EP03: ESG - the intersection with technology and assurance

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Izaan: Hello, everyone, and welcome back to the Tech for Leaders podcast by Mazars. For those of you who are new to our podcast, welcome, and for those of our returning listeners, welcome also. I'm Izaan, a privacy consultant within Mazar's Technology and Digital and the host for today's episode. This week, we're going to be discussing environmental, social and corporate governance, more commonly known by its acronym ESG. For this episode in particular, we're going to be moving past the buzzwords and looking at what ESG fundamentally means and examining how ESG came to become a critical topic in boardroom conversations, with ESG being mentioned in almost a fifth of earnings calls last year, investor relations, especially with modern investors increasingly looking at non-financial performance indicators for businesses and the public sphere. For example, with a new suite of more expansive ESG regulations being introduced by the EU and the US. We'll also be looking at and exploring how businesses can demonstrate to stakeholders that they are seriously thinking about and tackling sustainability issues with specific regard to the role and impact of technology and data along the way. To discuss this topic, I'm really happy to be joined today by Conrad Volker, Director at Mazars Technology and Digital, whose work spans a range of areas, including reviews of systems and organisations controls, more importantly, known as SOC, ESG and third party assurance audits. Alongside we're also joined by the Mazars lead for ESG and Sustainability Services William Hughes. So welcome, William and Conrad. Glad to have you on the show today.

Conrad: Thanks Izaan. It's great to be here.

William: Thanks, Izaan.

Izaan: So to start us off, let's bring it back to basics, what exactly is ESG? And I'm not talking about just the full form of ESG as I just explained, but what does it fundamentally mean?

Conrad: That's a great question Izaan. ESG is an acronym, it stands for Environmental, Social and Governance and it takes a holistic view that sustainability is more than just environmental issues. It's best characterised as a framework of managing risks that relate to how you manage opportunities relating to environmental, social and governance criteria. It's often used in the context of Investment Management, but stakeholders also exclude others such as customers, suppliers and employees. Stakeholders are increasingly interested in how sustainability issues are managed within organisations.

Izaan: And what about your thoughts, William?

William: I think from a business point of view, what ESG does, it forces you to consider a bit long, longer term and I think this is what has become really, really important. I think it's shifted the focus from, from the immediate, for now as to, as to what the future holds and I think it's been driven by a number of factors. The factors, there can be no denial that we have a climate emergency. There can be no denial that we have massive global inequality and with those, those in mind, stakeholders, investors, not just investors, have realised the power that ESG can bring because ESG has financial relevance. It has financial relevance for, for business and you can see it in, in really three ways. The first way is that there's a business case around ESG, why it's, why it’s important? The second is that global finance is shifting towards ESG, so, ignore it you sort of discount yourself from all the opportunities that come with, with because and if I can just reference the PRI, the United Nations Principles of Responsible Investment which has grown, it started in 2006 in New York has grown from $6 trillion of assets under management in 2006 with a handful of investors to, to $121.3 trillion of assets under management as at the end of 2021. Demonstrating that shift and these are asset owners, asset managers shifting the, their investments towards ESG linked funds. Now what does that mean? It means if you're not in that, if you're not, if you don't, if you're not in that you're going to be, find yourself very irrelevant. And the third of course that you mentioned is regulation. Regulation is driving, will be driving business towards, towards considering ESG but our view is that regulation and compliance should be a by-product of the value added. 

Izaan: It's interesting that you mentioned the UN because ESG as a term stems from a 2004 UN led initiative, which led to a publication of a study in 2005 called ‘Who Cares Wins’. But we well knew about problems with climate change and inequality back then, and ESG was largely untouched by organisations up until 2018/ 2019 because during that whole period I mentioned a statistic in the intro that over a fifth of all earnings calls in the past year referenced ESG, but that was a shift that happened from 2019. Up until that point it was actually less than 1%, so there was an exponential bit of growth in people and organisations considering ESG. So, what, what do you think are the factors that drove that massive adoption in the past couple of years?

William: I think, let me, let me go first there Conrad. I think that, that we talk about a climate emergency but it's backed by science, but it's backed by tragic events that are regularly taking place today. We have fires, we have floods and, and that's affecting many, many parts of the globe and affecting many you know, and who's taking the brunt of it? It's mainly those, the poorer communities that are taking, the developing world are taking the, taking the brunt of it, so that's focused our attention. I think the pandemic has also focused our attention on the fact that we're not as bulletproof as we thought we are. And suddenly we were extremely vulnerable to a situation that we say, well, you know, it's, you know, business as usual is no is no longer acceptable.  And having a connected world with technology and social media, it's no longer acceptable to do what you please and hurt what you please, and extract what you please without consequence. So I think that those factors are driving that, that and I think stakeholder you know, we talk of stakeholder capitalism, which I think is a very important topic around, you know, we mean, almost most organisations are for profit, of course, we have B Corp, which is,  which is changing that view. But, but this, this, this stakeholder capitalism is really coming into play where stakeholders matter and their voice matters, and, and they have power.

Izaan: Absolutely yeah, we are seeing that sort of shift. Sorry I want to go back to Conrad and ask what your views are and why ESG has become such a big thing.

Conrad: Yeah, absolutely. As William has outlined, we can't just go at the current pace we're going to lose the race and incremental change isn't good enough. And it's not just about saving the planet, it's about creating an equitable society as well. And good will and best intentions aren't enough, we really, we need a real reset in terms of what we do. And reality is people do what they're measured on, so, increased regulation and reporting is an absolute driver for that, and that is really focused on in my experience.

Izaan: Yeah, we've talked about this before where it's no longer possible, strictly speaking, that people just try to temper their own behaviours and consumptions as individuals, we require governments and organisations at large to also consider their sustainability practices. Moving on from what you just said, it's important to be able to measure these sustainability metrics as a result of regulations and as a result of changing business appetite for these things. So, I want to ask you, how do you actually measure environmental, social or governance metrics or aspects? What's the approach that you take?

William: If I could start Izaan and I think we have certain standards that have been put into play and we have organisations like the GRI, the Global Reporting Initiative, that has produced a set of standards. But what you found is that there's been too many, too many different organisations have come up, and it's become extremely difficult to to actually understand what is going on, because there are so many organisations out there measuring. I think what we need is something similar to how we report financially and I think where we are quite fortunate now, at COP26 they launched the International Sustainability Standards Board. And that, with an objective of providing a set of standards for non-financial reporting in a similar way to how we do financial reporting. So,  I think that's, that's fundamentally, if you want to go into more detail in terms of the E, the S and the G, I think in every aspect of, of, of ESG, there's an opportunity to measure and to set KPIs. If you look at in terms of carbon reporting, measuring your greenhouse gases, over the three scopes, it's important you can set KPIs around that, set reduction targets around that, a lot of the companies are doing that. In terms of the S metrics, it's around diversity and inclusion, gender pay gap, staff turnover. And so there's, there's but having said that, I think every organisation has got different aspects to,to consider and when we talk about ESG with organisations, we talk about materiality, understanding what is material for you. And then, and driving a measurement and metrics around that, so, that becomes relevant for you because it's not a cut and paste, everything is different. And, and I think around governance, stakeholder management, transparency, board independence, so for every single aspect of ESG, there's ways of measuring. And I think it's important that we do because, you know, talk is cheap- 

Izaan: Yes. 

William: -but, and performance is what's really important. And then I think what we’re gong to  talk about around assurance is going to come into this conversation, because that is of course, very important.

Izaan: Of course. Yeah, sorry.

Conrad: Absolutely, I agree with what William has said, everyone's got a lovely story about how seriously they take ESG, but it needs to be more than a story, you need some really defined metrics that you can compare others against, that you have benchmarks. And that's why we have these protocols and reporting measures. I think they're really important.

Izaan: Mm hmm. And how does it work in practice then for organisations who intend to go through those processes? What exactly will you be looking at or taking into account specifically to an organisation? So, for example, you'd be looking at things like supply chains and looking at the third parties that you interact with another aspect of the S in ESG is looking at, for example, modern, modern slavery and ensuring that you don't have any, anything in your supply chain that touches something remotely like that. So, going specifically to the topic of third party audits and assurance audits in an ESG context, how would that work for organisations? What exactly would you be looking at?

Conrad: Yeah, there are various protocols as we've talked about. For example, there's this scope one, two and three when it comes to carbon emissions, that's more Williams world. But scope three, for example, will look at your supply chain as well, it won't just be what you use directly or what you source, it will be, include your supply chain. When it comes to third party assurance, there you can look at some of the processes and controls that can help generate that information and validate the sourcing and add more credibility to that.

Izaan: Mm hmm. And where do you see the future of ESG going?

William: Well, well, one thing's for certain it's, it's, it's, yeah, it's here to stay- 

Izaan: Of course.

William: -there's no going back, you ignore it you, you do so at your peril to become irrelevant because your stakeholders will simply not find that acceptable. I think, in my opinion, in three to five years, we won't be really considering it as a separate issue. I think we will be reporting on non-financial matters in a similar way that we do our finances today. And under the auspices of the ISSB, I think that's entirely possible, and I think that we will be, it'll be business as usual that we will have to,to,to report on it. And I think that will be backed by regulation so that it won't be sort of an option anymore that you can, whether you're going to do it or not, because that has been one of the areas that, that has made it so sort of a reluctance for, for especially some of the smaller companies to engage. And I think that, that, you know, when you produce a sort of an annual report the finances, non finances will be there and it'll be assured, that for me is the future.

Izaan: What about yourself Conrad? 

Conrad: I agree totally. I think it will just be baked into the normal reporting that investors require. So, like we do financial segment reporting that will include an element of ESG reporting. Everyone will do it. There will be assurance of it, I think it will be business as usual.

Izaan: Sure. It's one thing for organisations to ignore ESG, but it's another thing entirely to do things like greenwashing. We've seen fines and sanctions being dished out to entities like BNY Mellon and Ryanair for alleged greenwashing claims in their advertising or their reporting. What would you consider to be examples of greenwashing in practice, and how can companies avoid that by inadvertently maybe being accused of something like that?

William: Greenwashing is a serious problem that we face today. Greenwashing is where organisations claim certain environmental excellence without having any backing to back it. We see examples every day on TV adverts, we see examples in, in the press, in reports, and it's driven by a fact that a lot of non-financial reporting is not assured. So, it's a, an organisation will use it as a marketing exercise to try and blow their, you know, to, to, to, to boost their credibility. And quite frankly, we've had enough of that and we've had enough of that, and hence our push for, for assurance of a non-financial reporting is becoming exceedingly important because we simply cannot believe a report that's not assured, third party assured. That is the reality and, and I speak for myself and I speak for many stakeholders out there, that where there's this belief that you can use this as a marketing tool is it so wrong.

Izaan: It's more fundamental than just saying that, oh, yeah, we're compliant. We're, you know, doing all of these things to improve sustainability. But another thing to actually demonstrate that very tangibly in what you do in organisational practices, right?

William: Well, we have, we have some really, really, some examples of, you know, of organisations winning sustainability awards, yet their employees are on strike now. How do you,  how do you actually bring those together?- 

Izaan: Yeah

William: -it's you know what I mean? That's just fundamentally where, because it's a culture, it's a culture around the, around the organisation. That's what ESG and sustainability is, it’s set from the top and if it's not throughout your organisation, it's greenwashing.

Izaan: So let's move the conversation to actually implementing all of this organisationally, but with a specific focus on technology. So, what technology trends do you see businesses adopting in order to improve their sustainability practices? Or to put it on the flip side, what current practices are businesses not sufficiently giving enough thought about in terms of how the tech that they use could be harmful to their ESG agendas? I'll throw that to you first Conrad.

Conrad: Yeah, from a technology point of view, the pandemic has been good in the sense that it has shown us we don't have to be in the office to do our job effectively. We interact with our teams, with our clients, virtually through Zoom, teams, whatever technology, and that works. And that's helped us to rethink whether we really have to make that business trip, whether we can't do it another way. So,  I think technology has played a big role in that. Also technology helps us to look at how we can reduce waste, how we do better reporting over our usage and interaction with the environment and in the office. Those are just some examples in terms of how we, how we can change our practices for the benefit of the environment.

Izaan: What about yourself William? 

William: I think technology's got a massive role to play in ESG reporting going forward. I think we're just sort of scratching the surface at the moment where we have the use of like carbon calculators, that is there to really enhance your, your carbon reporting. And we have things like ESG health checks that we use through a digital platform so we can really sort of be able to, to enhance. But I think what is coming in, in my opinion, is that like we and I again refer back to financial reporting. We want, we're going to find we're going to have software that we're going to be, that's going to be used that's going to assist us in this process. So, if you have a Sage or QuickBooks, QuickBooks or whatever, they're going to have a non-financial component so that you can capture your, your, your non-financial data as you do your financial data. And that has to happen because what we find is that companies find it challenging to get all this data outside of their finances because they’ve got to go and look for it. You know, you're looking for an invoice and you've got to look for the kilowatt hours on how much electricity you've used, that’s simply not captured generally at the moment, of course, it's starting to you know, to, to, to grow and there are certain companies that do, but that needs to be standard practice. And I think that's really where the big opportunity lies.

Izaan: Of course. And what about practices that are happening right now within organisations in a technological sense that you think could potentially be harmful to the general ESG agendas there? You can think of any? Maybe like excessive data centre use, for example, or focusing more, I guess, on the social side of ESG, looking at how personal data might be used in ways that might breach the privacy of individuals. I can, I can think of a lot of ways where, again, this is one example of how ESG is so focused on the environmental side of things, but not necessarily looking at the impact technology can have on things like human rights. So, I definitely do think that there are a couple of ways that organisations can improve their organisational practices and technological practices.

Conrad: I agree. I'll give you a real life example, data centres, for example, use a lot of power for cooling, and there are now efforts to look at how else can you achieve that. It could be cooling under the sea, for example, whether you can move some of the data centres there. So, there's, there's a constant look at technology as to how you can improve efficiency.

Izaan: With the increasing use of technology, especially since the pandemic, how does that reconcile with a broader, sustainability goal for organisations that weren't actually using technology in the first place and were, for example, going into work because they were local you know?  What do you feel like the extensive use of technology in our lives and the pressures that it places on the infrastructure of those technologies like data centres and how the Internet needs to be very, very replicated so we don't lose personal data, for example. How does that reconcile with the fact that, for example, we're just not travelling as much anymore? Do you think one offsets the other, or do you think we are moving maybe from one visible kind of harm to another, more insidious, invisible kind?

William: I think it's hard for me to comment as I don't really, I don't really know what the impact of that is. I think that the pandemic has shown that we can do things differently, we can work differently. I think for any organisation, when one examines one, one's impacts, one has to do it like that and understand exactly what, you know, any sort of decision that you take around, whether it's technology or anything, needs to have an ESG lens. And then having that ESG lens then gives you the opportunity to say, Well, are we, by doing this are we going to create more damage to the environment? Are we going to create more damage in terms of society? And the decision is taken around that. But you know I don't think I'd like to sort of give examples, I simply don't know what they are. We do know that less  travel equals less emissions, we know that's a fact- 

Izaan: Sure.

William: -I mean, and we've, we’ve found that we can work outside of the offices. And I think that's something we know, now how we manage that in terms of, of, of going forward is really,  depends on, on a lot of circumstances, what kind of business you're in, etc., etc. In terms of around data centres and obviously data privacy is, is a, is a fundamental human right and, and you know, that, that cannot be compromised on that. And I think it's very important that, that's put into play but I think we just need to be careful not to generalise too much and say well, these are the pluses and these are the minuses because everything is different and everything needs to be examined carefully around that, but if you take it with a ESG lens, then you've got a really good foundation.

Conrad: You make a good point, Izaan that there is a trade off. If you just look at the sustainable development goals, for example, a goal might be improve quality of life, for some people they might see that as having the latest Iphone and we're spending more on technology, so that has an environmental impact. So, there's a bit of a trade off in terms of measuring the good and the bad and offsetting or deciding where your focus lies, where's the greatest benefit and where's the greatest harm.

Izaan: Mm. And so it's up to organisations really based on their business models to determine what works for them as well as what works for their customers and broader society?

Conrad: Absolutely. And I think it's all about visibility.

William: And transparency.

Izaan: And Transparency. So, Conrad, why do we need assurance fundamentally?

Conrad: That's a great question Izaan,  I'm glad you asked it. I like to use an analogy of online shopping. We've all bought something online from a seller that we know very little or nothing about and the seller always makes some representations about the product because they want to sell it. But as a user, we tend to take that with a pinch of salt because we don't know whether we can trust them or not. So for me, assurance is having someone that can provide that independent view about that product, have they used it before: Are they  independent? Is it any good? If I translate that into the business world, it's about independence, you want someone that, that is not related to the subject matter, that has credibility in the market and can assess that subject based on a set of rules or criteria or methodology and that's where the different standards come in. The standards provide you with that set of rules around objectivity, about independence. And then you have the supporting protocols such as the Greenhouse Gas Protocol, which is the set of rules that determine the scope and the measurements that you assess that. And looking at that, you can provide that independent assurance, which can be either reasonable assurance or limited assurance, but it gives you some comfort to say, yes, what I'm presented with, I can take some additional comfort from.

Izaan: And that's the importance of independent work on it, so, loads of metrics and colorful charts, they don't they don't just suffice, do they?

Conrad: Absolutely not that's, that's also where greenwashing comes in. You don't want to take everything just at face value, you need to trust but verify. You need some kind of mechanism to validate that what is being presented.

Izaan: William, what are your thoughts?

William: It's, I think I've said it already around that we simply don't believe a report that's not assured anymore because of the, this, the marketing angle that organisations have taken to try and build themselves up without substance. So, I think fundamentally, it is important to have third party assurance. I think in terms of, of regulation that we've talked about early on in the chat you'll find is going to include assurance as part of the package as it is with financial reporting so it's something that's really necessary, it helps to build trust and helps us make it, gives us confidence in what's being produced.

Izaan: Absolutely. We see an increase in consulting organisations generally having ESG consulting and assurance as part of their normal suite of assurance and advisory packages that they've put forward to organisations and what are we at Mazar doing in that department? Is there anything interesting that you'd like to share?

Conrad: Absolutely, so this comes back to credibility. We at Mazar work together quite frequently and Williams team has a deep subject matter expertise around the issue related and subjects, the Greenhouse Gas Protocols, et cetera and then my team focuses greatly on assurance. So,  through that combination, we can add real depth and breadth to provide that assurance, which I think is a very positive and unique offering.

Izaan: Of course. So, out of all of the things that we've discussed today, what should a key takeaway for business leaders be? I'll give you one each.

William: Well from my side I think I've said it,  I think ESG is, is here to stay. I think it's really important we understand it, we bring it into our organisations, it becomes part of what we do. Ignore it at your peril.

Izaan: Ignore it at your peril. Conrad?

Conrad: Absolutely, I agree. It's, it's here to stay, we do what we are measured on. Greater reporting and regulation will be a driver for change, it is definitely here to stay. It's a force for the good.

Izaan: It's a force for good. Thanks to our guests, Conrad and William. Thank you.

Conrad: Thanks Izaan. 

William: My pleasure.

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That brings this weeks episode of the "Tech for Business Leaders'' podcast with Mazars to a close. If you enjoyed today's show, please subscribe to the series and leave a review to help us extend our reach and keep technology at the heart of the business community. We look forward to sharing more with you in our next episode but for now, take care and thank you for listening.