Adam: Hello and welcome to PwC Canada's newest podcast, Finance in 15, a series that explores finance transformation and what it means for leaders in the finance function. My name is Adam Boutros and I'm your host. For our new listeners, Finance in 15 is a PwC Canada podcast that explores finance transformation and what it means for leaders in the finance function. Today, I am very pleased to have Sarah Marsh, partner at PwC Canada in Vancouver and my PwC Canada colleague Arlind Sulaj, a director with our finance transformation practice, with us to talk about why ESG reporting has become a rising imperative for finance and CFOs. Sarah is the national lead for the firm's ESG reporting and assurance practice at PwC Canada. And she has extensive experience in PwC's sustainability practice helping clients meet their non-financial assurance needs. We also have Arlind with us, a director in the finance transformation practice and Arlinds's experience is really in helping clients modernize their finance functions, improve performance management and make better and faster decisions through defining the right insights needed to execute on their strategy. So I think we have the right people here with you for a very insightful and interesting conversation. Welcome, Sarah and Arlind.
Sarah: I'm happy to be here, Adam being part of the Finance in 15 podcast.
Arlind: It's great to be here, Adam.
Adam: OK, awesome. Let's jump right in. So for sure, we all know ESG is such a hot topic, getting more and more attention in the business world and CFOs have always been focused on what impacts the bottom line. So that increasingly includes sustainability. So Sarah, can you help to explain what's behind the growing intersection here between sustainability and financial performance?
Sarah: I think what's fundamentally changed the conversation around sustainability or ESG is really the growing evidence that strong performance in ESG is actually tied to strong financial performance. So CFOs, obviously we know they're focused on the profitability of their organization. And I think it was perhaps previously thought that managing sustainability risks, you know, wasn't necessarily part of that. But you know, what we've seen is long term investors have understood that that clear linkage, you know, whether it's the handling and managing the sort of risk side of it or things like allowing access to more customers. And of course, one of the key things is, you know, the ability to access a greater talent pool. I think, you know, CFOs have recognized that now and are starting to step in on this topic.
Adam: As well as PwC, we also recognize that ESG, it's not just a responsibility, it's a mindset and done right, it's an opportunity for growth, a real key success factor for a lot of organizations out there. So knowing where to start can be the overwhelming part. So in our newly released Canadian CFO Insights report, we found that a lot of CFOs are at the early stages in this evolution, and many interviewees noted that ESG reporting remains largely the responsibility of others like the CSO. How do you see most companies are going about this on their ES journey, and where do you see it evolving to?
Sarah: Yeah. I mean, I think there's definitely quite a variation, quite honest, in how companies are still approaching this. Some, I think, are still seeing this as a bit of a compliance task. There are others as well that are recognizing that, you know, by developing an ESG strategy, really being able to embed that into your overall corporate strategy that you know, that can bring that long term value creation that I mentioned earlier. So most companies that we're seeing really having to, you know, they're starting out by asking, you know, who are my stakeholders, who I'm actually trying to talk to here and manage with these ESG risks? What are the issues that really matter to them? And then how do those align with our corporate strategy? So I'd say that many are still many companies still in that phase, really asking those questions. And what we're beginning to see is now that they've they've asked this question that sort of setting out and starting to set out and strengthen internal behaviors, think about performance on ESG risks and how you can really create that lasting value. You know, one example, you know, climate has been top of the agenda right now. We're seeing companies setting many ambitious climate targets. You know, as they're really trying to manage that climate risk. And I think companies are looking at how they can really drive things like carbon reduction activities. So companies are realizing they need the carbon emissions information the same way that they need financial information.
Adam: Yeah, fantastic example. And you really start to see how this is crisscrossing all over the c-suite, the different functions definitely landing on the CFO's agenda. So, Arlind, let's switch over to you. You're working with a lot of different finance leaders in your role. What are you seeing from that perspective?
Arlind: You know, CFOs are paying really close attention to ESG. They recognize that organizations have to improve the way that they report on their environmental, social and governance capabilities. This data is driven by multiple factors. I think as we mentioned earlier, regulators, investors and shareholders and customers simply demanding more, but also by the evolving role of the CFO and the finance team to be more of a data custodian and become a better business partner and providing really business insights to the organization to make better decisions. In organizations that are at different stage in their ESG journey, however, most agree that ESG has to become an essential part of their managed reporting as well on their day to day decision making, and not just part of their financial statements or regulatory reports. What CFOs and finance team really understand? They understand that they're really good at preparing high quality financial statements that are backed by sound processing controls. And they recognize that they've got to leverage that type of skillset to do the same with ESG, especially when it comes to, you know, designing policies and procedures to ensure ESG reporting makes clear links to financial and non-financial data, managing data quality and collection, you know, assessing performance against targets and really applying the same sort of rigor to the process to to ESG as well the same way that they do for financial performance and of course, balancing risk.
Adam: So on that note, ESG metrics are reporting in particular. So we hear a lot around the lack of consistent and comparable ESG reporting standards that are out there, and this is a real barrier for a lot of organizations. So how does the CFO go about knowing which framework is right for their organization?
Sarah: And I think it really comes down to who the audience is for your reporting. So, you know, if you are focused on the investors as your audience, for instance, have come out, expect some of the larger global standards and frameworks. You know, we hear the phrase this has been TCFD being thrown around us as key standards right now. The complicating factor, I think for many companies is we have the new International Sustainability Standards Board, and so that's definitely one that the CFO is going to want to watch. But like if you step back from this, these standards, one thing they have all in common is that they are focused on, you know, the financial implications arising from ESG risks that are really going to impact a company's enterprise value. You know, if I'm the CFO, what I want to make sure that I can answer is the why for each framework. Who is the audience? What are they going to use that information for? Why should we be using this framework? Because you can get caught in a trap of trying to report against all the frameworks and standards out there and I think that's, you know, that's the challenge. So you need to be able to answer those questions and then that will help you have a really good, you know, high quality ESG reporting strategy that you can follow.
Adam: You know, I think a common first step or a step along the journey is definitely the first report, sort of the first sustainability report. And, you know, companies are kind of pulling them together and quite proud of it. What's the roadmap look like beyond the first report?
Sarah: Yeah, I would definitely seeing a lot of inaugural reports out there right now. So for those in that first report stages, you know, you've likely just identified your material topics. You know, you're forming those management approaches to those topics, starting to inventory your data that you'll need to report on sort of those related metrics. So a roadmap we'll typically think about, you know, how you can ready yourself for that future mature ESG reporting where you know what you're going to see, you're going to see strategy being really clearly articulated, you know, risks that are really well identified and discussion of what they are and how they're embedded, for instance, in your enterprise risk management process with those targets set that I mentioned and then those KPIs being measured and reported on, you know, year over year. So really, making sure that your roadmap is going to address, in my mind, sort of three key areas. So, you know, I think those disclosures are complete and in line with standards like, how are you going to get there? The process of controls that you need to have implemented to support that high quality reporting and then how you're getting ready for these to be assured because you know that we're hearing more and more, that is the market expectation. So for me, the key things you know is getting all the attention is whether those risks result in financial implications for the company. You know, whether those should be in your annual report and MD&A. So being able to just make sure that that roadmap thinks about all those elements and has a has a plan to get you there over the next sort of two to three years.
Adam: You know, I think as part of that definitely challenge with ESG reporting is the the quantity of data, the vast number of, you know, sort of things that need to be reported on. And we certainly heard it in our CFO Insights report as well around this trend of because of sort of all the complexity and rigor required around this information is really is shifting to the finance function. What trends are you seeing in that area? What are the types of data that companies are reporting on?
Sarah: You know, fundamentally, companies are being asked to report on their ESG topics and increasingly we're seeing it the request come that you should cover four key areas. You know, those are things like governance, strategy, risk management and then metrics and targets. And, you know, in recent ESG Reporting Insights report, we noticed that only 30 percent of companies are actually disclosing performance against targets, for instance. But we're seeing more and more companies reporting in the structure I mentioned, as well as identifying reporting metrics, you know, against those short, medium and long term targets. So as this reporting, you know, and it's really is going to have to really increase to cover the material topics for each of those companies. And what's interesting, as well as topic wise, the topics are really expanding. You know, we're seeing more and more of that metrics and that data around things like carbon emissions, water use, diversity, inclusion, community relations.
Adam: All right. So Arlind, it make this real for us. How our companies actually going to get this done? Like what's happening out there? What kind of systems are they building? What processes?
Arlind: Pulling user data continues to be a very manual process. You know, some of this data is available, some is internal, some external and some is quite frankly not even available. So they have to figure out how to get this data and what does that even mean for them. But with expectations changing very quickly, you know, identifying ways to extract this information in a more seamless and continuous way will go a long way in terms of helping you get to the get to it state from an ESG journey perspective. So building out a system for ESG components for all of them could be very overwhelming for organizations. So sometimes what we see is start, you know, companies can start with something smaller or a component that is more relevant for their company or industry. For example, for example, climate risk can help them gain traction. You know, one company took to bring this to life on a company that we worked with in the mining space. As a first step, they started by defining what KPIs and information needs matter most to them. We help them think about their KPIs in a more structured format by dividing them in two major groups and categories. One was the value creation KPI, which related to production cost and capital, which is something companies measure are very good at. And then the other group was responsibility KPIs, which related to health and safety, sustainability, community workforce and legal. And this helped them be more focused on the data and reporting capabilities they needed to satisfy those information needs. But also, we also help them to sort of think about what tools do they required to collect this information and data where the data is available, where there's gaps, as well as what dashboards could potentially look like for them to report this information.
Adam: You open up a lot of topics there, like I really like the framework between value creation responsibility. That's fantastic. And look all of this, it always does lead to a dashboard. At the end of the day, if the c-suite really is responsible for it, they need a digestible way to look at and manage the information that they're getting. So, you know, along those lines, another key metric that we've seen is the introduction of ESG targets in executive comp packages. Recently, the 2022 Canadian ESG reporting insights, we noted only 23 percent of companies link climate change targets to executive comp. What role does comp really play in communicating a company's ESG priorities, Sarah?
Sarah: What we're seeing is it's a real backing up that by linking, you know, by linking this to executive remuneration that the board are really sort of pointing out the strategic importance of it. We're also seeing, you know, things like the proxy voting practices that investors are willing to use to, you know, they're willing to use their influence on these topics. And what we've seen is an increasing amount of action on climate change strategies by investors. And boards are going to use that exact comp strategy to really demonstrate the importance and then also see that follow through internally. You know, as the exec put all of these actions into put all of these at targets into action.
Adam: I think what this one a lot of organizations are seeing the strategic benefit around it, maybe they don't know exactly how to get there, but you know, one way or the other in short order, all of the organizations are going to be getting to this. And so, you know, that kind of keeps going along this this thread that we're pulling on, Arlind, around, you mentioned earlier, it is a manual process for a lot of organizations, as this sort of the need for these broader metrics continues to spread and, you know, more timely reporting automation extraction is really going to be quite critical. Have you seen any developments in that area?
Arlind: But having the end state in mind will really help you understand what you need. You're not going in boiling the ocean. You really focus on the data that you're tracking. I think hiring and developing the right talent, both from an ESG perspective and data and reporting perspective is critical. Working with other parts of the organization so finance cannot work in silos, they have to partner with sustainability teams and other teams to help them throughout this process. And then embracing technology and cloud based solutions as much as possible to help manage the requirements. Whether it's your ERP system or specific and specialized solutions that help with reporting from an ESG perspective. You know, use of technology and assurance ready systems to underpin your reporting is important as well. An example could be to expand your existing source compliance platform to incorporate ESG, giving you a strong control component to capture your data in a system that is auditable and leaves within your financials. But it's very important as you develop your ESG data strategy and data models. The goal is to make sure that it's scalable and agile for future change, meaning you have to tag your ESG components in a way that allows you to adjust your analysis and reporting later as standards evolve over time.
Adam: And Arlind, you know, so in order to sort of make that happen, are you seeing like companies set up special project teams to really within existing functions? How is that kind of working on the ground to get this going?
Arlind: Yeah, absolutely. They're definitely setting up special teams that they're hiring outside consultants and help to understand what the strategy is going to be, what are the gaps and then start working on what to, do an assessment essentially of what tools are going to be able to help them, whether it's ERP. Well, like I said, whether it's a ERP that they already have or whether they need to go procure specialized systems that will help them with the recording.
Adam: Fair enough. And Sarah, any thoughts on this topic?
Sarah: You know, I think everybody's sort of looking down the road and just recognizing the data challenge that's ahead, right? We're sort of still in early stages. People are starting to deform their reports, you know, for those companies that maybe got out, got out ahead and, you know, they've already got those high quality reports, even they are recognizing the sheer volume of data requests. You know, it's a challenge even for those that been doing this for a while. And Arlind mentioned some software solutions or dashboards. But I think leading companies are recognizing there's a real need to pull consistent data because we're getting is lots of multiple rounds of reporting. So it's not just that ESG report, it's it can be the ratings agencies requests. It can be specific companies you know they don't want in the format of your ESG report. They've got their own form. So, you know, that is one of the challenges. And I think all in mentioned sort of some of that tagging and stuff that that's critical because companies are needing to do this and sort of really pull out that data kind of consistently and frequently. So some of the leading practices we have seen as things, you know, is a recognition of that and, you know, data tables actually being published. So I don't think anyone's solve this problem yet, quite honestly. Those leading companies are really trying to get ahead of that and recognize that that data is just being requested by, you know, so many audiences and they've got to try and solve that problem. One of the other things I think we're also seeing is leading companies. We're really seeing thinking about things like, you know, could be environmental profit and loss accounting. But they're not just putting the financial cost of decisions at the, you know, at the fingertips of people making those decisions but also the ability to know the impact, you know, so potentially, you know, if I make a certain decision, what's the impact on carbon as a result of that purchasing decision or the water use that results from that decision so that when companies have set these targets and these corporate level targets, they need to be able to have the people on the ground know what the implications are. So you know that I think is going to be a really interesting area as we sort of see everyone's use to financial budgeting. I think we're going to see the sort of world where other elements, other aspects get built into that budgeting and people make those procurement decisions very differently to see the way they have in the past.
Adam: Arlind, you might you must see a lot of this as well. You know, whether we're kind of looking backwards even without ESG, just sort of this this mindset of, you know, building these robust models that can handle a number of different factors now comes on the organization. What's your recommended approach there?
Arlind: The approach is similar to whether it's ESG reporting or regular reporting. I think you have to create as I mentioned that underlying data model that kind of captures standardizes cleans makes sure that the data is available and then people and different parts of the organization can tap into that data, model data leak, whatever you want to call it, to report specific needs from whether it's know your financial statement, your manager reporting other regulatory reporting. So the concept is get the data in a way that is accessible by self-service across your organization and then figure out how you want to use that data. Because the bulk of the work is not the dashboards and the final reports is really making sure that you collect the information. It's actionable, it's clean and it's standardized across the board.
Adam: Is benchmarking market information, competitive information where a company's at with that and what are the sources they go to? Are they building it into their dashboards and reporting to kind of see where they are relative to the industry and peers?
Arlind: Yeah. I'm glad that he brought up benchmarking because benchmarking is a very good way for companies to level set against their peers or competitors to see what they're doing well and what they need to improve. They sometimes refer to other companies like PwC, for example, does benchmarking in this particular topic, where they'll go through and understand what are some of the key measures and metrics that you know that are specific to your company or to your industry and benchmark you against it. You know, then you'll have a better understanding of where you need to focus your efforts and where do you need to improve and what are some of the things that you're doing well that you should probably learn lessons from to bring order to the items that that you need some work on.
Adam: All right. Well, we're getting to the end of our podcast here, and it would be great if each of you could share with our listeners top few corporate initiatives areas where companies should really focus on when implementing ESG strategies. Let's start with Sarah.
Sarah: I would say you should spend the time understanding what your material topics are. Think about what the material topics are and really who they impact as a result of that, how those impact your strategy. If you don't do this prioritization now, you'll never make progress because you'll just be trying to manage too many things. So that would be my first one. The second would be, don't do this in a silo. The you know, the ESG you, your sustainability teams will already have a wealth of knowledge. But what the finance team can do is really, you know, they can understand what they can offer here, right? We you know, we talked about this. They understand that you need developed policies and procedures to support the reporting of all of these ESG factors. So both groups actually learning, realizing what they can learn from each other and working together will increase your productivity exponentially.
Adam: Awesome. Arlind?
Arlind: Yeah, I mean, I agree with all that pointed Sarah made. I think starting now is critical. Do not wait till this is mandatory, get a head start because it's very hard to catch up later. I think also from a more tactical perspective is start thinking how ESG is going to impact your business and operations and how you need to make this part of your regular business planning and forecasting and budgeting because it will become part of that. And now we're talking more about it from a reporting perspective. But as this becomes more mainstream, it will affect your business in the way that you operate.
Adam: So this has been excellent, very insightful. Thank you, Sarah. Thank you, Arlind. If you would like more details on the Canadian CFO Insights report that we've talked about a few times and the 2022 Canadian ESG Reporting Insights, please visit our website at PwC Canada, where a community of solvers and we believe finance has a very important role to play in helping organizations succeed. If you'd like to be part of our CFO community of solvers, please reach out to me and we'll be happy to bring you into the community and get you involved. So I hope you enjoyed our second episode of season two. I'd love to hear your thoughts on this series, and please be sure to subscribe, share and leave us a rating or review. I'm Adam Boutros and this is Finance in 15. This podcast has been produced by PricewaterhouseCoopers LLP and is for informational purposes only. Contents discussed are for general guidance on matters of interest and should not be taken as professional legal, business or investment advice.
