ESG and the CFO with John Truzzolino, Director of Business Development, DFIN

Dana Barrett - Welcome to the Insider by DFIN, I'm Dana Barrett and joining me right now is John Truzzolino. He is the Director of Business Development for DFIN’s Global Capital Markets. John, good to see you.

John Truzzolino - It's so nice to be here, Dana. Thank you.

Dana Barrett - So we're here today to talk about ESG and why CFOs should care about it. So, we want to of course get into where ESG has been in terms of organizations and where it's going. But, before I dig into all of that, I need to know a little bit about you.

John Truzzolino - Sure.

Dana Barrett - So can you share a little bit of your background, your role at DFIN and how this ESG thing sort of came to be a part of your world?

John Truzzolino - Absolutely. So I started at DFIN in 2006 and it was just at the time the SEC was moving their reporting from filing an HTML format to filing in XBRL format. And XBRL stands for Extensible Business Reporting Language. And at the time, the role of the CFO who are immersed in financial reporting had no idea what XBRL stood for. It was a four letter acronym that made no sense.

Dana Barrett - Right.

John Truzzolino - So they brought me in the subject matter expert, to help the role of the CFO understand how this XBLR could be applied to their financial statements.

Dana Barrett - So where were you coming from, that you were already a subject matter expertise on this?

John Truzzolino - Yeah, so I had come from the printing world in the past.

Dana Barrett - Wow.

John Truzzolino - I had worked on printing documents for decades and realized that a certain point that would move from the printed document to a digitized document and put on the internet in a PDF or an HTML format.

Dana Barrett - Right.

John Truzzolino - And soon found out that, that information was no different than the printed document. It was just in an electronic format.

Dana Barrett - Got it.

John Truzzolino - And the movement would be to require that information to be machine readable.

Dana Barrett - Mm-hmm.

John Truzzolino - And machine readable allows you to embed metadata behind the information that gives it trust and transparency, throughout the document life cycle. So, that's where I became involved with the standardization of financial reporting, helping the CFO achieve this new requirement at the SEC for reporting.

Dana Barrett - So your sort of career, sort of evolved along with these data requirements, these changes in, from print to HTML to this XBRL, is that what it was called?

John Truzzolino - Yep.

Dana Barrett - I already forgot the acronym.

John Truzzolino - XBRL is correct.

Dana Barrett - Okay. I win.

John Truzzolino - Yeah.

Dana Barrett - But you know that, I mean, I feel like for CFOs who are focused on numbers and finances they're not before that they weren't thinking about format. They were just here's the report. Right? So, when we talk about did I cut off your background here, John? Because, I feel like I want to make sure we're caught up. So at DFIN you're dealing with ESG because you came in dealing with that format? How did that, what was the connection?

John Truzzolino - So helping the role of the CFO adapt to meet the requirements of the SEC I found that the new information coming, on environmental, social, and governance issues. The ESG data that companies were reporting in a voluntary framework would ultimately be required in a regulated document.

Dana Barrett - Okay.

John Truzzolino - And we worked to, to see this happening and have the standards developed for the metadata at the same time as the regulated information is required. And so it's the, it's the meeting of the two domains that excites me.

Dana Barrett - Right.

John Truzzolino - My technical background and the background on the ESG regulatory requirements will have metadata attached to them. And so the role of the CFO will now be in charge of this information, as it's reported, this data will be required to be audited by an internal and external assurance team.

Dana Barrett - Right.

John Truzzolino - And so the role of the CFO is elevated now into this reporting process. And we work with our clients to help them on our SaaS products, like ActiveDisclosure that gives them the platform to collaborate on these documents and work on the content which includes the XBRL tagging as part of the process.

Dana Barrett - So, if a CFO is listening to this right now and they glazed over, when you said metadata. Can you explain a little bit about just what metadata is and why it's important?

John Truzzolino - Sure. So metadata follows on the standardization of information. We need to work from a standardized framework. So you have your U.S. GAAP, accounting policies, you have your IFRS accounting policies. There are now new accounting policies for the International Accounting Standards Board on sustainability work.

Dana Barrett - Okay.

John Truzzolino - And so those, those elements within the financial reports will have clear metrics on water usage.

Dana Barrett - Yeah.

John Truzzolino - On, carbon, output, on, social elements on racial diversity within the company. These metrics need to be clearly, written down into technical terms that are incorporated into that metadata so that when information is communicated and today documents aren't read.

Dana Barrett - Right.

John Truzzolino - They're put on the website and bots read them.

Dana Barrett - Right.

John Truzzolino - Or artificial intelligence or machine learning. So that metadata goes to the artificial intelligence and gives more context to the information as part of their analysis.

Dana Barrett - So in other words, you might have a statistic of some kind around one of these, you know ESG metrics, that's, you see a number or you see some words in a number, but behind the scenes it's labeled as which standard it goes with.

John Truzzolino - Correct.

Dana Barrett - So, you know, the person viewing it with their eyes is not seeing that metadata, but the bot is saying, oh, that's that particular standard. I know what to connect this to.

John Truzzolino - Yep. This element of waste water or this element of water scarcity or my landfill reduction numbers or my CO2 carbon information is aligned with the CDP standard.

Dana Barrett - Right.

John Truzzolino - Is aligned with the SASB standard, is meeting the TCFD which is the Task Force for Climate Related Financial Disclosure. So all these acronyms become part of that metadata that can be reported for the intelligence of helping the analysis.
Be more complete and consistent as it needs to be comparable, across companies in the peer group, but also comparable across companies that I might be choosing to purchase, my, home furnishings from.

Dana Barrett - Right

John Truzzolino - So it's not just for investors anymore. It's for stakeholders that include customers, suppliers, employees that want to work for a company that have the same type of values that I embrace as part of my sustainability ideas.

Dana Barrett - I got it. So, I tend to go down the techie road cause it's interesting. And I do think for a lot of CFOs, again that's not their focus and they're not educated in technology. They're educated in finance, right? So these are, you know, where they sort of, you know need to know how they connect, right? How these things connect. And now we're talking about ESG becoming a part of compliance reporting. The CFOs are going to have no choice but to care and to start to manage this. Can you sort of talk about again where ESG measurement if it existed in reporting, if it exists, it was in a company and why it needs to get under the CFO now?

John Truzzolino - So in January, DFIN released our pulse survey that we did with Morning Consult, which looked at sustainability leaders within the public and private market. These are leaders in HR IR, illegal sustainability, and communications. And we spoke to them about the evolution of ESG reporting in their companies. And the numbers that they came back with on the survey said that 85% of them found that ESG reporting is burdensome. And another 75% of them said that this information will soon fall under disclosure controls and procedures. And 65% of them said that we will be bringing in the role of the CFO to provide greater oversight, of this process. And so we see that there's a clear path to how ESG was being reported on a voluntary basis and moving into solve the burdensome challenge prepare for the regulators and bring the CFO and her domain experience in putting auditable repeatable processes in place for this large data management effort that will undertake to take this information from voluntary reporting to mandated reporting.

Dana Barrett - You know, I think, you know, one of the things that pops into my head as we talk about this is that, you know, in the past, I guess and still to some extent in the present, right? But it used to be that all of what was being reported was around numbers. It was all about dollars and cents. It was all about the bottom line. And that was something that the CFO had complete control over. It was all coming out of their department if you will. But, now we're talking about bringing in data from a sustainability officer, from HR , from a lot of different sources. And so this, is, is now the CFOs going to have to start coordinating with these other roles in a more close way. Correct?

John Truzzolino - That is absolutely true. The pulse report also reported that 90% of respondents said this is a highly collaborative process.

Dana Barrett - Yeah.

John Truzzolino - And so you must reach out to these other stakeholders in your organization and build the journey together.

Dana Barrett - Right.

John Truzzolino - And DFIN offers solutions for that. Our Venue platform is a cloud-based platform where you could host all of your documents for the due diligence and review of your information. Our eBrevia platform allows you to add AI to the information for contract analysis or for supply chain review and ActiveDisclosure brings all of these players together to collaborate on a document that could ultimately be part of your 10-K or your proxy or a sustainability report. The role of the CFO will start to bridge the gap and develop a repeatable process. So, this is important because the board has a fiduciary role on oversight of this information.

Dana Barrett - Right.

John Truzzolino - And the board wants to align business strategy to these metrics and targets and they need this data in a monthly format or in at least a quarterly format so that they can measure these along the goals the company has set.

Dana Barrett - Right.

John Truzzolino - Traditionally ESG is reported once a year.

Dana Barrett - Yeah.

John Truzzolino - So the role of the CFO will help establish a more repeatable robust process for monthly and quarterly reporting to management. And the board, which will allow the management team to design executive compensation that include targets on diversity and inclusion. We recognize that there's an opportunity to elevate women in the company.

Dana Barrett - Right.

John Truzzolino - But we have a gap.

Dana Barrett - Right.

John Truzzolino - And we can start measuring how we can close that gap by using the SASB standards for those items. And so there are the SASB Sustainable Accounting Standards Board for material financial items. And so the controller and the CFO can use these tools to help establish the metrics and targets reported to the board to do more embedding this information into the long term strategy and value creation for the company.

Dana Barrett - So you know, if I didn't, let's say I decided not to use those tools. I'm going to, I'm going to go it alone. I'm going to, you know, just do this without I don't need all these crazy tools. Right. Does that mean I'm going to have to start hiring additional people under the CFO to manage all these, you know, all of this collaboration and all of this bringing together of data. I would imagine this is not an easy task, if you don't have the tools in place.

John Truzzolino - If you don't have the tools in place it becomes an arduous task to go out and maybe speak to a subject matter expert in ESG and then find another solutions provider for the software and then somebody else to help you write the document.

Dana Barrett - Right.

John Truzzolino - And another person to put that into a format that you can communicate in a design friendly document that has the same , graphics and images that the company brand does.

Dana Barrett - Right.

John Truzzolino - DFIN provides all of that. So we can differentiate ourselves from the service providers in the market that are offering these very vertical narrow items.

Dana Barrett - Yeah.

John Truzzolino - And build out a bridge to your team to utilize our resources for a fit for purpose solution on the entire end to end for ESG reporting.

Dana Barrett - Yeah, and because the CFO's always looking at the bottom line, you know, arguably when you are putting the right tools in place, instead of piece-mealing like you're talking about using some, you know some of these systems that just do one little part of it, ultimately you're saving money.

John Truzzolino - We are providing you efficiencies of scale.

Dana Barrett - Okay.

John Truzzolino - Allowing you to leverage our team from the beginning of the process to the end of the process and our software, at a lower cost. And the savings allows you to also build the knowledge set on your team, to begin to understand how I might take some of this knowledge and start training people within the company so that you can, you know build a future for ESG reporting within your company while leveraging our team and our assets to get that started rather than putting a person on software in your company, putting a person on ESG in your company or putting a third person on design and communications we provide all of that to you on your journey to reporting.

Dana Barrett - Right, and it's coming with all that knowledge sort of pulled together.

John Truzzolino - It is.

Dana Barrett - Right, as opposed to design doing its own thing in, in a silo, right.

John Truzzolino - Yeah, and the regulatory side of this is rapidly changing.

Dana Barrett - Yeah.

John Truzzolino - So the SEC put out a proposal for the enhancement and standardization of climate risk reporting. And so this requires the CFO and the C-suite to really pay attention to scope 1, scope 2, and scope 3. Which are the carbon reporting requirements that the SEC put in this proposed role.

Dana Barrett - Right.

John Truzzolino - Now, I always look for the silver lining.

John Truzzolino - Fortune 500 companies are already reporting on some of this information. And they're following a standard called the TCFD which is the Task Force for Climate Related Financial Disclosure. The SEC is also using the TCFD as the stepping off point. So they're leveraging existing platform that Fortune 500 companies are already using. So it's an easier process for them to build regulatory documents on a standardized reporting platform. And then for the smaller business companies that don't have the resources.

Dana Barrett - Right.

John Truzzolino - They can begin to build on the foundation of these larger companies that have laid the groundwork for them. So, it's a cascading effect that allows the companies to you know, to build on the work that these larger companies are doing on the scope 1, scope 2, and scope 3 of reporting landscape.

Dana Barrett - Well, and I think too, to your point, when they're when you're, you guys are already the subject matter experts and you guys are already following the regulations and knowing what changes are coming and how to prepare for them and building that into the tools, that they don't have to worry about keeping up with all of that themselves and the smaller companies, as you mentioned have that example to follow on.

John Truzzolino - Correct.

Dana Barrett - Yeah. So, I think that that's going to be huge because you talk about all these changes coming and I'm thinking, well I just got it working with the old way, and now I going to add this new thing. And that sort of sounds like, and correct me if I'm wrong, but that sounds like it's almost built in with the service you're providing.

John Truzzolino - It’s true. And so from the role of the CFO, you know she’s being challenged to identify the software, to identify the experts, to identify the process, to put in place the controls. They will come to DFIN who are their trusted provider for these services today for SEC reporting.

Dana Barrett - Right.

John Truzzolino - And we'll say to them that we have a program that allows you to leverage our team to facilitate all of those needs.

Dana Barrett - Right.

John Truzzolino - And so rather than listening to, you know 20 different pitches from new players in the industry that have no, experience with that company, we can bring in that experience, we can bring in the relationship and we can solve the business needs for that reporting team.

Dana Barrett - Right.

John Truzzolino - Using the work that we've done in our experience helping clients to communicate on ESG.

Dana Barrett - Yeah. That makes a lot of sense. I always love to get the real world example. So, can you and I know you can't always give company names or that kind of thing, but, can you sort of talk about a company that was sort of coming up against knowing they needed to do some of this and worked with, with your team, you know, and, and felt like, okay we feel confident moving forward. We have what we need in place to, to move to our IPO. Or, I don't want to put the example in your mouth, you know, words in your mouth.

John Truzzolino - So many companies come to us and they just don't know where to start.

Dana Barrett - Right.

John Truzzolino - And so we often give them an opportunity to walk through our five step process.

Dana Barrett - Right.

John Truzzolino - Which allows us to help them navigate their journey. The first step is a materiality assessment. What is it in your industry, that's important? We do a mapping of that materiality against your peers and we build a model that allows you to identify thematic messaging and report that information in a strategy document that is aligned with their long term value creation.

Dana Barrett - Right.

John Truzzolino - So that's like steps one through three.

Dana Barrett - Right.

John Truzzolino - Then four, is putting it into a document that is, you know designed and branded and then communicated in step five to the various stakeholders.

Dana Barrett - Right.

John Truzzolino - We did this, for a company using a SASB fact sheet Sustainable Accounting Standards Board fact sheet.

Dana Barrett - Okay.

John Truzzolino - We identified five thematic messages in a fourteen-page document that took us about six to ten weeks to put together. And in delivering that, in that timeline as soon as it was released, it was used on an earnings call.

Dana Barrett - Oh, wow.

John Truzzolino - It was picked up by the ratings firms and the company received higher ratings and rankings immediately for that process. So,

Dana Barrett - the Company then came back to us and said, that worked really well. What's next?

John Truzzolino - And, so now we're working on a full sustainability report which is probably a nine month engagement,

John Truzzolino - that will allow them to build on the platform that they created with that sustain SASB report. And hopefully get even more feedback from the market and key stakeholders like customers, employees, and communities that are now asking for this information.

Dana Barrett - I mean, that's a pretty good, immediate result. You know?

John Truzzolino - Yes.

Dana Barrett - People love that instant gratification. Not that however many, how many weeks did you say it was?

John Truzzolino - Oh, about six to nine weeks

Dana Barrett - But of course, that's you guys they're still doing their business running their, you know, doing all their work that's happening behind the scenes as far as they're concerned. And then they get this instant gratification with this result on their earnings call. That's amazing.

John Truzzolino - Yes. Yeah.

Dana Barrett - Yeah, So I, I imagine we're only going to see more and more and more of this regulation coming down the pike with ESG and it's just going to be instrumental for CFOs across the board at some point. Correct?

John Truzzolino - Yeah. And it, as it moves toward reporting on a regulated requirement so the SEC's regulating it in the EU. They have the green deal, which is the, a new requirement.

John Truzzolino - They'll be reporting in the EU using a different materiality standard but all this information and the requirements to be audited will bring in the controller we'll bring in the risk theme, we'll bring in the CFO. And I always try to leave on a good note.

Dana Barrett - Yeah.

John Truzzolino - So there are standards that help in that process. So there's the COSO standard for financial reporting that allows you to build on the principles that you've adopted for your financial reporting processes and bring them over to the ESG data that you're collecting.

John Truzzolino - So you can use existing frameworks and standards that are now being modified to support ESG data. So you're not starting from scratch. And that's a great way to just you know, to help solve a problem with existing tools. You'll have to build a little knowledge. You'll have to leverage experts with background. You'll probably need new software for carbon capture and accounting, but those items can be built on to existing programs like the COSO framework and follow those standards. Like the Sustainability Accounting Standards Board, and leverage the International Sustainability Standards Board which is the new accounting platform that's coming out with a baseline for all environmental, social, and governance reports to be used in jurisdictions around the world.

Dana Barrett - Yeah.

John Truzzolino - So there are, there are areas that are expanding and through this convergence we'll help the role of the CFO do things more efficiently.

Dana Barrett - Yeah. Well, there's a lot to take in, but I I think we get why the CFO needs to care.

John Truzzolino - Yes.

Dana Barrett - Yeah, for sure. So, John, very nice talking to you. Thank you so much for sharing your expertise.

John Truzzolino - Pleasure to speak with you, Dana. Thank you.

Dana Barrett - Really appreciate it. This has been the Insider by DFIN we'll see you next time.