ESG – How OneStream Can Support Emerging Global Disclosure Requirements – Transcript

Al Boyer:

There’s three ways to look at ESG and why it’s important to your business. And they are regulations, revenue and the right thing to do. You’re really starting to see a regulatory environment where companies have to track and disclose the impacts of their business on the environment, as well as environmental impacts on the materiality of their company. What I find most fascinating in the sustainability discussion really involves the space around revenue. There are companies that have clients that will call and ask to disclose such things as fuel usage or electricity usage in the conduct of their business. I’ve seen companies where they’ve been told, “Hey, if you can’t disclose this, we’re going to have to go find a different business partner.” You start to see a real driver with revenue.

Announcer:     

Welcome to The Hackett Group’s “Business Excelleration Podcast.” Week after week, you’ll hear from top experts on how to avoid obstacles, manage detours and celebrate milestones on the journey to world-class performance.

Trey Robbins: 

Welcome listeners to the “Business Excelleration Podcast.” I’m your host Trey Robbins, a principal and a OneStream practice lead at The Hackett Group. And today I’m joined by Al Boyer, a director and our domain lead for ESG. Thank you, Al, for joining us today.

Al Boyer:         

Thanks for having me. I’m looking forward to the discussion today.

Trey Robbins: 

All right. So on this episode, we’re going to discuss the importance of ESG, which stands for environmental, social and governance. And to start off with Al, why don’t you give us a rundown of what ESG is and why it’s important?

Al Boyer:

So ESG is nothing new. It’s a series of frameworks. They’ve been around for about 30 years, and it’s used to assess the sustainability of companies and countries with a specific emphasis on the three factors of climate change, human rights, and adherence to law. More specifically, ESG is an evolving process of frameworks and disclosure that has evolved over time, beginning as early as the late 1990s, and then most recently with the first disclosure regulatory requirement in Europe, which was passed. It’s called the Corporate Sustainability Reporting Directive or CSRD. So it’s been around for about 30 years. The term ESG was initially coined in 2004, following a UN global compact where a bunch of investors got together and produced a white paper as they described it. They basically called it “Who Cares Wins.” And in that white paper of banking investments was basically a birth or was born the term ESG.

Trey Robbins:

Thanks for the background on it. More specifically, can you address the overarching concepts of sustainability, materiality and how it impacts our clients, which I think is really important?

Al Boyer:

I break it down into two pieces. One of which is sustainability. And sustainability is really about the impact of environmental factors on a business, as well as the business in its conduct of the sector it’s in and what it produces or manufactures or sells the impact of that on the environment. So this idea of sustainability is about making the material factors sustainable for a company, but also understanding and measuring the company’s impacts on the environment, which really gets into this concept of materiality. There’s two ways to look at materiality. Materiality is essentially what factors, what products, what resources are required for the material practice of a company. So if you were a shipping company, material to your company is fuel. You need that to conduct your business. Very similarly in the conduct of that business, you emit carbon – you use fuel – so you have a material impact on the environment.

And this is what has become to be known as dual materiality. And that’s really what’s being measured is in the sustainability space. So as we understand the impact of things like carbon emissions, electricity, waste on the environment, it’s how does those factors impact the sustainability and the materiality of a company? And then in the context of their business, how does that affect the materiality of the environment? And that’s really what we’re after is we’re trying to measure this dual materiality when it comes to sustainability.

Trey Robbins: 

Thanks, Al, for explaining the dual materiality. That makes a lot of sense. Now, really, why should our clients give sustainability in ESG any thought, and how can you help them on this journey?

Al Boyer:

So when I talk about sustainability materiality, and really when I first started looking into ESG, I read some congressional testimony in the U.S. Congress of a Columbia professor from economics. And he essentially said that ESG is a broken reporting system. What’s happening is it’s not accounting for the implications of sustainable investing, and it doesn’t have the same disclosures – nonfinancial disclosures – as you do for financial disclosures. And this is not giving investors a full insight into what the company valuation is truly worth. And so it got me thinking about ESG, and I came up with what I call the three R’s.

And this is what I would tell our clients is there’s three ways to look at ESG and why it’s important to your business. And they are regulations, revenue and the right thing to do. And I start with regulations. I mean, what we’re seeing in Europe right now with VCSRD and what’s followed suit in the UK and in Canada, and now Australia and Brazil, and most recently the United States in California. And we believe the SEC is going to implement some federal regulatory disclosure for carbon emissions inside the United States at large. You’re really starting to see a regulatory environment where companies have to track and disclose the impacts of their business on the environment, as well as environmental impacts on the materiality of their company. And so I think this is where you first start is regulations. Regulations will force obviously compliance. It will have legal ramifications to it. And so most companies don’t need to be explained that they know that there’s regulatory disclosures. And if they meet those thresholds – just like they do for financial consolidations – they’re going to need to disclose and report.

But what I really like to focus on is revenue. What I find most fascinating in the sustainability discussion really involves the space around revenue. So, for example, there are companies that have clients or that have providers that will call and ask for their carbon emissions to disclose such things as fuel usage or electricity usage in the conduct of their business. And typically, if that’s a customer of yours, I’ve seen companies where they’ve been told, “Hey, if you can’t disclose this, we’re going to have to go find a different business partner because we’re going to have to disclose this based on our business practice and our business sector, and what we have to do because of our global nature.” And so what you start to see is you start to see a real driver with revenue. Meaning, I need to understand these very simple carbon emission disclosure numbers and how I can give them to my customers because if not, I may actually lose a customer, a lost revenue stream and that’s never good.

So I think you should always start to think about how do you understand your revenue streams and sector you’re in, and how do you understand that this is important to your customers or other clients? Then there’s another thing that’s going on with revenue, and that is there is actually an opportunity to reduce costs and increase your margins by doing things like carbon credits – carbon offset credits. And so you start to see a lot of government and local and state incentives here in the United States, per se, that offer such things as carbon offset credits or renewable energy credits, or ways to really reduce your costs – your operating costs – based on doing cleaner energy such as solar panel farms.

Solar panel farms are a perfect example of how you can offset electrical carbon emissions. It has a lower emissions factor, and it also can be at times cheaper in the long run. So there’s revenue implications. I’m working with a global shipping company right now, and I talk about what our product here at OneStream can do. And they do financial consolidations with us in OneStream already. And what they want to do once we get their nonfinancial ESG stuff loaded in is do scenario planning. So the idea is they’re like, “OK, I understand all my routes, and I understand how much fuel I burn on those routes by distribution center and the conduct of our business. What if, over time, I were to phase in a biodiesel fuel-driven truck or an electric truck, and the cost of that truck over time? Would it reduce my operating costs? And also, would I get credits for it or will it reduce my carbon emissions?” It’s a win-win is a way they’re looking at that.

So there’s actually revenue implications that can be researched and compared when you marry up nonfinancial and financial disclosures or nonfinancial financial observations inside of our system. And so there’s revenue implications for margins and reducing costs. Lastly, there is an entire new niche of investing that is centered on the sustainability market. As we all know, especially publicly traded companies, investors, shareholders – they matter. And I would tell folks that there is a massive movement inside the United States and globally to create portfolios that invest in sustainable companies in the tunes of billions and billions of dollars. In fact, one of the most interesting articles I recently read talked about how this revenue and investment in sustainable companies has the potential to move generational wealth into new sectors of business. It has that potential to have such an impact through the development of technologies, disclosure and just overall impact on the environment to actually move markets.

And so there is a host of revenue reasons that companies should entertain when they’re thinking about should they tackle sustainability or an ESG project. And the last thing is the right thing to do. I mean, this is common sense to me. It’s any company should be good stewards of the places where they live and work, and how they treat the environment and how they treat their people. And so I think that makes common sense that there are regulatory reasons for you to do this. There’s revenue implications. And then at the end of the day, you’re just doing the right thing by your company, by your workforce, and by the locations where you live.

Trey Robbins: 

Al, thanks for that background on the three R’s. It makes a lot of sense. One of the things I think I notice a lot in the states specifically, there’s so many companies that are unaware of these regulations that are coming. They don’t understand the European implications, or they don’t understand the downstream impact. So if I do business, let’s say with Amazon and they’re going to start requiring me to report, I may not be prepared for it. Can you provide some more background on that – on both those situations with Europe? I know we touched on it a few minutes ago, but maybe we can elaborate more on it.

Al Boyer:         

Yes. So what I like to say is regulations are absolutely driving revenue implications. And I mean that’s what matters to business. You speak the language of the board when you talk revenue. And those revenue implications are definitely responding to regulations. And we’re seeing this movement – this global phenomenon of ESG and sustainability reporting – throughout most of the world. And now, here in the United States, with what California recently passed and what the SEC may do, and so from a procurement standpoint, for most public and in some cases private companies, there’s always that desire to do operating efficiencies. How do I reduce costs? How do I increase my margins? And a lot of the ways you do that is with digital transformation. That’s always usually a procurement objective for many companies is how do I lower operating costs, and how do I procure digital advantages? And you’re starting to see that with AI.

And right on its heels is the growing of this ESG disclosure. ESG disclosure is again being required in many areas of the world by law – by regulations. And then the downstream impact of that is that it’s driving revenue implications. So companies are having, even if they don’t have to necessarily disclose, think about their sustainability approach for that revenue implications as we discussed previously. And so what I try to tell companies to think about when they do this is really five key considerations of why they should tackle a sustainability initiative within their company and their business sectors. And it’s not just from regulatory, as I said, it’s from revenue and right-thing-to-do implications. And the No. 1 thing when I talk to businesses is that I like to tell them is when you start thinking of sustainability, the first thing you should think about is staying true to your company culture and your sector of business.

I see this all the time. I mean, when we talk to people – senior VPs and folks and chief operating officers and chief information officers – folks that are tackling these sustainability issues, it should first and foremost be done in what is your business about? What is your company about? What is your culture, and how do you operate and what sector of business do you conduct? And I think when you start there, you start to really realize what’s important. Not everyone has fuel emissions – direct fuel emissions – because they use third-party transportation assets, which is another way of calculating, but they don’t have direct fuel emissions. And everyone usually has electricity emissions because they have offices and warehouses, but not everyone has waste or not everyone has reverse logistics or renewable energy. So you got to understand your culture and how you conduct your business and start there.

That clears away some of the confusion of these regulations and what people are actually talking about in the sustainability space. And then the very next thing – once you understand that – is I think you have to start your sustainability with a sustainability framework and strategy. Again, you got to know your company and your sector of business, and you need to know where you’re wanting to go, what you’re trying to accomplish, and how do you want to do that. That to me is a framework and a strategy, and you should start there because what that will do is it will drive the data transformation and consolidation that you need to accomplish that framework and strategy, as well as to disclose regulatory-wise what you’re needing to disclose. And then the next thing you need to do is find a platform to capture and a solution to organize the data.

I’m biased because I’ve seen it work. I think OneStream is a fantastic digital platform with which to consolidate nonfinancial and financial data in. And we have the blueprint that we’ve been working on now for Scope 1 and 2 carbon emissions, and we’re able to put in other types of sustainability issues – not only environmental but social and governance in there as well. And so I think when you capture that solution, what it does is it allows you to trust your data. And I think when you start getting into sustainability disclosure and you start to transform and consolidate your data, the very next question is you want to be able to trust it, you want to have traceability on it, you want to be able to have signoffs on it, and you want to be able to know that your data isn’t true. In fact, true. And that your data will meet the disclosure requirements you have, as well as your own framework and strategy and objectives that you’re trying to accomplish.

And so ultimately, sustainability is about achieving fully realized forecasting. So what we like to talk about Trey, as you know, is you can have a simple solution where we get the data in so you can just see what it’s doing and disclose. But ultimately, what we’d like to do is get to where companies can compare nonfinancial and financial data sustainability and operating data side by side and think about it from a financial perspective. And that’s a way to look at cost and gains. And it really, again, goes back down to revenue. So when I talk to the companies, those are really the key considerations is start with your business, your culture, and your sector. And think about how you can use data platforms, consolidate your data to disclose and ultimately increase revenue.

Trey Robbins: 

That’s good background. I think one of the things that I’ve noticed, there’s three kinds of companies. You’ve got one that’s not even aware that this is coming with the ESG requirements – the disclosure requirements – that are going to happen soon. They’ll be dictated by not just… they’re already dictated by other European countries and other areas and regions, but it’s coming to the U.S. But I think there’s the companies that are unaware about it. There’s other companies that are tracking it, but they do it in Excel. And there’s another version of a client that’s trying to get ahead of it. So they know that they have to start having the auditability – the traceability – of all the data. They have to make sure that it’s tying out, that it’s all correct and they’re looking for a system like OneStream to help capture that. But the way you explained the five key considerations and what to focus on, I think no matter which of those three scenarios that you’re in, you’re either in one of those three. But I think the five key considerations and to focus on what’s important is critical.

I think it’s really overwhelming for a lot of people. A lot of companies just they don’t know where to start. They’ve got too many KPIs, and they’re not really sure what to do. So I think those key considerations can help with each of those clients or companies that are looking at those different options and alternatives. So let me ask you the next question about obstacles. So what obstacles do you foresee coming into play as we start into 2024?

Al Boyer:         

So the very first thing I would start with is just trying to understand sustainability materiality and what it means. I mean, there’s a lot that goes into this that can be overwhelming to a client. There’s multiple different kinds of biodiesel and then there’s straight diesel. There’s multiple different kinds of a waste. There’s multiple different kinds of renewable energies. And so that can seem overwhelming to a company at first, but that’s what we’re here to do is we’re here to help them navigate their way through the ESG sustainability space given their business, their sector of business, and how they conduct their business. And then help them figure out how to consolidate nonfinancial data. One of the biggest hurdles I see is just aligning stakeholders inside of a company. Do I need to do this? Do I not need to do this? How important is this? How much effort do I want to put into this?

And quite frankly, I don’t think there’s much of a downside to consolidating this stuff because the way the regulatory environment is going is that this change – this ongoing change in this environment of disclosure – is not going to go away. It’s only going to grow. And disclosure in regulations are going to force many companies to have to understand and disclose sustainability data. And what that’s going to do is all their business partners and clients are also going to be responsible for disclosing their sustainability data. And so I think that’s where we start. The first thing they have to do… that’s why I went back to the… it’s so important to talk about culture sector, business sector and strategy. You have to acknowledge that this is here. There’s regulatory and revenue reasons to do this and try to gain some shareholder alignment. That’s difficult to do. It’s the No. 1 thing that I see. It’s difficult to do when all of a sudden you have a sustainability person that’s trying to figure out what are all these environmental disclosures. What are all these social and government disclosures that we’re trying to do? And normally, what happens is in order to find that data, we go follow a bill. So if you want to figure out carbon emissions from fuel, you go to the finance and the operations people and you say, “I need to see this month’s bill for how much fuel we burned in the conduct of our business.” And on that bill will be liters or gallons of gas – of diesel. And so you’re right there into a change in culture issue inside many business practices because operations and finance people, they just think differently. They don’t think in terms of gallons or liters of fuel. They think in terms of dollars. And so this is one of the biggest things we can help with is getting to stakeholder alignment through the business sector and company culture complexity. That’s the No. 1 obstacle that I see.

ESG ultimately is not that complex. It’s not that difficult. In fact, it’s very, very standardized. I mean, you use fuel or use electricity, or you don’t. And there’s emission factors based on location or market, and it’s not overly complicated. Once you understand that this change is here, it’s going to impact the culture of your business, and there is disclosure requirements forthcoming. That’s the biggest thing I see when we deal with our clients.

Trey Robbins: 

One of the things I was thinking about, so if I’m a client and I’ve got the stakeholder alignment, I understand my culture. I know what to focus on. I know who I have to report to. So if I’m a provider, let’s say to Amazon, I know that I’ve got some report, emissions, and waste and things I need to track. And then I look at how do I collect the information. So I look at, let’s say I’m a client, let’s say they have OneStream and they use OneStream for financial consolidations. Can a platform like that be used to collect nonfinancial data for ESG?

Al Boyer:         

Yes, absolutely. And we’re on our third company implementation right now as you know, Trey. And we’re finding out that the blueprint that we use with the ESG that’s established in there by OneStream, and the consolidation and dimensionality and functionality of what it can do financially can also be done for nonfinancial disclosure. And it’s very similar. So folks, especially clients who are OneStream customers already, they like when the cubes and the views and the dimensionality and the extensibility of OneStream for ESG is very similar to how they’re already doing their financial disclosures. And so, for example, most notably what I’ve recently discovered, and I think this is why you need to take ESG seriously and why OneStream is a good platform is in the UK, here in the 2024, the way that the signoffs are going to have to happen for nonfinancial disclosures are going to follow the same legal hierarchy that you use for financial disclosures.

Essentially, what that means is in this company I’m working with, the sustainability vice president is going to sign off, but she’s not the final signoff. It’s going to go over to the financial signoff authority who will ultimately sign off on disclosures overseas on carbon emissions data that will then be inputted by law into the regulatory requirements. And so I think what OneStream does, by its very nature, is it has the hierarchy. The legal hierarchy is what we follow for a financial consolidation for nonfinancial consolidations. And then it has the same dimensionality and extensibility, as well as traceability and audibility that we do for financial. I think that’s very powerful. It can crunch and maintain a lot of data. And there is a lot of data when you start dealing with global companies that are dealing with different climate disclosures, emission factors.

Trey Robbins: 

Yeah, it’s interesting because I heard a story of a client that was leveraging the existing legal hierarchy that was in OneStream, and they loaded their ESG data, and they were able to leverage the percentage ownership of these different companies or these entities or dimensions. And they could extend out the ESG allocations automatically because they were already doing that for the financial data. So now, they could allocate what percentage of ESG waste or environmental impacts to the different ownership pieces for that example. So I can see a lot of synergies between financial and nonfinancial data. I think even forecasting. I think once you do load the nonfinancial data and you’re marrying it up with the financial data in the same location, then you start getting to predict the modeling and scenario planning. And that’ll become more important as the regulations become more enforced.

So I think it’s going to be interesting to see how that translates over the next 12 months. Well, Al, I appreciate your time. Thanks for joining me today. Listeners, you can visit the OneStream partner page on The Hackett Group’s website for more information, and we’ll put a link in the show notes. Thanks for your time.

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