On a recent episode of the Risk & Accounting Advisory’s Risk-in-Review podcast, our risk leaders cover the very important topic of sustainability and Environmental, Social, and Governance (ESG). The term ESG is a relatively new corporate governance approach that many organizations have adopted or are evaluating over the past few years in response to external and internal forces like regulators, investors, employees, third party vendors, and other stakeholders to meet profitability goals, and advance diversity and inclusion and environmental initiatives within the organization.
The discussion covers the following to luminate the importance of this initiative:
- Defining sustainability and how it impacts the ecosystem
- Benefits and barriers to implementing ESG
- Regulatory guidance on ESG
- Next steps and where to go from here in your ESG journey
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HOST: NEIL BECKER: Hello and welcome to Cherry Bekaert's Risk and Accounting Advisory Podcast.
HOST: NEIL BECKER: My name is Neil Becker, Cherry Bekaert's leader of Risk Advisory Services. Today we are talking about sustainability and the future of ESG.
HOST: NEIL BECKER: Joining me today is Ved Gupta, a leader in Cherry Bekaert's Risk Advisory Practice. Ved has over 20 years of experience in business process and planning, financial reporting, governance frameworks, and operations management.
HOST: NEIL BECKER: In his career, he has examined ESG as part of a larger risk universe, defining the E, the S, and the G, and their positive impacts on business. Ved, thanks so much for joining me today.
VED GUPTA: Thank you, Neil. Happy to be here.
HOST: NEIL BECKER: Excellent. To kick off the discussion, let's start at the beginning. Our first question today, Ved, is: what is sustainability and why is it important?
VED GUPTA: Let me begin with a simple fact: we only have finite resources, but we have infinite wants and needs. Preserving and upholding those resources is what sustainability is about. It reflects the quality of life that nature provides.
VED GUPTA: In 2015, the United Nations established 17 goals called the United Nations Sustainable Development Goals. These goals strive for a better world, including circular economies, the elimination of poverty, and broad-based well-being. ESG is an actionable means to advance those goals.
VED GUPTA: The three pillars of ESG are environment, social, and governance. Environment includes the energy a company consumes and the waste it discharges, such as harmful gases, carbon emissions, and climate impacts. Social criteria cover the human aspects: creating a healthy work environment, empowering the workforce, and building relationships with the community. Governance pertains to tone at the top, ethical practices, and the processes and controls that enable effective decision-making.
VED GUPTA: If I have to say one thing, there is no ESG without governance. The decision criteria of people are changing; stakeholders consider a company's positive or negative contributions to the community when making economic decisions. Accuracy of financial reporting, effective processes, and strong leadership remain important, but a company's sustainability path has become critical. ESG is a question about our future, well-being, and survival.
HOST: NEIL BECKER: Very thorough. Does ESG impact businesses in creating value?
VED GUPTA: Yes. Maintaining the status quo is easy, but adaptation is essential. A strong ESG program brings benefits beyond profits: improved relationships with the community, employees, and regulators; increased employee productivity; enhanced access to markets; and reduced regulatory burden. Green initiatives can attract new investments and improve access to capital.
VED GUPTA: In the short term, capital and operational expenditures may increase as businesses adjust processes, but the objective is long-term value rather than short-term gratification. Companies that fail to adapt can lose relevance—examples include Kodak and Nokia—while companies that innovate, such as Apple and many semiconductor firms, sustain value.
VED GUPTA: Value is created by having a long-term vision, building and sustaining relationships, and creating prosperity for the broader community.
HOST: NEIL BECKER: ESG is still relatively new for many industries, with adoption varying by sector. Is there conclusive guidance on ESG at this point?
VED GUPTA: Not yet. Many organizations provide guidelines—Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), and the Value Reporting Foundation (VRF), which consolidated into the IFRS Foundation—but these are not fully codified. Voluntary frameworks can produce inconsistent, subjective results that are difficult to compare across companies or time periods.
VED GUPTA: The SEC proposed climate disclosure rules in March, and if adopted, they would make certain disclosures mandatory. The comment period is complete and a final determination is forthcoming. Europe is further along on ESG, and the International Sustainability Standards Board will issue guidance. Various countries are also developing their own sustainability requirements, all with the common objective of holding companies accountable.
VED GUPTA: Companies should start preparing now for mandatory disclosures. It is not a question of if, but when. ESG is here to stay because of its significant impact on society.
HOST: NEIL BECKER: What should companies do next?
VED GUPTA: Companies should begin by deciding which KPIs matter to them and their stakeholders. This is a purpose-driven exercise and involves a materiality assessment—different from the PCAOB materiality concept in financial audits. Materiality for ESG means identifying how a company materially affects its surroundings.
VED GUPTA: Materiality assessment is generally a two-step process: identify potential KPIs, then assess how relevant each topic is to stakeholders and the business's ability to impact them. The process can be complex, but guidance exists to help companies determine material topics.
HOST: NEIL BECKER: For companies beginning their ESG journey, what should they consider?
VED GUPTA: I recommend four priorities. First, set up the governance framework: determine who will steer the ESG program, who provides oversight, and the role of the board. Second, determine data requirements: identify what data is available and what additional data is needed. As companies publish baseline data and future targets, completeness and accuracy are critical.
VED GUPTA: Third, consider technology needs. Data collection, compilation, aggregation, and reporting should not be a burden, so appropriate systems must be in place. Fourth, invest in people and subject matter expertise. In-house knowledge is necessary to guide the program.
VED GUPTA: The key question is not the current cost to implement an effective ESG program, but what companies need to build an ESG framework. It will cost more in the future if they do not adapt. Think long term and realize the power of compounding: act quickly and act correctly.
HOST: NEIL BECKER: Do it quick, do it right.
VED GUPTA: Do it quick, do it right.
HOST: NEIL BECKER: Thank you, Ved. I expect this will not be our last discussion on this topic. ESG is still evolving and increasingly affecting the organizations and industries we serve. Ideally, ESG will become ingrained in mainstream reporting and business operations, similar to how cybersecurity became a standard boardroom and audit committee topic over the past decade.
HOST: NEIL BECKER: We invite you to check our FAQ on ESG at cbh.com. Please stay tuned for more risk topics in this series, including podcasts on internal audit planning and pitfalls and effective control automation.
HOST: NEIL BECKER: If you have risk topics you want us to cover, visit us at cbh.com/risk. Please like, share, and subscribe to the Risk and Accounting Advisory Podcast. Thank you for listening.
