Episode 82: The Rising Appetite for ESG In Business

The Importance Of Creating An ESG Framework

There's a growing sense that companies must disclose how they are addressing the impacts of climate change on their operations. I think, at least all the large cap companies are certainly doing that and it's starting to filter to mid-size and even now smaller companies are starting to address that. How they address it of course, is the key.

Tune in as Tim Doyle, Senior Policy Advisor at Bipartisan Policy Center explores with Rochelle March, Head of ESG Product at Dun & Bradstreet the rising interest for companies to incorporate Environmental, Social and Governance policies into their business practices. Tim also discusses the likelihood of ESG regulation and how he sees the ESG industry taking shape in the future.

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The Power of Data Podcast

Episode 82: The Rising Appetite for ESG In Business

Guest: Tim Doyle, Senior Policy Advisor, Bipartisan Policy Center
Interviewer: Rochelle March, Head of ESG Product, Dun & Bradstreet

Rochelle 00:00
Hello, and welcome to The Power of Data Podcast. I'm Rochelle; I'm the Head of ESG Product at Dun and Bradstreet. And today I'm really excited to be joined by Tim Doyle, the Senior Policy Advisor at Bipartisan Policy Center. Welcome, Tim, how are you today?

Tim 00:14
Hi Rochelle, nice to be with you and I'm doing quite well. Thanks for having me on.

Rochelle 00:18
We're really happy to have you. So Tim, it'd be wonderful if you kick off this podcast with a bit about yourself and your background. You've had an impressive career in positions related to public policy and legal counsel. Could you just give our listeners a brief overview of your journey and your role today?

Tim 00:36
Sure, absolutely. Like so many people in DC, I have a diverse background and a number of different things starting a number of years ago - we won't tell them how long - but in state politics, believe it or not, I was a trial attorney, which I have to say I miss now and then. Worked on some congressional committees. Then probably maybe relevant to your listeners back in 2010, I think was the first time I started working on corporate social responsibility issues. And then probably more specifically, in the corporate governance and ESG space back in 2016, I worked for a small think tank here in DC called the American Council for Capital Formation. And I believe we are some of the first that group and others at the time a small group of people here in DC that really started to talk about these issues. Now, of course, they're experts in ESG everywhere you go. And then most recently, it's been a couple of years now, but spearheaded at the Bipartisan Policy Center, a program that we created on corporate governance and ESG. So that's a pretty good background, I think.

Rochelle 01:31
Definitely, definitely. And yeah, around that time, the 2016, right after the UN stamp development goals were launched in the Paris Agreement, you started to see a lot of focus on ESG. And so that's interesting to hear on the ground, your experience with that. And yes, today, we're seeing a lot of focus on ESG. It's evolved very quickly.

Tim 01:52
Yeah, and in DC, as you recall, back in that time, there were really few people talking about it, obviously, at the SEC, Senate Banking and Health Financial Services, but outside of those pretty small groups from at least public policy, people were talking about it, and certainly they weren't talking about it administrative wide as they are now or DC wide as the case may be.

Rochelle 02:13
Definitely. Related to that, what do you think are the main reasons why we're seeing such an increased focus on this area ESG, particularly from companies?

Tim 02:24
Sure, I think probably there's always been shareholder activists for a variety of different reasons. They get involved with companies at their annual meetings and want to either steer the direction of the company or get questions answered for them. But I think it's probably been, five or six years, maybe a little bit longer. There's a kind of a different type of shareholder of activism that started to have more focus on broader issues. And what we now call ESG. Back then, wasn't necessarily called ESG. But, you know, corporate social responsibility and governance issues. So that was probably where it started, I think as shareholder activism that the annual meetings, I think, then that following through that, or when that became a bigger issue was when proxy advisory firms started to have recommendations that were affecting the voters, you know, the shareholders. And then of course, I think truly, when companies really were like, wait a minute, this isn't just shareholder activist that we deal with every year with the same kind of proposal over and over again, this is something much larger than that. And I think that that happened, probably when institutional investors, the BlackRocks, Vanguards of the world, started to side with some of the activists on some of the issues. It started on climate change, but it has now expanded into a broader ESG topic. And then probably lastly, for those of us in DC, when DC probably got the wakeup call was - it probably happened before this, but I really tried to use this as a starting point - was Business Roundtable - I guess it's been two years now came out with their purpose of corporations or purpose of a company. And we configured or kind of changed the definition or how we discussed the role of corporations. It's not just a shareholder primacy, or based on just shareholders, but rather this broader stakeholder analysis. And so I think that's when people in DC started being like, whoa, something really is happening here. It started in Wall Street, and it is now here in DC.

Rochelle 04:20
That's so interesting to hear that perspective from the DC area. And yes, that Business Roundtable, key leaders in the business world join that so I'm sure it was a major symbol of where the shape of leadership would go and where the mainstream may go. And yeah, you know, Larry Fink and BlackRock, I remember his 2014 letter to companies asking to stop sacrificing long term value at the price of short-term gain.

Tim 04:48
Short termism.

Rochelle 04:49
Yeah. And then his most recent one was just all about climate and carbon neutrality and extremely explicit. So it's very interesting to see that evolution.

Tim 04:58
Yeah, it's been interesting when it comes to Larry Fink because his annual letter that comes out, I think it's in January that it comes out. I mean, people really do look forward to, what is he going to say now? Where is he taking it? And it's just because BlackRock for those listeners that don't know, and I'm assuming most do, but it's the largest institutional investor, I believe in the world, something almost close, like 7 trillion under management. I mean, it's just a giant company. Well, the company itself is large, but I mean, because of the amount of money that they manage, it really has an incredible influence. So when he speaks, it's kind of like back in the I guess it's the 80s when they said EF Hutton, when EF Hutton spoke, everyone listened. I kind of feel like when Larry Fink makes a statement, and people listen.

Rochelle 05:41
Definitely yes, I couldn't, couldn't agree more. And part of that, too, is BlackRock owns a little bit of almost every company, so it's difficult to be shielded from global events like climate, which I think is one reason you mentioned climate earlier. This is something that's really emerging as potentially mandatory in the US and mandatory and other areas. For example, the governments of the UK, New Zealand, Hong Kong, Switzerland, and the G7 group of nations have said they will back the Task Force on Climate Related Financial Disclosure or TCFD framework that outlines the type of disclosure to articulate in relation to climate. I know that this is an area you've covered closely, you know, what's your perspective on the momentum in the US in terms of mandating disclosure of climate change in company reports?

Tim 06:35
So I guess there's probably two different issues in that question. First being momentum to disclose, I would say the second is mandating disclosure. So let me address momentum first. I think that there's a growing sense that companies must disclose how they are addressing the impacts of climate change on their operations. I think, at least all the large companies, the large cap companies are certainly doing that it's starting to filter to mid-size and even now smaller companies are starting to address that. How they address it, of course, is the key here and I think people get concerned in the companies about how they're supposed to do it. But clearly, companies are conducting these, what they called Climate Risk Assessments under different scenarios to try to figure out how it will impact them. And as I mentioned, though, not all companies are going to be affected by climate change in the same way. And some of this has to do with the predictability in some of the modeling that they use on these impacts and how far out they go, and how that's going to affect them. And I don't think companies are like, well, we're not sure climate change is occurring. I think that they're all on board with that it is, the question is how it actually will impact them. And the models that they use, some are extreme on one end, and some are extreme on the other. And it depends on kind of the models. And so it gets very difficult when you're predicting out, you know, 10, 15, 30 years. And then the other issue I think that companies are trying to address is the mitigating technologies that are beginning to emerge. And we're kind of seeing ironically, a lot of them seem to be coming out of the oil and gas sector from carbon capture two carbon removal and things of that nature. Ideally, if those technologies really take off that could change the equation and how companies are dealing with climate. Of course, then there's a geopolitical events, right. I mean, we're currently in an energy crisis, like, how will that affect the companies in the future? So on the momentum, that's kind of where there is, I think short answer is, yes, there's momentum. And I think companies are going to be disclosing more.

The second part of the question, which is on mandating, I think this is where a lot of companies have some real concern in the US. The EU and others globally are a little bit further ahead than the SEC is on this. But I think that there are US companies that are concerned with mandating a more prescriptive framework. And the idea of first behind the prescriptive framework is that it creates consistency and a comparable framework, which those that are in favor of that say it's lacking right now. On the other side of it, you have companies that are that believe that a principles base, which is kind of the current model now that we have, is a better way to take into consideration the differences among sectors and within companies themselves, not to mention the added cost associated with this prescriptive framework, especially when you look into things very kind of getting in the weeds or a little bit. But when you get into things like scope three emissions that are just incredibly difficult and will be costly for companies to be able to gather, and then of course, disclose. Now, all that being said, from a momentum and mandating side of it, the SEC is in fact moving forward with a rulemaking probably later this year, early next year, where they will be mandating. It's pretty clear based on comments from the Chairman of the SEC, that they will be promulgating a rule on a prescriptive framework. And in particular, as you mentioned in the question on TCFD, and I think Gensler has indicated I think, a couple of different occasions that he's not going to wholeheartedly embrace TCFD verbatim but I think that the framework that they will come up with will be largely based on TCFD. So that's probably where we stand I think when it comes to momentum and mandate.

Rochelle 09:54
Got it, and for those who are not as familiar, what's the main difference between a principles based and a prescriptive based directive around climate change disclosure.

Tim 10:04
The simplest way is that on a principles base you have a set of principles and actually TCFD is in fact, based on principles. A lot of people don't realize that they think it's very prescriptive. And actually, if TCFD is not, so they have a set of principles, and then you as a company, use those principles and assess how they affect your individual company and then disclosed accordingly. As opposed to a prescripted, typically, mandated disclosure, you almost feel like a fill in the blank, like you must provide this piece of information, not whether that piece of information is material or not to your business, but you have to disclose it regardless. That's the main difference. And this is what many argue for is it will undoubtedly result in companies having to disclose more information. Those of us who follow kind of the courts on this more information does not necessarily mean better information or understandable information. But we'll leave that for a later discussion.

Rochelle 11:00
Definitely, yeah, that's really interesting, Tim, and we see that momentum building from the SEC around the mandatory disclosure. For example, they released their recent sample letter to companies regarding climate change disclosure, and it outlined some of the pieces that companies might be required to disclose later on. Curious in your initial thoughts about this sample letter? Do you think it covers enough, for example.

Tim 11:27
So in 2010, there was guidance on climate change disclosure that the SEC put out. And since that time, and definitely in the last year or so the SEC has indicated it wants to update or clarify that guidance document. Essentially, that guidance document instructs companies on how to disclose in this space. So there's guidance out there current guidance out there from 2010, that the SEC wants to update. The SEC is also working on a proposed rule that's coming out on climate risk disclosure. So the SEC has I believe, and this is just my personal opinion, I believe the SEC is telegraphing, it's telling companies that they absolutely are engaging on the 2010 guidance document. However, until the guidance document is updated, or a rule is finalized, we expect you as companies to disclose in the certain areas or in the certain ways. And that's really what the letter is telling companies that, hey, if you plan on waiting until our guidance is actually updated, or the rule is finalized, we're here to tell you, you ought not to do that, that our enforcement folks are going to be looking pretty clearly at what you are disclosing. So that's what I believe the sample letter is. So does it cover enough? I guess from what I've heard that the SEC wants to do? I would say no, it doesn't cover enough for them for sure. But I think it's kind of a shot across the bow of if you will, of companies to say this is what the SEC expects them to do. And quite frankly, if the updated rule is everything that the SEC wants it to be, there might not be a need to update that guidance, because it will be covered in the rule. Because those are kind of follow the regulatory process, you have a rule typically comes out and guidance usually is a follow up to a rule when questions come out about the rule. Rules have much more weight from a legal point of view than guidance. So that's where I think the SEC is going. And that’s a long way to say why I think the letter came out.

Rochelle 13:13
Now that's super helpful to have a little bit more of the background and also your perspective, from the policy elements of how this plays out and how this will eventually affect companies who will need to comply potentially with those rules. We've talked about TCFD, we mentioned is a framework for helping to articulate what to focus on in terms of climate change disclosure. It is principles based there are some metrics included. And it is very forward looking, for example, it requires a scenario planning analysis to look into the future with different types of warming scenarios. I think this is you know, obviously the first choice in terms of informing a framework that doesn't necessarily tackle the short-term impacts of climate. You know, we've seen recently storms and floods and instances that are really testing the resiliency of companies. So I'm curious, do you think it's the right framework to use and are there other elements missing that maybe will come out in that guidance, perhaps?

Tim 14:19
Sure. Well, Chairman Gensler, of the SEC has indicated that TCFD will be the basis of the framework. So I guess whether it's the right framework or not, that's the one I think they're going to use. So I guess it probably doesn't matter beyond that, so to speak. But I will say that so obviously Chairman Gensler referenced it multiple times. A number of companies use it, or at least part of it, right. I don't know how many actually fill it out or use it to its full extent, but many companies use aspects of it in their disclosure. Of course, then there are the big five and the major five standard setters and frameworks, and that's GRI Global Reporting Initiative of a CDP, which is formerly the Carbon Disclosure Project, Climate Disclosure Standards Board, IRC and SASB. So those are the big five, although I think SASB and IRC have merged and become the Value Reporting Foundation. But I say all that because these are the five major standards centers, current major standard centers and framework creators. They all - all five of them abide by TCFD. So the idea that you're going to have something different than TCFD. I just don't see that happening. And lastly, and we mentioned it before, but Larry, Larry Fink, he always comes up when we're talking about this stuff. I think it's his last two letters, Rochelle, but it definitely might have been this last year for sure, where he essentially said in his annual letter to CEOs that he expects companies to report using TCFD. I think with all of those things going on, I think companies can pretty much rely on the fact that TCFD or something very similar to it will be required of them. So whether it's the right framework, I guess we'll see. I think that the real issue is how its implemented, as we may have talked about before, companies have used TCFD and all disclosure and standards centers as a tool to disclose the data that they determine that their investors would kind of want to know in order to make investment decisions. And so some of this gets back to our initial discussion about prescriptive versus principles based disclosure framework. It'll be interesting to see how the SEC mandates a prescriptive version of TCFD. So stay tuned right? What we'll see soon enough, I think, as I mentioned, something will be out at the end of this year or first quarter next year.

Rochelle 16:31
Certainly, yes. And as we were talking about earlier, what we're seeing right now is a real culmination of alignment and reaction and also sophistication in terms of the type of ESG information we want to see and make sense that it would be built upon the foundation of these frameworks that have been around for almost as long as ESG has been a concept. So very interesting.

Earlier, you were mentioning about the rule, right, and this letter, kind of giving a precursor of what to expect with the intent that enforcement may be forthcoming sooner than later. We're already starting to see some of that enforcement. For example, there's several companies under SEC investigation for quote, greenwashing, or overstating sustainability claims. In your opinion, what are some of the steps organizations can take to ensure that they're measuring ESG genuinely, and they don't come under fire for accusations of greenwashing.

Tim 17:40
Right, well, some of it is going to depend on the type of company in the sector they're in. Some sectors are just going to be open to greenwashing, no matter kind of what they do. But for advice, I suppose as to what organizations to do, I would say they need to be careful what they're saying. And this is from, I suppose, a legal perspective, because certainly don't want to open yourselves up to class action lawsuits about misleading statements or emissions there of, when you're talking about what your company is doing to either overcome a greenwashing allegation, or just as a statement as to what you're doing. So I would say definitely say, be careful what you say, make sure it makes sense. And I think that, you know, quite frankly, investors are already asking some of these questions. The SEC is already doing investigations, Commissioner Hester Purse, back in the prior administration, this was one of her big issues. She was concerned that people in Wall Street are slapping the ESG label on all kinds of fun and practices that aren't really defined, which is an issue, we can talk about a minute about how ESG is really not as defined as maybe it should be for other things. So for specific steps, though, I think that ESG issues need to be addressed and taken at the highest level. Like this wasn't always the case, especially when you're talking about corporate social responsibility and your sustainability reports. Certainly the executive, the C suite kind of knew about it historically. But I don't think that they until relatively recently, last few years, I don't think they took it to the level that it needs to be, which is truly an issue equal to the financial concerns that a company would have. So there's that, it needs to be addressed at a very high level. I think that the initiatives that companies say that they're going to do, they’ve got to follow through with it. So don't create an issue or say you have it, or going to do this initiative with no intention of doing it or no ability to do that? And so that probably gets me to my next one, which is to set realistic and obtainable goals. I think that from an investor perspective, and probably societal, I suppose from a DC perspective, as long as we can see that a company is moving in the direction that those that are supportive or that are embracing the ESG philosophy, as long as I see companies moving in that direction, I think most companies are going to be okay. Again, provided they're setting these realistic and obtainable goals. And then you know, as we talked about before, to a lot of companies see ESG disclosure and strictly a negative, it's a costly thing. And it does have costs. I'm not, I'm not here to say that it doesn't, it can have incredible costs. At the same time. ESG issues can be used by companies to promote themselves and distinguish themselves. And this is where I think that if you're doing it in the way we've just kind of discussed, it may not prevent the accusation of greenwashing, but you will be able to better refute or rebut that claim, if you are doing the things that we've kind of talked about. So those are probably the off the top my head some small pieces of advice that might be helpful in the greenwashing space. Again, as I mentioned, sometimes it's just going to be inevitable based on the company and or sector, people are just going to say that.

Rochelle 20:38
Sure, yeah. And I think to your point about certain sectors, it is going to be very particular for that. You know, this year, we saw more underwriting funds generated in banks from issuing ESG bonds or sustainability bonds versus fossil fuel bonds. So the money is going towards ESG in a real way in the financial markets, but then it does beg the question, what data is behind that? Is that truly, you know, ESG related or is it simply trying to attract those premiums?

Tim 21:10
Right, you just hit the nail on the head so to speak that the data is still coming in. And I think that it's probably more likely than not that there are ESG funds and companies that claim that they're embracing ESG that aren't, and I think it concerns the SEC, that's why the investigations are happening. But I think at some point, investors are going to realize that. So I think with the combination of a regulatory hand, as well as in the end, it'll be in the returns. That's when I think you'll see a more settling out of ESG funds and methodologies in using ESG to make investment decisions.

Rochelle 21:46
From my perspective of a data provider and ESG provider, it's very challenging to get quality ESG data today. You know, some companies have some disclosure, there's different ways to triangulate it. But in general, the way to overcome that lack of quality is, you know, from the investor community, perhaps or do you think that it would need to come more from regulatory?

Tim 22:10
It's coming from both, I think, well, in the previous administration, and you can obviously take the fact that it was a different administration into consideration when I say this, but I think it was more on the investor side of the change that were happening that historically had been the case. I think this current administration and the current SEC plans on doing it regulatorily because they believe that the investor side either wasn't working or wasn't working quickly enough. And so I think that that would be what's happening now. And so barring the change in the administration, which as we all know, won't happen for a couple years, based on what Chairman Gensler at the SEC, what Secretary Yellen, what the President and others have said, I think there will be in continued to be a regulatory push for this, not only at the SEC, but throughout the administration. So regulation is coming. If there's one takeaway thus far it’s regulation is coming. I'll see what it actually looks like.

Rochelle 23:06
Yeah, that is the question, right? What will it look like? I'm sure, it will be an interesting development and process. Speaking of regulation, we focused a lot on investors and public companies, those companies that big asset managers, like BlackRock and others are invested in. But we are starting to see some regulation impact private companies, and notably Germany's Supply Chain Due Diligence Act that is requiring companies operating in Germany to disclose ESG data on their tier one or direct suppliers. What do you foresee as the trend relating to mandatory private company ESG disclosure?

Tim 23:44
Well, I think that from an SEC point of view, and I suppose there are some arguments, but I think that they really are the minority view here. So I think majority of those, from a legal perspective, do not believe that the SEC has the authority to regulate private companies in the way in which we've just discussed. I don't see that happening. That being said that there certainly is when you look at bills that have passed, in particular that the House Bill Disclosure Act that passed this past June, clearly in the sense of Congress's that they would like them to do that. But I think you need more than that. So I don't see it, at least initially. And the SEC has got their hands full with all kinds of other non-private or public companies that deal with and that, of course, is their mission statement. You know, all that being said is that as we mentioned a minute ago, the rest of the administration, from Treasury on down, they do have some tools to affect what private companies do, for instance, any those that have federal contracts and that are bidding on future contracts. When it comes to assessments that they are done in in various departments, private companies can all be affected through that. So while I will say the SEC is unlikely to be successful in regulating private companies, I think the whole of government approach that the Biden ministration is taking with regard to climate, I think that they will be able to affect private companies to a certain extent.

Rochelle 25:02
Yeah, that's a very valid point, I think we have started to see that with the real estate sector and some of the many new codes and regulations that have come out around energy efficiency and building resiliency and things that are naturally occurring, you know, on the municipal or state or even federal level in some cases. So, yeah, I see what you mean, there can certainly be a proliferation in trying to enforce these ESG priorities, maybe not from the SEC, as you mentioned, their purview is really on those big public companies, but through other avenues as well. Well, thank you, Tim, this has been incredibly insightful, and so excellent to get your on the ground perspective in terms of these policies and developments. It's certainly going to be an interesting next year I think, as some of these developments settle out. We talked, you know, a lot about looking forward and what's happening, but you know, anything else that you might see shaping ESG and the industry going forward? We talked a lot about climate, but anything else that you would want to share with us?

Tim 26:08
Sure. Well, as you know, anyone that's been following ESG issues in general realize that it's a very broad in some would argue too broad of a category where almost anything can fit under an ESG umbrella. So I do think the administration and the SEC is focusing on some other issues, obviously, other than climate. But I would say that a merging trend, or the one that I think is probably the one that people should pay attention to the most or at least pay attention to is on human capital management. This is something that will almost certainly be a rule on disclosing Human Capital Management coming out roughly the same time as the climate rule. I think the SEC has realized that they've bitten off a pretty big chunk when it comes to ESG. And so there'll be a number of roles. But I think human capital management in particular, Chairman Gensler has talked about it repeatedly. So I think it's coming. And Human Capital Management of course, really opens up a whole new issue for companies, because a lot of people when they think of it, they're like, Oh, you just want to know our diversity numbers, or our hiring trends or things of that nature. And the way it looks, and courts haven't seen the rule. So again, speculating, but the way it seems to be is that the SEC is going to be asking for something more than just disclosure of Human Capital Management that is, you know, from a diversity to other metrics, but they're going to be asking companies a little bit more, they're going to be asking for analysis in that disclosure, and I think there are a number of companies across sectors that are concerned with that. And if you think about it, I suppose it makes sense, right? Because really, you're talking about strictly disclosing the numbers versus kind of something closer to the day to day activities of a company, and whether we should be requiring companies to disclose those types of decisions, especially when as many would argue some of these day to day decisions when it comes to Human Capital Management, make them a competitive advantage? Or is it in the realm of competing with other companies? And so you know, at some point, where do you draw the line. And so I think that is going to be an emerging issue. And then, of course, as all things go, ESG, and I'll end with this is information overload. And so this is something the Supreme Court when initially dealing with the issue of materiality, and what companies should disclose. The court was very specific on saying that they have a real concern that if companies provide too much information that a reasonable investor just won't know how to process all of the data in a way that is going to be beneficial so that they can make an informed investment decision. So while climate change, of course, and climate related risks, we're not there yet, but I think human capital management and other broader categories of ESG, we get, I think, a little bit closer to that point of information overload. So it'll be interesting to see but one that I think people should keep an eye on.

Rochelle 28:49
So interesting. Yes, we could have a whole other podcast on that last point Tim, thank you for that. It was such a pleasure speaking with you again, and I hope those listeners on the power of data podcast, also enjoyed it. Thank you so much, Tim.

Tim 29:04
Thank you, Rochelle. I really appreciate being here with you today.

Rochelle 29:06
And thank you all for your time today.