ESG: Where Do I Start?

NEAL BEGGAN: Hello and welcome to the Risk and Accounting Advisory Podcast. My name is Neal Beggan, firm leader in Risk Advisory for Cherry Bekaert. Today on our podcast we're taking a closer look at everyone's favorite topic these days: ESG.

NEAL BEGGAN: We get a lot of questions about where and how to begin the journey to corporate sustainability and establishing a long-term ESG program, so we thought we would memorialize this by way of a podcast. With me again today to discuss 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 framework, and operations management. He joined us previously to unpack and define the E, the S, and the G on a prior podcast, so we're looking forward to having Ved join us today. Ved, thank you.

VED GUPTA: Thank you very much, Neal, for having me here.

NEAL BEGGAN: All right, let's get started. As I mentioned, we get a lot of questions, as you do, Ved, from companies wondering where a company should start along the ESG journey.

VED GUPTA: The simple answer is defining the purpose. Identifying the issues that really matter and where the business can truly make an impact provides the foundation for a healthy journey. Businesses should initiate and conduct a materiality assessment.

VED GUPTA: This is not the same as the materiality assessment that the PCAOB lays down in the financial statement audit, but it is for ESG. It means how a company affects its surroundings in a material way.

VED GUPTA: It is mainly a two-step process. Step one is identifying what is important, or the potential KPIs. Step two is identifying how relevant the chosen topics are to stakeholders and the business's ability to impact them.

VED GUPTA: A materiality assessment helps in defining the long-term vision, identifying risks, understanding what competitors and business partners are doing, knowing stakeholder expectations, and forming the strategy to achieve goals.

VED GUPTA: Note that I use the term stakeholders, not shareholders. ESG impacts many constituencies along the value chain, upstream and downstream — suppliers, employees, customers, and investors. It is not just the shareholders of the company; it's the stakeholders.

NEAL BEGGAN: Got it. So the company completes the materiality assessment and identifies issues that matter most across environment, social, and governance. What's next? Let's start with environment. What would you say comes next there?

VED GUPTA: When we talk about environment, we talk about greenhouse gases, or carbon emissions. Let me quickly describe Scope 1, Scope 2, and Scope 3 greenhouse gas emissions.

VED GUPTA: Scope 1 is emissions associated with operations that are owned and controlled by the company, for example fuel combustion in furnaces, vehicles, or other machinery. Scope 2 is emissions from purchased electricity, steam, cooling, or heat used to run operations that are owned and controlled by the company.

VED GUPTA: Scope 3 covers upstream and downstream activities, such as purchased goods and services, capital goods, fuel and energy, transportation and distribution, business travel, employee commuting, and leased assets. Downstream Scope 3 categories include transportation and distribution, leased assets, franchisees, investments, use of sold products, and processing of sold products.

VED GUPTA: When we talk about emissions we focus on the data, including completeness and accuracy. As companies articulate baseline data and future targets, the completeness and accuracy of reported data is critical.

VED GUPTA: We also must consider qualitative aspects of climate change along with the quantitative aspects and the risk it poses to companies — risks of maintaining the status quo and risks associated with a transformational plan.

VED GUPTA: Many guidances are available for calculating emissions in all three categories, but it requires a concerted effort and a well-thought-out program to collect, aggregate, measure, report, and track the data.

NEAL BEGGAN: Breaking down Scopes 1, 2, and 3 makes a lot of sense. Environmental considerations are broadly understood, but I'd like to talk now about the social aspect, which is a very important component of an organization's overall program and is often more challenging for businesses to apply.

VED GUPTA: The social aspect is very important. I believe the S was placed in the middle of ESG so the world should not lose sight of it — people are at the center of everything we do.

VED GUPTA: Many organizations now have diversity and inclusion officers to ensure the company represents the general population and provides equal opportunities. Some organizations choose not to do business with companies that lack women or minority representation at the board level.

VED GUPTA: Social aspects also cover labor exploitation that exists globally, including child labor and unsafe employment conditions. Many countries in Europe require companies to conduct due diligence to ensure suppliers follow company policies, create humane working environments, and do not engage in child labor.

VED GUPTA: Organizations can include audits as part of agreements with suppliers or distributors to ensure compliance. Finally, benefits and wellness opportunities should be comparable to industry standards, such as paternity leave, mental health resources, No Meeting Fridays, and personal time. These practices foster a welcoming environment where employees feel wanted, respected, and cared for.

NEAL BEGGAN: Thanks, Ved. That helps a lot. Now, I want to go to the last one. We normally keep these podcasts to five questions; today we're doing four. Governance — what concepts should companies evaluate when looking through the lens of the G in ESG?

VED GUPTA: There is no ESG without the G. Governance is the foundation of the program and provides transparency, fairness, accountability, and responsibility. It requires oversight at the highest levels and integration across the organization to accomplish ESG goals.

VED GUPTA: The ESG program must be integrated into strategy and business operations to achieve objectives and create value for stakeholders. If I summarize how an ESG program can be approached: first, engage with stakeholders to identify areas and intensity of impact.

VED GUPTA: Second, create a descriptive, time-phased roadmap of prioritized initiatives, goals, and targets. Third, take inventory of your emissions and leverage diagnostic or data platforms to calculate baseline numbers.

VED GUPTA: Fourth, track physical and transitional costs and benefits of transformative initiatives. Finally, report and disclose the progress that has been made.

NEAL BEGGAN: Thank you for joining today's podcast. Sustainability and corporate responsibility are becoming more ingrained in business strategies and operations. I hope our audience gained some insights — I know I did — into how ESG can positively impact their organizations and customers.

NEAL BEGGAN: If you have questions regarding ESG or the topics we covered, whether you are beginning your ESG journey or looking to assess or optimize efforts to date, reach out to risk@cbh.com to speak with Ved, myself, or others on our team. You can visit cbh.com/podcasts to check out the latest episodes on risk topics, trends, tax, and accounting matters.

NEAL BEGGAN: Please like, share, and subscribe to the Risk and Accounting Advisory Podcast. Thank you for listening, and Ved, thank you again for your insight.

VED GUPTA: Absolutely. Thank you, Neal.