Financial Reporting and Regulatory Update

Third Quarter 2022

How to Implement a Tangible and Practical ESG Strategy.

Environmental, Social and Governance (ESG) standards have recently moved beyond the realm of necessities. These standards, used to attract socially conscious investors, have become necessities for companies and organizations alike.

The real struggle for many investors is tangibility and practicality. Greenwashing too, has become a real industry challenge. Chris McClure is a partner with Crowe where he leads Crowe's newly established ESG Center of Excellence. With over 25 years of experience in regulatory and compliance matters, Chris dismantles some of the most common pitfall’s organizations face when setting the ESG agenda and concurrently when applying the strategy.

Below is a transcript of the conversation edited for clarity and brevity. To listen to the full conversation, click on the link below.

Shivani Somaiya: Crowe recently just launched the Crowe ESG Center of Excellence. Can you tell us more about the foundations that led to this launch and why now?

Christopher McClure: Yes, we did launch the ESG Center of Excellence earlier this year. It follows on a lot of work that we've been doing over many years around elements of ESG for our clients. Now that we look across the marketplace and we see the trends in specific industries around regulatory requirements and customer requests and investor obligations, now is really the time to make sure that we're formulating our approach and we're able to offer all the ESG services that our clients need.

Our ESG team is a cross-functional one. We have different backgrounds, accountants and engineers and other types of consultants with different experiences, and we collaborate from the ESG Center of Excellence. We have lines of communication all across the firm to industry verticals and other business units so that we can make sure that when we approach a client, we understand that ESG means something to them, but this is different for each organization. We want to make sure that we can have a customized approach that meets their specific profile and needs, and that oftentimes requires us to bring in different professionals from different parts of the firm.

Having the ESG team in place enables us to stay on the cutting edge of what's happening in the ESG environment, which is very, very dynamic right now with all the regulatory issues and things that we're seeing.

In short, our team stays on top of all the new things and then we collaborate with our colleagues to bring solutions to our clients.

Somaiya: What does Crowe's Center of Excellence bring to the market that an unbundled approach does not?

McClure: Given all the demands that our clients are seeing, ESG now requires our clients to have internally cross-functional teams. They need the backgrounds of the people that are listening to their investors, listening to their customers, dealing with their supply chain, who are in IT, who can source new data streams for them, people in HR and, legal. They have to bring together all these elements to be successful in the way that they look at ESG and manage all the demands on them.

Similarly at Crowe, we have a cross-functional team that can facilitate that effort. So it may be that they need specific types of consulting that we have to combine with industry expertise. They may need help with an IT platform selection as they're migrating towards investor ready data. It could be that they need help understanding a specific regulatory requirement. They may need internal audit assistance with controls and process and IT controls. Or it could be that they're evaluating, trying to understand what the external assurance requirements are going to be, what does limited and reasonable assurance from an external party look like.

At Crowe we have all those capabilities, so we can bring them all together and make sure that we're answering all the questions that the clients have: there are a lot right now. This is moving very fast and there's a lot of new obligations that our clients have. It would be very challenging to do it in any type of a siloed approach. You can't really do one by one, you need a comprehensive review so that as you're setting up a program, for example, if you're in the early stages of it, you also need to be thinking about what external audit is going to look like next year so that you're not missing any steps and that you're moving forward in a path that's going to get you where you need to be. One that is going to satisfy all your obligations.

Somaiya: You've been in the ESG space for some time now. From the seat that you sit in, what are some of the most common mistakes firms are making when setting their ESG agenda and strategy?

McClure: In some cases, it's very new for a lot of organizations in that: ESG is a newer acronym that you're hearing, but it relates to corporate responsibility, corporate sustainability, concepts that have been around for a long time. It is much more comprehensive, and it requires a regimented approach to understanding, again, who out there, which stakeholders around an organization, really matter. Whose voices are important and how do we address those? Oftentimes, again, those are your investors, your customers, your regulators, your own personnel, and, again, your competitors, maybe ratings agencies and others. And in the past, a lot of this effort was voluntary. Now we're moving into a time where a lot of it is much more mandatory.

If you look at the regulatory environment, it's increasing. If you want to compete for capital, investors look at things through an ESG lens. It's a much more regimented environment and you have to make that transition. With that you have to have stronger processes and controls, you have to have better collaboration within your organization, and you need data: that's a new trend too. There's a lot of pressure now on data that's comparable and verifiable. Whereas in the past you might have had a limited number of people in your company looking at maybe what they called sustainability, now we're in a world where everybody's looking at ESG and you have to have a comprehensive approach and a cross-functional team.

When we talk to clients, we see that at various stages of maturity around that. Sometimes they just need some coaching and some advice on how they can accelerate their process and then what all the considerations are, again, as they move forward.

Somaiya: What are some of the most common challenges that you see when your clients are engaging their board?

McClure: At this point the board should be very engaged. It should be a collaborative process and the board should understand their obligations. Specially if you look at the frameworks that are being employed around complying with the new SEC climate rule. For example, one of the frameworks is Task Force on Climate-related Financial Disclosures, which has specific sections of obligations for describing what the board knows about climate risk, how they're engaging and how they're enabling management. It should be very top down.

The first thing is that you don't want to be in a combative environment: you want to be in one that from the top down sets the right tone and creates the environment where the organization can be successful. The board has to get educated on these issues, understand all the risks and the opportunities that ESG presents. Sometimes we only talk about the costs or the challenges, but the reality is, as the world migrates towards different energy sources and looks at new things within their organization to find cost savings, there's a lot of opportunities as well.

In terms of setting a strategy, it has to be tied to the key stakeholders. It's not just the will of certain people within management or one or two people on the board, it really is enterprise wide. It's what the investors want and demand. It's what your regulators require. It's what your key customers are asking for. If you're walking through the process of a strategy and a materiality assessment and stakeholder engagement the right way, then the outcomes are clear and then everybody should understand why the organization has to move forward in that direction.

Somaiya: In what ways did the pandemic challenge ESG reporting initiatives? What were some of the most common pitfalls you saw when working with your clients?

McClure: Firstly, data is critical. In the past data was never top of mind with regards to sustainability. A lot of the sustainability reporting has been narrative driven and selective, meaning just certain topics that you wanted to report on, some of it with data unclear. We're in an environment now where, given the new regulatory requirements and expectations in the market, data is going to be critical. It has to be sourced from verifiable systems and it has to have controls around it.

Close towards investor grade, which means it's going to mimic what's in financial reporting, which you all know is very, very rigorous. Now, we're looking for data from new streams of information. Some of it may come from HR, some may come from your utility providers, from your process and operational people. Which brings us back to why we need cross-functional teams and, why we need people in the financial and accounting space to apply that rigor to get it ready for financial reporting.

The pandemic itself created challenges with communication and collaboration. People are in disparate locations and there's a lot of other operational challenges. Another challenge is that we're seeing a lot of regulatory pressure and investor pressure for ESG reporting. Meaning looking at frameworks and standards like SASB and GRI, conducting materiality assessments and understanding which topics we have to move forward with, and then understanding each one of those topics, whether it's climate, or diversity and equity and inclusion, or some sort of a governance or cyber protection issue. All of them will have metrics around them and those measurements have to be verifiable.

Somaiya: What are some effective strategies business leaders should consider when mobilizing internal resources to support their ESG strategy in a virtual work from home environment?

McClure: First, identify all the right people. It's not a one- or two-person effort. There are a lot of different people within the organization that need to get involved. Second, you need to start early: get all of your key stakeholders lined up and establish a cadence of meetings and the jobs to do and a reporting structure for how you're going to show progress.

We've seen businesses get very proficient at working in a virtual space. This is not to say there weren’t any challenges initially, but they've created a lot of efficiencies. When you can take advantage of technology to collaborate, there's so many different ways you can use it to have meetings, to store data, to have centralized repositories of information that people can be reviewing in real time. IT systems are advancing in order to capture data and create controls around it.

Somaiya: How would you react to some of the investor and public pushback on ESG?

McClure: ESG is a very broad term. It means a lot of different things to a lot of different people. It is important to be very careful when you're discussing ESG. You need to define it, understand the context, stakeholders, industries, and the implications.

We tend to focus on it for our clients around what their customers and regulators are asking and, what their peers are doing. In the press, ESG is being talked about in a lot of different ways around whether it's divestiture efforts around pension funds, or it has to do even with school curriculum, and many, many other things. We talked about costs and opportunities: if you dig into what different large companies are doing at different industries, you'll find that while some of them may have some climate risks, they also have a lot of climate opportunities that they're pursuing with renewable energy.

Somaiya: Concerns over climate related financial risk has gained momentum, along with other aspects of the broader ESG priorities. Can you elaborate on why we should be involving financial services companies in the climate change discussion?

McClure: The idea of climate risk and climate measurement involves everyone, as we've seen. The definitions of greenhouse gas emissions really involve all different types of organizations. Financial services firms have an introspective understanding: what they spend, how they operate, and then the issue of financed emissions as well. That's the concept of where you're lending and what the impact is of where you're lending and what industries you're invested in and what their emissions are. We're seeing that ESG concepts are not standalone nor are they just administrative: they're being integrated into strategy, which is really the right way to go forward.

Somaiya: For banks and credit unions, what should be their utmost priority in this moment when it comes to considering their response to the climate related financial risks?

McClure: First and foremost, let's understand where you sit and what your obligations are. You want to get your board engaged and make sure that they're well educated at a high level on where your focus should be, what are your regulatory obligations and lastly, what do your customers expect?  

You want to get a plan in place for understanding your stakeholders. We call this a materiality assessment with stakeholder engagement. It's identifying who out there are really the key drivers of your strategy and your approach, and then assessing what they want. You have to have a mechanism for getting that information. It could be a limited approach where you say, "We understand what our investors want from their websites. We understand what our competitors are doing from their websites. We know from the regulators and what they're asking for, what they want. Let's start there and let's move down the path." Or it may be something more involved, where you do surveys and interviews and other outreach to really get more in depth.

When we talk about reporting in ESG, there's two main outlets: your financial statements, which will be dictated by regulation primarily, what has to be embedded in your financial statements going forward and, your voluntary reporting, your sustainability report or your ESG report.

It's important for everybody to understand that the SEC indicates that. ESG data is very important and what you say around ESG issues is also important, such that it rises to the level of an investor disclosure. All of the voluntary reporting that banks or other institutions have been doing is now viewed by the SEC also as an investor disclosure. This creates more rigor and stronger obligations around understanding what you're saying voluntarily on your website, separate and apart from your financial statements.

Somaiya: Could you sum up how an organization can design an ESG strategy that works practically?

McClure: Take an inventory of what you're already doing, get an understanding of the frameworks and standards and, stakeholder requirements. Lean on your outside providers, there are lots of consultants and law firms that provide a lot of information to you proactively.

You don't have to make massive investments in technology right away, you can do a lot with a committed group of coworkers who are diligent about understanding the resources that are available to them.

ESG is a big issue. There's a lot to consider. It's not a one person or two-person job at any organization. You really need to collaborate amongst your teammates across the platform there and across the organization.


The information in this article is not – and is not intended to be – audit, tax, accounting, advisory, risk, performance, consulting, business, financial, investment, legal, or other professional advice. The information is general in nature, based on existing authorities, and is subject to change. The information is not a substitute for professional advice or services, and you should consult a qualified professional adviser before taking any action based on the information. Crowe is not responsible for any loss incurred by any person who relies on the information discussed in this document.