A Global Update: ESG & Carbon Accounting (Scope 3) from Persefoni’s Mike Wallace


To better understand the state of ESG investing and climate accounting regulation, VX News turns once again to Mike Wallace, Persefoni’s SVP of Strategic Market Engagement. Wallace opines on the financial sector’s expanded thinking about ESG and notes the latter is “creating tremendous movement of capital in a positive way and creating all sorts of new business opportunities.” On a more granular level, he also updates readers on the various regulatory standards emanating from California, the Federal Government, and globally; and, how these new reporting rules are already affecting investment & global markets.

Mike, not since June of 2020 has VXNEWS had an opportunity to speak with you about ESG investment, regulation, and Covid.  Let’s begin by asking, what trends are you witnessing, as Persefoni’s SVP of Strategic Market Engagement, that are guiding & driving global markets and investments?

Mike Wallace: As I look back over 25 years in the field, I wouldn't say they're trends so much as they’re cycles. The cycles just get deeper as we, as business people, understand due diligence a bit more, especially on the softer issues like environmental, social, and governance (ESG) performance.

Increased regulation is one of the things that's clearly going on in this cycle. We've seen this before. It started in Europe and has rippled through global supply chains. Everybody had to get the chemicals out of their products or they couldn't sell them in Europe. Now, we're seeing similar things with regulatory developments in Europe, Japan, New Zealand, Singapore, and now the US. The SEC is coming out with some regulations around disclosure of carbon and human capital related to material issues.

You’ve said in the past that there have actually been three sets of rules impacting the disclosure space: the SEC proposed rule, the ISSB’s latest standards, and Europe's EFRAG. Address each  sequentially?

The SEC has talked about these issues for quite some time for a number of administrations now. There have been discussions about proposed disclosure, rules on carbon emissions, and climate risk. Just a couple of weeks ago, the SEC came out with this latest proposed rule. It’s 500 pages worth of documentation.

If you look through the comment letters and the comment meetings that occurred, Persefoni is listed in the comment letters and met with the SEC on three different occasions. The point of those meetings with the SEC was looking for evidence of the cost of carbon measurement management and disclosure, as well as to be prepared for the pushback that they would get. That pushback is already coming in comment letters that you can see really easily right now on the SEC’s website.

There is no doubt, though, that this particular series of rules that came out of the SEC are changing the way the markets are playing already.

ISSB is an evolution of 20-plus years of sustainability disclosure. If we go back to the very beginning, there was something called the Greenhouse Gas Protocol and something called the Global Reporting Initiative. They were born almost the same time.

Roughly 25 years later, we see the emergence of entities like SASB, the Sustainability Accounting Standards Board, that then morphed into the Value Reporting Foundation and merged with the IIRC and the CDSB. Then, the IFRS foundation absorbed these entities and then produced the ISSB.

This is a very profound global standard movement because the IFRS foundation is the standards body that drives all of the financial markets across the world. So, when the IFRS comes out and says they think we need a global sustainability board and they create the ISSB, the world wakes up. That's already been happening since the announcement of the ISSB.

EFRAG is the European Union's approach to this. Everybody has to be a little bit different. At the end of the day, it comes down to due diligence by investors, due diligence by corporations, and how they're looking at their suppliers and the companies they own through this new lens of ESG performance.

Re Rules & Regulation, what about California’s  SB260? Do most of the proposed new rules in the US have commonality with past rules?

I'm not quite as schooled on that one, but having read bits and pieces about it, it drafts off a lot of these other rules, developments, and regulations that are out there.

A lot of people and a lot of the different rules point back to the Greenhouse Gas Protocol, which was created and established in 1997. If you fast forward 25 years later and you're on a board of directors, and you're saying that you don't know what greenhouse gas means or don't know what Scope 1 and 2 mean, there's a governance issue. You've had 25 years to learn about the Greenhouse Gas Protocol.

The Greenhouse Gas Protocol is important because everyone's pointing back to it. If you're going to measure your carbon footprint, use this accepted 25-year-old accounting standard, if you will, and apply this methodology to your Scope 1, 2, and 3 calculations.

Now, over the last five years, people have been mentioning and pointing to the TCFD, the Taskforce for Climate-Related Financial Disclosures that came about because of Mark Carney and a few other key people like Michael Bloomberg and Curtis Ravenel got together and said it wasn’t just about quantifiable emissions, it’s also about qualitative risk assessment. The TCFD is being adopted and referenced in a lot of the regulations we see out there. Even the SEC points to and mentioned the GHG Protocol, TCFD, and other standards.

Mike, address why ESG rulemaking has picked up of late?

The best example I have is that people are realizing that the unpredictable can cause tremendous business interruption. During COVID, when I, like many, thought that the world and business were melting down, the sustainability field took off. I was sitting at ERM as a partner in a 5,000 person global consulting firm, and we got busier and busier and busier on these environmental, social and governance issues while it seemed that the economy was slowing down tremendously at the same time.

It seems like enterprise risk managers, CFOs, and general counsels suddenly realized that there's some unpredictability in the marketplace that they hadn't really thought about before. Maybe that climate change issue is real. Since they were revamping all of their enterprise risk management thinking, maybe they were going to take this into consideration. How would they prepare? Even though there might be those on the other side of the spectrum who they don't believe in climate change or they didn't want to hear about these things, that risk of business interruption woke up a lot of people on both sides of the aisle.

Speaking of managing business risk, allow VX News a quick Rorschach test: we say, “supply chain,” you say?

I think disruption.

You say, “supply chain”; and I say, “do you understand the carbon footprint of your supply chain? Do you know what Scope 3 is?”

You're going to respond, “I don't really know that. How could I know that across 500 suppliers?” Well, you already have contractual agreements in place with 500 suppliers. You're probably buying based on price, deliverable, timing, and quality. Now you need to factor in the carbon footprint of that product or service you're buying from them.

“How can I possibly do that?” Well, there are ways of quickly estimating and calculating the carbon footprint of your supply chain. Once you do that, you'll see spikes in that carbon footprint across those 500 suppliers, and you're going to see where there's a higher carbon footprint versus a lower carbon footprint. Those spikes, either up or down, are going to create questions in your brain. Why is it that way?

Then what you should do is go ask these suppliers a few questions since you buy from them. Why is this footprint so big or so small? How can this be? Are you prepared for regulation in your own country? When that regulation hits those countries, it's going to drive their prices up. That's going to drive your own prices up. By the way, there's also qualitative risk out there like storms, fires, etc. Are they prepared for these types of issues and situations? How do they have a backup resilient plan that's going to allow you to keep getting you supplies from you even during the most traumatic events that are occurring in the world?

Case in point, there was a large chip manufacturer that I was working with on a TCFD project risk assessment. After talking to the investor relations officer, he thought the whole project was ridiculous because he didn't believe in climate change. Then, we got involved with the enterprise risk management team, and they started talking amongst a dozen executives about the risks that they physically saw out there in their world because they had been planning for it. Then, the Investor Relations Officer started to feel rather embarrassed about it. For the Enterprise Risk Management team, the volt is that they've been building a large factory below sea level in Asia, and they've been buffering the area with earthen berms to hold back the ocean because they know storms are coming.

That then got the general counsel and other parts of the risk team to be thinking about earthen berms. Is that going to be enough? Then, they started talking about capital expenditures and capital costs.

This whole can of worms started with someone being very pissed off that Larry Fink wrote yet another letter to their chief executive about SASB, TCFD, climate change, and human capital. So that's the typical approach that I've experienced in the last five years in my field.

How have exchanges, such as the Toronto Stock Exchange & NASDAQ, evolved in their view of ESG; and, in how they regulate their members’ financial reporting?

Their brands and revenue streams are dependent on the fluidity of the marketplace that they're hosting on their exchanges. It started off originally as a brand risk management approach. They were going to at least say that they're doing something. They were going to sign on to the Principles for Responsible Investment and the Sustainable Stock Exchanges Initiative. They were going to at least say that they would like the companies listed on the exchange to do those things.

Slowly, as the ebb and flow of the economy occurred, more rules were passed in countries where these exchanges are set up and domiciled. Those rules in those countries help the exchanges take a stronger stance.

At the same time, if you watch the marketplace, entities like the Intercontinental Exchange, who own 12 different exchanges globally, are ramping up their ESG teams dramatically. NASDAQ puts out its own sustainability report and is buying up ESG specialized firms because they need to provide services to those companies. They're seeing the writing on the wall, and now they've got an ESG solution in house and advisors to the 3,400 companies that are listed on NASDAQ.

NASDAQ is also thinking about its data centers as the biggest part of their carbon footprint. They're also thinking now about climate risk, where those data centers are, if they're below sea level or in a high-risk area of the world. This expanded thinking about ESG is creating tremendous movement of capital in a positive way and creating all sorts of new business opportunities.

Elaborate on the financial services industry’s current response to climate risk and climate accounting.

Most of the largest financial institutions in the world are signatories to things like CDP or the PRI. Probably the one that you should pay closest attention to is PCAF the Partnership for Carbon Accounting Financials. In essence, this is a group of like-minded financial services organizations, a mixture of insurance firms, banks, asset owners, and asset managers, that all sat down together and said they needed to agree on the way that they account for our carbon footprint in different types of transactions.

If someone insures your corporation, they’re helping you to succeed, but that insurance vehicle means they own some of your carbon risk and your carbon footprint. If they invest in you as a publicly traded company, and they own 5 percent of your company, they own 5 percent of your carbon footprint. If I'm a private equity firm, I'm traded on a stock exchange and own 200 private equity companies, I own a portion of their carbon footprint too. That becomes my carbon footprint, and I now need to report it.

How am I going to measure that carbon footprint? That question is rolling through the financial services sector in a truly dramatic way. That's what we call in the carbon accounting world and in the Greenhouse Gas Protocol, Scope Three, your financing emissions. Finance emissions are being worked on very rigorously by all of the financial services players across the world now.

How is the Biden administration and Congress addressing these same issues in 2022?

It’s a full court press from what I understand. Over the past nine months being here at Persefoni, I've been talking directly to the Security Exchange Commission, the General Services Administration, and the White House Council of Environmental Quality.

If you think about the things that I’ve mentioned, there's a procurement angle there. The General Services Administration is the largest buyer of goods and services in the world, other than the European Union as a whole. Biden's administration has an entire scorecard up on its website showing the top 100 suppliers to the US government: Lockheed Martin, Booz Allen Hamilton, McKesson, etc. It shows whether or not they're doing anything about climate change. If you're a supplier to the US government and you see your biggest customer outing you for what you're doing or not doing, that supplier might want to wake up and start being more transparent.

On the procurement side, Biden's got a stick. On the SEC side, he's got a stick. From the work we've done, the Department of Defense has been thinking about sustainability for ages because they want to make sure their supply chains stay intact. The Biden administration is hitting it on all cylinders in my opinion.

Mike, you will be speaking again this June at VerdeXchange. What will be your focus?


Counting, counting, counting. Numbers, numbers, numbers. These are all things that can be quantified, and even if they feel soft and squishy there's some actuary out there that can put a number to anything. Carbon accounting, like I've mentioned, has been around for 25 years. There's nothing new to this. It's just the fact the world has really woken up to it. I plan on focusing on a lot of the things that we discussed today, but probably the biggest thing is the traceability of carbon to the financial markets now.

“There is no doubt…, that this particular series of rules [on proposed disclosure, rules on carbon emissions, and climate risk ] that came out of the SEC …are rolling through the financial services sector in a truly dramatic way.” -Mike Wallace, Persefoni