ESG Reporting Journey with Frank Kelley, DFIN’s Director of ESG & Compliance Services

Dana Barrett - Welcome to the Insider by DFIN, I'm Dana Barrett and joining me right now is Frank Kelley. He is the Director of Corporate Governance and ESG for DFIN, and we are here today to talk about all things ESG, so welcome.

Frank Kelley - Thank you.

Dana Barrett - It's very nice to have you here. I feel like you're in the hot seat now. I get to grill you on all things ESG, but before we get to that, tell me a little bit about your background. How did you get into this world of ESG and what are you doing for DFIN?

Frank Kelley - Yeah, absolutely. So I'm currently a Director of ESG and Corporate Governance here, and I have about 15 years’ experience across the corporate governance in ESG landscape. I came to DFIN from ISS or Institutional Shareholder Services, where I was a senior advisor for a number of years. Prior to that, I spent a few years at McKenzie Partners, a leading M&A Proxy Solicitor. I began my career as a Compensation Consultant at Willis Towers Watson.

Dana Barrett - Interesting.

Frank Kelley - And specific to those endeavors, I actually covered oil and gas and electric utility, and this was at really the infancy or nascent stage of Cap and Trade, and some of those environmental metrics that would eventually be morphed into ESG and subsequently, although it was a serendipitous path to DFIN, very much aligned with my former background to become the Director of ESG.

Dana Barrett - Interesting, so the term ESG for people who don't know, there are so many acronyms in the world of finance, but in particular, this is Environmental Social Governance.

Frank Kelley - Correct. Yeah, it's a sort of word salad and acronym soup in the industry right now. But, yeah, Environmental Social Governance, and although those seem like disparate verticals, they actually aligned to form cohesive sustainability programs, policies on reporting.

Dana Barrett - Interesting, and so when you were talking about your earlier career, it started out more with some environmental stuff, and then all these other things sort of got added to the mix, let's be honest, as people began to care about them more.

Frank Kelley - Yes, absolutely.

Dana Barrett - Yeah, so when did the term ESG come to be? Do you remember?

Frank Kelley - Yeah, it's an interesting question. ESG really existed, I'd say in the background since around 2007 and 8 with cap and trade, but it really started to explode in the lexicon of your sort of lay individuals and various stakeholders probably within the last three years.

Dana Barrett - Okay.

Frank Kelley - And that's really been driven by a number of groups, including the SEC regulators and interestingly enough, activists, as well as index funds or index shareholders.

Dana Barrett - Interesting. Well, that brings me to a great question. because you mentioned a lot of the, for lack of a better term, stakeholders, who care about ESG, including the SEC. So what's going on in the world of ESG now, what's been changing, what's happening, what's new?

Frank Kelley - Yeah, absolutely. Well, there's a real stakeholder and I love that term stakeholder demand for ESG reporting. Historically, a number of companies did report on ESG, but it was what's called traditional CSR reports, and CSR reports were mostly qualitative statements, it was kind of this nice to have report touching mostly on social, some governance programs as well as environmental, and in the last, I'd say, three years, there's been a wellspring of reporting and specifically data-driven reporting around the various ESG frameworks, and that demand is increasing. With the recent SEC updates, it seems reading the tea leaves that this will certainly be mandated in some form in the near future.

Dana Barrett - Yeah. So when you're talking about CSR or Corporate Social Responsibility, I'm going to just translate all the acronyms that I know. I might get them wrong, but you know, going to go for it. But talking about that and the way that qualitative sort of reports used to be, it was more of like, we do this thing, we do some environmental good things, look at us or, you know, we treat our employees great. Check it out.

Frank Kelley - Yeah.

Dana Barrett - And now to your point, it's becoming more of, well, how do you compare to your peers? And the only way to do that is with that data, correct?

Frank Kelley - Absolutely, there's been a paradigm shift in the market and historically not to denigrate the old reports, they were great, but it was sort of, I used to call it kind of rainbows and kittens and butterflies.

Dana Barrett - Yeah.

Frank Kelley - And now they're all beginning to really be formed around the various ESG frameworks like GRI or Global Reporting Initiative, like SASB or Sustainability Accounting Standards Board, or like TCFD or Climate Financial Disclosures, excuse me.

Dana Barrett - Yeah. It's so funny cause I just said I'll define all the acronyms and then you just throw out three that I was like, huh? Okay. Well I want to get to those frameworks, but before we do that, talk to me a little bit about where the SEC is on all of this right now.

Frank Kelley - Yeah, the SEC, it's kind of a gray area. They've come out with guidance on ESG and specifically really climate change.

Dana Barrett - Okay.

Frank Kelley - And so companies are beginning to really have to define materially how they look at climate change and greenhouse gases, how they sort of have oversight of the program, and at the same time, beginning to report on what they call scope one or scope two emissions, which is really your direct and indirect emissions.

Dana Barrett - Okay.

Frank Kelley - There is some debate whether supply chain emissions will be included, but that's still a little bit fuzzy.

Dana Barrett - Yeah. Well, I sort of get that because that's not always necessarily under their control.

Frank Kelley - Yeah, absolutely. To be honest, and this is probably true of the scope three emission market, the accounting behind it and some of the metrics are still a bit gray. So a lot of companies as this begins to crystallize would rather report on scope one and two and not their supply chain emissions at this time.

Dana Barrett - Right, I do understand the logic behind that at least whether it holds, I guess, remains to be seen. Right? All right, well, let's talk about the three frameworks with all the initials that you tossed out earlier. So I’m not starting with ESG, is it SASB? Is that how you say it?

Frank Kelley - SASB, yeah.

Dana Barrett - Yes. Oh, SASB. All right, I'm learning. So talk about that one first.

Frank Kelley - Yeah. SASB in my opinion, is the most utilized framework in the market today. It really was champion beginning in 2011, Michael Bloomberg was one of the early champions of SASB, and it’s industry specific. So it was designed by industry experts to really parse out material topics that were material or important to 77 different industries.

Dana Barrett - Okay.

Frank Kelley - And because of that, companies often find it easier to report on, because it's the most apt or appropriate topics.

Dana Barrett - So you can like literally find your industry, see what the kind of guidance is for that?

Frank Kelley - Yeah. You can go on Google, look up SASB organization, you can type in your ticker and find your industry for a public company at least.

Dana Barrett - Got it, got it.

Frank Kelley - You know, the one thing I would say the inverse of that, it’s standards are not particularly rigorous. There is some debate because there's a little bit of flexibility with some of the SASB disclosures, and so therefore, although in my opinion, institutional investors prefer SASB because it is the most digestible. When you look at the leading issuers, the gold standard in terms of ESG, they still align with SASB, but they include other frameworks like GRI and TCFD.

Dana Barrett - What a lovely segue, Frank, thank you for that. So let's talk about GRI. How does that one differ?

Frank Kelley - Yeah. GRI is really the gold standard of the industry and the great thing about GRI is there's set of requirements and recommendations for the various topics, and if you do not meet set requirements, it's very tough to get credit for GRI or Global Reporting Initiative. Now the inverse of that, or the flip side of the coin is that it's a very high water mark, and so issuers that are at that nascent or infancy stage of their ESG journey, who really have not heard of those cats or got all their ducks in a row, might not find it beneficial at this time to report on GRI, but…

Dana Barrett - Because they just can't meet those high benchmarks.

Frank Kelley - Yeah, but for any company that eventually wants to be a leader, I would strongly recommend align with GRI.

Dana Barrett - Okay, Okay. Throwing out the recommendations, I like it. All right. So let's talk about TCFD.

Frank Kelley - Yeah, TCFD historically it was fairly niche and it was obviously centric around climate change. But then, and I'll do the consultant thing of throwing a monkey wrench into all, we have SASB, which is the most digestible, we have GRI, which is a high water mark. TCFD was niche, but Larry Fink of BlackRock fame came out and sort of indicated that they, I wouldn't say preferred it, but they find it very preferential when they're analyzing their companies or so-

Dana Barrett - I like that, you're like, well, they didn't prefer it, but it's preferential. Fair enough.

Frank Kelley - Needless to say-

Dana Barrett - BlackRock obviously has a lot of power.

Frank Kelley - Yeah. When the 800-pound gorilla in the index fund world says, “Hey, you know, it's a nice to have”, that really means every company better starts scrambling to align with TCFD.

Dana Barrett - Yeah.

Frank Kelley - And therefore we've seen a lot of companies of late start to align with the various requirements, and the good news is with SASB, with TCFD and even a lesser extent, GRI, they very much fit in nicely and align with the SEC recommendation. So it’s not wasted effort to start to align with TCFD or SASB at this time. In fact, it appears to be very synergistic to future SEC requirements.

Dana Barrett - So I’m glad you brought that up, because that was actually going to be my next question, is the SEC basing what they’re coming up with on all three of these frameworks, on parts of them?

Frank Kelley - Yeah.

Dana Barrett - How are they doing that?

Frank Kelley - Yeah, it’s a great question, and to be fair, they’ve sort of telegraphed it, but they haven’t explicitly stated it.

Dana Barrett - Okay. So what kind of guessing a little bit at this point.

Frank Kelley - Yeah, absolutely. But I would say that they’ve even come out and said, they’ve looked at the SASB and TCFD standard and when you look at their sort of initial commentary and guidance, it appears that they’ve very much incorporated those standards into the taxonomy. I would say GRI is a lesser extent, my guess is going forward that GRI will be incorporated into the taxonomy, but that will be sort of the gold standard, that additional requirements that companies may do post SEC regulation.

Dana Barrett - I got it. So if they’re trying to sort of say no, no, no, we’re even better than that, they’re going to do GRI?

Frank Kelley - Yeah, absolutely.

Dana Barrett - Like we’re meeting the minimum requirement for the SEC based on these other two frameworks.

Frank Kelley - Yeah, the overachievers in the class.

Dana Barrett - Yeah, I like it. All right, so you’ve made some, you know, comments and some suggestions already for companies thinking about this, but let’s sort of walk through the process that DFIN might, you know, use, you know, going to a client, maybe somebody who’s, you know, not public yet, but getting ready for IPO and they’re like, we need to have these things. We don’t have them yet. What do we do?

Frank Kelley - Yeah, that’s a great question. So to me, it’s probably a five-step process.

Dana Barrett - Okay.

Frank Kelley - So I mentioned the three major frameworks before, SASB, TCFD and GRI, and what we would want to do is when you look at those frameworks, there’s about 150 ESG topics there. What I recommend is based on your industry, based on your company, based on our conversations with you, having us help you hone in on maybe the right 10 to 12 ESG topics to report on it. It always reminds me of the idiom, “You don't want to be a Jack of all trades and a master of none”, and so we want to actually successfully report on ESG topics based on the frameworks and if you're at that nascent stage, I would probably say, we're going to overweight SASB compared to some of the other frameworks in the market.

Dana Barrett - Can you give me like a real world company example? I don't necessarily mean, you know, divulge company secrets, but a particular, you know, industry you might recommend these 7 to 10 versus a different, you know, like give me an example of what they might be.

Frank Kelley - Yeah. So, for instance, if we were looking at electric utilities, it's going to be a very heavy environmental topic. So, of course, we're going to be looking at your greenhouse gases, we're going to look at how you handle water, waste mitigation, recycling.

Dana Barrett - Right.

Frank Kelley - But conversely, if you think about, say a tech darling out in West Coast, well, they might have already an implicitly strong environmental story, right? They have very little greenhouse gases, they're not a producer of any sort of waste or major waste, and so subsequently their overweight topics would be more aligned with the social front. You know, there's a need for diversity inclusion in tech right now. Their human capital story. Obviously a lot of tech companies are run by these very kind of powerful founders, but often who hold a lot of sway. So there's governance issues and so governance subsequently will be weighted heavily as well, it's definitely more so than environmental.

Dana Barrett - Okay. I think that helps me a lot, because I'm sort of thinking, well, shouldn't they all do everything. Like, you know, shouldn't they all be perfect environmentally and perfect socially and perfect governance and, you know, magically?

Frank Kelley - In a perfect world, we can boil the ocean, but, you know, unfortunately right now, I always just recommend really it's a journey and so it's not a spring and so companies have to kind of take on incremental progress for the topics that are meaningful for them and impactful for investors.

Dana Barrett - Right. So you mentioned five steps. So that first one is sort of figuring out those 7 to 10.

Frank Kelley - That hybrid approach to the framework, 7 to 10 topics.

Dana Barrett - Yes, and then what's the next step?

Frank Kelley - Well, the next step would be looking at your peers, because all the major raiders and rankers like MSCI, Sustainalytics, ISS, which score you relative to your peers. So we want to look at your peer’s proxies, your peer’s websites, your peer’s reporting, and statistically distill what they're doing, and so that subsequently gives you a roadmap of where you need to go and at the same time, it really informs your gap or what they call gap analysis, and that can be your short term gaps or intermediate term gaps and your longer term gaps. There's one really cool wrinkle that I like to this step as well, is there might be topics that aren't scored that you do really well as an organization. So, for instance, you might come to me and say, you know, we have a great women's support group, we have a great veteran support group, we have a really cool Earth Day and recycling and cleanup and subsequently, although those might not be scored based on the standards we're aligning with. We still want to parse out and tell that story, and we can look at your peers to give you comfort that you're not going to Pluto with the disclosure, rather it's apt and appropriate given your peer group, your company, and your individual story.

Dana Barrett - And if you're doing something special, I would imagine then it could be a differentiator.

Frank Kelley - Oh, yeah, absolutely.

Dana Barrett - Like they're only doing this, but we also do.

Frank Kelley - Yeah, set yourself apart, accentuate the positive as they like to say in PR and that's absolutely what you want to do.

Dana Barrett - I feel like you should sing that now. All right. So we've got looking at the peers, we've got our 7 to 10, you know, material, framework stuff that we're looking at, the topics, what's the next step?

Frank Kelley - And this step is interesting, to me, it's an art and a science. So we have our 7 to 10 topics as you just discussed, we might have a couple topics that were uncovered in our peer review.

Dana Barrett - Right.

Frank Kelley - That's a lot of topics, right? That's maybe 14 to 15, 20 topics right now. I can barely remember what I ate for breakfast, and so what we want to do is we want to take a step back and say, okay, thematically and this is the kind of art of it versus a science. What do these topics tell us? So, for instance, we might have waste, water, emissions. Maybe we say thematically, that's a bucket of environmental responsibility. We might have our people story, our community story, our diversity inclusion story. Maybe that's a thematic bucket of social impact. Then we have what you do with cyber security, your board, etcetera, and maybe that's a bucket of culture of governance. So now what we've done is we've set up these thematic buckets where you can begin to report on ESG going forward, so on your website, in your proxy, in your report, and at the same time, that's creating a harmonization to it. A lot of companies that get accused of green washing, they read very disparate between the proxy, the website, and this certainly mitigates that. Now, the science of it is that after we set up those thematic buckets, which sounds like an easy endeavor it is, we can help you set up working groups internally. So we can set up a working group around environmental responsibility, a working group around social impact, a working group around culture of governance, identify the subject matter experts or SMEs and help you start to build out the team, because as you know, from the SEC, this is going to be required going forward. So it's very important not to just have your consultant do all the work and take the Baton and run with it, rather you need to start to implement it and have it permeate your organization, or "Teach a person how to fish versus us fishing for them."

Dana Barrett - Yeah, absolutely. All right. So last but not least like that was four steps, Right?

Frank Kelley - Well, that was a third actually.

Dana Barrett - Was that the third? Oh, right. Thematic. Got it.

Frank Kelley - Yeah.

Dana Barrett - All right. Go to number four.

Frank Kelley - Well, the fourth is probably-

Dana Barrett - Good thing you're paying attention, Frank.

Dana Barrett - It's this coffee strong. So it's actually it's for the issuer, which is great, probably the easiest step, but for us, it's the hardest. So we would be working with your consultant, have them go in, take all your data, align it with the ESG frameworks in a matrix, and at the same time draft that narrative.

Dana Barrett - Okay.

Frank Kelley - So, I mean, this could be, you know, a very voluminous report. It could be a short and sweet report, but working with your consultant to really parse out that story, that also at the same time really augments and aligns with your data matrixes for SASB, TCFD, GRI, or whatever framework you use.

Dana Barrett - So you're not necessarily, even though you've now put these into three buckets, essentially, you're not necessarily going to weight them all the same.

Frank Kelley - Yeah.

Dana Barrett - You want to tell the story of where you're doing the best work, that kind of thing.

Frank Kelley - And just as you said earlier about, hey, maybe you have a differentiator, we want to accentuate the positive. So if you have that great women network or veteran support group, let's tell that story. Let's get into the weeds. Let's make sure we have data to go with our social endeavors and topics. But at the same time, as you said, we want to differentiate the company and really tell to our stakeholders, cause increasingly employees read this, future employees read this, a lot of the younger generation, you know, your stakeholders, and so we really want highlight that in narrative as well as having the traditional sterile data in the back of the report.

Dana Barrett - Awesome. Well, I think I can count now. So now we're up to five, correct?

Frank Kelley - Yeah, absolutely.

Dana Barrett - Okay. Go ahead.

Frank Kelley - And the final step is really just essentially design. That sounds like a bit of an odd set, but I can't tell you how many companies we've worked with where maybe they could draft the narrative, maybe they would have sort of the data matrix, but then it didn't look particularly slick, and so increasingly you want to use infographics that elucidate your tenants, highlight your data and really help to tell that story as part of the report. So when you think of any ESG report, three legs of the stool: data, narrative, and then design.

Dana Barrett - Interesting. It's so interesting that design has become such an important part now of really all reporting or as much as you can do that way. We know people have a short attention span, we're used to visuals in our world now we want to see things quickly and visually and, you know, it's amazing because it wasn't that long ago when everything was just words on a page.

Frank Kelley - Yeah, always better to show than tell. Yeah, and that evolution really started in the proxy world where traditionally proxies were very sort of black and white and textual, and now they've evolved increasingly into these design documents that still have your kind of traditional text.

Dana Barrett - Right, and so that's true for ESG as well, bottom line.

Frank Kelley - Yeah, absolutely following suit because they sort of align and follow each other.

Dana Barrett - All right, before we wrap up, Frank, I just need you to get out the crystal ball and tell me kind of what we can expect in the near future as it relates to ESG.

Frank Kelley - Yeah, I mean, obviously there's going to be continued stakeholder pressure.

Dana Barrett - Yeah.

Frank Kelley - So what do I mean by that? And I think that's low hanging fruit, right? The SEC, of course, are going to regulate this, but the interest in wrinkles to me is a lot of the activists have kind of plucked a low hanging corporate governance fruit. They're really zoning in on ESG as a topic to at least speak to their issuers and possibly go after some of their issuers, whether it's the board or leadership changes or traditional activist’s endeavors. At the same time, I would say specific to an issuer beside the SEC and maybe an activist, what do they have to worry about? To me if you were reading the 2023 tea leaves, increasingly institutional investors want to see ESG skin in the game, and so what do I mean by that? It's really parsing out and developing ESG metrics that are then embedded in the compensation plan. In my opinion, they're going to start to push back on these symbolic 5%, you know, this is a scorecard that the board does that has very little oversight. They're going to want to see real skin in the game, and so the companies are going to have to develop quantitative metrics with substance that can be reviewed by their shareholders, and that are implemented as part of their pay for performance alignment.

Dana Barrett - Yeah, that makes a lot of sense. If it doesn't affect their bottom line, they're going to be less concerned about it.

Frank Kelley - Yeah, absolutely.

Dana Barrett - Yeah, makes a million percent sense. So one last question, you know, obviously you bring all the expertise you have from your past and all your work for DFIN, but you know, are there other companies that are sort of providing similar services to help people get to, you know, ESG the way they should. What's the advantage of sort of being with DFIN?

Frank Kelley - That's an interesting question. I would say, you know, there's a wellspring of ESG consultants, but I would say there's a lot of false profits in the industry right now. There's your sort of IR generalist who can write, but they can't really do the data matrixes. You have some of the, you know, accounting firms who increasingly can do the data, but they really don't want to write, and then really none of them can design. So when you think of an ESG report, again, data, design and narrative, and the sweet spot for DFIN is that we do all three. Just one warning I would give or thing to watch out for my issuer clients, is as there's been a wellspring of consultants, they often don't have the G background, the Governance, and there's a lot of ENS consultants, environmental and social consultants, who are helping or are having issuers implement certain ESG statements and regulatory documents, and the problem is when you put these certain goals or targets in a regulatory document, you're really going to draw the ire of your stakeholder community if you do not follow through. So oftentimes, I talk to these issuers, especially around goals of, you know, greenhouse gases and environmental metrics, I say, you know, why did you put that in your proxy? They said, oh my ENS consultant advised me to and so it's very important to vet your consultant for a governance background.

Dana Barrett - Interesting, and that's probably not as obvious.

Frank Kelley - Yeah, absolutely.

Dana Barrett - Yeah, that makes a lot of sense. I feel like a lot of people know what the E and the S stand for even just lay people and they don't really get what the G is about.

Frank Kelley - Yeah.

Dana Barrett - So that makes a ton of sense. Frank, tons of information. I feel like I've been educated, so thank you very much, I appreciate it.

Frank Kelley - Thank you.

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

This has been the Insider by DFIN. We'll see you next time.