Ep. 55: Alessia Falsarone - 2020: The Year of ESG Data

Alessia's Suggested Resources:

• PwC’s 2019 Annual Corporate Directors Survey: https://www.pwc.com/us/en/services/governance-insights-center/library/annual-corporate-directors-survey.html
   
• SASB’s Materiality Map: https://materiality.sasb.org/
   
• EY, What investors expect from the 2020 proxy season: https://www.ey.com/en_us/board-matters/what-investors-expect-from-the-2020-proxy-season
   
• Alliance for Corporate Transparency 2019 Report: Analysis of Sustainability Reports of 1,000 Companies Pursuant to the EU Non-Financial Reporting Directive: https://www.allianceforcorporatetransparency.org/assets/2019_Research_Report%20_Alliance_for_Corporate_Transparency-7d9802a0c18c9f13017d686481bd2d6c6886fea6d9e9c7a5c3cfafea8a48b1c7.pdf
   
• SASB Integration Insights, Building TCFD-Ready Portfolios with SASB’s Standards, September 2019: https://www.sasb.org/wp-content/uploads/2019/10/ESG-Integration-Insights-Pinebridge-092719.pdf 

FULL EPISODE TRANSCRIPT:
 Adam: (00:00)

You are now listening to episode 55 of Count Me In, IMA's podcast about all things affecting the accounting and finance world. I am your host, Adam Larson and I'll be bringing you right up to the conversation between my cohost Mitch and Alessia Falsarone. Alessia joined Count Me In to talk about how and why 2020 is the year of ESG data. She is the head of sustainable investing for portfolio management for PineBridge Investments and has a wealth of knowledge in the area of sustainability and integrated reporting. Let's head over to the main part of our episode now and hear Alessia share her valuable perspectives on ESG data.

Mitch: (00:43)

What are some typical line items or key data points relating to ESG and sustainability that accountants should really be reporting on? 

Alessia: (00:57)

Well, first of all, thank you Mitch for inviting me to share the investor lens with your audience at the IMA today.  2020 is truly the year of data for ESG. The entire field, not only investors, I am referring to- but also corporate finance specialists, controllers, treasurers, CFOs and auditors are taking a much closer look at what is generated across their organization as relates to sustainability efforts of the enterprise and starting to take stock of any linkages  between sustainability credentials that a company may list for customer outreach and end-market awareness in their reports and their website vs. the financially material sustainability factors that affect the profitability of their business. And that is an area where either accountants or treasurers or CFOs are spending in my opinion, as it is the case for the companies I engage with as an investor, a lot more time, since they're really looking at them not only as an engagement tool, but as an alignment with their financial commitments. So where sustainability is adding value in reporting is at the intersection of enterprise value, operating efficiency and top line growth. What's interesting about that is, when we think about corporate governance, and go back to corporate directors surveys for last year, for example, I think it was The PwC’s annual corporate directors survey that found more than half of directors say investors are giving too much time and focus to ESG – environmental and social governance considerations – which is nearly twice the percentage in 2018. What is it eye brow lifting for me as an investor when thinking about the accounting side of the business? Clearly there is the need for continued dialogue- if the board does not recognized the value, nor its audit committee, then investors can continue to debate the divestment saga or not but we will see little value in corporate reporting initiatives. So when you compare that survey to the engagement priorities for institutional investors during the 2020 proxy season remains environmental resilience and also the ability of the board to address resilience and capital planning considerations is clear. My lens remains bias as I am both a capital markets professional and a certified director with NACD – the National Association of Corporate Directors - in the US and a governance fellow for a number of years. I can assure you that at NACD there has been a strong push to elevate directors’ skills – certainly those sitting in audit committees – to see the relevant disruptions. This is something I would like to make clear to the audience at the IMA. ESG is certainly a tangible one on a clock – it carries reputational risk that no sustainability credentialing process could make up for if lost. Few enlightened board chairs or audit committee members see that and they are certainly keeping the accounting for ESG data up the priority list. 

Mitch: (04:21)

So that's really interesting. And you know, from this investor perspective here, you know, aside from the time and the priority that goes into it, I'm sure there are a number of other challenges as well that, you know, accountants particularly must be aware of. So from your perspective, what are some of these challenges that accountants face with this ESG data when it comes to giving investors the information that they're really looking for? 

Alessia: (04:45)

It’s quite interesting. When I think about financial innovation and the headlines surrounding the issuance of sustainability-linked financial instruments such as traditional green bonds, loans or even transition-linked capital raising instruments, they have certainly raised awareness as the treasury team at a company and the CFO is as involved as the auditors and the external verifiers in aligning capital raised with capex associated with a company’s green effort. That’s one part of it. Certainly, from an accounting perspective, the need for ESG data is to be aligned with the financial commitments of a firm as data is about long terms trends that will require as much opex as capex to build resilience or competitive advantage and top line growth. Either way, ESG data and the impact on $-Unit measures are the hardest to address as non-financial risks and non-traditional sources of risk don’t come in same unit measure. Clearly you have accounting and finance professionals testing themselves on kilowatt-hours when aggregating energy efficiency to metric tons of CO2 per home yearly when discussing home energy use, or even more esoteric such as “near misses” which is the count of events with the potential of loss or injury if the accountant is analyzing health and safety statistics within the workforce. Who’s domain is that? It is increasingly of financial professionals. While there is certainly room to define best practices, it is simply good business management to define E-S-G indicators at the company level that are associated with financial outcomes and address them and report them consistently – they could be in the form of trends or as statics, absolute levels if there are absolute (sustainability) targets in place.

I will give you an...