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Steve Peck  

This is the EY Think Ecosystem podcast. I'm your host, Steve Peck, and in this first episode of the series, we'll be discussing sustainability, or more broadly ESG - environmental, social, and governance. ESG is one of the defining issues of our time. And in this high-stakes atmosphere as we lead up to COP27, businesses can expect increasing scrutiny of their corporate ESG strategies and outcomes. All this can come from governments, investors, employees and customers alike. Companies are inspired now more than ever to collaborate, innovate, be inclusive and accelerate to a more sustainable and equitable future. 

But are their strategies focused in the right direction? And are they doing the right things? 

In today's discussion, we will examine how the rapidly changing ESG landscape is impacting companies and why data-driven insights are the key to a profitable transition to an entity becoming carbon neutral, carbon negative, or ultimately carbon net zero. With sustainability at the forefront, I'm delighted to have two guests with us today to take us through the challenges and opportunities sustainability presents. 

But before I introduce them, please remember two key points. One, conversations during the EY podcast should not be relied upon as accounting tax, legal, investment or other professional advice, and two, listeners must consult their own advisors. 

Joining me now from London, England is Steve Varley, the Global Vice Chair of Sustainability at EY. Steve, it's great to have you here today. I know you live this ESG topic nearly every waking moment of every day. And recently, you were among EY's executive boots on the ground at COP26. I very much look forward to our conversation and to your insights.

Steve Varley  

Hello, Steve. Thanks so much for the invitation to be part of this podcast. I'm really looking forward to our discussion.

Peck  

And from Walldorf, Germany, I'm delighted to welcome Gunther Rothermel, Head of SAP HANA Sustainability Solutions at SAP. Gunther, I know this is a busy time at SAP as you kick off your new year. So, thanks for taking time out of your busy schedule to join us today.

Gunther Rothermel  

Yeah, thank you for having me. And hello, everyone. Delighted to be part of this conversation.

Peck  

Well, let's dive right into it. So, question one, I want to send this one out to both of you. There's so much going on in the world right now - the challenges around COVID-19, supply chain disruptions, workforce changes, the need for diversity and inclusion at all levels, new working models and digital transformations. How does a company keep ESG at the forefront? Steve, let me go to you first.

Varley  

Sure. And I think you're right to remind us all of the challenges that are taking place globally. And we've also got issues of rampant inflation as well in some markets. So there's plenty to distract a CEO and their top team from ESG. But maybe the best way to think about ESG is that is all of those issues. So, on social, you got social inclusion, racial inclusion, mental health, and all of that will be impacted by topics like inflation, that's the S of ESG. And then on the E, you've got greenhouse gas reductions, air quality issues in many jurisdictions, water scarcity, biodiversity impact and natural capital. And then on the “G” of ESG, you've got issues on decision-making, are we making the decisions in the right way, and take into account all stakeholder needs? So I think my starting point, Steve, is that ESG is the ideal umbrella to capture all of those issues. Fundamentally, the way that we at EY think about ESG, it can be a quest for value, a quest for competitive advantage. And that's a really useful frame for any company that is embarking upon a journey to investigate ESG, how it can create value, how it can create competitive advantage.

Peck  

So ESG at the centre of the transformations of the very topics they need to deal with to be competitive and survive in this global marketplace. Fantastic. Gunther?

Rothermel  

Yeah, these are certainly challenging times. There's no doubt about this. I guess nobody said it was easy. But if there's one thing that we, I think, learned in the recent two years is that we cannot expect to run on business as usual. No organization can expect to, to just do business as usual. And I also believe in I think, I fully agree with what Steve just said, ESG is in the center of what organizations need to do moving forward. It's not a side activity. It's almost a license to operate for most organizations. So I think it's key that we and all organizations, we are getting ready on all aspects to address ESG and the transformation that goes along with it.

Peck  

Yeah, for sure. There's no question about that. Steve, let me throw this next one out to you. You were a key part of the EY delegation at COP26. So, as we look ahead to COP27, later this year in Egypt, what are some of your key insights and takeaways coming out of Glasgow? And how are they going to impact businesses?

Varley

Well let me start by saying COP26 in Glasgow, November of 2021, it was a privilege to be there for the full two weeks on the ground, in the heart of the blue zone, helping some of our EY clients and countries complete their negotiations. It was humbling to see the energy, the activity, the dedication of what I understand was nearly 30,000 civil servants, and climate negotiators working together to keep us on a pathway of not heating this planet up by more than one and a half degrees since industrial levels. And I'll let others commentate on how successful collectively everybody was there. Let me get to the heart of it, as you say, looking forward to COP27 in November 2022. The big change is to move from pledges and promises through to evidence in progress and performance. So, of all of the countries that went to COP26, they're all asked to update their nationally determined contributions NDCs, which for those not familiar with our language, is the basic of how much each country will reduce their greenhouse gas emissions by, and that's a pledge, that's a promise. COP27 is going to be different. Because at COP27 all 192 countries agreed that they would come back to Egypt to update on their progress and their performance against that pledge, and against that promise. Now, I think Steve, and Gunter, that provides companies with an ideal opportunity to follow. So our CEOs of the companies that we were with at EY and SAP, move to a position of evidencing the progress and performance against the pledges and promises that they've made. So, COP27, Steve, I think he's where reality's going to bite. And I hope that we can all evidence, both at the country level and the company level, that we have reduced greenhouse gases even more than we said we would do to stop the planet warming up. So that's my take.

Peck  

Yeah, fantastic insights. And clearly, actions are going to speak a lot louder than words going forward this year. Gunther is there anything you'd like to add there?

Rothermel  

Absolutely agreed, again, with the observation Steve just summarized, we see the same motion. You know, companies are really looking at, you know, an action plan, they are driving an action plan to get to, as you call it, progress and performance. That is the motto or the headline that we see with many conversations moving forward. So fully agreed.

 Peck  

Excellent, excellent. There's so much activity around ESG coming from every direction. So, what are some of the core elements that companies need to cut through all the noise to focus on, Steve?

Varley  

Well, let's go back to the top of the discussion here about the view that companies can find value from being better at ESG. Now, how do you do that, then? Well, I think part of this is reaching out to your stakeholders, typically, your customers, let's always start there, what else do they need on the ESG front, for them to see the differentiation of your company? So that might be rebasing your relationship with your major customers. And then I think you have to do that with your suppliers as well. So many clients are working together to collectively, in the ecosystem, reduce our greenhouse gases. So we're trying to work this whole ecosystem at the same time. But then let's get back to some of the harder stuff shall we, which is this reporting area, because there's lots of reporting to be done. Some of it is mandatory by various markets, the EU, the USA being the biggest ones that have big ambitions on mandatory reporting. Then you've got the suite of voluntary reporting. And I know that from the work we've done together with SAP, many of our clients really do find a challenge in getting the right taxonomy for that data, doing the data collection, doing the data aggregation, making sure management signs it off, before it rolls up to the executive level. So, the opportunities there again Steve on value creation, competitive advantage, work in the whole ecosystem. But also, this isn't gonna be straightforward. This whole new scrutiny on reporting more mandatory reporting, an opportunity for more voluntary reporting, well, that will take some of our leading companies to build new capability. And yeah, it's a very exciting, but somewhat daunting situation as well, Steve.

Peck  

Yeah, between regulatory and all the other ways that requirements can come at you so fast that it just, there's just so many ways that you're going to need to collect data. Gunther what are your thoughts on that when you look at enterprise data?

Rothermel  

Yeah, we are all, of course, standing in front of this multitude of frameworks that need to be supported. We know, some of it is even local, and for international and global organizations, we need to cater for several of these frameworks per company. So I believe, and that's a topic which we will certainly touch upon in a minute, again, it's very important for all companies to get the data foundation right for what is coming our way to lay the foundation to be able to address, you know, the need for visibility by stakeholders internally, as well as from our regulations perspective, to address that well, and in increments, so that's why we as SAP, bring forward SAP Cloud for sustainable enterprises where we believe this is giving companies the chance to put a very solid data foundation in place for everything that's coming in the world of ESG.

Peck  

Yeah, that's a great point, let's drill into that a little deeper, Gunther. So, SAP systems touch approximately 82% of the world's transactions, which is a daunting statistic. And many of those are across global supply chains. So, when you think about the inside the enterprise and outside the enterprise that makes up a supply chain, you know, just how accurately can companies be expected to calculate, you know, the overall footprint, in their extended enterprise at a product level?

Rothermel  

Yeah, you're totally right, Steve, when we map legal obligations and reporting frameworks, you know, to available data then indeed a lot of the data that companies need for ESG reporting and steering already sit in SAP systems, right, be it from a financial perspective, from a human resource perspective, or for core sustainability topics like emissions management, and so on. So, of course, we want to reuse as much as possible from that data set and if companies have modelled their organizational structures, their plans, their product hierarchies, that's all great assets that that you can bring into, into the world of ESG, as well. And of course, we as SAP are making use of that data by providing integration out of the box. But at the same point in time, there is still additional insights and data that we need, we need to complement those data sets that I mentioned with secondary data, for example, for emissions factors from all sorts of sources. But in general, we need to complement that and we need an open platform to bring everything together that we need. And then on that foundation, we can calculate and generate new insights, we can calculate product footprint, ideally, over time, more and more on primary data, more and more on your specific, you know, company data. And then if we use all data sets, if we move more and more to your original, your authentic, own data over time, then I think we get more and more accurate and more and more descriptive. So that's the goal. There's one thing I also like to say, of course, such a broad approach to really bring together all relevant data sets across industries, is not something that SAP can do alone. We of course, provide a solid product and technology for that. But this is something that we want to approach in a very open style in partnership style with partners like EY, but also a broad ecosystem. And we also want to be very open to standards and formats that are emerging. So that then and coming back to your initial point about the supply chains, that we are also able to even you know, exchange, for example, carbon footprint across the value chain and then get really accurate, really complete as an ecosystem. 

 Peck  

Yeah, that's a great topic for the ecosystem and the partnerships because none of us can do this one alone. We all have to come together. It's such a daunting, big goal that's so important for our very few features. Steve, anything you'd add to the top of that, about standards and things?

Varley  

Well I must say I love Gunther's point about the ecosystem and reminding us all of the need to work with our suppliers and our clients. And I think government also is part of that. These challenges, best met by us all collaborating and working together, and that really does require that you have the right technology, partnerships, and the right business relationships as well. And the transparency point is key. Some of the information is very deep in your organizations. Some of you may be electronic, some of it may just be passed around on paper, your ability to transparently openly, quickly and efficiently share that data with your clients and with your suppliers could be a source of competitive advantage. So I think that's an opportunity for boards to really double down on this whole area of ESG data collection in this quest for value, Steve.

 Peck  

Great point, and with increased insights, I would assume would come more increased scrutiny and accountability in this area?

 Varley  

Oh, yeah, you bet. What we see is government and regulators really focusing a lot more on the ESG data. Now, why are they doing that? Well, they see investors, major investors, also retail investors, you know, moms and pops in the high street, as they say, making decisions based on ESG data. So regulators like the SEC are getting really interested in the veracity, the accuracy, the timeliness of this data, because investment decisions are being made based on it. And we track some organizations that when they're doing investor calls and updates are using, let me call it non-financial data, like ESG data in the same breath as they're using financial data. And we do hope that those organizations have comfort and assurance that the non-financial data they're using is the same level of quality as the financial data. Because you don't want to be caught out, Steve, using data that hasn't got the right level of assurance, that's not a great place for any listed or private company to be. So I think the scrutiny and accountability is accelerating massively in this area, to the point where it'll be similar to if not identical to financial data accuracy. That's a really big ask, I think.

 Peck  

Great point Steve. So, based on what you're saying, it seems like the transparency of the data being reported and all that is becoming under even more scrutiny. What are you hearing from your customers on that Gunther?

 Rothermel  

Well, we are certainly clearly seeing a need for a new level of transparency. And when you look at that new level that has numerous dimensions. On the one side, it's getting more and more regular. So, while in the past, we have seen organizations doing this maybe once per year, and then in a highly manual kind of process, we now see that a lot of organizations want to do this on a more frequent basis, because it's not only for regulations perspectives only, you also want to see your activities on a regular basis. So frequency, and a higher frequency is certainly one aspect that we see. And then second, of course, the data sets that are needed are getting much broader. And again, we touched upon this, it goes across numerous functions in your organization. So we need to simply tap into more data sets, and be able to make use of all relevant data that is needed. And then third, I think, Steve, you also touched upon this, of course, you want to make sure that you can trace and audit all relevant data sets at a certain point in time. So in other words, we've got to log this data well, we got to make it fully transparent, where the data is coming from and where they have been calculations. So that's a third aspect we are seeing that all in all together is simply creating the need for a new level of transparency to respond to the higher scrutiny and accountability that we just mentioned.

Varley  

Maybe what I can add to that Steve on Gunther's good points is this whole extension to data ownership? So I think what does best practice look like will not only have you as an organization establish a single taxonomy across all of your enterprise, but also as part of that taxonomy, you know what roles within your organization own particular data points. That is a really different mindset, I think, for many of the companies that that we see out in the marketplace, where non-financial data, this ESG data is kind of in a way being the lesser cousin of financial data, if I could put it like that. But now we're in a world where this ESG data really counts, it counts to investors, it counts for customers, to employees, to tomorrow's employees. And one of the ways to, I think, start that transformation is making sure that the data is owned by the right people in your organization. And even more than that, Steve, the people know they own the data, which is sometimes a missing point as well.

Peck  

That's a great point. And with all the data standards, and the scrutiny around that, that is, I guess, you cannot start early enough on your quest to get the data and create what you're going to need to go forward for transformations. And along that line, you know, if you're looking to build an ESG-centric strategic transformation, for all the reasons that we've talked about already today, what are some of the fundamental steps that organizations must take in 2022, as a baseline for that Gunther?

Rothermel  

I think it all starts with, of course, a clear definition of goals. Most organizations that we talked to are well on that track already., I'm always also advising customers to over-communicate these goals, internally and externally, so that everyone is s really aware of what the company is going after. Based on that, I also believe and that's also something that we clearly see without in our installed base is that this need to get this data foundation, right that I started to explain. That does not need to happen in, you know, one big bang approach, but you got, you got to develop a plan and a vision on how to get this data foundation right. Then based on that data foundation, you can start to address, you know, the need for transparency, the need to support specific frameworks, one by one in a very incremental style. And you can do so as I said, in slices, and then always realize a return on investment quickly, and then move on to the next one, expanding your data foundation as you go. And then based on all of that, we at SAP believe that at the end of the day that the vision that we want to enable is that you, whenever you make fundamental important decisions in your organization moving forward, you've got to include ESG, and sustainability in a broader sense in that decision-making. So you're not only taking the bottom line and the top line as factors to consider, you're also taking in what we call the green line. In other words, ESG data, facts like, you know, CO2 emissions, and so on, to make sure that all decisions are taking, you know, ESG and sustainability into consideration. And that's, that's the vision that we want to enable. That's why we are launching SAP Cloud for Sustainable Enterprise to give our customers the tools and the data foundation that is needed. So these are in my mind key steps that organizations need to go through. I typically advise that this is done in an agile way, always realizing quick wins and fast return on investment. And then maybe let me say one more thing. We talked about the need to comply to regulations, and so on. And this is of course key because it's basically your license to operate, to comply here, but I'm always also stressing the fact that there are big opportunities in this topic. We see a lot of organizations who are defining new business models, who are starting to differentiate from their competitors by having a better approach to ESG and sustainability and communicating this clearly out to the market. So I think at the end of the day, if you take the steps that I quickly outlined here, as an organization, there's lots of new opportunities that you can realize.

Peck  

Yeah, opportunities in the face of great challenges and amazing goals that we all need to come together on. Steve, anything you'd like to add to that?

Varley  

I really like Gunther's point on decision-making, and how decision-making in your organization changes, once you start to appreciate the power of ESG, and how your decisions impact ESG. Allow me to try to bring this alive with an example. We talk a lot in this ESG space about pricing in externalities. So typically, companies when you made a decision, maybe in decades gone past, it was just within the boundaries of your own organization. But now we know that many companies in creating value for their shareholders are actually destroying value for other stakeholders. So what do I mean by that? Well, go back to some of the basics on major emitters in the industrial world, where you're cranking up production to maybe meet you customer demand, means that actually you're polluting the atmosphere even more. That's an externality. And if you're bringing the economic piece into that, many jurisdictions, many markets including the EU, is showing every indication that they'll extend their carbon pricing. So now, decision-making in your company, you may want to ramp up production, you may want to meet more customer needs. But the decision-making gets more complex, because now there may be increased taxes that you have to bear if you emit more than you're permitted to on carbon. Those taxes could be so punitive, so big, they wipe out the value from you increasing production. And that's the easy example, Steve, it gets a lot more complicated when you start to look at the EU's ambition on what's called the carbon border adjustment mechanism, which basically is a carbon tax as you transition your product into the EU ring fence. Now, I won't go into that here on this podcast as it's a whole separate podcast. But I guess I'm just trying to underline for all of our listeners Gunther's point on decision-making. ESG makes it more complicated. And then you get back to that concept at the top of that podcast, let's find the value, the competitive advantage from including ESG because that has to be there for you to have an organization that can sustain its performance on the long term.

Peck  

Wow, what a brilliant end to an excellent discussion. That was phenomenal. Thanks for wrapping that up so tightly. In fact, I don't have to do my job as the moderator with you wrapping it up. So both of you that's really fantastic stuff. But before we close considering everything that we've covered so far, why don't each of you give three predictions to the year ahead, Gunther?

Rothermel  

Yeah, number one from my side would be definitely we will see more progress and performance across industries and geographies. It's needed. It's absolutely needed. But we will also see this this year. So that's certainly an optimistic prediction number one. Second is the fact that I believe that we will see more data exchange, for example, about carbon footprints between organizations along the value chain. I mean, we all know and we don't want to go down this conversation of scope three, and so on. But we know that this is needed, desperately needed. But it's also challenging for various reasons. But I believe we will see a great progress. And again, we are also committed to support open standards so that the world is able to speak in more common languages when it comes to exchange of data. So that's second. And then the third one, that's the one that I personally find most exciting. That's the fact that we will see more new business models and also great organizations that will differentiate themselves really well by simply having a smart and powerful strategy and execution around their ESG ambitions. And I'm very sure we'll see great examples in the course of this year.

Peck  

Yeah, really well said Gunther. Steve?

Varley  

Yeah, I like those from Gunther and I'm trying to now think of something different to say here as well. So how about this. I think I kind of run my life by being an optimist. I like being an optimist. But I'm also an optimist that worries a lot. So, I'll start with a pessimistic view. First, I think really, sadly, that the evidence over the next 12 months will show that we continue to heat the planet up far more than one and a half degrees, I think it could be over two degrees, or maybe just under three degrees, which, as I'm sure all our listeners know, is catastrophic for many species, and for many parts of the planet as well. So, I think that'll be the bad news. I'm pessimistic about our collective ability, in the very short term to stop the planet from warming up. But let me try and be optimistic. I am optimistic that country leaders, government leaders, will start to really take this challenge even more seriously, because we the voters, we society will compel them to do so. So I'm optimistic about our ability to mobilize a collective voice to get governments to change. And then here's my last bit back into companies. This was classed as a decade of action by the UN, I think we need to do better than that, I think it needs to be the year of extraordinary action by us in the private sector, by us in companies. And while some of the countries are struggling to square the circle of things like energy poverty, and reducing greenhouse gases from cheap fuel supplies, I think we need business to build on Gunther's point about innovation and business models. I think we in business, Steve, can do better than countries, do better than governments and radically reduce our greenhouse gas emissions to do more than our fair share. Because, frankly, over the last 200 years, especially those of us in western democracies, we've profited a lot by industrial revolutions, and I think it's, I think it's down to us as companies to go carbon neutral, to go carbon negative, to really ramp down our greenhouse gases to do more than our fair share, because we have profited for many decades, from the richness on this planet. And we need to be careful about that. So ending on an optimistic note, Steve, it’s down now for companies to lean in, and to help us all solve this problem.

Peck  

Steve, it's really, really well said, and I know SAP and EY are leading by example in that category. Thank you so much Gunther and Steve for joining me to talk about the ESG challenges, opportunities, lots of really valuable insights and it's clear, there's no time to lose.

Rothermel  

Thank you very much for my side as well. And for the invitation, I really enjoyed our conversation, looking forward to jointly moving the needle and make a real difference.

Varley

Thanks so much for the opportunity to see my friend Gunther again, and Steve to work with you. I learnt a lot and hopefully our listeners did too. 

Peck  

I hope all our listeners enjoyed the conversation. For more information visit EY.com or SAP.com. And a quick note - the views of third parties set out in this podcast are not necessarily the views of the global EY organization or its member firms. Moreover, they should be seen in the context of the time in which they were made. I'm Steve Peck. I hope you'll join us again for the next edition of the EY Think Ecosystem podcast.

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