What will it take to make sustainability measurable? has been saved
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James Cascone: There’s not as much automation as you would expect, not as [many] controls in place to verify the accuracy of [nonfinancial] information. So, there’s a multitude of data and technology challenges that companies face in ensuring that the sustainability data they’re actually gathering is accurate.
Tanya Ott: The US Securities and Exchange Commission (US SEC) is working on new regulations that will—perhaps as soon as early 2023—require some companies to quantify and verify their climate-related risks. It’s a big change, one that companies are watching closely. And I’ve invited James Cascone on the show today to talk us through it. James is a partner with Deloitte & Touche LLP, where he leads the sustainability, climate, and equity offerings for the Consumer industry. But his interest in sustainability goes way farther back.
James Cascone: I’m a first generation Italian-American. My parents were poor farmers in Italy, and they left Italy after World War II because the country was just devastated—and they moved to Canada. I grew up in Canada before I came here. And to teach me the value of work, I worked in a factory. And in this factory, there were [a] lot of recent immigrants and it was a plastics factory. And so, not only did I see the impact of plastics and the waste that was being generated in that factory, but the fact that I was doing manual labor, gave me the impetus to say I better go to college and study and make a career for myself. I saw the challenges that we have. When you talk about sustainability, you talk about forced labor issues —not that I was in the forced labor camp—but I could just see how there’s a whole different segment society in the supply chain that supports many economies. And I saw the impact that manufacturing has on the environment because I actually worked in a plastics factory at a very young age. This is something that was always in the back of my mind. But frankly, sustainability wasn’t a priority in the United States for many, many years.
Tanya Ott: But that’s changing. For decades, publicly listed companies have had to produce financial data that was subject to external review from the Securities and Exchange Commission. The SEC is now extending that scrutiny to sustainability and environmental data [as well]. While the SEC works out its final revisions on the new rules, companies are scrambling to shore up their data-collection systems to make sure the data they have will stand up to verification by independent third parties.
James and his team surveyed 150 consumer companies and found that only 3% of them said their sustainability data was as accurate and verifiable as their financial data. James says the new SEC rules raise a lot of questions.
James Cascone: It’s a fairly lengthy proposed regulation from the SEC, which is still subject to revision. Indications are that it might get finalized by the end of this year and would go into effect beginning next year for certain companies and be phased in over the next several years. But the proposed disclosure relates specifically to climate-related risks. Companies currently do disclose in their MD&A—which is their management’s discussion and analysis section of a 10-K—[and] they do currently disclose any significant risks that can impact operations such as the threat of hurricanes, wildfires, earthquakes, what we call physical risks in the sustainability world. But it hasn’t really necessarily been quantified. It would be more qualitative in nature—meaning these environmental risks may impact our operations, and so and so forth. Geopolitical risks may be indicated in there as well, even though that’s not necessarily a sustainability risk.
Now, there’s going to be a requirement by this proposed rule to actually quantify the potential impact of climate-related risks. And what’s considered [to comprise] climate-related risks may vary by industry; it could encompass not just the physical risks I just mentioned, but what’s called transition risks. As companies try to reduce the amount of pollutants that they emit or their effect on the environment or what’s called greenhouse gases or GHGs, as they transition their business models and their operations to reduce the carbon footprint, that also may incorporate certain financial risks. The key tenets of this proposed disclosure requirement is around better assessing, if you will, and quantifying climate-related risks and their impact on the business from a financial perspective. And that’s going to be a challenge for many companies, especially if it pertains to their supply chain and the impact that their supply chain may have from a sustainability perspective.
Tanya Ott: It’s not just the pressure from the proposed SEC rules. You also have seen significant customer demand and demand from activist groups for more accountability.
James Cascone: Correct. Some companies have been at the forefront of sustainability for many years. Some companies are well-known for being sustainable or making efforts to be more sustainable. Some companies have embraced this as far as reducing waste, reducing impact on the environment, upcycling, coming up with more sustainable products, removing plastic from within their product portfolio, and things of that nature. Others haven’t been as perhaps aggressive or assertive in being more environmentally sustainable. And that’s changing because of consumer pressure, activist pressure. Even from a financial perspective, you have investors evaluating companies on their sustainability footprint and showing an interest in investing in companies that are more sustainable. So, there’s a lot of capital and financial impetus now, above and beyond just the regulatory or proposed regulatory requirements that are encouraging companies to be more sustainable.
It’s frankly being shown to be good for business because companies that reduce waste actually improve their bottom line, in addition to doing good for the environment or finding new ways of innovating around packaging that have less of an environmental footprint, [which] can reduce cost from a packaging perspective. More and more companies are realizing that there’s operational and financial gains associated with being more sustainable, which wasn’t necessarily the case five or 10 years ago.
Tanya Ott: We see a lot of big claims or a lot of big plans for the targets that they’re going to hit.
James Cascone: So many companies are charting a pathway to net-zero, meaning having a net-zero impact on their carbon emissions and carbon footprint. And it varies by companies. Some are committing to achieving it by 2030, 2040, 2050, in many cases. The challenges vary by company, based on their global footprint, the complexity of their supply chains, and their product portfolio, [besides] the industries in which they operate. If you’re an automotive company versus a company that sells fashion apparel and things of that nature, or if you’re [in] the food industry, depending on the type of food that you sell to consumers, some of those supply chains can be quite extensive and opaque, whereas others are less complex and more direct. So, every company faces its own challenges to achieving it. But the one challenge that they all share in common is obtaining accurate and verifiable data, because it wasn’t really a requirement in prior years to do so from either a regulatory or even from an investment-committee perspective. That’s certainly changed over the last few years. What you find is that companies are further scrutinizing the data that they receive from their suppliers, even from within their own operations, regarding energy use and environmental impact, because of the additional scrutiny either from a regulatory consumer, NGO (nongovernmental organization) or, activist community.
Tanya Ott: Going back to the net-zero promises which vary, as you say, from company to company, what happens if they don’t follow through? If they don’t make those goals?
James Cascone: Well, there is a bit of a perception issue around “greenwashing,” where companies would make certain claims around being sustainable, and then under further scrutiny, it’s been determined by certain groups that the claims were not wholly accurate—in some cases, [even] potentially false or misleading. There has been a perception that some companies were greenwashing their initiatives and impact on the environment that they were having. Since it wasn’t subject to extensive external scrutiny above and beyond maybe some NGOs, it was limited to certain companies. So, in the past, companies would face reputational damage, which could have a share-price impact as well. Now the ramifications, if these proposed rules get enacted, would be far, far greater, above and beyond reputational damage or trust issues that consumers may have regarding a particular brand. There could be significant potential lawsuits, [and] financial liabilities as well.
Tanya Ott: So, the need for accountability then is very high for a lot of reasons. But what is getting in the way? You mentioned suppliers, supply chains, [and] consumer companies dealing with an entire ecosystem, if you will. That’s an issue.
James Cascone: It is. And our research has shown that governance is a challenge for many organizations. The more extensive your supply chain, the more global your organization, the more complex as far as the jurisdictions in which you operate and the number of consumers that you touch. Silos inevitably occur either functionally or as far as how data is stored, accessed, analyzed, [or] managed. So, data governance, data risk governance, master data management, having technologies in place to be able to actually ingest and consume all this data, look at the information holistically, do a proper scenario analysis from a climate perspective and actually determine what the potential financial impact may be, is a big challenge for companies because they may not have technologies or platforms that speak to each other within the organization. Most organizations implement technologies over a period of multiple years, and some of them may be antiquated or just don’t communicate to each other, especially nonfinancial systems. So those are the challenges around [that] just the myriad of technologies companies may have.
Where data is retained and stored is also a challenge. It tends to be siloed for many organizations—if it’s nonfinancial data. Some information is still tracked manually in spreadsheets, which, you know, anything that’s manual is subject to a greater risk of errors. So, there’s not as much automation as you would expect, not as many controls in place to verify the accuracy of the information. There’s a multitude of data and technology challenges that companies face in ensuring that the sustainability data they’re actually gathering is accurate. And if they’re subject to external assurance or verification, it’s auditable as well. So that is a big, big challenge for companies. The whole premise behind our point of view around accountable sustainability is that in order for companies to really be successful in ensuring that they’re providing accurate information, they need to have the right technologies and the right data-governance processes in place to manage all of this. Otherwise, the siloed nature of data and sometimes organizational structures could be a hindrance to achieving that goal.
Tanya Ott: And the big overriding thing is like it’s not just about a company’s internal sustainability. It’s about all of those down-chain suppliers and whether or not you take the supplier’s claims at face value or is there an auditing process in place?
James Cascone: Correct. Correct. Most companies obviously know who their tier-one suppliers are that they source from, that they procure from. They may have visibility to what’s called a tier two—so whom their suppliers actually source from. But visibility or transparency beyond tier two, [to] tier three, can be limited for many, many companies. As a result, what you’ll find is that companies now are trying to gain that visibility and that transparency into ultimately the source of a material or product or substance, how it’s actually being manufactured, in order to enable accurate reporting. Large, accelerated filers—as defined by the SEC—will be required under the proposed regulations to disclose what’s called Scope 3 emissions, which is emissions within their extended supply chain, their extended enterprise. That could be an exhaustive effort for companies to achieve because it never was required in the past. Sometimes, these extended supply chains extend across the globe. Companies may be sourcing from countries where perhaps systems aren’t as sophisticated or data isn’t as easily available. Privacy rules come into play. Some countries actually restrict the sharing of information. Every country has or a region may have their own privacy regulations that need to be navigated. And frankly, there’s a trust issue as well. Some suppliers may view their information as proprietary. They may view it as competitive information. So, there’s a lack of trust there in some cases where suppliers may not want to share that information because they’re not sure how that would be used potentially against them, or if they share that information are they subjecting themselves to an audit. Many of these suppliers are privately owned companies, so they may not care that the United States has some SEC regulation that requires disclosures. If they’re a privately owned company outside of the United States, they may not want to share that information. So, these are just an example of some of the challenges companies are going to face [from now] on.
Tanya Ott: These issues are so complex. I assume no one assumes that they’re going to get 100% accountability all the way down through the whole process. But where do you start? What are the possible solutions to some of these challenges that you talked about?
James Cascone: We recommend that companies focus on ensuring [that] they’ve got proper governance within their own organization to begin with. Looking at how their corporate social responsibility or sustainability or ESG (environmental, social, and governance) function, they go by a variety of different names, whom do they report up to? Do they report up to marketing? Do they report out to legal? Do they report up to the CEO? Sometimes, that internal structure makes a big difference around how empowered that particular function is to actually influence and enable the organization to achieve their net-zero commitments. If they’re buried within the organization or siloed within a particular function, they may not be as empowered to effectuate [the] change that’s needed. So, we recommend that companies look at how they’re internally governed right now, from a functional perspective, to make sure that the right access to people and decision-makers within the organization, within the operations, for example, within manufacturing, is there—that have that empowerment. Then looking at their visibility and access to their own data and their own technology platforms and the capabilities of the technology that they have right now, as well as the talent in house to be able to gather and analyze and report on that information.
So, just working within an organization’s own four walls is highly recommended because if you don’t get your own house in order, you will not be as effective when it comes to reaching out to your suppliers or even other third parties that you collaborate with. Companies have, in some cases, a lot of work to do internally around getting a hold of their own data before they reach out and try to gather new information from third parties.
Tanya Ott: So, there’s a lot of work to be done and you just can’t do it all at one time so you’ve got to prioritize it. And it’s not just about concentrating on the products that have [the] most impact, but also the ones that might be the most high-profile or might have the most issues.
James Cascone: Or may have the most impact from an environmental perspective, you know, high profile [in that manner]. There are different dimensions to it: The level of revenue that’s generated, the volume. You can have a low-dollar product that sells for US$2. But if it’s a high-volume product, which low-dollar items tend to be, that can have a significant environmental impact, even though it may not be a big revenue driver. And where you’re sourcing that product from can have significant impacts, as well. Companies need to look at their environmental impact or climate-related impact through a multidimensional lens to determine which are the most prioritized risks and how should they prioritize their efforts. Because not only is it extremely difficult or impossible to get accurate data across all of your products when it comes to environmental impacts or climate-related impacts, but it’s also not cost-feasible. You’re going to have the greatest impact by prioritizing which products really move the needle for society, for the environment and for your organization. That prioritization effort is extremely important. But unless you’ve got accurate data or complete data, it may be challenging to even do that prioritization.
Tanya Ott: I imagine in this process it’s going to be a sea of data. So, how do you figure out the important metrics and how do you make sure that you can actually find them amidst all of this data coming in?
James Cascone: It comes down to doing like a business-impact assessment, really looking at the source of your data, the reliability of that data, and how often that data is subject to being refreshed or updated. For example, some companies may have IoT (Internet of Things) sensors embedded within their logistics and distribution network, or it could be embedded within their warehousing facilities, and things of that nature, where information regarding products is automatically being ingested by systems. We see that with some retailers and distributors. In that particular case, there’s a high level of trust regarding that data. It may not need to be scrutinized as much as data where it’s provided to you by a third party via, let’s say, a flat file—not even an API (application program interface) but a flat file—and you then need to take this information and input that into a system or into an Excel spreadsheet, and it gets further manipulated. That type of data is obviously less reliable. So even understanding the nature of the data and how you receive that information and how it’s actually managed will go a long way toward identifying where you may have some gaps. In some cases, you can readily make a determination that, yeah, this is a weakness of ours, it’s a gap, we need to shore this up immediately in the near term. That’s all part of the whole business-impact assessment and going through a materiality-assessment process that companies undertake to determine where they could be most impactful.
Tanya Ott: You touched on this briefly with the mention of IoT, Internet of Things, devices: Technology isn’t a cure-all, but it can certainly help in this front.
James Cascone: Absolutely. The less manual the process, the more automated, the more tech-enabled a process, the higher the level of assurance, whether it be internal assurance from a management perspective that you can trust information or external assurance if you’re being audited. We’re seeing companies embarking upon a wave of digitization, technology enablement, emphasizing the importance of data and the veracity of data and data management, data governance. There’s no doubt that this is resulting in a new wave of technology investments for companies, whether it is cloud-based technologies or operational type of technologies within their stores or within their supply chain. They realize that the long-term benefits, the ROI (return on investment) they would gain from that initial investment will pay off in spades.
Tanya Ott: Never a boring day in your space, James.
James Cascone: It’s exciting being able to help clients solve a critical business issue, even aside from compliance, because there’s operational and financial benefits to doing this regardless of what the final regulations will look like, because the long-term benefit that you have on society, on the environment and on your own operations financially can be quite significant. And you touched upon this earlier, Tanya, where you said employees and consumers are asking for this as well. Every generation tends to emphasize different things and times change, but the new generation has really embraced the importance of climate, of environmental sustainability. Companies that perhaps may be skeptical should look to their employee base, should look at their talent, should look at their consumers and realize that times are changing, priorities are changing. This is being embraced by a new generation of investors as well. It used to be just NGOs and activists, and now it’s the financial community, the investment community, it’s your consumers. And companies that are agile and adapt and embrace it for logical business reasons, not just compliance reasons, will not just survive, but will thrive. That’s why it’s important for helping companies improve their operations, as well as helping society and the environment at the same time. What more can you ask for? It’s just wonderful.
Tanya Ott: James Cascone leads the Sustainability, Climate, and Equity offerings for Deloitte & Touche LLP’s Consumer Industry sector.
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Cover image by: Natalie Pfaff