Podcast transcript: How to plan for a sustainable future: A conversation with NAEM
25 min approx | 24 Jul 2019
Welcome to Sustainability Matters. This is a regular podcast series of Ernst & Young, EY. My name is Chris Hagler, and I’m one of the leaders in our climate change and sustainability services practice, and I’m your host for this series. We put this podcast together to provide leading trends, practical advice around environmental, social and governance issues that are facing businesses today.
So today, we are talking with Carol Singer. She is the executive director of NAEM, which is the National Association for Environmental Management, and Rich Goode, a colleague of mine and a leader in EY’s climate change and sustainability services practice. NAEM recently published their environmental health, safety and sustainability trends report called Planning for a Sustainable Future. And today, we are going to discuss the key trends and how business is responding to them. So welcome, Carol; welcome, Rich. Let’s get going.
Carol, can you first tell us a little bit about the report? How did it come together, who participated; a little bit about the background?
Really, the purpose of this is to get a look under the hood at what companies are doing, to talk about what’s going on in the boardroom, in the senior levels of decision-making.
The way that this report comes to fruition is that we go out and we interview some key stakeholders that are external to companies. We try and document trends and ideas, and then we use our leadership companies, which are about a hundred companies, and we benchmark. We put together a survey and ask them about those trends. And from that, we publish the report.
Awesome. And EY’s participation?
Yeah, thanks Chris and Carol. I just want to say how important NAEM is in terms of your membership, your research and, really, this report. And EY is very pleased to be able to sponsor this research this year. As being a client-serving professional at EY, it’s important for us to be connected, informed and responsive to our clients. And the research that you do really helps us attain that goal.
From my personal perspective, I want to know what’s keeping my clients up at night so that I can also worry about how to best serve them. And those are the things that keep me up at night as well.
Let’s go into the trends. The one that struck me the most is that environmental, social and governance issues are board-level issues now. What is driving that trend, and where do you see that going, Carol?
Well, in a word, transparency. There has been such a public movement in civil society to make companies better understand that what they do is important not only to their customers, but to the public, to ESG — environment, social and governance investors — activist investors, and also institutional investors.
Folks want to understand what companies are doing, how they’re defining their performance, and what are the criteria. And so, we’ve seen this transition over the course of the last 10 years into transparency. I do think that external drivers such as this growing realization that climate change is a risk, whether it’s the recent IPCC report or the Paris Accord a few years back, we now have a public agreement that in fact climate change does have implications for companies.
Chris, you know that part of the job that you and I do is talking to dozens of clients every week. We really learn a lot from those we speak with, and sometimes the people we talk to just say, “Look, I don’t see environmental health, safety or sustainability being a topic that anybody is asking me about.”
And you’re smiling because we hear that a lot. However, the board-level, or the CEO, is now being put on notice. Letters like the Larry Fink letter from Blackrock Capital to CEOs saying, “You have to stand for more than just making financial profit. You have to create social value.” Investors are putting companies on notice that they have to be indeed, Carol, as you say, more transparent. I’ll use an example to illustrate this.
So, I’m working actually with two companies, both manufacturers, and they create a lot of greenhouse gas emissions. And they were sort of like, the people that we talk to often that say, “Well, I’m not really under pressure from my constituencies to talk about sustainability.” Both of these companies in 2018 alone had draft shareholder resolutions that said, “We want you to take a carbon footprint, tell us what your greenhouse gas emissions are, set a reduction goal, and tell us what you’re doing to reduce your impact on the environment.”
Well, guess what? When you have a shareholder resolution, the board takes notice. That is actually targeted to the board of directors. And with the board of directors under pressure, believe me, that pressure flows downward. So, now people who we speak with on a regular basis are, instead of saying, “I don’t hear about this from my customers or my suppliers,” they’re saying, “We’re hearing about this from the board.” And when the board talks, people listen.
So, what I hear you two saying, first of all, investors are driving this. Mainstream investors, activities investors, they are asking for this type of information, they are providing shareholder resolutions that are demanding action on these ESG-type topics. And therefore, boards are responding because they certainly respond to their shareholders.
In addition, Carol, I heard you say there are real, external issues that are making boards significantly more aware of environmental, social and governance issues; climate change being one of those big things, and as recently underscored by the IPCC report by the Fourth National (Climate) Assessment. And what we haven’t talked about yet is the World Economic Forum, who just recently released their top five risks for 2019, and three of the top five are related to climate change.
So, these are not just business issues, they are big world issues, and that’s part of why boards are responding.
I totally agree. The whole idea of what business risk is and how corporate stakeholders are evaluating companies has really expanded over the last several years. Business resiliency, the ability to operate continuously all across the world is impacted by climate. So, when you have major climate events, you oftentimes have challenges with your supply chain. This is a business risk that’s really come to light with a lot of folks.
Second, there is a notion that if you begin to look at climate risk not only just as a public policy issue but where you’re siting your facilities, where your employees are likely to be living or wanting to live in the future, where there are going to be increasing economies and decreasing economies because of the impacts of climate risk, and some of the other social issues, are now coming together in a broader conversation.
In addition, one of the key attributes of sustainability is also safety, and so the safety of employees. We do know that the ideas that companies now have are much broader. Companies now regard the safety of their employees not just while they’re at their offices in the nine-to-five time period, but what they do on their way in to work, on their way at home, and what they do. So, safety is a number one issue in sustainability. So, there’s a lot of topics that are really jumping into this pool of conversation that are driving it.
Carol, I’d like to actually pick up on part of that because I think you bring up the risk aspect as being really important. And I’m going to take that a little bit further, where … and we talked about this at the forum this year, the NAEM forum in Louisville, where risk has sort of expanded to include environmental, social and governance topics, or ESG. And that’s really a super set of sustainability-related risks. You have things like diversity and inclusion, the ability to attract and retain millennial talent, which is a challenge for many organizations, as well as sustainability, waste water, greenhouse gas, health and safety, regulations of hazardous chemicals.
And further, I’ll take that risk piece to talk about the “M” word or material, material risk. So, anybody in enterprise risk management is going to say, “Okay, I understand what material is.” Well, material just means that this is an important enough risk that if investors, or other interested parties, had that information, it would change how they respond, change their actions. And what we’re seeing is ESG risks — sustainability, health, safety, diversity, inclusion, recruiting, regulations, the use of hazardous substances — is being elevated to become a material risk.
EY was lucky enough to collaborate with the World Business Council for Sustainable Development, where we developed a report that shows how environmental, social and governance professionals or sustainability, EH and S professionals, can collaborate with their enterprise risk management professionals to speak the same language and say, “Look, the issues and risk that we’re talking about here today — environmental health, safety, sustainability, ESG — are actually material to the company.”
And Rich, I’m just going to jump in there … that you’re absolutely right that EY did that study with the World Business Council for Sustainable Development, but that’s a whole other podcast. So, we’ll come back, and we’ll talk more about risk, but let’s come back to climate risk because I want to get to the next trend that was identified in the report. And that trend was around goals are all coming to fruition.
So many of our clients have set 2020 goals and now they’re looking to what’s next, and the goals are a little bit different. It sounds like the trends are going from incremental goals to being more transformational kind of goals and particularly around climate. So, talk to us a little bit about what you saw in the report, and maybe Rich, you can share some ideas about what some of EY’s clients are doing related to this.
Well, the whole area of corporate performance and goals is really fascinating to me. We are seeing a shift from backwards-looking performance metrics to companies trying to envision what an aspirational goal would or could be. And so, these are going beyond quantitative measurements to qualitative. And it aligns with this idea that companies have a broader responsibility in society, which is part of the trends that we’re seeing.
So, you see Dow for example, the Dow Corporation, has developed the blueprint for the next economy in which they’re talking about how they as a company are going to be valued, how they’re going to value raw materials, how they’re going to value the ecosystem. You have companies trying to figure out how you incorporate their growth goals for business with an economic goal.
So, you’re saying that as companies are looking at new goals, the trend is to look for significantly more aspirational goals and perhaps even complete ecosystem goals?
Rich, what are you seeing with your clients at EY?
I’ve just noticed an uptick in the amount of clients calling us to talk about helping them upgrade their goals. A lot of companies, I notice, set goals to reduce emissions or waste or water by a certain amount by 2020. Well, it’s 2019; 2020 is coming due pretty soon. But linking this back to our first topic about how the board-level is involved now, well, if you’re setting goals and the board is involved, that means there’s going to be a lot more scrutiny on the goals. You can’t have an oil refinery talking about goals for recycling office paper. It’s just not material. You have to really focus on what can you do to transform.
And Carol, I really liked your point about ecosystem goals, where transportation companies working with raw materials companies for glassmakers or steelmakers working with their downstream customers saying, “Look, there’s actually innovation to be had in these goals.” We read something from an automotive manufacturer that just … the partnership with developing lighter steel helped reduce the overall life cycle of greenhouse gas emissions for vehicles. I mean, that’s an ecosystem, that’s stepping out of bounds, and that’s truly what I think we would call transformational.
I’d like to add also, there’s something else that’s really going on that’s very interesting, and that is if you look at what a paradigm shift for sustainability is, I would say that the first stage is really this reduction and increased efficiencies.
But the second stage has to do with the types of products that you produce. And it’s not only looking about what the inputs are, but what the products are and how that’s changed. So, there’s a tremendous amount of innovation that’s being talked about internal to companies but not as being externally communicated, because they are really trying to figure it out. And it’s very exciting.
And from my perspective as a professional association that focuses on the EHS and sustainability business functions, a lot of the sustainability in the next generation is going to come from R&D, new product development, new process systems, new manufacturing systems. So, it’s going to require a lot of integration internal to a company again with new approach to … and a systems-wide approach to solving these new problems.
Well, agreed, but sometimes those things have manifested themselves in external goals. I think AT&T is an interesting example, where, like many organizations, they had a carbon reduction goal, and then a recent goal they came … I guess it’s been a few years now, but they came out with a goal that said not only do we want to reduce carbon footprint in our operations, we want to produce products that help our customers reduce 10 times the amount of carbon as we have in our operations.
So, they’re taking that product development innovation and setting an external goal around where can we make the biggest impact. Not just what is our biggest impact, but where can we make the biggest impact. And I think that’s an interesting example as well.
Yes. You see a lot of that in the high-tech industries like computers, chips; you also see it in a lot of transportation products like elevators or escalators or building material, you’re really looking for the types of products that can have a multiplying effect for energy efficiency for the customer.
And that’s really one of my key takeaways for a lot of our clients. We tend to default to risk. What is the risk, and how can we avoid it? But really sustainability, ESG, is about so much more than just risk. There’s so much opportunity, and opportunity for innovation, not just cost savings, but really making money. And we often say, make money, save money, reduce risk. People just focus on risk, and if that’s where you’re focused, I think it’s somewhat limiting in your approach. So, it’s encouraging to see people come up with these transformational types of goals.
Yes. I think it’s limiting and it’s just not as much fun.
We are talking a lot about goals and internal systems and how do we make all of this happen. One of the other trends that you have in your report, Carol, is this increased use of technology, big data, sensors, wearable technology. I mean all kinds of technology driving sustainability and environmental health and safety. I was at a conference recently where somebody said, “Every decision today is a technology decision.” So, what are you seeing as it relates to technology and EHS and S?
We see an uptick in the use of wearables for on the factory floor, drones for compliance and safety monitoring, as well as big data and IoT.
Artificial intelligence is coming to fruition. The challenge actually for the EHS professional is what to do with all of the data. So, we’re just at the very beginning. Internal to companies, you’re going to want to have data scientists engaged alongside others. There’s going to be real changes in how this happens in order for us to realize the opportunity of this technology. Again, transparency and awareness and the ability to communicate and multiply information quickly, and make proactive decisions, is really the place that we are on the cusp of in terms of the management of EHS.
Rich, what are you seeing with your clients and technology?
Well, I guess I’d like to start off even with what we’re seeing within EY, and take our traditional part of our business, the audit practice, where we provide assurance services for the Fortune 1000.
It used to be that we went to the accounting schools and recruited CPAs and put them through the mill and got their CPA and then went on to grow within the organization. But really, now what we’re seeing is we have to recruit so much more for people who are digitally savvy or people who are software engineers; people that we haven’t traditionally recruited. And that’s really changing the nature of how we’re hiring and attracting and retaining our talent, because we have to be responsive to our clients.
The other thing, and this is maybe the not as sexy piece of technology is, I don’t have any clients who don’t tell me they’re being told to do more with less. Provide results, but you have a smaller budget. And frankly, technology is the way to do that. Even us, within EY, we have taken the unusual step of forging alliances with several software vendors. And we’re software agnostic; we go with what the clients want. But we really have to forge these alliances, so we can better understand how best to serve our clients, so we’re helping them to implement some of these software services across organizations. And frankly, it’s a very large, fast-growing part of our practice.
And then finally, I’m a techno geek, so I love these examples. I came up through Bell Labs and Lucent Technologies in the day. And I read this article about an aircraft engine manufacturer using wearables on remote technicians. So, the people who actually design and built the engines, they were at their corporate headquarters in the US, and there were technicians in the field in Kuala Lumpur and they had a broken engine. And the choices were fly someone in from the US to Kuala Lumpur to help them fix the engine or put the wearables on. And the technician was looking through the same eyes, if you will, as a technician and say, “Oh no, that yellow part over there, take that out and replace it,” and the engine is fixed.
And that’s just so cool, but that’s a great example of technology in action and doing more with less, because, ultimately, it costs the client a lot less money in terms of downtime, inconveniencing their customers, and being able to take advantage of that big data and big bandwidth.
I agree. I think technology is going to change the way a professional in environmental health sustainability actually works going forward and, really, create great careers for people as well.
The other thing that I think is interesting, and I’m sure you’re seeing this with your clients as well, Rich, is that there is so much more data available, figuring out how to use it to make good decisions is half the battle. And hopefully that’s, Carol, when you were talking about data scientists for example, that there is additional information, so we can make better decisions around solving risks or identifying opportunities because there’s more information available.
This is an area that’s really robust and we’re seeing a lot of maturity in the marketplace. When you think about it, the software is designed to capture compliance. Software has been used to assure compliance, make sure everybody in the company is filling out their forms and identifying the metrics that we need to report up. But think about it. In order to be a sustainability company in the future, we have to also consider all of the resources that are going into the product. We now have regulations that are product-based and not just process-based.
So Rich, to wrap up this technology discussion, it’s clearly more than just a software system. Technology is clearly more than that. What are some of the key takeaways from the report and what we’re seeing with our clients?
When I think of big data and how much data is out there, we have a new refrigerator at home that has an IP address. Who is using that and how? Right? So, with the clients that we’re serving, they have all these disparate systems; sometimes they’re Excel spreadsheets, sometimes they’re databases, sometimes they’re systems that they’ve bought from a software vendor.
Really, the challenge is how do you pull all that together? So, it’s a matter of having an overarching system, the right practitioners, the right data scientists, and the right help and insights to make sense of it all, to help, really, ultimately support better decision-making. And to me, that’s the point of technology and that’s why it’s become such a critical issue.
Better decision-making is something high on my list no matter what we’re talking about, including technology. Now, we could talk about this report all day, but unfortunately, we need to wrap it up. So, what I’d like to talk about is really a key takeaway, but also when you do this report again two years from now, what does the future look like? What do you think the big changes will be in environmental health, safety and sustainability?
From my perspective, it’s a pretty exciting report. Those of us who have been in EHS and sustainability for a number of years are really seeing the fruits of our labor come to fruition. The notion that boards really are paying attention to environment and sustainability and social and governance issues is pretty amazing. And the fact that they’re actually taking ownership and accountability and moving the conversation forward I think is what you’re going to see.
The public is asking companies to stand up and be accountable for what they do and how they make money, and I see the companies are meeting that challenge.
Carol, I remember when I first met you, I was the head of sustainability for a Fortune 500 company, and you and I were working together as your role as executive director of NAEM. And the biggest conversation we had was how do we get the attention of the C-suite? Not the board but maybe even a chief procurement officer. That was the Holy Grail. And now here we are several years later, and we have the attention of the board.
So now when I look forward and say what’s it going to be like two years from now, sometimes I often say that sustainability, the “S” word is maybe a little bit overused. Because if sustainability is really about reducing your risk, increasing your innovation, boosting revenue, isn’t that strategy? Maybe sustainability becomes the strategy word. But more specifically, I really think that the risks and opportunities that we’ve talked about today really become mainstream. They’re referenced in the enterprise risk management section of a company’s book of business. Really, a risk is a risk. If it impacts an investor’s ability to make money, they want to know.
For better or worse, shareholders are number one priorities for corporations. And if a shareholder wants to know is my money, my investment in your company, put at risk simply because you have risk from climate change, they want to know. And honestly, they have a right to know. And I love the word you used earlier, Carol, transparency. And there’s an old quote that I remember, if time is money, transparency is time. So being open and transparent is going to allow companies to better communicate with their shareholders and other stakeholders and show that their investment in their company is worth it.
I can’t wrap it up any better. That’s really great points, and thank you both so much for being here today and sharing your insights. I am sure that everybody has taken away one or two great ideas that they can use as they go forward in their work.
If you haven’t yet, do go to NAEM.org to download the report to learn more. There are more trends in there and a lot of data and specific bullet points you can use to back up your own business case for environmental health, safety and sustainability at your organization. And we’ll stay tuned for another report in two years, Carol. Thank you all very much.