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ESG: Challenges, Opportunities and Resources for CPAs

September 9, 2021

What is ESG and what does it mean for business? In this episode, host Sean Stein Smith discusses the challenges and opportunities for CPAs when it comes to environmental, social and governance issues - as well as technologies and other resources that are available to assist.


Episode Transcript

Welcome back to the NJCPA TechTalk Podcast brought to you by the Emerging Technologies Interest Group. I'm your host, Sean Stein Smith, and we're back today for episode nine on an area and a topic that, really, I am very interested in. All of us really are going to be more and more involved in going forward, and an area that is honestly going to impact every aspect of business, accounting and all the rest. So, all of that said, let's get underway.

So just a quick piece of background about me. I'm your host, Sean Stein Smith. I do a lot of work in the blockchain and crypto assets space. I'm on the board of a few different enterprises out there. But I'm also really interested in anything that brings accounting, technology tools and any other emerging areas, hot topics, areas of real critical importance for enterprise for our internal colleagues or external clients off the back burner and onto the front burner.

And so today, we have a really sort of honed in topic, which is a bit different from our usual content here on the NJCPA TechTalk Podcast. Basically, trying to talk about environmental, social and corporate governance issues — ESG — which is a hot-button issue. It's a hot topic.

What is ESG?

I'm sure all of us have heard about it either in conversations, on TV, with our external clients. But honestly, what is this area? Acronyms are always great to toss around. There are all these buzzwords, and they always make for excellent headlines, but actually what is ESG?

And so, the first one off the top topics, it concerns about the economic and environmental impacts of firms is probably the area that all of us are probably the most comfortable with, right? Talking about pollution, carbon footprints, CO2, hydro power, solar power, solar panels, all the rest.

And so honestly, so in terms of that, all of us are probably the most comfortable talking about those issues because they're the easiest to 1) understand and 2) try to frame in terms of all of us have covered previously and heard content on previously, but there also, in almost all cases, the easiest to try to quantify in terms of the assets to be allocated and the payoffs of this asset allocation in terms of power savings, reduced carbon dioxide output, all the rest. But the other two areas, how to deal with sort of broader sort of social issues. Now, obviously as a CPA, we aren't going to solve all of the world's problems. But there are issues out there in terms of our pipeline, in terms of the makeup of our field, in terms of how diverse, how inclusive we are, both as individuals, our firms and our industry at large are issues that are directly impacting all of us on an individual firm basis but are also definitely impacting our external clients.

And so, it's really critical, I think, to be able to have conversations in this area and having conversations on this topic is not always easy, but it's even more important to have them because it is not easy, but how do we quantify that? Are there any action steps that all of us can take now to have an impact both now and going forward? And then to almost sort of add onto that, this whole idea of corporate governance issues and the best way to try to frame that to the context around corporate governance in terms of us as an industry, as a CPA, and in terms of our external clients, is that really that as our firms become more diverse, more inclusive, then all of that is going to help the corporate governance of the firm.

And so, the whole idea of corporate governance is kind of a murky area, because it's not super easy to quantify, to analyze. And there are good metrics, benchmarks out there that are used by external firms in the asset management field to try to rank how well a corporation runs its corporate governance operations. But in terms of sort of hands-on practical impacts of this idea of corporate governance, it honestly is best phrased as how the firm interacts both internally and how it interacts to its broader external community. So, all three areas are equally as important right now, and they are only, I believe, going to become more important going forward. Now, it isn't just me, right? There's a lot of other content on this topic in terms of podcasts, dense articles, all kinds of actual content out there.

And there has been a pivot and a real sort of shift in terms of actually where assets are being allocated to in terms of companies, EFTs, firms, individuals more oriented courses area, it is not a top-secret thing. That the E, S and G area has been an area that has attracted a ton of eyeballs and a ton of actual capital too.

Challenges

But in terms of the opportunities out there and any obstacles or any challenges out there for our field, for our industry, for our profession, I would say that the two biggest challenges or obstacles out there in terms of how we can add value to these conversations. Because we aren't going to be experts in everything linked to environmental, social or corporate governance issues. But our expertise really at analyzing data, drawing insights out of that data, and then having the capacity to translate both that data and those insights into actionable business ideas really do, I think, sort of, when it comes to the forefront here.

Because I believe everyone knows that all of these issues are important, but it can be awfully tough quantify the impact of these issues on any size firm — small, medium, large. And it's important to keep in mind that in terms of the actual challenges out there, that probably the top challenge is that it can be tough to quantify this, and it can be tough to quantify this on a consistent basis, on a high-level basis. Because there are no authoritative accounting standards yet on these topics.

Now the AICPA has some great content out there. The SASB and the IIRC also have some great content out there in terms of frameworks, policy tools, all the rest. But the overall one, sort of the challenge I tried to quantify the data that by its nature is not always going to be quantitative and then two, trying to do so on a consistent and comparable basis in the face of not having any authoritative guidance out there are two of the biggest obstacles out there.

Opportunities

But in terms of the opportunities as outlined earlier, there has been a real pivot and shift towards people and actual dollars and funds that are increasingly allocated towards this whole area. And so obviously there is going to be an uptick in interest and an uptick in funds to do projects in this space. But also, there is sort of one other aspect of us that I think is kind of overlooked. That as the economic outlook changes, the workforce changes and our field changes, and as there are new folks entering into the field, current partners are bought out, retire, exit the field, and there are more and more, the folks that are currently right now in high school and then in college, entering the field, entering our firms, and entering our external clients, issues in this area are not optional issues anymore. They aren't backburner issues.

All of these issues have really, over the last two, three, four, five years, popped off the back burner and are front-burner, top-of-mind issues being talked about every single day. Even if they aren't being talked about in our individual firms or at our individual clients right now, they are definitely being talked about out there overall. And it's only a matter of time until all of that conversation and interest and asset allocation really has a direct impact on how our firms have to operate in terms of how our firm has to actually function and the projects that our firm undertakes. But also, in terms of actually what the expectations are of us from our external clients.

So as any field changes, as any large tools, technologies, trends have an impact on the economy at large, it's definitely, absolutely going to have an impact and influence the question and the expectations of our clients of us.

And so that's really, I would argue, the biggest opportunity out there. 1) that there is current interest in sorts of people and actual dollars coming into the space and 2) those individuals that are in high school right now, college, interns right now are really interested in these issues. And all of those individuals are ultimately going to become our external clients, partners, directors, managers at our firms. And so, it's a good business move to become, at the very least, more aware, and more educated and more on top of sort of what the current issues are and then how best to try to talk to clients on these issues. And then ultimately, how to quantify them in a manner to help our external clients, as well as our firms make better business choices.

Tools and Resources

Now, in terms of tools out there, I would say, arguably, on the NJCPA TechTalk Podcast, that obviously, the growing use of tools, but especially automation tools, AI, or automation just overall sort of broadly has honestly made trying to analyze the impact of these issues a lot easier because as a direct byproduct of having more automated tools, of having more capacity in those tools, it's a lot easier for us as individuals, us as our firms, and us in conversations to our clients, to be able to try to sort of gather up all of this other data outside of the income statement, the balance sheet, cash flows, inventory levels, AR confirmations, all the rest outside of all of that. And all of that is absolutely core to our role and to our expertise out there in the marketplace, but there's a lot of other stuff and a ton of other data going on. And all of that is not anything new to anybody out there.

Either in the field or at an external client but having these automation tools out there. And I will include some hyperlinks to some tools in the box below, but there are any number of tools out there that basically help us by 1) having the capacity to capture and to analyze non-quantitative data or non-financial data. And then 2) help us try to sort of get a handle on, okay, so I have all of this other information in that sort of giant pot, giant pile of non-quantitative data. How do I analyze it? How do I get trends out of it? How do I turn those trends into items that actually connect to our core business operations? And that's really the key here, right? Because, I mean, the individual tool itself is not as important as understanding of one, how to the tool operates and two, the point of having tools of this kind in place at your firm or at an external client.

So ultimately, there are definitely excellent resources to help there. There are definitely external podcasts, webinars, all the rest that are out there. And what I honestly wanted to hone in on here ultimately is that this whole idea of environmental issues, social issues, issues linked to corporate governance can be a bit challenging to talk about and to analyze either inside your firm or outside your firm. And that's fine. It's okay to have conversations that are difficult to have and on topics that are an obstacle to have, and that are a challenge to have. But the underlying fact that having conversations on these areas can be hard, can be a challenge, is all the more reason why having conversations on these issues and trying to figure out how to best analyze the issues, quantify the issues and translate that data into actionable business data is so important going forward. But there definitely are some external excellent resources to help.

And actually, the excellent people here at the NJCPA have an upcoming NJCPA event at the very end of the month on the 30th of September. What CPAs Need to Know about ESG. And honestly, this whole topic has moved sort of off the back burner onto the front burner, out of the optional category and into a must-have topic for all of us currently in the field to help deal with current issues, to help deal with our clients and to also help us attract, develop and then hold onto talent so that as we speak to the pipeline coming into our field and all of which are interested in these areas, in these topics, and it makes good business sense because operating in a manner that's good for the environment.

That's good for your employees and your staff at your firm. And that's good in terms of how the firm is run, how it interacts internally and how it interacts externally with the broader community makes good business sense.

Have an awesome day. See you next time.