In her recent WSJ piece, Kimberley A. Strassel raises the point: “Did ESG Help Sink SVB?” I don’t think it did, but … the fraudsters and embezzlers are waiting in the wings.

By Don Keelan

I envision the embezzlers, corporate fraud culprits, and stock manipulators waiting in the background for their time to arrive before they carry out their illegal deeds on unsuspecting businesses.

During this hiatus, businesses will spend tens of millions of dollars and hours engaging consulting firms on how to begin to assess, comply, and report on their firm’s ESG matters.

ESG is separate from the current B Lab, the social and environmental certification by the nonprofit organization out of Berwyn, PA.

ESG stands for Environment, Social, and Governance. For a quick summary, the following is an abstract from the February issue of Accounting Today. Companies will be required to report on how it has and continues to progress in three areas:

ENVIRONMENT: Greenhouse gas emissions, deforestation, biodiversity impacts, pollution generation, and more.

SOCIAL: Employee well-being and safety, labor relations, workforce diversity, and customer and community relations.

GOVERNANCE: Executive compensation, board diversity, practices, DEI (diversity, equity, and inclusion) policies, benchmarks, and data security practices, among many other things.

Let’s discuss the Environment Section and how a company must comply. In 2021, Microsoft, in a WSJ piece, reported its ESG filing: it produced about 22 million metric tons of gas emissions in 2017 (later reduced to 11 million), of which a small portion came from manufacturing and the balance by its employees commuting, vendor deliveries, and customers using the company’s software programs on their computers and cell phones.

Imagine how this data is collected from multiple sources and its accuracy. Referred to as Supply Chain-Scope Three, companies must gather the carbon footprint of the other businesses they partner with and include their ESG data in their own report. For example, if Microsoft is working with an outside consulting firm, it would have that firm provide its carbon footprint to Microsoft’s ESG report.

Let’s move to the area of Governance. Assume that a board of directors of a publicly traded corporation, mandated to comply with ESG, has a make-up of 21 white men and all graduates of Ivy League universities.

If such a board did exist today, it would be required to provide its plan to diversify, design a timetable, and add members from BIPOC and other minority groups based on education, wealth, sexual status, and, of course, gender.

In Social, let’s assume a manufacturing company employed welders, and out of 100, only five were from minority groups. It would be required for the company to disclose in its ESG filing how it plans to increase the number of minority welders and by when. Each year, it would disclose its progress.

So far, reporting under ESG is quasi-mandatory, but that will shortly change. Banks, large equity funds, socially-minded companies, stock exchanges, and soon the SEC will compel companies to provide such data in their annual reports with assurances. This means an independent source must verify the data; in this case, the Big Four international accounting firms are lining up for the business.

They are not alone. Countless consulting firms have also added engineers, biochemists, and environmental experts to their staff.

The accounting firms’ new line of business comes when college accounting class enrollment has diminished, and firm retention continues to be a challenge.

Most publicly-traded companies know their duty to protect the environment, continue eliminating bias, and provide opportunity and safety for their workforce. Such a company doesn’t need to spend millions of dollars and hours documenting how it addresses current social issues.

Our country does not need any more Silicon Valley Bank, First Republic Bank, Signature Bank, and FTX financial failures by having the “watchdogs” distracted by verifying what a company reports as its carbon footprint.

In her recent WSJ piece, Kimberley A. Strassel raises the point: “Did ESG Help Sink SVB?” I don’t think it did, but … the fraudsters and embezzlers are waiting in the wings. Their stock in trade is to strike when folks are not ‘watching the store.’ It is always the case.

Don Keelan writes a bi-weekly column and lives in Arlington, Vermont.