

PL: And that guidance is coming soon?

RS: I certainly hope so.

DW: I think we all do, Richard!

PL: Thanks very much everyone. It’s a really fascinating conversation. We’ll talk about it again, but it’s been a great primer.

RS: Thank you.

MJ: Thank you.

DW: Thank you.

PL: So we’re taking a break for Christmas now, but Accountancy Insights will be kicking off what promises to be a fascinating new year with economic, business and political predictions from our regular team of futurologists: Santander UK chief economist Frances Haque, Sunday Express political editor David Williamson and ICAEW’s own in-house expert on all things business and economics Iain Wright. And if you didn’t already know, these podcasts count towards your CPD, so if you have not already subscribed to the series, why not make that one of your new year resolutions? Thanks for being with us this year. Enjoy the holiday.