Ciara Lee, ESG Controller from CISCO, gave an engaging presentation to the FEI (Financial Executives International) members of CFIT (Committee on Finance and IT) on ESG (Environment, Social and Governance). She provided an overview on how ESG has evolved from a philanthropic to fiduciary duty. People want companies to support positive impacts on society.
I remember being a kid in the 1970s when pollution was highlighted as an environmental problem. The message then was that people had to come together to solve it. I remember sidewalks littered with trash. My elementary school had given all the students trash bags to help clean up the trash in the woods surrounding our school. I was doing my part to help fix the problem. I felt a sense of pride and accomplishment. Environmental pollution is still a major problem today, but the solution message is still the same: we need people to help fix the pollution problem. My experience has influenced why I am highly supportive of ESG initiatives today.
Ciara said, “Finance needs to be part of the story of ESG, the data collection, the reporting.” CISO, as a Fortune 100 company, has been publishing its Corporate Social Responsibility Report, also known to CISCO as their Purpose Report, for the past 17 years. Only now is it becoming a regulatory requirement and Ciara has a finance background. Large public companies like CISCO will be the first ones to lead the way with ESG reporting requirements. As a finance leader for a small or medium-sized private company, it would be wise to take notice and prepare for ESG before it becomes a required part of all company reporting. Ciara predicts that investors and stakeholders of all companies will want to have ESG details.
Ciara reports, “For governance, the rules on anti-money laundering, ethics, anti-corruption, anti-bribery have always been there for finance to follow. It is the Environment and Social part of ESG which has not been top of mind for boards.”
There are proposed SEC (Securities and Exchange Commission) rules for the board of directors of a company to be responsible for environmental and social actions. While private SMB companies do not follow SEC rules, it is telling that financial reporting is headed in this direction. EY authored a paper on how FASB (Financial Accounting Standards Board) is looking to propose changes to U.S. GAAP (Generally Accepted Accounting Principles) to include ESG disclosures.
A framework will be needed to manage ESG. Many people want to be part of ESG efforts, but there could be a duplication of efforts. The intent may be good, but the consistency in messaging should be there along with the investment decisions.
A CFIT member questioned if cybersecurity was part of the ESG movement. Many people expect the board of directors to be there to guide good cybersecurity practices. Cybersecurity falls under the governance umbrella of ESG but is kept more on the sidelines of ESG regulations due to the expertise needed and there are other regulations and standards where cybersecurity data is reported.
Ciara mentioned that “The SEC is proposing rules regarding human capital.” CFIT was introduced to author/speaker Dave Bookbinder at an earlier CFIT meeting this year. Dave is leading an important effort called the NEW ROI: Return on Individuals which is focused on managing human capital properly. He is often quoted as saying, “The value of a business is a function of how well the financial capital and the intellectual capital are managed by the human capital. You'd better get the human capital part right.” I am glad there is progress on this important social/governance issue as I support Dave Bookbinder’s movement, too.
Ciara also talked about Greenhouse Gas Emissions (GHG) which is a focus in her role as an ESG Controller. She gave an example of reporting voluntary emissions of cars leased. What are the emissions from the products that are sold by the company?
Here is a breakdown of the categorizes the GHG data collection by scope level
Scope 1 – All direct emissions that occur from sources that are controlled or owned by an organization
Scope 2 – All indirect emissions associated with the purchase of energy
Scope 3 – All other emissions that are the result of activities from assets not owned or controlled by the reporting organization, but that the organization indirectly impacts in its value chain.
ESG reporting needs to be quantifiable to be measurable against performance goals.
CISCO must explain risk assessment, and what methodology is in place to manage risk. Who have you talked to? The data collection around ESG could be onerous. CISCO pulls data from multiple sources and is true for other companies that Ciara has spoken to. Many companies are still trying to figure out how to collect all the ESG data. Ideally, there is an end-to-end software tool to keep all the ESG data. The SEC is issuing rules while there are far more international standards, which could be a future path for ESG reporting in the USA. Things are difficult for companies today as many rules are still in the proposal stage.
There was a discussion among CFIT members on the variety of opinions and approaches to reporting on ESG. There are lawsuits and other people who disagree with the idea of ESG reporting. Not everyone sees the merits or needs to report on ESG, and it continues to be a controversial topic. An argument is that you can still support worthy causes as a company, but why does it need to be regulated? As a finance professional, it is better to get ahead of the ESG issue and have a plan before you do not have a choice and need to act. As a CFO (Chief Financial Officer) for a private startup, I see ESG reporting as a necessary topic to report to Boards and Investors, even if it is voluntary, for now. The motivation behind ESG is to raise attention to solve societal issues, and it is the people in every company that should also work toward those solution goals.