These days, investors are increasingly applying Environmental, Social, and Governance (ESG) factors as part of their analysis process to identify material risks and growth opportunities. ESG might be a new subject for many CFOs, considering it's a non-financial criterion. But a CFO should absolutely do a little research on the topic of ESG strategy to continue to attract top investors to their businesses.
To better understand ESG, we invited John Truzzolino, Director of Business Development at Donnelley Financial Solutions onto the show. John is responsible for coordinating research, development, and publications around evolving global compliance, focusing on Environmental, Social, and Governance issues. He has more than two decades of experience following SEC compliance changes, publishes research articles, and speaks at leading governance organizations' events.
Welcome back to CFO weekly, where we're talking with financial leaders about how to build efficiency in their teams, create time for strategy, and ultimately get results with your host Megan Weis. Let's [00:00:30] jump right in.
Megan: Today, my guest is John Truzzolino. John is the Director of Business Solutions for Donnelley Financial Solution or DFIN with more than two decades of SEC and global reporting experience. He is a leading DFIN's ESG Thought Leadership, client engagement and partner program, including authoring ESG Thought Leadership geared for CFOs and finance teams published on FEI daily as well as expanding ESG credentials with Berkeley U ESG board [00:01:00] certification and currently working on SASB FSA training certification. Mr. Truzzolino participates and leads emerging ESG reporting working groups including EDM Council ESG working group, the data coalition chair ESG working group, XBRL US chair regulatory modernization working group, data quality committee. John, thank you so much for joining me today.
John: Oh, it's pleasure to be here. Thank you for inviting me to the podcast.
Megan: [00:01:30] Today we'll be hearing your story and learning about environmental, social, and governance or ESG. These days, investors are increasingly applying these non-financial factors as part of their analysis process to identify material risks and growth opportunities. This is an area that's pretty new to me. I'm really looking forward to learning more about this topic but let's start with you. First of all, can you tell us a little bit about your career journey and how it is that you got to where you are [00:02:00] today?
John: Sure, Megan, thank you. I started my career in the brain world. I'm evolving along the path of helping companies communicate their financials in the printed format, as it evolved to an electronic format, very closely aligned with the migration of regulatory reporting at the Securities and Exchange Commission. In the printing world, in the early '90s, we [00:02:30] helped the community move from printing documents and sending them to the SEC to the electronic EDGAR filing system.
In doing so, we also built a roadmap that allowed us to move from the document format to a digitized format in the mid-2000s when the SEC created a requirement to use machine-readable format. Fast forward to today, the global regulatory environment is embracing the use of [00:03:00] machine-readable formats. Over my career, I've gone from watching information put on a piece of paper printed and sent out to millions of people to see this information now produced in a digitized format using interoperable standards to help more efficiently and effectively communicate complete, consistent and accurate data and all of this while benefiting the environment by not printing these documents.
Megan: That's [00:03:30] amazing. Technology has brought us so far in the last 20 years. I was an auditor, like way back when I started my career, and I can remember sending stuff to the printers when it was actually printed format.
John: Our goal here at DFIN in our senior management team and board of directors are moving toward 44% of our revenue to be derived from SaaS products and services by 2024. A major shift in our platform [00:04:00] and our service and our client service model to support the evolution of technology tools that are used for governance and for reporting on the global scale.
Megan: Let's talk about Donnelley Financial Solution for a second or DFIN. What exactly is it that they do?
John: Donnelley Financial Solution was derived from the R.R. Donnelley printer who has their roots in Chicago from 1860. [00:04:30] I love working for a company that has such a long history. Our division was spun out in 2016 as Donnelly Financial. Donnelley Financial Solution really helps companies on their evolution of risk and compliance solutions, bringing together both SaaS and service models to deliver fit-for-purpose solutions for clients in their risk management, regulatory, and investor communications models.
Megan: Did it spring from R.R. Donnelley?
John: [00:05:00] R.R. Donnelly was the parent company and we spun off in 2016 to create DFIN, Donnelley Financial Solution.
Megan: How long have you been with the organization now?
John: I started with Donnelly in 2006. I came on then as a product specialist, as the SEC was beginning their roadmap to transition from collecting documents to collecting data using a standardized format called [00:05:30] XBRL for extensible business reporting language, which, Megan, is equivalent to thinking about the use of a barcode when you scan a barcode, it tells you the price, the place, it's manufactured the quantity, the contents, it might even tell you an expiration date.
There's a machine-readable barcode on data today. At DFIN we think this is extremely important in light of the fact that material that is read today, [00:06:00] it's used by bots, it's algorithms and machine learning and artificial intelligence. When you apply standardized, interoperable data, then you can finally see the proliferation of artificial intelligence and machine learning, deliver high-quality complete consistent data. For those in the finance industry that's really exciting.
Megan: That's so interesting. I don't think of data as not being read but you're right. It's mostly [00:06:30] being read by robots these days.
John: Very much so and the SEC is aware of that. You'll see in the SEC's recent rulemaking, that almost all of the new rules require some part to be formatted using structured data, whether it's an XML data stream, or an XPRL, or inline XBRL. The SEC and other global regulators, like in the EU for the ESEF mandate, are also requiring that. [00:07:00] Megan, there's one other piece, this is very important you can have data that's standardized and data that's interoperable but if it's not audited, and there's no assurance, it misses that trust and transparency. Now, regulators are also requiring that this data be audited.
Megan: What are your proudest achievements since joining DFIN?
John: For me, the proudest achievement is to be here for the transition of disconnected documents to documents that are created using [00:07:30] standardized, interoperable, machine-readable information. It really helps set the stage for democratizing information for anyone who wants to use it and putting that information out there for machine learning artificial intelligence, to pull in the information and have it information be complete, consistent, and correct.
Megan: At Donnelly part of your role is to focus on evolving environmental, social, and governance issues. As we mentioned, this is also [00:08:00] known as ESG. Talk to me about what ESD is, and what its current role is in the financial services industry.
John: In the financial services industry, environmental, social, and governance, it's really starting to take traction for a couple of reasons, and CFOs, and controllers, and auditors are paying attention. Over the course of the last decade, environmental, social, and governance items were communicated to various stakeholders by corporations through their [00:08:30] communications team or their legal team or their marketing teams, for even sustainability teams.
Once a year practice, you expose the values that the companies apply to their environmental principles, their social programs. Today, this information is now being measured and monetized, and put into company's specific KPIs. Here the CFO and the controllers are building out controls around [00:09:00] the data to not just report it voluntarily, but to report it in the 10-K or in the proxy statement, as these new social programs are aligned with executive compensation programs or the client's program on greenhouse gas production are set around net-zero targets. These targets need to be measured and applied against executive compensation programs.
CFO professionals, controllers, auditors are really starting to stand up alongside the sustainability teams, [00:09:30] and design these programs around the fact that risk oversight, a creation of a controlled environment. All of the processes in place in financial reporting, are now being looked at as tools that can be used to provide more complete, consistent and accurate data for these ESG topics.
Megan: That's really interesting. How are they monetizing things like environments and social topics?
John: For companies that are looking [00:10:00] at account management, diversity, equity and inclusion, we are in a great resignation era. Turnover has become a huge problem for many boards. In fact, it's probably one of the top three challenges at company today at the board level and C-suite level. Diversity, equity and inclusion talent management programs, these retention programs, and training programs, and employee-centric programs are really designed around keeping that talent, retaining that talent, [00:10:30] and bringing new talent to the company.
You're monetizing your business through a social program that was not deemed important possibly maybe 5 or 10 years ago, but it's become critical as companies evolve from the COVID pandemic and we need to work on talent management as an aspect of building long-term value for the company with a lower turnover rate.
Megan: You might have just answered this, but [00:11:00] why is ESG more important now than ever? Are there reasons beyond talent management?
John: Sure. The SEC in March unveiled their long-awaited climate rules and the proposed enhancement in standardization of climate really is the springboard for a lot of this information to be reported in the 10-K and proxy statement. Before the SEC came out with the proposed rules, they spent the last year looking at [00:11:30] companies voluntarily disclosing this information and publishing it on their websites.
In the late to mid last year, the SEC sent out comment letters. "Dear CEO," "Dear CFO, we noticed that you include greenhouse gas emissions on your ESG report on your website. What decisions did you use to not include that information if it's material in your 10-K? The SEC is really starting to build a roadmap [00:12:00] that looks at the risks around greenhouse gas and the proposed rules will require our companies to provide Scope 1, Scope 2 and Scope 3 if needed greenhouse gas emissions to the SEC, and then describe how that impacts the materiality to their strategy of the company in the M&A section of their 10-Ks.
Megan: Obviously, it's the CFO that's putting together the 10K at the end of the day, but what other role [00:12:30] will the CFO play in this ESG strategy?
John: To date, there are leaders in sustainability reporting and DFIN did a pulse report in January. We looked at 100 ESG leaders across the marketing legal communications, IR and finance group. 100 in the US, 100 in the UK. We know from that survey that marketing and [00:13:00] HR are leading the responsibility. However, we also know that over 60% of respondents said that they had plans to bring in the financial reporting team to provide greater oversight and controls over the ESG reporting process.
Then in those 70% in that survey said that they had intentions on bringing a controlled environment to the ESG reporting process. Here you see CFOs and financial reporting teams really taking the lead [00:13:30] as they build up the best strategies and practices for bringing these teams together, HR, marketing, communications, with the financial reporting teams to build out the full picture of their ESG reporting process, map that, identify the gaps, and start to build the in-control environment that allows them to have an on-ramp for SEC reporting and prepare for this information to have limited assurance in year two of the SEC's rule, and reasonable [00:14:00] assurance in year three.
Clearly, the CFO, the controllers, the chief audit officers, they're all paying attention to the evolution of reporting from a communications model or sustainability team to under the leadership of the CEO and the audit functions within the company designed around higher quality and audit information. After all, when it's in the 10-K, you have to have your auditors review that and the board has, therefore, to share responsibility as well. [00:14:30]
Megan: I'm always talking on the podcast about silos and how finance and accounting can no longer operate in a silo, but this sounds like one clear example of why that can no longer be.
John: Absolutely. It's coming to a point where these silos are being torn down and they're being rearranged. It's not one team doing more than the other. [00:15:00] Our survey also did a study of the collaboration within companies. We know from the survey that it is highly a collaborative process that within the companies they rely on collaboration across the company to identify responsibility of data owners and subject matter experts within various aspects of the company.
That may be in operations, that may be in communications, that may be in procurement, that may be in supply chain [00:15:30] management, that are all now part of this ESG reporting process. It truly is a collaborative experience for companies and the CFO to bridge these teams and bring them together.
Megan: In your mind, what is the key to building an effective ESG strategy?
John: DFIN has developed a program where we help our clients along the path of their ESG journey, we call it. Many of them will start their journey with the materiality assessment. [00:16:00] It helps them identify the company-specific items that may be important within their sector. Megan, I do like to point out some good news around this. It's a very challenging world for ESG reporting. There are standards that came out that help companies identify the financial material items within industries. There's a standard called the Sustainability Accounting Standards Board, SASB that has identified accounting standards within 77 industries.
If you're a CFO, when you're looking for [00:16:30] the financial material items, you can refer to the SASB standard and find those financial material items within your industry and then start to work with your team to identify, "Do we have these metrics? Where are those metrics? How can we account for them? Can we put them into a repeatable process? What are the gaps?" Then we'll look at their peers. What are your peers doing? Are they including more? Are they providing less? Because right now, it's still all voluntary.
Then through that process, companies identify thematic [00:17:00] messages that they want to align with long-term business creation, which is part of the board's role in strategy and risk management. Once that's all done, we bring it together and put it into a SASB fact sheet or an ESG or sustainability report, or we help the clients write content to put in their proxy statement aligned with board oversight of ESG and identify the skills matrixes within the board's composition to show that the boards [00:17:30] are following on these items. Human capital management is one of the items that we're following in. Several of our board members have a deep background on human capital management. We're helping them prepare for it in those ways.
Megan: You've just explained how DFIN can help, but what differentiates DFIN from its competitors? Are there competitors?
John: Absolutely. DFIN is taking the role of being a staff solutions provider with a [00:18:00] level of expertise in the ESG and compliance world. We provide a one-stop shop for issuers to work with us as they prepare their road map and take their journey down the ESG reporting process. Some of our competitors only offer one aspect of software.
They'll give you the tools to make it happen, but they can't help you along the journey by identifying materiality issues. They can't do the peer analysis or create the company KPIs [00:18:30] that you want to use to begin the reporting process, or they'll just report on the information in a SAS model. DFIN is the solutions provider that brings us all together in a team that combines staff services and expertise within the ESG reporting domain.
Megan: Is there an ideal client of yours? I imagine it's hard for a lot of companies to even know where to start.
John: That is a big question that we receive all the time, Megan. Companies want to know where [00:19:00] to start. It often resides at the board level. We get the feeling that boards are really starting to pay attention to this. When they do, then it goes down to the C-suite. The C-suite wants to know what it is my peers are doing, how can I begin to understand the ESG metrics that I need to measure and manage? We begin the journey with them by doing that materiality assessment.
The good news that the SEC [00:19:30] has put in place is their migration from voluntary reporting around greenhouse gases to mandated reporting will follow a phasing. Our largest accelerated filers will go in first, so the biggest corporations will need to comply with the SEC's mandate first. That gives an onramp for the non-accelerated filers and the small business companies as they can build on the economies of scale that will come into play after helping the largest [00:20:00] companies go through this reporting process for the first time.
Megan: In your experience, what do you see as some of the common mistakes that companies make when it comes to ESG?
John: Honestly, the most common mistake is don't wait for everything before you start down the path. We are helping clients to disclose very high-level information in their proxy statement around the new committees that were created to provide oversight of ESG, including graphics [00:20:30] that show where those committees are, how often those committees meet, where those senior team has responsibility for a control environment and building that process and communicating that in the proxy statement. You can do that while you're in the process of identifying company KPIs, while you're identifying the gaps of where data may reside and where you have to begin to collect data. Don't wait until it's already, begin [00:21:00] the journey with small steps.
Megan: I imagine it's taking that first step as always. That's the hardest.
John: It is taking that first step. That is the hardest, and it's something that we catalog every year. This is the 10th year making that the DFIN will put together our guide to effective proxies. This year's guide to effective proxies will take a special look at ESG oversight in the proxy statement. This is the section that has received a lot of attention over the last year and a half. As the SEC [00:21:30] is requiring oversight of climate in their proposed rules from the board, from the C-suite, we expect this section to be built out as well for the 2023 proxy season, which is something that clients will begin working on soon after their annual meetings taking place right now.
Megan: Where do you see the future of the ESG heading?
John: The ESG frameworks that were very common and defined in the industry [00:22:00] as alphabet soup, you had SASB, you have the GRI, the Global Reporting Institute. You had TCFD, Task Force for Climate-Related Financial Disclosures. You had the CDP, you have the IIR standards and frameworks. The good news is there has been a consolidation, Megan, and a harmonization of these data and framework standards. That is happening under the International Sustainability Standards Board, the ISSB. [00:22:30] The ISSB is working on a common core set of data points that are relevant to every company reporting on the climate spectrum.
Then in different jurisdictions, you might build out on some of those reporting elements within various verticals and industry segments, but the exciting part about this is, there is the focus on standardized using an independent standard organization that is managed under IFRS [00:23:00] to create the standards they're moving forward with interoperability so that these data sets will include machine-readable information. Finally, Megan, they're requiring these data sets to be audited. Those are exciting aspects of where this is moving and how rapidly things are changing.
Megan: It'll be exciting to see how this area evolves in the coming years. Is there any other advice that you would give a CFO who's maybe just starting to think about ESG for the first time?
John: [00:23:30] Sure. It's important for the CFO to recognize this as a journey and you really do need to step in and look at the existing framework within your company, speak with your senior team, make sure that your board is on board. With that understanding, we know that this is complex. We did our pulse report and 89% of respondents said that the current process is challenging [00:24:00] and burdensome. Know that going into this, that the task at hand will be challenging. We know that the CFO's role comes to the table with a set of strong controls over financial reporting, those controls over financial reporting lay out the framework for the establishment of data sets that will ultimately be audited and then assured by third parties.
[00:24:30] The role of the CFO is it's working throughout management to understand a company-wide understanding of what ESG and sustainability means for that company. Then working within the company to identify subject matter experts, whether they're in operations or procurement or supply chain that are important in the data collection process, and then designing those systems in place that allow you to have repeatable processes for efficient, effective [00:25:00] financial reporting, which will now include some of the metrics and targets that are being discussed around this ESG migration.
Megan: That's an interesting point. I'm sure this does look different for every company out there which probably makes it a little more difficult to standardize than some other areas of finance and accounting.
John: It does and it's also important. When the SEC made the announcement, they announced that they're building the climate standardization enhancement on the back of existing frameworks, like the task force for climate-related financial disclosure, the TCFD. The TCFD is already being used to disclose greenhouse gas for Fortune 500 companies. The standard is already in use. You would think that since companies are disclosing it voluntarily, the migration to a mandated report will be [00:26:00] a little more streamlined as they have already been collecting and reporting under the four pillars.
There's a governance pillar, there's a risk management pillar, there's a strategy pillar and metrics and targets. Then there are 11 items underneath that, that inform the format that is used to communicate this information on scenario analysis of your greenhouse gas emissions on setting resiliency tests and developing a robust [00:26:30] process around testing that environment and reporting that environment. The SEC is doing a great service here by building these new reporting mandates on existing frameworks and not requiring something new.
Megan: In your current role, it's no secret that the last two years have been relatively tumultuous, but what keeps you up at night as you look both near term and also long term?
John: Sure. Near term [00:27:00] is the growing need for an ESG resident expert within the corporation to become the go-to person that will understand the evolution of the company's ESG metrics and targets that can align with the accounting profession within the company and work with the controllership and the CFO to begin to embed these ESG metrics and targets into the company's long term strategy and framework. [00:27:30] Then the longer arc of this is to help the industry adopt these standards from the international sustainability standards board that ultimately drive complete, consistent and accurate data points available for all decision holders, not just your investors.
Many of the users of ESG data today are employees that want to work for a company that expose the [00:28:00] same values that they have. You have suppliers that are asking for ESG information due to the work that they provide in the supply chain, they are aligned with the company's ESG. You have customers and communities that are depending upon the company to not just provide a service, but to do so in light of the fact that they need to meet certain standards to support the environmental and social issues [00:28:30] that are so prominent in the global markets today.
Megan: That's really interesting. Just curious, have you seen C-suite roles created for ESG?
John: Yes, the chief sustainability officer is a role that is actually happening at the breakneck speed these days. We are seeing a chief sustainability officer role come into play to be that linchpin that works for [00:29:00] the consistency across the domains that are in place that run the company today. Elevating somebody with knowledge within the company that understands the growing challenges around ESG reporting into a senior position is taking a more senior role within companies today.
Megan: That's really interesting. John, thank you so much for being my guest today.
John: Megan, it was a pleasure to be here for your podcast, and thank you for the opportunity to speak.
Megan: [00:29:30] This has been a fascinating topic and I've enjoyed learning from you thank you for sharing your knowledge and time with us. To all of our listeners, please tune in next week, and until then have a wonderful week ahead.
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In this episode, we discuss the role of ESG in the financial services industry, how to monetize ESG, what the role of a CFO in building the ESG strategy is, and how to build an effective ESG strategy, among other interesting topics.
The ESG Role in the Financial Services Industry
Companies have started measuring and monetizing environmental, social, and governance factors and programs, putting them into business-specific KPIs. And CFOs are building out controls around the data in the 10-K or proxy statements.
“All of the processes in place in financial reporting are now being looked at as tools that can be used to provide more complete, consistent, and accurate data for these ESG topics.”
As companies struggle against the Great Resignation, most focus on talent management and DEI for building long-term value with a lower turnover. So businesses are now monetizing diversity, equity, inclusion, and talent management programs designed to keep, retain, and attract new talent to the company.
“You're monetizing your business through a social program that was not deemed important five or ten years ago. But it has become critical as companies evolve from the COVID pandemic.”
Connecting ESG and the CFO
CFOs and financial reporting teams take the lead in creating the best ESG strategies and practices to bring the HR, marketing, and communications teams on board. They are also responsible for building out the full picture of their ESG reporting process, mapping it, identifying the gaps, and preparing the required financial statements.
“The CFO, the controllers, the Chief Audit Officers are all paying attention to the evolution of reporting from a communications model or a sustainability team to under the leadership of the CEO and the audit functions within the company designed around higher quality and audit information.”
How to Build an Effective ESG Strategy?
The Sustainability Accounting Standards Board (SASB) identified accounting standards within 77 industries. If you're a CFO, you can refer to this SASB standard, find the financial items within your industry, and then work with your team to identify the necessary metrics. You can also get in touch with specialist companies like Donnelley Financial Solutions (DFIN), if you need clarity on the process.
“DFIN is the solution provider that brings us all together in a team that combines SAS services and expertise within the ESG reporting domain.”
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