On-Demand ESG Webinar

Compliance ESG Webinar Transcript

Speakers: Kayvan Alikhani(Compliance.ai), Jeffrey Smith (LawVisory), Carolina Murphy

INTRODUCTION (Sheila)

Thank you everyone for joining us. Today’s webinar will be a closer look at ESG and where it’s headed, I would like to introduce Kayvan Alikhani, Our CFO and co-founder of Compliance AI. Kayvan, please go ahead. 

Kayvan Alikhani (Kayvan)

Thank you so much Sheila and I’m very honored to have Jeff and Carolina as co-panelists. Jeff has amazing experience as a compliance practitioner.

 <To Jeff> (Is that a good way to position that Jeff? ) Both on the compliance and on the risk side and (of course) on counsel. He has been a head of legal at various organizations, Carolina (thank you so much for joining as well) is a strategic advisor to senior executives and organizations that are looking to have a sustainable ESG strategy. Thanks to both of you for joining today. 

Really, I’d be hard pressed to find a single meeting with compliance officers/risk officers that we have at Compliance AI on a day-to-day basis. Over the past, I would say probably a couple of months, (maybe three) where they haven’t asked, “where are you?”  (in terms of your coverage) for environmental, social-governance related rules/regulations, write ups, thought leadership, guidance, white papers, and also even enforcement actions.  Where are the regulators actually finding (as it relates to ESG). It’s very much a hot topic, heading into the next year. I want to first provide a level-set perspective on the history of environmental, social and governance related regulations, rules, and also guidelines and frameworks. What are those frameworks and which ones are most effective? How do you set the bar for becoming compliant with environmental/social governance related to regulations and looking into our crystal ball-(What do we expect to see coming into the future?)

With that, Jeff, if you can give us a bit of a history lesson on ESG? That would be really great. 

Jeffrey Smith (Jeff)

Sure, yeah, I’m happy to. It’s a really fascinating area to see how far we’ve come as a human race, honestly. If we go back to a seminal case: in 1919 the sentiment was that corporate profits are the most important thing and the only duty of any corporation is to its shareholders (to maximize corporate profits). We started there in 1919, with a Supreme Court case in Michigan, that was actually a case between Dodge and the Ford Motor Corporation. The Dodge Brothers created Dodge Motor Company after that, to compete with Ford. So we’ve come a long, long way and (obviously), that was during the Industrial Revolution, then we had World War II. After World War II, we started seeing some movement in this area starting in the 50’s, surprisingly. As far as the timeline (Carolina will talk more about this) but

we actually started with focus by institutional investors (associated with some labor unions) in their investments. Of course, it grew from there. Initiatives were taken up by countries, and then globally (global initiatives), as we’ll see. Culminating in one of the most seminal points was in 2004, with a former UN Secretary General Kofi Annan, who wrote to over 50 CEOs of major financial institutions, inviting them to participate in a joint initiative, (under the auspices of the UN Global Compact), with the support of the International Finance Corporation. This was government and the goal at that time was to find ways to integrate ESG into capital markets. Then a year later, there was a report that was produced called “Who Cares Wins” by Ivo Knopfful. But Carolina I’ll actually pass it over to you, to kind of talk in more detail about some of the things that happened in this remarkable and interesting history of ESG. 

Kayvan

Before we go there, you started off with kind of the corporate objectives and shareholder value, potentially being at odds..

Jeff

Right. 

Kayvan

So maybe we can think of that as part of the mandate of the bylaws of a C corporation (or Capitalistic Corporation) in general. Maybe now we can see more and more of the formation of B Corporations, specifically in the United States, which have a slightly different set of goals and objectives (that’s not the number one objective is it?) Are we seeing a little bit of that, or is that not happening? It’s still under the same structure as a C corporation, with the same bylaws, that tries to find the intersection of shareholder interests with those of environmental/social governance related goals. Is that what we’re seeing? Or is it mainly just changing the formation of the company altogether? 

Jeff

Yeah, I think what I’m seeing is there’s still the C Corporation structure. Still, by law, (actually in most states), there is a requirement to maximize shareholder value, that still is very much wired into the DNA of pretty much every corporation. However, with the B Corporation, companies can voluntarily associate themselves with best practices and doing things for humanity (and other good causes) and can be recognized as such. Then, of course, a lot of the pressures that are at the governmental level, (and we’ll talk about this more) but coming from the governmental level. It’s coming from special interest groups, from international organizations that realize that we have to attack this collectively. Otherwise, the impact is going to be minimal. So I think it’s more external pressures now that are really causing people to say, “Okay, we better do this.” Laws are changing that require public companies (subject to public disclosures) to change the way they’re doing things. Now we’re seeing a movement towards more self-regulation, even though it may not be required by law, but it’s more of a self regulation and implementation of best practices on an aspirational level. 

Kayvan

Absolutely and you refer to a more detailed timeline. So let’s dive in. What really triggered this?  What key frameworks have been established through time? Obviously, this goes to 97. The next slide takes us all the way to, hopefully, near the present term. So if you guys can walk us through this timeline, that’d be really helpful.

Jeff

Sure.

Carolina, feel free to feel free to talk about some of these highlights that are of particular interest to you.

Carolina Murphy (Carolina)

I think one of the most important things that’s actually the current argument that some folks are confusing,  (Sorry, for the background noise) 

They’re confusing ESG with a socialistic point of view, like Walker when he really isn’t. If you look in your timeframe and all the arguments that he raised in the 60s all the way to the 70s. It’s pretty capitalistic. Also, if you look at the CFR, the definitions used by the CFR Institute, they’re very different approaches. You cannot make impact investing with ESG. I think unfortunately, there’s a lot of mixtures happening and a lot of confusion. Also, if you look at the framework, the UN Convention of finance framework, the definitions are very different. If you look at the UN PRI, the definitions are even more clear, ESG metrics will be used as a strategy, as well as a metrics for your financial institution. The stability and results (as well as the way to measure results) for financial institutions. Not necessarily social metrics, per se. (They’re part of it, but they’re not the core focus). 

<To Moderator> if you go to the next slide.

Also, if you look at the UN compact, and you read all the descriptions on the UN compact in the syllabus, at the very end, you will learn definitions that are pretty clear, (especially for the lawyers in the audience.) I think that it’s a very important piece of information to take into account: the definition from the framework versus the definition imposed by the media ( based on recent events). Historically speaking, the definitions are very clear and a lot of the ESG metrics are out there. They directly tied results to financial performance, not necessarily to philanthropy.

Kayvan

Jeff, what would you like to add to this brief history timeline? Which ones do you want to highlight? Ones that have been consequential, raise the awareness and also raises the participation level? Do you think it’s been more “we have a framework, we have a mandate” carrot stick? Is it a balanced combination of both? Maybe we can talk a little bit about the drivers for issues, but over this timeline, which one do you want to highlight further?

<pause>

Jeff, did we lose you? 

Jeff

Oh, yeah, sorry. My internet just paused momentarily. Can you repeat the question, please?

Kayvan

Actually, let’s go into the next discussion. Really, what are the drivers? You know, above and beyond the historic framework? What are the drivers towards compliance? Maybe Carolina can get us started. Regulation is obviously a driver but how do we see that and how is that working? Maybe we can also touch upon politics and special interests. And Jeff, if you can give us a sense also for the institutional social conscious drivers for ESG, that’ll be great. Carolina, let’s hear it on the regulatory side. 

Carolina

On the regulatory side, what we see I think is a natural evolution for the industry to start having more incentives, (as well as penalties) for those that are non compliant. They call them green washers, companies claiming to be doing ESG. They’re claiming to be investing based on ESG metrics. And they’re actually not, unfortunately, their reports can be used as an indicator of compliance. And I think that has a lot to do with what the FCC has been debating since 2008. Actually, if you look at the minutes, that’s not a new topic within the SEC, they’ve been talking about it ever since we had the financial crisis and the credit default swap crisis in 2008. And if you look at the UN prior to that every show on the timeline, the debates have been going since the 80s, (you can even say 90s) as a framework: since 2004. So it might be new to some folks in the investment industry but it’s not new to a lot of us on the regulatory side of things. And as a result, we can also see for those concerned about financial risks, you can see the example of Apple or Microsoft. In Brazil, we can speak about Valle, the company that had a huge reputational problem, and they lost massive amounts of money (in the billions) of market share almost overnight, part of it was for not managing their reputation, and also for having ESG reports that turned out to not match reality. So there is a huge financial risk tied to regulation. And it’s very useful for all of those under the regulatory compliance side of the business to be aware of. I will leave it to Jeff to talk about legal terms.

Kayvan

Yep, maybe closing on that thought: So have we truly gotten there? Where the reputational impact of being “singled out” in the news or through the buyers who are now environmentally conscious, or socially conscious? Is the impact so high, that it forces organizations to reconsider? Are we there? Jeff, do you feel that that’s already arrived? Or not yet? Is it kind of like a checkered-type situation right now?

Jeff

Yeah, I think we have arrived. I think shareholders and investors are more and more interested in what companies are doing for the planet (or what effect or impact they’re having on the planet). There is more of a consciousness around that. Thank goodness. So yeah, I do think that we’ve arrived, but we have a long way to go still. So we’ll talk more about some of the regulatory side in a bit (specifically in relation to the SEC). But yeah, I agree with Carolina that the regulatory side is obviously a major part of this. I think we’re just going to see more and more regulations as we go forward. On the institutional investment side, what I’ve seen is that there are a lot of mandates that a lot of institutional investors have in their investment policy statements.Those mandates require a certain amount of focus on ESG related investments. So massive amounts of capital has to be invested with the idea in mind that some of it will be invested in ESG focused projects (or funds of that sort). Because these are such massive dollar amounts, this definitely has a huge impact on companies, because companies want to have enough capital, and they want to have enough investment, or enough interest from investors. So they are changing when it comes to certain types of industries, digital asset communities, for instance, and miners. They’re very, very sensitive to this, because they realize that if they don’t have a focus on ESG, they’re probably not going to get investments from the institutional marketplace, or even major high net worth individuals. So they are very sensitive to this, and they are actually adapting.

Kayvan

Carolina? <pause>

 <To Jeff>Oh, sorry, go ahead. 

Jeff

No, no, please, please go on. 

Kayvan

So Carolina, you and I had an earlier conversation, you were talking about the green bonds that have been issued as a driver (as a carrot incentive). Can you talk a little bit about that? Some initiatives that we see in the tech world and how is that being embraced? And is that resulting as a key driver for ESG compliance and adoption in general?

Carolina

Sure, I’ll give a good example: Google raised a massive amount of money issuing a green bond a few years ago, I believe. (2019, if I’m not mistaken). The amount was 5.6 billion. It’s almost a whole entire new company. And those funds have been used to not only drive the Diversity and Inclusion Initiative, but also to bring in the infrastructure. If you look at the offices they have (not too far from where I am, here in New York), they changed the retrofitting of the entire office. They created a green space and a public space as well, for the folks that live in the area, new Chelsea, on 23rd Street and it’s been amazing. They are renovating. If you’re in the San Francisco area in the bay, you will see they have a whole new campus, it’s beautiful. That’s actually water positive, not just net positive for electricity, but also for water. Also zero emissions. And then even above platinum standards, so if you measure the building based on LEED standards for green buildings, it’s amazing what companies can do, (especially if they have receivables). If they can, they’re at a point in their life where they can use your bonds. It can be extremely, extremely beneficial because of their lower interest rates and not just mutual funds, but also all sorts of institutional investors and pension funds.

Kayvan

What range have we seen? I know we’re talking about venture funds and private equity funds. And we see “put your money where your mouth is” in terms of investment commitment on the private equity side as well.

Carolina

Yes, but private equities are very quiet about it. They’re buying the company that they’re going to talk about once they’ve effectively had those studies and the results, I think in the public sector and the issue of public bonds: bonds and public markets are different. 

Kayvan

I thought there was a pledge by the private equity industry to invest a substantial amount of dollars on ESG related assets. So I don’t know if that’s a pledge that’s been kind of like a benchmark or basically binding clauses associated with it, or is it more lip service? I think it was actually in the trillions. 

Carolina

Yeah, in the US it is about at least two trillions. And the fact depends, there’s so many pledges right now with an alphabet soup with Penny, just like ESG standards where there’s 600 Plus ESG standards out there, we select the ones that are more useful to the company we work with. Same thing with pledges, there’s hundreds of pledges out there, throughout the world. The graphical alliance is the most famous one, technically, that one is in 120 trillion. We’re Latina with a B, which is huge. But the challenge is enforcement. Pledges are beautiful, but the challenge is enforcement. And I think in the US, the private equity industry is actually being very serious about how they’re going to implement. But again, enforcement is a challenge. However, depending if the company eventually became publicly listed, you would have to comply with the exchange. So NASDAQ has very strict rules, as well as pretty much every single exchange out there in the developed world. In Europe, same thing. So I think that’s where the carrot is, the exchange. The possibility of going public and having higher standards presents your investors well, especially this social industry, because we think about the pension funds, the amount of power and dry powder that they carry now..

Kayvan

I’m a company, I want to adopt ESG, I want to look at environment, environmental, social governance related (let’s call it) guidelines. As you said, there’s a wide variety of frameworks to select from. You mentioned, I think you just said 50, if I heard it properly, but here, and maybe you can start it off by talking about some of these and some of the adoption of these frameworks as well.

Carolina

Sure, the CDP is the most popular one, a carbon disclosure project (a nonprofit) that’s been around for quite some time. They set standards throughout the world. And they also have standards for benchmarking your company against your competitors. And they become very popular in our greenhouse gases, because they are the number one metric, basically the number one framework, that can be used for greenhouse gases standards. So if you’re producing computers, and you’re trying to benchmark your production against your competitor, you reach out to the CDP and they can issue your report based on the parts and the products and the raw materials that go into your computer. Same thing for phones and for pretty much any product out there. They’re the most robust when it comes to greenhouse gases. Again, if that’s what you have to comply with immediately. So let’s say, well the US government just published the guidelines for their supply chains to be compliant with greenhouse gas emissions and scope three. The CDP will be a good framework to start with. Second framework, I will recommend the GRI because it’s global and is the oldest one. The GRI also has the publication (if I’m not mistaken) 505, 405 and 406 which is diversity inclusion and equity. It’s very very important for special manufacturers that are worried about child labor to make sure they can show that there’s no child labor, no illegal labor or prisoners labor within their supply chain. The GRI has a very, very respected reporting structure and it’s been around for decades, so it’s the oldest report. The next one is the GSI, but I’ll let Jeff talk about it, because that’s more in his realm. Also to let you know about Europe: I will say the JIRA is widely used in Europe, but you also have the IFRS (which is the toughest framework in the world right now). This is a framework that’s going to be imposed by the European Union onto all the companies that are based within the European community. 

Kayvan

Yeah. Jeff, give us a sense of the Dow Jones Sustainability Index sounds like something that would be a new “up and coming” index, or is it already well adopted and looked at as a reference? 

Jeff

I think in the US, it’s pretty well known.The DJSI publishes the corporate sustainability assessment, the CSA, and provides simple sector specific disclosures for public companies. The way it works is that the 2500 largest companies in the s&p Global broad market index, are evaluated and scored.

The focus is really just industry specific: economic, social, and environmental criteria, that have material value to investors, as far as the scoring. The way that works is the DJSI reports a sustainability score between zero and 100 and it’s ranked among its peers. Then the top 10% highest scoring organizations in each industry are highlighted in the index. 

Kayvan

That’s basically how environmentally focused, right? It’s not ESG. Altogether, it’s more environmental. Right?

Jeff

Yeah, I think it is, definitely. It does have some social aspect to it, but I would say it probably leans more towards environmental. That’s correct.

Kayvan

Very good. Well, you know, this is kind of on the framework side and these are nice. It would be great if you could adopt this framework, we recommend you adopt this framework. But, in the US specifically, as it relates to the SEC, now, it’s a matter of “Wait a minute, you also have to comply with these rules, not just a set of framework.” So Jeff, talk to us about this proposed rule that has come out by the SEC, and how does it relate to ESG and ESG-related funds? 

Jeff

Sure. So this is really targeting those organizations that have to register with the SEC, in some capacity, therefore giving the SEC jurisdiction to supervise and ultimately bring either investigations or enforcement actions against the entities. So for instance, it would relate to what are called Registered Investment Companies. That’s a fancy way of saying mutual funds and ETFs, predominantly, also business development companies. And then registered investment advisors who are obviously those subject to a fiduciary duty under the investment advisors act, but they’re registered to provide advisory services. And then certain unregistered advisors, perhaps exempt reporting advisors, who also still have to report with the SEC, but are not technically registered. What this is really focused on is the disclosure aspect of the securities laws, which is how the securities laws primarily work in the US. So the idea is that if certain disclosures are not made, or they’re not made correctly, then there can obviously be problems with the SEC. For instance, fund prospectuses annual reports, or what are known as the Form ADV advisory brochures, (which is EDD, part 2-A), that is where those disclosures are predominantly going to be reviewed, and ultimately be subject to supervision. To get into a little bit more detail, the proposed rule is sort of saying that there’s a layered tabular disclosure approach for ESG funds, specifically to allow investors to compare ESG funds at a glance. So the idea is they want disclosures that are useful and actionable, which makes perfect sense, because there’s so many disclosure requirements out there. I think everything gets lost in the noise. They also want to require certain environmentally focused funds to disclose the greenhouse gas emissions associated with their portfolio investments. Which makes sense, however, it could be challenging to actually live up to those disclosures, because you have basically a basket of companies. How do you collectively quantify all of that and then report on it accurately? I mean, I’m sure it can be done, but it’s going to be a little bit more difficult. 

Kayvan

Yeah, disclosures are a big deal. So, no compliance ai webinar would be complete without the mention of crypto in 2022. Crypto and certain digital assets require mining and the mining is notorious (or at least has been associated with) high energy usage. What is the FCC doing? And what is the role in terms of regulating digital assets markets, and the intersection of crypto mining meets ESG? 

Jeff

Great question. So I think the best way to start the discussion in this area is to realize that once again, the SEC is driven by jurisdiction. So they have jurisdiction over securities, but they don’t have jurisdiction over non securities. Several years ago, the SEC took the position that Bitcoin was not a security and the head of corporation at the SEC originally said that Aetherium was not a security. However, Gary Gensler is sort of pulling back that position on Aetherium, after its merger, and after it became basically a non proof-of-work standard. But even with Bitcoin, which is subjected to a proof of work, and therefore is fully decentralized and not a security. That way that’s being addressed is on the mining side. When you look at the energy and the environmental impact of mining, which we’ll talk more about, there are certain ESG related requirements and disclosures that have to be met. So, for instance, public mining companies will need to have (probably in the future, very soon) and perhaps they’re going to have to have certain disclosures around their environmental impacts. And then the investment funds (or investment advisors that are making it) provide advice or bundling some of these investments together also have disclosure requirements.

Kayvan

So you just talked about whether this is fact or fiction in terms of the environmental aspects of mining. I’ve seen the impact of it at a national level in many countries when it’s used and abused. But talk to us about that. I’ve noticed this reference we had over here talking about the Cato Institute report, but what are we seeing? Of course, some environmentally friendly (let’s call it) “cryptocurrencies” have emerged as well. 

Jeff

Yeah, absolutely. This is such a fascinating area. So obviously, you have the extremes, which are China. China was the biggest bitcoin miner in the world. The government made it illegal for various reasons. No, I don’t think it was entirely environmentally driven, I think it was more about controlling money (and having control through the central government). That was the primary reason but it was having a significant environmental impact. The idea was “just produce as much Bitcoin as possible and forget about the environmental impact”. Now that there is a consciousness around the environmental impacts of mining Bitcoin, and similar proof-of-work types of technologies. What’s happening is, you’re all of a sudden now getting response from the various regulators around the world, (particularly New York, for instance.) Actually this is very timely. Just yesterday, the New York governor signed into law one of the most restrictive laws in the United States on regulating cryptocurrency mining, which makes it the first state to impose such a ban. The bill says it triggers a two year moratorium, which means it has to stop writing new permits for crypto mining companies that are powered by fossil fuels, and use proof-of-work authentication methods. So the idea is no more fossil fuels to be used for Bitcoin mining in New York. This is gonna have a massive impact. It’s going to push everybody to renewable energy sources. The challenge is that in New York, most people work off of the “grid system.” The grid is a blend of energy sources and you have to negotiate with the power company to determine which energy source you’re going to pull from. It’s going to make a very interesting challenge for all of the Bitcoin miners. Now at the same time, what’s happening, because of this push on the ESG side, because of the regulatory changes, this is actually stimulating innovation and efficiencies on the mining side (with the miners making them way more efficient: using less water, using less energy. And on the renewable energy side, the mining and mining operators are moving towards renewable energy sources and super cheap energy, such as flare gas, So they’re actually creating a positive environmental impact on this, and they tend to smooth out the demand for energy over time, which can be very helpful to certain rural communities. So it’s actually evolving, and the mining community is playing ball and is doing what they can to contribute to ESG but at the same time, trying to sustain their successes as operators.

Kayvan

That’s one side, Bitcoin, but of course, there’s (at last count) thousands. Yeah, actually they are not mining at all. The methodology and the whole process has entirely changed to be more energy efficient or ESG-friendly. 

Jeff

 100%. Yeah. So Aetherium just moved to proof of stake, right? Which uses, you know, way less energy. It obviously introduces its own challenges, its own problems. But yeah, then you also have hybrid coins out there that are doing both proof of stake and proof of work. So there is a lot out there. Yeah, go ahead, please. 

Carolina

I’m sorry, I will give the example of Iceland. That’s the US geothermal system. Iceland is one of the countries in the world that has dual term loans. So there’s Costa Rica, but Iceland does have its own mining industry as well. And it’s a perfect example of what can be done, right. And it’s not rocket science, it’s feasible. Another one is heat pumps, they’ve been using Denmark to my knowledge. And I remember, (I don’t know if you guys remember), but early on, the first kind of “clean tech” bubble back in the mid 2000s. A lot of companies such a Yahoo, Google Microsoft: the data centers, they were using solar as well, on top of a lot of them. Because some of the data centers are located in remote regions in Arizona, where there’s extreme heat, and when you put solar panels on top of it, it also helps reduce the temperature for the air conditioning. I don’t know if you guys remember that example as well. 

Kayvan

Yeah. I mean, temperature is one side, but the big driver was just consumption. And in Nevada, specifically, prices went up and crypto mining declined as a result of it. And of course, states like New York and California. Similarly, it’s not about cooling things down. It’s also about the consumption itself, in general, is extremely high. So as you said, Iceland may be the example of using alternative ways of either powering it or cooling it down or changing it entirely from proof-of-work to proof of other types of methodology. Yeah, sorry.

Carolina

Yes, because the servers have to be kept at a certain temperature as well, on top of all the equipment and its massive consumption. Absolutely, as Jeff explained in detail. And again, there are a lot of creative ways to tackle it. If you issue a green bond, you can use a huge part of your green bonds to actually change the source of electricity as well. And depending on how much electricity is produced, you can sell it back to the grid at a very high price. That happened with Yale University. If you look at their endowment, a big chunk of their profitability actually comes from the fact that their net positive electricity they sell back to the Connecticut grid. This is one example out there. It’s a creative approach that’s been done by universities. 

Kayvan

So we talked about the benefits, the green bond, the incentive rules. But of course, as an organization, you’re usually looking at the enforcement actions as a measuring stick of “how serious are the regulators?” and “why am I even thinking about this, if I’m not necessarily socially conscious?” Just doing this as a way to basically adhere to a certain set of regulations to avoid enforcement actions, looking at 2022 to date. I saw a fresh enforcement action settlement this morning with a large FII here in the United States that happened literally today with the SEC, but the numbers are fairly low in the millions of dollars. You see some Environmental Enforcement, where they’re charging (like Mellon) for misstatements or misleading statements on the decisions that were made. The second one, Vail,  manufactures iron ore and is an ore producer. The impact that it had from an environmental and social perspective was what the FCC brought forward. And of course, the failure to adopt written policies and procedures, they felt was a socially inadequate approach that was used by wide investments, which is an advisory service provider, as well. (So that trends.) When we look at compliance.ai as an environmentally, socially governance-related environment: enforcement actions, the numbers are not necessarily comparable to the other types of enforcement actions that have been issued. But Carolina, you mentioned an interesting one occurring in Europe that could have far reaching implications specifically around Shell. Can you talk a little bit about that?

Carolina

Sure. Shell was interesting because it was shareholders (basically shareholder actions). They gathered with other industrial institutional investment sides like pensioners. They basically press the Dutch government to take action and as a result of that, if you actually read all the articles and read through the lawsuits, Shell actually changed its headquarters from the Netherlands, they don’t drill Dutch oil, changing headquarters to London. But now I guess in London, they have also been hit with a series of different regulatory structures that they didn’t plan for, they might be going back to the Netherlands, it sounds like a fortunate thing. And in Brazil, they happen to Petrobras as well, the Brazil national oil company, which is partially private and listed in the New York Stock Exchange. They will also find significance, (mainly related to the governance,) the G for ESG is not necessarily environmental, which is the case for Shell. That’s been happening a lot throughout the world. And I think this is going to happen more often. Therefore, companies really need to have their compliance metrics and frameworks in place to avoid (again) not just the fines, (the fines might be just a drop in their big bucket of cash). But I would say, the reputational risk, because then you lose like Valle: $4 billion in market share. It’s not little change, that’s a significant amount of money, and the shareholders will be upset. And of course, the board gets ousted every time something like that happens. So there’s a domino effect in my experience. 

Kayvan

So you heard it in this year’s first compliance.ai webinar, the way to avoid the fines is to change your name and move. Move your headquarters to another country. And that gets the work done. So that’s on the carrot stick side. But of course, there are some model citizens and maybe countries or jurisdictions that are doing a great job of adopting ESG related initiatives. Carolina talk to us about where we’ve seen that and Jeff, feel free to add other input or areas that you’ve seen adoption. Carolina Go ahead, please.

Carolina

Sure. Well, Switzerland literally just announced today that they are going to be implementing tcfd, which is a task force for (quite basically) the whole concept of climate risk is financial risk. So therefore, any company with a market value of 20 million Swiss francs, you will have to comply starting January 2024. They are basically doing what the FSC is still debating about doing CFD, they are also considering the NFT, which is beautiful, because that’s biodiversity. So they’re also going to be putting a price on the biodiversity risk of your company, being in compliance with that. And that’s still being based in Switzerland, they already have their CFD report in place. It’s not mandatory, again, it is recommended, which is the best way I think to transition for a new company. If this is new for anybody, it’s not rocket science. But it’s not new for all of us. Some of those reports are also still in the making. It’s version 2.1. So we also have to be candid about the reality for the corporations out there. The first reports are never perfect, but “done” is better than perfect, I believe. In Switzerland, news came out today, (it’s been debated for a long time) the UAE is also moving towards they have pledged for net zero as well, which is amazing. They are also hosting the next copter Conference of Parties in 2023. And as a result of that, they are really serious about trying to cut their emissions because they know their oil reserves are not going to last forever. And they are proactive about it. It’s beautiful. And I wish more companies and more governments were honest about it. Also the government of Singapore, I know, has pledged for net zero by 2050. Maybe it’ll be earlier than that. What else… So there’s a lot of governments actually trying to be ahead of the curve and starting the regulatory studies project, the regulatory framework so their companies can be very competitive and can be ahead of the pack as well. 

Kayvan

And of course, none of the images on the right are Switzerland, maybe we should just show a beautiful box of chocolate to represent Switzerland. But you know, speaking of adoption through investment, often like decoupling the E and the S looking at a probably lopsided level of investment that is going into and is being scoped out for environmental related compliance. But Carolina, you’re talking about a trend changing and skewing now more a little bit towards a balanced view both towards environmental and social objectives.

Carolina

Yes, they overlap, right. So the E and the S and the G if you look at the original framework, there were three circles and in the middle was like the ideal, I guess, the holy grail of a framework. So the holy grail of standards, right. And depending on your industry, the standards will be very different, like if you’re in consumer products, one standard is to clean up your supply chain, and to measure and publish greenhouse gas effects as well to make sure your employees on the retail side are happy to have a proper distribution. Second, if you’re manufacturing something and if your bank lender is different, the reports will be different. That’s where I believe CFD plays a big role within these financial institutions. That’s the reason why I think the SEC is serious about adopting it. On the other hand, on the customer product side, I believe the GRI side of the reports are amazing. And they also have sub reports, but industry specific, which is really helpful. And as you can see, on the chart in front of us from Bloomberg, the change is out there: the change in mindset, the change in strategy, it’s happening. So then it’s a decision of your board and you see, “oh, you’re going to be ahead of the pack,” or “you’re going to be behind.” Are you just going to follow your peers? That’s something that’s worth thinking about because you and they can be a competitive difference for the future, for a lot of companies big and small, in my opinion. 

Kayvan

Yeah. Well heading seeking out the future. What do we foresee, you know, in terms of going into 2023? You know, in terms of regulations in terms of what organizations are going to be doing and what do we expect to see heading into the next year? Jeff, Carolina feel free to get started on that. 

Jeff

Yeah, sure. So I think what we can see happening in the US will probably be something that happens gradually outside of the US as well and globally. But obviously, there’s a huge focus on disclosure, and that focus on disclosure is expanding to where it will be, it’ll cover pretty much anybody that’s in the securities industry that has a disclosure requirement (which is pretty much everybody). Then because we know that where this push is coming from, it is to a large extent, global, I think that we’re going to start seeing other governments push things forward, so that their companies are acting prudently and taking into consideration all aspects of ESG, particularly the environment and social, it seems. So we definitely see more regulation coming. And also more enforcement coming for sure. And I think we’re just seeing the beginning of this right now. 

Kayvan

And Carolina, you mentioned the role of government, you think they’re gonna get more serious in 2023?

Carolina

I think so. Because actually the pressure is coming from the constituents, right? The electorate. It’s putting pressure on the new generations and putting pressure on (I believe) a lot of pensioners are worried, especially in the US. Because, again, climate risk is financial risk. And if you think of how this global population lives, (I don’t quote me on this) but 75% of the global population lives in areas that are prone to flooding, therefore, everybody’s at risk. So your real estate investment, which for a lot of people, that’s their biggest investment in life. They’re all at risk. So there’s pressure, I believe, 

Kayvan

It sounds like we’re done with pledges and moving into decisions going into the next year. Right. So kind of moving more to a practical realm, “I’m a business, I want to make sure I have a successful environmental, social governance related compliance program”: What are we recommending, from a “call-to-action” perspective to the organizations? What should they be looking at in terms of how they measure the success of those compliance programs?

Jeff

I think that if you look at these things, it kind of breaks down where changes can be made, or where they can be conscious of areas of improvement. So obviously, the carbon footprint being reduced that sort of front and center, but also energy efficiency improvements, like what we’re seeing in the digital asset mining industry. And then of course, you’ve got employee health and safety, product safety, and business ethics, right? God knows we need more business ethics in the world. And I think that’s at the core, pretty much ethics. It’s trying to enforce those ethics. And that’s really the challenge and reducing those ethics to policies and procedures that people understand and can actually comply with. Then to increase diversity within the board of directors. God knows we need more diversity there. You know, the leaders of our worlds should be a combination of our population, right? To be a representation of our population. And then obviously, inclusion is just very important as we move into the future. Carollina, please share any additional thoughts or comments?

Carolina

Well, yeah, and item one and two, I would say you can manage what you can measure. So knowing your carbon footprint is important. It doesn’t matter how big it is, you just need to know it’s like one of those numbers that you need to know because otherwise you can’t even start your projects. Unless you’re just paying lip service (green washing). So any CEO, any board out there, that’s industrials, even though you need to know what you’re measuring, you know your numbers. So knowing your carbon footprint is key in order to actually do efficiency improvements that will be effective. Otherwise, again, greenwashing. But eventually you might when companies engage in greenwashing, what we’ve seen so far as massive fines and reputational risks previously. And then, of course, employee health and safety is key, especially in developing countries as well, because we’ve integrated supply chains and social media and everything else. And nowadays, with satellite technology, all of that can be reviewed, as well, based on geolocation. If you’re operating a factory out of a prison camp, or not and so forth. That’s very established ethics, If you ever see the recent governance issues and the compliance issues in the crypto sector with FTX, right there is the newest example. And in the past, with Enron and all the other companies’ names, the nomenclature was different, but in the end, it was a failure of governance, in my opinion. 

Kayvan

And earlier, we were talking Carolina, you were suggesting that this cannot happen organically, the companies need to start looking at forming proper committees and task forces around these types of initiatives, right?

Carolina

Yes, because you need champions within a corporation, and you’d be surprised how many employees might be interested, they might be more inclined to the environmental side, or they might really like the governance and the compliance aspect of those metrics. The metrics are massive, depending on which framework you choose, that could be up to 700 variables. So there’s plenty of variables out there for folks to decide to adopt and based on their talents, and based on their personal passions is well within boards within C suite, and also within management, because you can have a top down approach, but you can also have a bottom up approach. And I’ve seen that actually with retailers recently, they’re starting to train the folks on the floor about the importance of some ESG metrics. 

Kayvan

Absolutely. And a big part for us at Compliance.AI is being in the know, in terms of what’s changing. I guess, a bill that you just heard Jeff mention in terms of the state of New York, or “what is the state of California doing?” Initiatives around the world, proposals, notices, guidelines: How do you keep abreast of this mountain of information? We have been collecting (and as a secondary aspect, classifying) changes that are relevant, specifically through environmental social governance (ESG) or collection of them. So users will be able to easily decipher whether or not it’s applicable to them to get a sense of what’s happening within other jurisdictions, or what’s coming down the pipeline in the form of enforcement actions by the likes of the SEC. We just saw multiple examples and we’ve seen at Compliance.AI the enforcement of action reporting, similar activities in the UK and elsewhere. And as Jeff mentioned, a lot of it is disclosure driven. Did you disclose? And did your disclosure match? What was already in place? Did you misrepresent and as you saw, some of the enforcement actions are very much disclosure driven. And ultimately, those are the type of enforcement actions that we help users track and then ultimately have a certifiable approach that can show a regulator that you were able to track, monitor, react and report on those changes, regulatory changes on a timely basis. I want to thank both Carolina and Jeff, for providing their insights and thoughts on this important matter as we’re going into 2023. I’m sure this is not the last time (I think we’ve already had three webinars on ESG a compliance.ai  this year alone) So there’s going to be more coming. This webinar is going to be available on an “on-demand” basis through our website. And once again, thank you so much, Jeff, and Carolyn for all your help. 

Jeff

Our pleasure. Thank you. 

Carolina

Thank you. Thank you for this wonderful opportunity and happy holidays

Kayvan

Happy Holidays to you as well. Absolutely.