Alphabet Soup of ESG

Decoding the “Alphabet Soup”
of ESG and Reporting
Ken Witt, AICPA & CIMA,
Senior Manager, MA and Member Engagement
CFC2116
2021 AICPA & CIMA Corporate Finance & Controllers Conference
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Polling Question 1 – Why are you here today?
What prompted you to attend this session today?
A. My company has done sustainability reporting and I think our
finance function needs to be more involved
B. We have been getting inquiries about ESG from our board,
investors, bankers, others
C. I have been seeing a lot about ESG in the media and need to
know what I might not know
D. I am just desperate for CPE
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Kenneth W. Witt, CPA, CGMA
Senior Manager MA and Member Engagement
• Staff liaison to AmRAP - Americas Region Advisory Panel
representing members in business
• Thought leadership reports and tools – strategy, risk,
performance management, sustainability
• Competency Framework, CGMA FLP Curriculum
• Conferences – Corporate Finance & Controllers, CFO,
Engage
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Objectives
2021 AICPA & CIMA Corporate Finance & Controllers Conference #Conference
Evaluate
Evaluate emerging climate change legislation and regulation in the U.S., the
U.K. and the E.U. and the potential impact on business operations, financing, and
reporting for your company
Recognize
Recognize the need for sustainability reporting standards and the formation of
an International Sustainability Standards Board by the IFRS Foundation to create a
global architecture for comprehensive corporate reporting
Distinguish
Distinguish between the major reporting frameworks and the collaborative
efforts underway to develop a comprehensive solution for global reporting,
including SASB, CDP, CDSB, TCFD and GRI

Alphabet Soup
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ESG
Reporting
Frameworks
Standards
Regulations

Myths or Misunderstandings
ESG is
not just
about…
6
• Social and Governance
• People - DE&I, EHS
ESG not just about
environment
• Business risk and opportunity
• Potential costs and revenues
ESG not just about
reporting
• Assurance needed
• Confidence and credibility
ESG reporting not
just about disclosure
• Internal controls, systems and
processes – suitable criteria
ESG assurance not
just about the auditor

ESG Background Information
What are we talking about and why?
Sustainable development refers to ‘development which
meets the needs of the present without compromising the
ability of future generations to meet their own needs’
Brundtland Report 1987

ESG- What are we talking about?
Environmental
• Energy
• Water
• Waste
• Climate/GHG
• Biodiversity/Nature
Social
• Health & Safety
• Diversity, Equity,
Inclusion
• Talent
• Brand/Reputation
• Privacy/Cybersecurity
Governance
• Ethics/Conduct
• Anti-Corruption
• Executive
Compensation
• Board Composition
• Risk Management

ESG – Why are we talking about it?
Changing expectations of business
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Business Roundtable Statement 2019
…we share a fundamental commitment to all of our stakeholders. We
commit to:
• Delivering value to our customers.
• Investing in our employees.
• Dealing fairly and ethically with our suppliers.
• Supporting the communities in which we work.
• Generating long-term value for shareholders, who provide the capital
that allows companies to invest, grow and innovate.
Shareholder Perspective Stakeholder Perspective

Climate Change Basics
The 2°C was not
agreed because it
was “safe”, but
because multiple
analysis had
indicated that
doing much better
would be
extremely difficult
technologically and
economically.
2021 AICPA & CIMA Corporate Finance & Controllers Conference 11
Paris Agreement
COP 21 - 2015
• Limit global
warming to well
below 2° Celsius,
preferably 1.5°,
compared to pre-
industrial levels
Emissions of heat
trapping gasses
• Reductions of
80% to 100% by
around 2050
needed to meet
goal

Current State – IPCC 2021
Stabilizing the
climate will require
strong, rapid and
sustained
reductions in
greenhouse gas
emissions, and
reaching net zero
CO2 emissions.
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Panmao Zhai,
Working Group I
Co-Chair
• Flooding, droughts
Water cycle
• Increases/decreases by region
Rainfall patterns
• Coastal flooding and erosion
Sea level rise
• Loss of snow cover, ice sheets
Permafrost thawing
• Heatwaves, acidification
Ocean changes
• Amplified heat, coastal flooding
Urban areas

Flying Blind: The glaring
absence of climate risk in
financial reporting
• 70% - no indication that climate
matters considered in 2020
financial statements
• 72% - treatment inconsistent
between financial statements
and other reporting
• 80% of the auditors did not
appear to assess the effects of
climate risks when auditing
these companies.
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September 2021

Additional related terms
COP 15
Convention on
Biodiversity
postponed to
Spring 2022.
Accounting for
Biodiversity
standards in
process
Net Zero
• Net zero refers to a state
in which the greenhouse
gases going into the
atmosphere are balanced
by removal out of the
atmosphere.
• This is the state at which
global warming stops.
Biodiversity
•Nature-related risks
•Eco-systems
•Wetlands
•Deforestation
•Keystone species- bees,
bats, beavers, etc.

Timeline of Events
Major driving forces and activities

Blackrock Larry Fink letter to CEOs Jan-20 Accounting for Sustainability (A4S) Call to Action
SASB - a clear set of standards for sustainability Role of accountants - sound advice, integrate risk,
TCFD - a valuable framework for climate risks implement standards and frameworks
Group of 5 - Statement of Intent IFRS Consultation Paper on Sustainability Reporting
CDP, CDSB, GRI, IIRC, SASB Proposed new Sustainability Standards Board (ISSB)
Need for more coherent reporting A "climate first" approach
SASB + IIRC = Value Reporting Foundation (VRF) UK Financial Reporting Review
Integrated Thinking Principles, Integrated Reporting Issues - governance, reporting, audit
Framework, Sustainability Accounting Standards professional oversight and investor reporting
SEC Climate Change Consultation EU Corporate Sustainability Reporting Directive (CSRD)
Disclosures, standards and frameworks, EFRAG European Financial Reporting Advisory Group
assurance, measurement and other issues to set standards. Includes "double materiality"
SEC Disclosure Requirements Oct-21 COP 26 Copenhagen
Accounting and Reporting Timeline
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A Fundamental Reshaping of Finance
This year, we are asking the companies
that we invest in on behalf of our clients
to:
(1) Publish a disclosure in line with
industry-specific SASB guidelines
(2) Disclose climate-related risks in
line with the TCFD’s
recommendations
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Climate change has become a
defining factor in companies’
long-term prospects.
In the near future – and sooner
than most anticipate – there will
be a significant reallocation of
capital.
Climate risk is investment risk
Jan 14, 2020

Climate-related Risks – TCFD Risks
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Transition risks – transition to a lower carbon economy
• Policy and litigation risks
• Technology innovations that may affect competitiveness
• Market and reputation risks - customer and community expectations
Physical risks – acute risks and chronic risks
• Acute risks – event driven, such as extreme weather events like
hurricanes, cyclones, flooding or fires
• Chronic risks – longer-term shifts in climate patterns, such as higher
temperatures, extended heat waves, sea level rise

The Prince's Accounting for Sustainability Project
Accounting Bodies Network
The call to action highlights that
climate change represents an
economic, social and business risk –
a risk that accountants from across
the world must take action on.
The accounting bodies network has
also committed to achieve net zero
GHG emissions and also providing
an enabling environment for their
members to do the same.

Group of Five – Statement of Intent
• Frameworks and standards that “ensure high quality, assurable
information create a foundation for reporting that supports more
efficient markets and more informed decision-making.”
• Goal is to create a “similar mindset” around sustainability
information that has evolved for financial information.
• Recommended standard setting process acknowledges the
distinct materiality considerations of different stakeholders and
corresponding different reporting objectives.
• Statement proposes a “stepping-stone” or “building block”
approach.
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Value Reporting Foundation
One global organization with a
unified strategy and three principal
products or offerings:
• Integrated Thinking Principles
• International <IR> Framework
• SASB Standards
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IFRS Foundation - Proposed International
Sustainability Standards Board (ISSB)
Initial IFRS
Consultation
September
2020
Proposals
Recommended
April 2021
New board to be established
Initial focus on climate change reporting needs
Will “move quickly” to other ESG issues
Build upon existing frameworks – TCFD
Building blocks approach – working with others

EU Corporate Sustainability Disclosure (CSRD)
• Extends scope to large privates and others – 50k vs. 11k
• EFRAG to introduce more detailed requirements – Oct 2022
– will take into account global standard setting initiatives,
– will require “double materiality” lens, and
– will cover full spectrum of ESG risks extending beyond
TCFD requirements covering only climate
• Digital tagging requirement
• Assurance obligation – initially “limited” with progressive
approach to “similar level” to financial reporting
Proposed
CSRD
April 2021
Based on
determination
that EU NFRD
not meeting
needs

SEC Climate Change Consultation – Mar 2021
2010 Climate Change Guidance
• Information about climate-related risks and opportunities might be
required – legislation and regulations, supply and demand,
physical risks, etc.
2021 Public Request for Input
• How can the SEC best regulate, monitor and review climate
change information in order to:
• Provide more consistent, comparable and reliable information for
investors
• Provide greater clarity to registrants on what is expected
• Where and how should disclosures be provided

SEC Sample Letter re: climate-related
disclosures – early warning
General
Inconsistencies between
Corporate Sustainability
Report (CSR) and SEC
filings
Risk Factors
Transition and litigation
risks affecting business –
regulatory, market trends,
credit risks, technology
MD&A & Results
Material effects of
legislation, regulation,
international accords
Capital Expenditures
Past or future capital
expenditures for climate
related projects
September 2021

The Accounting Profession
Standards, frameworks, regulations and requirements for
accounting, reporting and disclosures

Polling Question – Involvement in ESG
How would you characterize the involvement of your finance function
in your company’s ESG efforts.
A. Have been, and will continue to be very involved
B. Have not been, but likely to be more involved
C. Have not been, and unlikely to be much more involved
D. Not sure
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ESG becomes a part of the work finance professionals already own and support
Long-term value
creation and
business
resiliency
Execute internal &
external reporting
Identify material
ESG factors
Note: the specific role of the CFO / accounting & finance teams will vary by organization. In all cases, finance will partner with internal and external stakeholders.
Sources: adapted from KPMG’s Integrating ESG into your business and the Task Force on Climate-related Financial Disclosures (TCFD) framework.
Begin efforts to
integrate ESG factors
into operations
Risk management
Governance
Strategy
KPIs, metrics &
targets
Make financing &
investment
decisions
Assurance

Building Blocks Approach – Double and Dynamic Materiality
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Source: SASB

Global Reporting Initiative – updated standards 2021
The objective of sustainability
reporting using the GRI
Sustainability Reporting
Standards (GRI Standards) is to
provide transparency on how an
organization contributes or aims
to contribute to sustainable
development.
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The GRI Standards enable an
organization to publicly disclose its
most significant impacts on the
economy, environment, and people.

GRI Topic Standards
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Economic Environmental Social
• Economic
performance
• Market presence
• Indirect economic
impacts
• Procurement
practices
• Anti-corruption
• Anti-competitive
behaviour
• Tax
• Materials
• Energy
• Water
• Water and
effluents
• Biodiversity
• Emissions
• Waste
• Environmental
compliance
• Supplier
environmental
assessment
• Employment
• Labor management
relations
• Occupational health
and safety
• Training and
education
• Diversity and equal
opportunity
• Non-discrimination
• Freedom of
association
• Child labor
• Forced or compulsory
labor
• Security practices
• Rights of indigenous
peoples
• Human rights
• Local communities
• Supplier social
assessment
• Public policy
• Customer health and
safety
• Marketing and labeling

Task Force on Climate-related
Financial Disclosures (TCFD)
The Financial Stability Board established the
TCFD to develop recommendations for more
effective climate-related disclosures that could
promote more informed investment, credit, and
insurance underwriting decisions and, in turn,
enable stakeholders to understand better the
concentrations of carbon-related assets in the
financial sector and the financial system’s
exposures to climate-related risks.
32

Core Themes
Governance: The organisation’s
governance around climate-related risks
and opportunities.
Strategy: The actual and potential
impacts of climate-related risks and
opportunities on the organisation’s
businesses, strategy, and financial
planning.
Risk Management: The processes used
by the organisation to identify, assess, and
manage climate-related risks.
Metrics and Targets: The metrics and
targets used to assess and manage
relevant climate-related risks and
opportunities.
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TCFD Metrics – Scope 1 Direct GHG emissions
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• Generation of electricity, heat or steam
– furnaces, boilers, turbines, etc.
• Processing of chemicals or materials,
e.g. cement, aluminium, waste
• Transportation of materials, products,
employees or waste in company-
owned vehicles
Emanate from
sources that are
owned or
controlled by the
business:

TCFD Metrics – Scope 2: Electricity Indirect GHG emissions
35
• Purchased electricity used in a
company’s equipment or operations
• Tracking purchased electricity creates
the opportunity to evaluate risks and
opportunities of alternative sources of
electricity.
Electricity Indirect
GHG
encompasses
emissions from:

TCFD Metrics – Scope 3: Other Indirect GHG emissions
36
• Materials suppliers, third-party
logistics providers, waste
management suppliers, travel
suppliers
• Lessees and lessors, franchisees,
retailers, employees, and customers
Other Indirect
All indirect emissions
that are a
consequence of
business activities
but occur from
sources not owned or
controlled by the
business:

Sustainability Accounting
Standards Board (SASB)
Five broad dimensions of
sustainability
26 General sustainable
issues
Applied across 77 industry
sectors
400+disclosures and metrics
for different industries.
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SASB Approach
Identify ESG factors reasonably
likely to have a significant effect
on the financial condition,
operating performance, or market
valuation of companies within an
industry.

SASB Sustainability Dimensions
IR Framework
Capitals
Social
Human
Intellectual
Manufactured
Financial
Natural

SASB Industry Sectors
Financially
material risks
and
opportunities
across 77
industries in
11 sectors

SASB Materiality Map – Unique profile for each industry

Association ESG Initiative and Resources
Mission - To position global accounting, auditing and
finance professionals as sustainability leaders…

Reports, Guides and Briefs – MA and Assurance
AICPA
CGMA

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© 2018 Association of International Certified Professional Accountants. All rights reserved.
Thank you
© 2019 Association of International Certified Professional Accountants. All rights reserved. This presentation’s images are subject to copyright protection and used under license from
third parties. Do not use images from this presentation in other presentations or documents without first consulting with Legal. The use of copyrighted images outside the
licensed scope constitutes copyright infringement and subjects the user to monetary damages and other penalties.
Thank you
© 2021 Association of International Certified Professional Accountants. All rights reserved. This presentation’s images are subject to copyright protection and used under license from
third parties. Do not use images from this presentation in other presentations or documents without first consulting with Legal. The use of copyrighted images outside the
licensed scope constitutes copyright infringement and subjects the user to monetary damages and other penalties.

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