Ep. 225: Unraveling ESG: Understanding Environmental, Social, and Governance Factors in Business – Part 2

Get ready for part two of our insightful ESG (Environmental,
Social, and Governance) discussion on the Count Me In podcast.
Our expert panel, Douglas, Dan, and Catie, unpack the pressures
and fraud risks inherent in ESG reporting, offering invaluable
insights gleaned from real-world scenarios. But it's not just
about identifying risks; they also provide practical guidance for
those embarking on their ESG journey. Learn how to start with
what you have, concentrate on materiality, and establish a
robust, cross-functional ESG team. Tune in for an essential
roadmap to navigate the complexities of ESG reporting in today's
business landscape. This is one episode you won't want to miss!


Connect with our speakers:
Catie: https://www.linkedin.com/in/ctserex/
Dan: https://www.linkedin.com/in/dan-mosher-8552519/
Doug:
https://www.linkedin.com/in/douglas-hileman-fsa-crma-cpea-p-e-6abbb71/


Download the reports mentioned into today's
podcast:
Achieving Effective Internal Control Over Sustainability
Reporting
Managing Fraud Risks in an Evolving ESG Environment


Full Episode Transcript:
Adam:            Welcome
back to Count Me In. Today we have part two of Unraveling ESG.
We're joined, again, by Catie Selex, Douglas Hileman, and Dan
Mosher for the completion of their conversation. Now, if you
didn't hear part one, I encourage you to pause right now and
listen to that first. In today's episode, we explore the
challenges and risks of ESG reporting, including the potential
for fraud.


 


Our experts delve into the pressures companies face and discuss
real-world examples of how well-intentioned sustainability
efforts can sometimes lead to misreporting and potential fraud.
But it's not all about the pitfalls, they also offer essential
guidance to those new to ESG. Emphasizing the importance of
starting with existing resources, focusing on materiality, and
setting up the dedicated cross-functional ESG team.


 


Don't miss this invaluable conversation, so let's get started.


 


[00:00:55]       < Music
>


 


Dan:             
  Doug, I mentioned the ACFE's Fraud Triangle
earlier, and I'm eager to hear some of your perspectives on
applying that Fraud Triangle to ESG. 


 


Doug:           
  Thank you, Dan, it can be done too. It's a
familiar construct, and I was fortunate to be an in-house at a
Big Four when Sarbanes-Oxley hit. And at the very beginning of
designing internal controls and testing internal controls, we had
to consider the possibility of fraud.


We had to design controls to prevent fraud, in audits we had to
detect fraud. 


 


Being an environmental specialist, and then with the IIA coming
out with changing their IPPF, their framework, to require testing
for fraud. I've been testing for fraud and considering fraud for
20 years, in the environmental space since 2002.


 


It looks a little different for ESG, but not as different as you
might think. There is pressure, pressure can be, "We've got to
get this report out."


 


"The customer wants this answer."


 


"We have to say, for example, that our products didn't come from
Bangladesh, so what the heck? How will they find out?" There's so
much pressure. I see that people are involved in ESG, in this
non-financial reporting, as an add-on to their jobs. It might be
20% of their job, and it's the 20% between 120 and 140% of what
they're supposed to do. People are under, and companies, are
under tremendous pressure to put the right answer out
there. 


 


They have the opportunity to do so because the controls are not
designed, and have not been implemented with the potential for
fraud in mind. So where there are weak controls or no controls,
the opportunities are there. I see this comes into play, also,
when data and information comes from outside the
organization. 


There's this tricky thing where so much of what we do, in ESG, is
not only what the organization controls but what the organization
can influence. There are some challenges there, how do you
control what you don't control? 


 


So the opportunity is there because the controls can be weak or
nonexistent. And the rationalization can be, "Well, everybody
does it." 


 


Or "It's not about money, it's about prestige."


 


"It's not really this, we want the award." We've seen, for
example, there's a magazine, an organization, that rates
colleges, the 10 best colleges in each thing. And we've started
to see, in recent years, where the colleges are even fudging the
information to get the prestige of being in that award. That may
have secondary effects for how many people go to that college or
what they're willing to pay for tuition, but that's fraud. 


 


In my book, if you submit data and information that is incorrect,
or inaccurate, or misleading, with the intent to deceive at the
expense of others. Especially if that turns into actual or
potential financial gain, I call that fraud. So that applies on
all three sides of the triangle. It's just a matter of thinking
about this ESG and non-financial world and how that can happen.


 


Dan:             
  Excellent, Doug. Yes, maybe, just to add a couple
of extra points around those pressures and incentives. Today we
are seeing that there is incentive compensation for certain
executives that is linked to various ESG measures. If you think
about that and the opportunity for management override of certain
controls that are out there, that's a great incentive. 


 


If you're going to get paid a bigger bonus because of greater ESG
metrics, and your ESG, for example, your emissions information is
held in Excel spreadsheet, which in many cases that is the case.
I saw a survey, not so long ago, of more than a thousand
executives saying that, I think, it was 86% of them had their
emissions data just sitting in a spreadsheet.


 


And if you could change that with a few keystrokes, at the
executive level, to boost your bonus, someone might do that.
Other things I think of are from an incentive or pressure
standpoint. Things around ESG-linked bonds or credits where there
are a key performance indicators and you're required to maintain
those metrics, to maintain certain interest rates or payment on
your bond. Those things are out there and they're going to
influence some portion of those that are held to them. Catie,
maybe, you have some other thoughts around this as well?


 


Catie:           
  Yes, Dan, so one of the things that we're seeing
in ESG, especially because people are so compelled to make great
strides on their data and to make progress towards their targets,
in a very quick manner, is there's an emerging market of
solutions that some are absolutely l...