Coming up with a business sustainability report is an important thing in any team's growth and planning. What can you do to streamline this process and make it better? Jennifer Sadenwater presents the solution through ESGLynk. Joining Victoria Meyer, she explains how they connect people with the value that matters in three important points: environmental, social, and governance. Together, they talk about which industries can benefit the most from this strategy, its impact on investing, and the standards the come with it. Most importantly, Jennifer discusses how ESG can improve a company's performance and plan execution.
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Jennifer Sadenwater On Streamlining Your Business Sustainability Report Process
I'm speaking with Jennifer Sadenwater, Managing Director of ESG Lynk. She's a hot topic. Jennifer is going to be sharing a lot more about what it is and what chemical companies need to be thinking about and doing as it relates to that. Jennifer, welcome to the show.
Thank you so much. It's so good to be here.
I’m delighted to have you. First of all, tell us a little bit about ESG Lynk. Your company that you guys have started.
ESG Lynk was founded in 2018. We have the purpose of streamlining the sustainability reporting process. Oftentimes, we see these ESG reports with a vast amount of information. It isn't useful to investors. We focus on guiding our clients with disclosing sustainability metrics that are financially material to their business. Our backgrounds are in SCC financial reporting. We apply those same methods we would use with the financial reporting process to ESG reporting. We believe in treating nonfinancial data with the same integrity that we would with financial data and always having an audit trail to support the disclosures.
We're going to get into that a little bit more. Especially since ESG has gotten so much highlight over the last several years, there's a lot of people that frankly don't know much about it. You can even tell us what is ESG. What does it stand for? What do people need to know about it?
ESG stands for Environmental, Social and Governance. The way that I like to define ESG is by connecting people to value that matters. We know that organizations driven by a purpose or mission beyond profitability alone outperform their competition. They may have more loyal customers, engaged employees and ultimately generate longer-term value. Companies can do that and tell their story by publishing an ESG report. It tells the reality and the whole story of a company financially and ESG related. It gives opportunities for brand differentiation, attraction and retention of top talent. It provides opportunities for innovation and helps to improve operational efficiencies in some areas. Oftentimes, it gives the ability to attract capital and increase their market valuation. Investors are looking for companies that are considering these efforts in their everyday operations.
ESG was thought of as a fad, but now it's not going away and has a high potential to become part of the mandatory reporting process.
When I think of ESG, I think of sustainability. Sustainability has a whole wide variety of definitions and points of view. Is it the same as sustainability? Is it different than sustainability?
The way that I look at it is ESG is the metrics you can use that are specific and measurable to achieve sustainability. Looking at metrics that address environmental considerations, water, hazardous materials, social considerations, your overall risk management and governance structure. Those are measurable areas that, in the long run, you can say, “We are a sustainable company because we've achieved X, Y, and Z, and have progressed over time and improved our metrics in these areas.”
I hear a lot about ESG expectations. Are there greater expectations of ESG in certain industries? Is this a consumer products issue? Is it an industrial manufacturing issue? Who cares about that ESG or which industries need to be thinking about it?
I don't think it's more so on one industry versus another. Each industry has a different role to play within the ESG realm and how they're contributing to a better tomorrow. What's different is certain metrics that are material for some companies may be weighted more heavily, let's say environmental considerations, whereas other industries may have a greater focus on human capital. All in all, it takes a village to drive change. Every industry needs to do its role in building a more sustainable future or global economy depending upon what impacts them the most. We all need to look at it.
Do you see that ESG is having a real impact on investing or investor sentiment?
The majority of our prospective clients are coming to us because of investor requests and more transparency around these ESG topics. We're also seeing trends of ESG information being more closely integrated within financial disclosures. An example would be the SCC’s rules on human capital disclosures that came out in the fourth quarter of 2020. A lot of what they recommended were very closely or directly related to the types of social disclosures you would find within an ESG report.
This week, the SCC is collecting input on climate change disclosures. This includes asking SCC to consider companies to disclose ESG matters in a document separate from their 10K’s and 10Q’s. What it means is if the SEC allows this flexibility, companies who are already issuing ESG reports would have a minimal effort that they needed to comply with potential future SCC disclosure requirements. For a while, ESG was thought of as a fad. However, we can clearly see it's not going away and has a high potential to become part of the mandatory reporting process.
Does it tend to apply more to publicly traded companies as opposed to privately held companies? Is that what you guys are seeing?
No, I think it's both. Public companies often are having it from their investors, but so are private. They both are, and their boards are driving it. We see it with even private equity. Private equity investors are publishing their ESG reports, and that's trickling down to their portfolio companies. Because they want to see what we are investing in. Our client mix is a mix of public and private.
How about from a regional perspective? You've referenced the SEC, which is a US-centric agency. However, sustainability in a lot of those topics has been bigger in Europe. Is this a global topic? Is this a Western world topic? Which is a regional focus on this?
It's global. There's the World Economic Forum. We've heard about them. There are standards that are more US-focused. There are ones that are more broad and global focus. There is the UN sustainable development goals. All in all, these types of topics are driven more heavily over in Europe and the US is a little bit behind. European companies have been reporting on these types of metrics for longer than the US. The US is getting on board as one of the global leaders and global leaders in the economy. It's fabulous that the US is now on board. A lot of these issues are global issues and with ways that supply chains reach across the world. Talking about one of the SASB topics is managing environmental and social impacts of your supply chain so much trickles down. It's cross-functional. It's something that is not region-specific.
When companies focus on those metrics that are financially material to them, they will see improvement.
The other thing that people have asked me about when I talked about this topic is, does ESG help a company's performance? If somebody is effective at managing ESG, are they also performing better financially? That's an easy metric to use. What do you see with that?
To truly look at trends, the reporting on ESG hasn't been around quite long enough to look at trends from time over time. I can tell you that when companies focus on those metrics that are financially material to them. You will see improvement. One of the benefits is improving operational efficiencies. We've seen with companies who are reporting on GHG emissions, for instance. When they go out to their assets and start doing some direct measurement because they want to report emissions and realize, “We need to upgrade some of this equipment. We need to do maintenance,” with the intents and minimize emissions. It's affecting their operational efficiencies and they can be much more efficient with those assets. The original driver was to report on those metrics. The end-result has much more benefit to it.
We touched on this a little bit already. Chemical companies for years had been focused on sustainability. It continues to be a trend of increasing importance. A lot more going on with that. They've been doing sustainability reports, many companies, for years. Do the ESG reports replace sustainability reports? Do they flange together? How do you see that fitting in?
A lot of companies have a great story to tell. They've been looking at these metrics and measuring them long before the term ESG was commonplace. The focus is on effectively communicating their story in an organized way and using standards that allow year over year comparisons. Companies can show progress and benchmark against their peers. If you've issuing these reports in the past, once you adopt a framework, you can see where the gap is on what you have been reporting versus what the framework is asking you to report. Many times, there's quite a bit of overlap. It's organizing that and putting it in a way that making sure you're focusing on those metrics that are financially material to your company.
Are there reporting standards on this? Particularly in the last six months or so. It seems like there's a number of what I would consider accounting-based organizations that are trying to either own that space, place standards, claim standards for ESG reporting, etc. I know two of the big act organizations have announced to intent to merge. It gives me this question of who's governing ESG and setting standards?
It's a great question because it can be very confusing. As we know, ESG reporting is not currently regulated and it's completely voluntary. Companies have their pick when it comes to how they report and which standards they choose to report under. The ESG ecosystem is filled with a myriad of acronyms. We published a white paper on this topic title, Navigating the ESG Ecosystem. I'll be happy to share that paper with any of your readers who are interested.
That would be helpful.
It's super helpful because the acronyms make it very confusing. At ESG Lynk, we recommend companies report under SASB standards or the standards issued by the Sustainability Accounting Standards Board. The reason being is that SASB standards are industry-specific and are focused on metrics that yield the most decision, useful information for investors. It is true that IIRC and SASB. The IIRC is the International Integrated Reporting Council and SASB merged. It became effective. To create an entity called the Value Reporting Foundation. The purpose of the value reporting foundation is to deliver a more coherent corporate reporting system by working closely.
Companies can use ESG information to increase their value, gain additional capital, improve risk management, and secure the best talent.
I'll throw out another acronym, the IFRS, which is the International Financial Reporting Standards. Working with them and other leading framework providers and standard setters around the world to make an entity that will regulate this. It's very difficult even to peer benchmark, for instance. There are little nuances with different standards. It's hard to compare yourself to peers when everyone isn't reporting on the same data. SASB allows for that. It's also focused on metrics that a company typically already collects. It's very cost-effective for a company to implement those standards and report on them.
What are chemical companies need to know or do to start measuring and reporting on ESG?
I think chemical companies most likely already collect data. They may have it. They need to know how to organize it. Topics considered material for a chemical company would include items like GHG emissions, their energy management, wastewater management, hazardous waste materials, labor practices. They're going to collect all of them. Using a set of standards like SASB to see specifically what about the data they need to report. Organizing that in a way, developing the narratives to tell their story, is best practice.
Who do you find in the companies that you guys work with? I would say who cares about this? I know everybody does, but who's focused on it? Who owns ESG typically in the companies that you guys work with? What do you see?
It varies. We work with the CFO a lot of times, general councils and investor relations because a lot of companies don't typically have a sustainability reporting team. Oftentimes, we become their outsource sustainability reporting team. It’s part of our name, ESG Lynk, because we link the different corporate functions involved within the process and coordinate that with all of them.
ESG Lynk, you guys have been doing some great work. I know with a variety of companies. How do you help them navigate the land of ESG? What do you do when you come in and help figure out an ESG report?
We use the sustainability reporting process as a guide to help them define their strategies. Many companies believe that they need to have a comprehensive ESG strategy in place before initiating their reporting process, but it's not true. The conversations that need to happen when drafting the narratives, collecting and analyzing the data reveal both the strengths and the weaknesses of a company's existing ESG practices. All companies want to identify sources of value where they stand out.
The focus on ESG is a natural way that they can differentiate themselves in the market. We find that in the analysis of ESG information, alongside financial information, both internal and external reporting, helps them get a more comprehensive view of the opportunities and risks facing them and their industry. They can use that information to increase their value, gain additional capital, better manage risk, position for growth, secure the best talent. A lot of the workforce entering are very concerned about these topics. They want to make sure they're going to work for a company that compliments their personal values. It's a win-win scenario.
It sounds like part of the whole process of getting to the ESG report is also a bit of a gap analysis or risk analysis. The people and companies can have an execution plan that they know that they want to improve upon, take action on, etc.
Yes, absolutely. One of the first steps we do is we'll look at the size of the standards recommended for their industry and lay them out. We'll go down each one and find out which metrics you are already collecting data on. What does that data look like? A company doesn't have enough data to fully disclose what the metric is asking and that's okay. That's what we say, “That is okay.” You need to start somewhere. You need to have a baseline. That helps you develop your roadmap for the future of where you need better data collection, more data collection, where you need to improve performance. It helps that first inaugural report. It helps set the stage for the direction that they need to go in the future.
Jennifer, this has been great talking with you. I appreciate you joining the show. Is there anything else that you wanted to share or have we covered it all?
We've covered it all. I'm passionate about this topic. I think companies can drive change while also creating value for themselves in this space. It's rewarding to help those companies often that come to check the box. At the end of the project, they realize the value in it. That is personally satisfying to see that happen. It's exciting to be part of the journey with them.
How can people get in touch with you or get in touch with ESG Lynk?
Thanks for joining us. Thank you, everyone, for reading.
About Jennifer Sadenwater
Jennifer Sadenwater is Managing Director of ESGLynk. ESG Lynk® was founded on a mission to simplify the sustainability reporting process to help companies attract capital and lead long-term performance. Jennifer has nearly 20 years of experience in accounting, audit, and ESG reporting serving a wide range of private and publicly held clients.
Her experience as an audit manager with KPMG and then with her consulting practice focused on financial reporting, technical accounting research, and policy documentation. Her detailed oriented approach leads to projects that are managed on budget and delivered on time. Jennifer also has extensive experience in developing and conducting training courses for the Texas Society of CPAs and is a subject matter expert for the FSA Exam issued by the Sustainability Accounting Standards Board (SASB). Jennifer is a certified public accountant, an FSA Level II Candidate from SASB and has a BS in Accounting from Louisiana State University.