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    Culture of Compliance | Introducing ESG to Your Company

    ESG or Environmental, Social and Governance is becoming a major part of the corporate vocabulary, but what does it mean? Sabrina Serafin interviews Laura Wanlass, Senior Client Partner and the Global Corporate Governance & ESG Advisory Practice Leader at AON. Laura defines ESG and explains why it is important to companies.

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    Culture of Compliance | Introducing ESG to Your Company

    This transcript was assembled by hand and may contain some errors.

    It has been edited for readability.

    Sabrina Serafin: Welcome to Frazier & Deeter’s Culture of Compliance Podcast series, where we discuss compliance as a competitive advantage in today’s marketplace. I am Sabrina Serafin, a Partner in Frazier & Deeter’s Process, Risk & Governance Practice.

    Today we’re excited to have Laura Wanlass on the podcast. Laura is a Senior Client Partner and the Global Corporate Governance & ESG Advisory Practice Leader at AON. She is a frequent speaker and writer on corporate governance & broader ESG related topics.

    Laura, welcome to the podcast.

    Laura Wanlass: Yeah, thanks for having me.

    Sabrina Serafin: Laura, we live in a world of acronyms but the three little letters that have been the topic of conversation I think in 2021 almost as much as COVID is ESG. I wanted to start off today with the basics. So could you please define ESG for our listeners who may not be as familiar with the topic?

    Laura Wanlass: Sure, I’d be happy to do so. It’s certainly a term that gets thrown out a lot in the marketplace, in the news, everywhere, and the interesting thing about ESG, which we’ll talk about, to answer your question, is that it means different things to different people. That’s what I found and it can be used interchangeably to mean social good, it can mean a board’s oversight of material, environmental, social and governance factors, it could mean sustainability to a different subset of interested parties, so it means a lot of different things to different people. But when we think about environmental and social governance in the field that I work in, with boards of directors and the C suite, it really is an integral part of how a company does business, and how each of the individual elements are really intertwined so we see this interplay when a company seeks to comply with an environmental laws, for instance. This affects the company’s ecological footprint, the relationship it has with its community and stakeholders, social, and then it’s compliance with regulation, which is governance to some degree. Any one of these topics that a board or company has to navigate often has an E, an S, and a G component. And I’d say in recent years, interest in ESG issues has risen dramatically among institutional investors, lenders, regulators, policymakers, consumers and employees. So thinking about how each one of these external parties views ESG is incredibly important to accompany in today’s environment in terms of how to navigate and prioritize.

    Sabrina Serafin: Great synopsis. There are some other acronyms thrown in just this set the stage for us. Can you also define DEI and HCM as it relates to ESG?

    Laura Wanlass: Sure. Two terms that also end up being thrown around just as much as ESG, and often interchangeably, even though they do mean distinctly different things. So human capital management is what we mean when we think about HCM, and that’s really a set of practices that a company uses to manage all of their activities and goals surrounding attraction, retention and development of people. It’s that oversight of people risk and opportunities at a company, and actually HCM happens to be the US’ first SEC mandated ESG reporting. Companies have to fill in their form 10-K to explain their HCM quantitative and qualitative practices, so quantitative metrics and qualitative practices around how they’re managing people risk and opportunities. DEI, which is diversity equity and inclusion, is really about how are you tackling those topics across all of your activities within attraction, retention and development of people. How are you integrating diversity, equity and inclusion into each of those people risks and opportunities? And the interesting thing about DEI is, because that’s such an area of focus, largely in the US, due to the social justice movements and even COVID highlighting the importance of people, you see that a lot of investors are asking companies, and their boards, what are you doing on human capital management because people happen to be the biggest risk and the biggest opportunity for virtually every industry. If you don’t have your people dialed in, you are probably having issues at your company, so the interesting thing is when companies see other companies taking action on DEI, maybe setting a diversity metric in their incentive programs, or a hiring goal, they’ll often come to us and say, “what goal should I set?” and we say “step back a second. What is your broader human capital management strategy? Do you have proper controls in place to really think through this topic? Do you have true goals on attraction retention and development? And have you figured out what you’re trying to do on DEI across all of those topics?” They’re intertwined because human capital management is a vital part of ESG, and then DEI is a vital part of human capital management. You can’t look at any one thing in isolation.

    Sabrina Serafin: That’s a great a great example, and it’s true we see those acronyms being used interchangeably to really address different items. Now that we’ve got the vocabulary out of the way, let’s dive in. I mentioned earlier that ESG is one of the hottest topics in governance these days and with management teams and boards discussing and sometimes struggling with, as you mentioned, how to address new expectations, can you explain why ESG has suddenly, and I use the term suddenly very loosely, why has it currently emerged as a dominant board level issue?

    Laura Wanlass: You can’t actually have an effective ESG strategy, or ESG practices, if you don’t have proper oversight at the board level and at the C Suite. So the first thing the board has to do, is figure out what their role is in a company’s ESG analysis or an ESG risk assessment. What type of risks are material to the company? In which key committees or even the full board should be overseeing material ESG risks? Which risks go to the audit committee? Which risks go to the compensation committee? Which risks flow to the nominating and governance committee? What is everybody’s role in the current environment? Then you have that oversight question and then you have boards also trying to figure out how do we interplay with management because the board can’t micromanage management in terms of the ESG strategy they’re dependent on management to tell them what they’re doing, why they’re focusing on certain areas and management is the one that has access to data. Management might tell the board what goals make sense, and what the strategy is, but the board then has to ask for that data because they can’t readily get that on their own and a lot of different ways.

    Now, the reason the board is asking is because ESG is important, as we’ve talked about. To various stakeholders, your employees care, your customers care, and if you’re a public company, your investors care. The Board has to be smart enough to know what types of questions to ask management. It is their role to be smart enough on climate to know what climate is material for their company and how its material to know which committee should own human capital management and should it be an official role of the compensation committee or the nominating and governance committee. The why is easy, but why the board is talking about it, and the interesting part is, there is no one size fits all for how the board manages this and the stats kind of bear this out when you look in the market.

    Because company culture comes into play, the size and the industry of a company also comes into play, in terms of where they might be in their ESG journey, so boards are being asked real time to navigate a very complex topic and for most board members this isn’t their full-time job. So, this becomes a very difficult environment.

    Sabrina Serafin: That’s an excellent summary and I think we need to talk about the how, when it comes to management and we’re hearing a lot of different ideas about how to improve sustainability and accelerate progress regarding diversity, but what are some of the actions that management teams are taking to address the expectations of the board?

    Laura Wanlass: The expectations of the board, and I would say the expectations of investors too, because you know corporate IR teams are hearing directly from investors as well.

    The first thing that we see a lot of companies doing is figuring out what’s appropriate for them, meaning, where are they in their ESG journey, what have they already done, where might they be deficient, what are you now basically cataloging and what the expectations are from their various stakeholders so that they can prioritize their next steps. It’s basically coming down to governance again. It’s figuring out where are we now, what are the expectations, and how do we manage those expectations, whether it’s any of those stakeholders I just mentioned.

    A good example might be, again, human capital management; we’ll give that example just because it’s the SEC and they mandated first ESG reporting here. This process I’m going to explain is very applicable to every part of ESG, meaning HR teams are tasked with looking inward right now at what data they collect around people, what quantitative data that they have on hiring, what quantitative data that they collect on the demographics of their workforce, and what data do they have on the demographics of their leadership? Is it diverse, you know, are they aligned with the industry, are they aligned with their goals, you know basically taking stock of where they are, and then determining what their room for improvement is and setting a strategy that can be communicated externally. So, it’s really going to be the same, whether it’s human capital, climate, cyber, you know, it’s really just evaluating your risks and creating a roadmap for reaching goals on those risks.

    And the other thing I want to throw out there is ratings. You know a lot of companies, the first thing they think is I need to improve my ISS or Glass Lewis score, or sustain analytics or MSCI or Moody’s, and very quickly there they point out that there’s dozens of ratings and ask what do we do. I think that’s a struggle for a lot of companies and what I would say to them is until there’s a convergence of universal standards or universal disclosures, the best thing you can do is really think about your risks inward before you look outward at these ratings because a lot of the ratings don’t agree on whether you’re doing a good job or not. And there’s a disclosure bias right now. Whoever discloses the most tends to get better ESG ratings whether they’re good at ESG or not. So, if you’re if you’re really trying to make effective progress on ES and G, you have to take stock of what’s material for your industry in your company, you have to be honest about where you are in that journey, and set reasonable short, medium and long term goals as we move the needle in a way that you can be successful.

    Sabrina Serafin: So, to say that these are complicated areas of risk to assess and monitor is an understatement? So, can you talk about ESG reporting and the most prominent frameworks being leveraged right now?

    Laura Wanlass: Yeah, absolutely. So, there’s a difference between the US and Europe. I would say in Europe, we we’ve seen expanded ESG reporting for a long time. Whether it takes the form of just self-reporting in a sustainability report, CSR, ESG report, or leveraging TCFD, or using GRI or SASB report formatting for displaying certainly a few related metrics and practices. Europe’s further along in the US market, except for the largest CAP companies. Most companies are literally just starting out how they’re going to disclose, and I know I work with a lot of small to mid-caps, they are trying to figure out what’s required by law. For example, what does the SEC require? What do my investors prefer? And where might things be heading? For a lot of companies, right now, I would say you know just based on what we’ve heard from Blackrock and some of the other investors, there’s absolutely a preference or a standard to start with SASB. It has been probably the most predominant but, again with the various standards converging in the near future, I think companies will have more clarification on which standards to focus on.

    Sabrina Serafin: Okay Laura we’re getting into acronyms again, can we take a step back and explain some of those key acronyms?

    Laura Wanlass: Sure. Some of the most common ones you’re going to hear are SASB which is the Sustainability Accounting Standards Board, which puts out a materiality map, by industry, that tells companies generally which factors within the ES and the G are material. And it’s a nice roadmap. You don’t necessarily have to follow all of the items on their materiality map to be, you know, compliant, or to meet an investor expectation, but it does a good job of telling you where to focus and what do you think about how many factors they’ve got. Other things that we see, or that you might have heard a lot about, are our TCFD disclosures, which is a framework put forth by the task force on climate related financial disclosures. That’s really the climates based disclosures that we see a lot in Europe, and definitely here at the largest CAP companies in the US. Really it’s about what are your oversight mechanisms on climate and then, how is the board navigating risks and opportunities as it relates deployment. The other standard that we hear about is GRI and that’s the global reporting initiative. Again, it’s just another set of standards for helping companies identify where they should be focusing on ES and G risks and how they can report it out in a manner that investors can follow.

    Just like we’re talking about the ratings being dozens of them, there are so many different standards and ways to approach your reporting and we do expect both regulation and convergence of the various reporting standards.

    Sabrina Serafin: Thank you. We always like to include pragmatic advice for our listeners. Do you have any suggestions regarding first steps for anyone in those mid or small CAP companies who are at an early stage of trying to manage ESG risk? What are the first steps?

    Laura Wanlass: Yeah. The first steps are don’t be overwhelmed and necessarily look at the largest CAP company’s disclosures and think you need to immediately go to that level because you know those companies have millions of dollars of budgets and for a lot of small to mid-caps, it’s really about taking stock of what you’ve already done and making sure your disclosures adequately convey your existing processes. Your board probably has great oversight on a lot of material ESG risk topics. Is that coming through and your disclosures? Right.

    Have you adequately conveyed how the C suite looks at these topics, not only in your regulatory filings but on your company web pages? Do you have an ESG strategy? Put it out there. And then, and then there’s some low hanging fruit. As I mentioned, because you might not have dedicated ESG resources, but every company has an HR team, and given that human capital management is material for basically every company in every industry, fix your people story. What have you done? What are you trying to do? And how is ESG even part of your people story? That can motivate prospective employees or anybody looking at your website so really honing in on your strategy on human capital can be an easy first step for a small to mid CAP to move the needle on ESG.

    Sabrina Serafin: And what about the rest of us? Consumers, employees, current or future employees, or organizations who are going through the vendor selection process. What advice do you have for them in managing all of this data and information that’s being thrown at them?

    Laura Wanlass: Yeah. You know and that’s where I think don’t be too dependent on what a rating agency tells you because everybody has a proprietary methodology. I would say if you’re trying to make an informed decision about a public company or private company, go to what they’ve put out there. Read their sustainability reports. Read the information and you can, at a high level, quickly observe if the news or the stories about that company are consistent with what the messaging is that the company’s putting out there. If a company is saying they care about ES and G, they care about their employees, but they have a lot of reputational crises in the news. That can be as telling as reading a reading or about a company’s profile. So, it’s really about the research. It’s definitely about reading everything a company has put out there to really make an informed decision and sometimes you’ll find that companies are inconsistent in their in their messaging. Whether it’s the employee facing website or their CSR report and that can be incredibly informative.

    Alright, so one of the evolving pressures that we’re also seeing on the board of directors right now, really driving change in ESG, is the formal policy application of foxy rating firms, such as institutional shareholders services, ISS and Glass Lewis and company, as well as the proxy voting teams of BlackRock, Vanguard and Fidelity. Some of the largest institutional investors that basically own every public company and basically what each of those firms is doing, to different degrees, is requiring the boards of directors, themselves, to be more diverse. And diversity can mean different things to different investors in terms of what their thresholds are. But failure to comply with these board diversity requirements can result in against recommendations or against votes at the director elections. So, we are seeing declining director elections as a result of some of these ESG driven policies by investors who are trying to reflect obviously the people that own the shares with what their preferences are on ESG, and that’s driving a lot of the changes. And it’s not even just on-board diversity. Things such as disclosing while your oversight mechanisms are on E and S and G is equally as important to these investors so it’s really interesting to see how ESG is actually impacting director elections and how that really is being a catalyst for change for our company.

    Sabrina Serafin: Well, this has been great. Thank you so much for joining us on the podcast and we appreciate you sharing your knowledge with our listeners.

    Laura Wanlass: Yeah. Thank you for having me.

    Sabrina Serafin: And to our audience, thank you for listening to Frazier & Deeter’s Culture of Compliance Podcast, and please join us for our next episode as we continue to discuss transforming compliance requirements into investments in your business.

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