16 January 2024

Presented by:
Chris DeSa
Carla S. Nunes, CFA
Julianne Recine

Zoe Koskinas

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22

STORIED BRAND
1932-2004

NEW FIRM,
EXPANDINGCAPABILITIESONE TEAM,ONE KROLL
2021-present

2005-2020

Our Evolution
In Operation for
Nearly 100 Years•

Duff & Phelps founded as
investment research firm•Started as valuationand corporate financeadvisor•

Duff & Phelps rebrands as
Kroll and completes brandunification•

Rapid growth into
other governance,
risk, compliance andcomplementary
solutions•

Full business life cycle
capabilities across risk,
governance and growth•Serving clients in 140
markets across nearly
every industry and sector•

Acquired Crisp andResolver risk companies•

Acquires AVC Ltd. tocreate dedicated energy
team within FAAS practice•

Acquired 30+
businesses,
including Kroll

3

Our locations
Across 32 countries and territories worldwide

Asia Pacific

The Americas
Atlanta

Los Angeles

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Secaucus

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Silicon Valley

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4Disclaimer• Any positions presented in this session are those of the panelists and do not represent the official position of Kroll, LLC or
Compass Diversified Holdings. This material is offered for educational purposes with the understanding that neither the panelists
nor Kroll, LLC or its affiliates, nor Compass Diversified Holdings are engaged in rendering legal, accounting or any otherprofessional service through presentation of this material.
• The information presented in this session has been obtained with the greatest of care from sources believed to be reliable, but is
not guaranteed to be complete, accurate or timely. The panelists, Kroll, LLC or its affiliates, and Compass Diversified Holdings
expressly disclaim any liability, including incidental or consequential damages, arising from the use of this material or any errors
or omissions that may be contained in it.

5Julianne Recine

Background• Julianne Recine is a Managing Director in the ESG Advisory practice, based in New York. She has more than 29 years offinancial and investment management experience.
• Julianne is responsible for providing support to endowments, foundations, public and private pensions, sovereign wealthfunds and family offices seeking to build out, upgrade or optimize their operational due diligence process for various typesof firms. These include hedge funds, fund of funds, managed accounts private equity funds, real estate and real asset fundinvestments. Julianne has extensive experience in building operational due diligence frameworks and operational platforms.
Relevant Experience• She has worked with ESG platforms, investment vehicles and has managed account and seeding platforms. Additionally,
she has provided consulting and oversight to early stage and emerging managers and has a great deal of experience withstrategic acquisitions and implementing regulatory oversight programs.

Managing Director –ESG Advisory
Qualifications:•

MBA in Finance from Iona
University•

Bachelors of Business
Administration in International
Business from Iona University

Location: US (Miami)
Languages: English and Italian• Prior to joining Duff & Phelps, Julianne was an executive director at JP Morgan Chase where she established the Americas
Control Manager organization for the Securities Services business within the Corporate Investment Bank. She was also
involved with establishing governance frameworks to insure compliance with various banking regulations. Prior to joining
JP Morgan, she was COO and Director of Operational Due Diligence at Sciens Investment Management where she was
responsible for overseeing the due diligence, operations and marketing of Sciens' liquid and real assets businesses. She
joined Sciens from PineBridge Investments (formerly AIG Investments) where she was Head of Operational Due Diligenceand responsible for building out the Operational Due Diligence infrastructure. Prior to joining PineBridge, she was Vice
President of Investor Services at EnTrust Capital Inc. Julianne's previous roles also include her stints at Goldman Sachs andBrown Brothers Harriman.
• She holds an MBA and bachelor's degree in business administration with a focus on international business from Iona
College Hagan School of Business. Julianne is a member of 100 Women in Finance, The New York Hedge Fund Roundtable
and the Women's Association of Venture & Equity. She is also a board member of Belmont Community Day Care Centerand a regional member of the National Organization of Italian American Women.

6Chris DeSa
Background
Chris is a Managing Director in the Environmental, Social and Governance (ESG) Advisory practice, based in Los Angeles. Chris serves as atrusted advisor to clients on ESG and sustainability-related matters, including with climate-related risks and opportunities, ESG materiality
assessments and benchmarking, KPI selection, sustainability accounting and reporting, and internal controls.

Relevant Experience
Chris offers particular expertise helping clients to ensure the integrity, consistency and transparency of their ESG data and climate-related
disclosures under evolving U.S. and international ESG regulations and norms. He has significant experience on energy transition issues,environmental standards and GHG emissions reporting, having assisted NYSE-listed public companies preparing for attestation andassurance on their ESG disclosures, including around their GHG emissions inventories and disclosures (Scopes 1, 2 and 3) and the related
internal controls and systems.

Managing Director –ESG Advisory
Qualifications:•M.Phil (Economics/Politics) with
distinction from the University of
Oxford•J.D. with honors from the University ofTexas at Austin•

B.A. from UCLA•

Fundamentals of Sustainability
Accounting (FSA) Credential (Levels 1& 2)•

Certificate in Sustainable Capitalism &ESG from UC Berkeley School of Law•

Certificate of proficiency inOrganizational GHG Accounting

He also assists private equity funds and companies with pre-acquisition ESG screening, due diligence and risk assessments as well as
post-acquisition remediation plans.
Prior to Kroll, Chris was a managing director in the Risks & Investigations practice at FTI Consulting, where he assisted clients withidentifying, investigating and managing complex environmental, political, social, labor and compliance risks. Chris also assisted externalcounsel with expert witness and advisory services on complex securities class actions and enforcement actions by the Securities andExchange Commission (SEC) and Department of Justice (DOJ).
Chris also previously served as an associate director at Control Risks, where he advised multinational clients on matters related toregulatory compliance, reputational risks and corporate intelligence. He began his career as an associate in the São Paulo office of White &Case, where he advised clients as a U.S. securities and capital markets lawyer.
Chris received a Master of Philosophy in Latin American Studies (Economics & Politics) with distinction from the University of Oxford, a J.D.
with honors from the University of Texas at Austin (where he was a member of the Texas Law Review) and a Bachelor of Arts from UCLA.
In addition to the Fundamentals of Sustainability Accounting (FSA) credential, he also holds proficiency certificates in Organizational GHG
Accounting from the Greenhouse Gas Management Institute and Sustainable Capitalism & ESG from UC Berkeley School of Law.
Chris is fluent in Portuguese, having lived and worked extensively throughout Brazil.

Location: US (Los Angeles)
Languages: English and Portuguese7

Carla S. Nunes, CFA, ABVManaging Director
Philadelphia, PA
Carla.Nunes@kroll.com

Carla S. Nunes is a Managing Director in the Office of Professional Practice of Kroll (previously Duff & Phelps). She has over 25 years of experience.
In that role, Carla provides firm-wide technical guidance on a variety of valuation, financial reporting and tax issues. She also co-authors Kroll'sannual U.S. and European Goodwill Impairment Studies. In addition, Carla is the Global Leader of Kroll's Valuation Digital Solutions group, which
produces cost of capital thought leadership content and data housed in the Cost of Capital Navigator.
•

In 2011, Carla completed a one-year rotation in Kroll's London office, where she promoted the firm's IFRS education efforts and marketing
initiatives, as well dealing with IFRS implementation issues.

•

Prior to this role, Carla was part of the Valuation Advisory Services business unit, performing engagements primarily for financial reporting andtax purposes at Kroll’s predecessor firms, PricewaterhouseCoopers, Standard & Poor’s, and Duff & Phelps.

•

Carla has conducted numerous business and asset valuations for a variety of purposes, including purchase price allocations, goodwill impairment
testing, M&A, corporate tax restructuring and debt analysis. She has been involved in multiple valuation assignments for a wide range ofindustries, including pharma & biotech, healthcare, vitamin retail, specialty chemicals, industrial manufacturing and gaming & hospitality. Carla
has substantial experience with cross-border valuations, working with multinational corporations to address complex tax, international cost ofcapital and foreign exchange issues.

•

Carla is one of Kroll's experts addressing valuation issues related to cost of capital. She is a co-author of the “Valuation Handbook” series and isa co-creator of the Kroll Cost of Capital Navigator. Carla is a frequent speaker in webinars and conferences on the topics of cost of capital,
goodwill impairment and valuation in general.

•

Carla is a member of the Education Committee of the International Institute of Business Valuers (iiBV) and a former Practitioner Director in the
Board of the Financial Management Association (FMA) International. She was a Fellow of the defunct Kroll Institute.

•

Carla received her M.B.A. in finance from the University of Rochester's Simon School, an honors degree is business administration from Lisbon's
School of Economics and Management (ISEG Lisbon) and completed coursework for a Masters of Taxation from Villanova University School of
Law. Additionally, she holds a Chartered Financial Analyst (CFA) designation, an Accredited in Business Valuation (ABV) credential, and has
passed the exam and fulfilled all the requirements for the Certified in Entity and Intangibles Valuations (CEIV) credential (now-discontinued).
Carla also holds a certification awarded by the Wharton ESG Executive Certificate for Financial Professionals Program.

•Carla was a co-author of the Kroll’s “ESG and Global Investor Returns Study” (2023) which examined the relationship between historical returnsof over 13,000 publicly traded companies across a variety of geographies and industries and their ESG ratings to determine the correlation of
ESG ratings to company performance.

8

Zoe Koskinas

Background
Zoe Koskinas is Vice President and Head of ESG at (NYSE: CODI), a publicly-traded holding company that provides
shareholders with unique access to niche middle-market businesses. She is responsible for the firm’s ESG strategy andworks closely with the portfolio companies to integrate the firm’s environmental, social and governance outcomes acrossthe business.
Relevant Experience

VP, Head of ESG••

B.A. from University of Western
SydneyInstitute of Sustainability
Leadership at Cambridge

Location: US (Orange County)

Zoe is a seasoned sustainability professional who drives sustainable business initiatives and fosters positive impact. She
excels in engaging closely with company management teams, ensuring the timely execution of initiatives that mitigate
risks and contribute to value creation, resulting in win-win scenarios. She is recognized for her ability to build and executeinitiatives in key ESG areas such as health and safety, inclusion and diversity, climate change, and employee engagement.
She has a proven track record in identifying, tracking, and reporting on ESG data management and key performanceindicators and developing systematic processes to ensure consistency. With her experience working across Australia andthe UK and a commitment to making a difference, Zoe continues to be a driving force in the financial services industry,
shaping the future of ESG practices
Prior to joining CODI in 2021, Zoe was in the Global Sustainability Team at Lendlease Group and held various roles acrossAustralia and the UK.
Zoe is a graduate of the University of Western Sydney, and the Institute of Sustainability Leadership at Cambridge.

91. Recent ESG/Sustainability Disclosure andRegulatory Developments
2. The Critical Role of Materiality Assessment
3. Kroll ESG and Global Investor Returns Study
4. Questions & Answers
5. Extra Resources

10

11

ESG & Sustainability Disclosure Standards
Background• Many questions have arisen on what qualifies an initiative or an investment to be labeled as climate-, ESG-, orsustainability-focused. Accusations of greenwashing have risen significantly.
• Lack of consistency and standardization about what these terms mean contribute to ESG.
• The voluntary nature of much of the reporting means that many companies and funds selectively disclose
information that portrays them more favorably. According to the Carrots & Sticks project (analysis by Kroll):– In 2020 there were over 600 sustainability reporting provisions globally, with almost 60% being mandatory
and with the balance being voluntary.
– In 2023 database expanded to cover 130 countries. In May 2023, the number of sustainability reporting
provisions had increased to over 2,400, with 55% being voluntary in nature.
• This has led to a greater effort by international standard setters and regulators to propose and, in some cases,
adopt mandatory disclosure rules.

12

ESG: The Land of Confusion
Ratings Agencies
Governing Principles

Investor Resources

Reporting Frameworks
Data Aggregators

13

International Sustainability Standards Board (ISSB)• Created in November 2021, following widespread support during theUnited Nations Climate Conference (COP26) in Glasgow.
• The IFRS Foundation now oversees two global standard settingboards:– (1) the IASB, responsible for international financial reporting
standard (IFRS) and– (2) the ISSB, tasked with setting IFRS Sustainability DisclosureStandards.
• In 2022, the IFRS Foundation integrated other independent
organizations that had been previously producing voluntary climate,or more broadly ESG and sustainability disclosure standards. In
2024, the TCFD will be transferred to ISSB’s supervision.
• ISSB’s Objective: Deliver a comprehensive global baseline ofsustainability-related (climate and other ESG) disclosure standards
that provide investors and other capital market participants withinformation about companies’ sustainability-related risks andopportunities, thereby allowing more informed investment decisions.

Source: Kroll ESG and Global Investment Returns Study, Exhibit 3

14

Important Corporate Reporting Initiatives with Potential Global Reach

United Kingdom (UK)
Department for Business andTrade (DBT)International Sustainability
Standards Board (ISSB)

European Union(EU)IFRS S1 General Requirements
for Disclosure of Sustainabilityrelated Financial Information

Corporate Sustainability
Reporting Directive (CSRD)

UK Sustainability DisclosureStandards (SDS)IFRS S2 Climate-related
Disclosures

European Sustainability
Reporting Standards (ESRS)
developed by EFRAG

Corporate disclosures onsustainability-related risks andopportunities will be in linewith ISSB (IFRS S1 and IFRSS2), with any diversion only ifstrictly necessary

United States
Securities and Exchange
Commission (SEC)

2022 Proposal“The Enhancement andStandardization of ClimateRelated Disclosures for
Investors”

State of California

Climate Corporate Data
Accountability Act (CCDAA)(CA SB 253)
Climate-Related Financial Risk
Act (CRFRA)(CA SB 261)

This is by no means an exhaustive list. ESG and/or sustainability-related regulation has also been recently adopted or
proposed by national and subnational governments and regulators across the global.
15

Fund Reporting Initiatives with Potential Global Reach

European Union(EU)

United Kingdom
Financial Conduct Authority(FCA)

United States
Securities and Exchange
Commission (SEC)

State of California

Sustainable Finance
Disclosure Regulation (SFDR):• Article 6• Article 8• Article 9

UK Sustainability Disclosure
Requirements (SDR)

Amendments to the Fund
“Names Rule”

California Fair Investment
Practices by Investment
Advisers (SB 54)

Applies to issuers of bonds
and shares listed on a UK
regulated market and UKbased investment managers.
Focus is to provide greatertransparency and consistency
in the market for sustainable
investment products

Proposed ESG Disclosures for
Investment Advisers andInvestment Companies

Mandates that investment
advisers managing venture
capital or certain other private
funds to report information
about their portfolio
companies, which includes
information on the diversity of
the founders they are backing

16What does this all mean for you?

Given the broad jurisdictional reach and low financial thresholds, many public and private
business and funds will be caught off guard by these regulations.
Illustrative examples of financial thresholds and timing
Regulation

Minimum Revenue Threshold Public/private

Earliest Potential Timing

EU CSRDEU €40 million*

Both

For certain issuers, annual reporting
begins as early as 2025 for 2024
data. Dates vary depending onorganizational characteristics.

CA SB 253

US $1 billion

BothAnnual reporting begins in 2026 for2025 data (2027 for Scope 3 GHG
reporting).

CA SB 261

US $500 million

Both

Biannual reporting begins in 2026.

Organizations need to determine now whether new regulations may be applicable and begin preparing for the significant policy,
procedural and data-related improvements needed to ensure proper management and disclosure of material sustainability information.
* Subject to change. An increase of the threshold to €50 million has been proposed in 2023.

17

18

Where to begin?
Organizations should prepare for evolving voluntary and mandatory requirements by taking a sober
look at their current situation and mapping out an implementation strategy in line with reporting
requirements. This typically involves a combination of the following:• Take a deep, introspective look (“gap analysis”) at your current situation. Gaps andweaknesses should be identified.

• Establish high-level sustainability-related strategic goals and objectives at the board andexecutive-level based on preliminary assessment and needs. They should reflect the enterprise’s strategiccompetitive positioning on material sustainability factors and fundamental commitments.

• Build a roadmap with key tangible milestones to adopt and implement specific policy andprocedural enhancements over the short-, medium- and long-term to align your sustainability programwith timing requirements (i.e., governance, strategy, risk management and metrics/targets).

19

Assessing the Materiality of Sustainability Information
Materiality Assessment is a process designed to identify priority ESG and/or sustainability issues or topics for a specific entity. The
process is informed by internal & external stakeholder interviews and surveys, as well as research and analysis of industry and entity
specific background and ESG and/or sustainability-related information.

1

Informing Strategic Decision-Making

Identifying strategic areas of focus in relation to
ESG/sustainability, including important areas of value creation& preservation

2

Informing ESG/Sustainability Reporting

Identifying priority ESG/sustainability topics to focus on
for reporting & external communications based on key
stakeholders' expectations

3

Identifying Emerging Risks & Opportunities

Identifying areas to monitor on an ongoing basis to inform risk
management and to anticipate regulatory and stakeholder
demands

20

Different Definitions of Materiality
The definition of what is material in the world of sustainability varies significantly across different reporting standards & regulations
and may be different from definitions of traditional materiality as defined in financial reporting.

Financial (Single) Materiality

Double Materiality

Impact Materiality

Company

Company

Company

Impact ofenvironmental &social risks on thecompany

Impact of thecompany on
people & planet

Impact ofenvironmental &social risks on thecompany

Impact of thecompany on
people & planet

People & Planet

People & Planet

People & Planet

Example: SEC proposal, ISSB/SASB

Example: EU CSRD
(Corporate Sustainability Reporting Directive)

Example: GRI (Global Reporting Initiative)21

Conducting the Assessment
There are four basic steps for designing and customizing a materiality assessment to align with the needs of a given organization,
including specific reporting requirements.
STEP 1: DEFINE APPROACH &OBJECTIVESSTEP 2: UNIVERSE OFPOTENTIAL MATERIAL TOPICS

To design the right approach forthe organization we provide
guidance to define the following:

Creation of a list of topics to beassessed based on step 1, andpeer disclosures. Research ofreference frameworks/
standards could include thefollowing:• Assessment Objective(s)• Reporting Requirements (Voluntaryor Mandatory)• Materiality Definition (Financial, orDouble Materiality)• Assessment Output

STEP 3: ASSESSMENT

STEP 4: RESULTS

Assessment of the importanceof each topic from an impact
and/or financial materiality
perspective. We use a mixture of
methods to carry out theassessment:• EU CSRD• GRI

Aggregating the results anddefining thresholds throughdiscussion with management, inorder to finalize the list of
material topics (e.g. 1 - topics
that of strategic importance, 2 topics to be reported, 3 - topics
to monitor..)• IFRS S1/2/SASB

Surveyinternal/external
stakeholders

Interviewinternal/external
stakeholders

Basic Assessment *Expert &In-Depth Research- Litigation/Media- Industry Trends- Regulatory Trends- Peer Analysis Etc.

Subject toAssurance
under CSRD

Full Assessment* Basic Assessment can include light touch industry research.

22

23

Kroll ESG and Global Investment Returns Study
Executive Summary• Released in September 2023
• Universe of over 13,000+ publicly-traded companies across a variety of geographies and industries
around the globe.
• Investigated the relationship between a company’s total stock returns (dividends plus capital
appreciation) and its MSCI ESG rating over the 2013-2021 period.
• Examined four geographic regions (World, North America, Western Europe, and Asia Pacific) and12 countries/markets (Australia, Brazil, Canada, China, France, Germany, Hong Kong SAR, India,
Japan, South Korea, United Kingdom, and United States).
• Within some of these geographies, we further scrutinized the results for 11 industries (as definedby the GICS): Energy, Materials, Industrials, Consumer Discretionary, Consumer Staples, HealthCare, Financials, Information Technology, Communications Services, Utilities and Real Estate.
• Interactive ESG Dashboard available here: https://www.kroll.com/en/insights/publications/cost-ofcapital/esg-global-investor-returns-study
24Why MSCI?
Rationale for selecting MSCI as the source of ESG ratings for the Kroll StudyIn early 2021, Kroll conducted an analysis of main providers of corporate ESG ratings to decideon which source to use for our analysis. We interviewed researchers at some of these providers
to better understand their rating methodology. Ultimately, our decision tried to balance some of
the following key elements:• Coverage period• Coverage depth• Frequency of re-rating• Composite ESG ratings availability• Rating methodology

25Monthly Average Number of Issuers Includedin the MSCI ESG Ratings Time Series
13,77013,60520192020

14,44912,749d in the MSCI ESG Ratings Time Series

9,777

9,982

2014

2015

10,816

11,453

7,455

2,055

2,176

2,104

1,978

1,860

2007

2008

2009

2010

2011

2,668

2012

2013

2016

2017

2018

2021

26

MSCI ESG Ratings System
Not the same as Credit Ratings

AAA

AA

LeaderA company leading its industry
in managing the mostsignificant ESG risks andopportunities.

A

BBB

BB

Average
A company with a mixed or
unexceptional track record ofmanaging the most significant
ESG risks and opportunities
relative to industry peers.

B

CCC

Laggard
A company lagging its industry
based on its high exposure andfailure to manage significant
ESG risks.

27

MSCI ESG Ratings Over Time
Example: Tesla

28

Kroll ESG and Global Investment Returns Study
Methodology Summary• Created portfolios (or indexes) comprised of companies rated in each of MSCI’s ESG rating
categories and rebalanced them each month over the study period.
• Computed total returns (= dividend + capital appreciation) on a monthly basis for each index:– Calculated what the cumulative return was for each index since January 2013 throughDecember 2021 (i.e., what would $1 invested in December 2012 would grow to be at the end of
December 2021).
– Annualized the cumulative returns for easy comparison of one rating category relative toanother.
• Index returns are market-cap weighted based on the individual companies’ total returns in eachrating category.
• Returns are denominated in USD to allow for comparison across geographies.

29Top 16 Countries/Markets Included in the World Indexes
Number of Firm-Month Observations (January 2013−December 2021)
52.3%
261,572(32.2%)

45,356(5.6%)

22,613(2.8%)

32,533(4.0%)

13,747(1.7%)

16,190(2.0%)

20,848(2.6%)

12,554(1.5%)

76,742(9.5%)
40,986(5.1%)

30,046(3.7%)

21,728(2.7%)

18,146(2.2%)

14,801(1.8%)

12,644(1.6%)

11,703(1.4%)

30

Kroll Study

Aggregate MSCI Ratings (Leader, Average, Laggard) vs. MSCI ACWI IMI Index Cumulative Return(USD 1 Invested in December 2012)

January 2013–December 2021
$3.50

World (Leader)World (Average)$3.00

World (Laggard)

MSCI ACWI IMI GR USD
$2.99
$2.75
$2.53

$2.50

$2.11

$2.00

$1.50

$1.00

$0.50

$0.00

Source: Kroll ESG and Global Investment Returns Study

31

Kroll Study
High Level Results – World Portfolio

Source: Kroll ESG and Global Investment Returns Study
Filtered by Rating (is Leader, Average, Laggard, or Overall), Industry (is Overall), Region (is World)
32

Kroll Study
High Level Results – World Portfolio

13%
64%
24%

Source: Kroll ESG and Global Investment Returns Study
Filtered by Rating (is Leader, Average, Laggard, or Overall), Industry (is Overall), Region (is World)
33

Kroll Study
High Level Results – North America

Source: Kroll ESG and Global Investment Returns Study
Filtered by Rating (is Leader, Average, Laggard, or Overall), Industry (is Overall), Region (is North America)
34

Kroll Study
High Level Results – North America

10%*
72%*
17%*
* Differences due to rounding

Source: Kroll ESG and Global Investment Returns Study
Filtered by Rating (is Leader, Average, Laggard, or Overall), Industry (is Overall), Region (is North America)

35

Kroll Study
High Level Results – Western Europe

Source: Kroll ESG and Global Investment Returns Study
Filtered by Rating (is Leader, Average, Laggard, or Overall), Industry (is Overall), Region (is Western Europe)
36

Kroll Study
High Level Results – Western Europe

34%
60%
6%

Source: Kroll ESG and Global Investment Returns Study
Filtered by Rating (is Leader, Average, Laggard, or Overall), Industry (is Overall), Region (is Western Europe)37

Kroll Study
High Level Results – U.S. Industry Example: Financials

Source: Kroll ESG and Global Investment Returns Study
Filtered by Rating (is Leader, Average, Laggard, or Overall), Industry (is Financials), Region (is United States)
38

Kroll Study
High Level Results – U.S. Industry Example: Energy

Source: Kroll ESG and Global Investment Returns Study
Filtered by Rating (is Leader, Average, Laggard, or Overall), Industry (is Energy), Region (is United States)
39

Kroll Study
High Level Results – Western Europe Industry Example: Energy

Source: Kroll ESG and Global Investment Returns Study
Filtered by Rating (is Leader, Average, Laggard, or Overall), Industry (is Energy), Region (is Western Europe)
40

Kroll ESG and Global Investment Returns Study
Main Takeaways• The idea behind ESG investing is that if significant capital is flowing to companies that are considered “good”
ESG citizens, they should be able to raise capital at a lower cost (when compared to “bad” ESG citizens).
• From an investor perspective, a lower cost of capital means that investors should expect lower returns fromcompanies with better ESG credentials. However, the Kroll study reveals that companies with better ESG
ratings generally outperformed those with lower ratings over the 2013-2021 period, the opposite that theory
would predict.
• This relationship holds generally for all the major geographic regions and for most countries in the study. While
we have not shared the graphs in this presentation, there are two notable exceptions: Brazil and Germany.
• Focusing on U.S. industries, the best ESG rated companies do not always come out on top. ESG Leaders
outperformed Average and Laggard-rated companies in only five out of the 11 industries examined. Leaders
still outperformed Laggards in all but three industries: Energy, Healthcare and Communications Services.
Outperformance is not limited to the Tech sector, contrary to popular perception.
• Bottom line: making an adjustment to Cost of Capital (discount rates) for ESG is not a straightforward exercise– it could vary by industry and country as well as over time.
41

Kroll ESG and Global Investment Returns Study
Caveats• As more scrutiny is placed on what constitutes an ESG-focused investment, capital allocations maychange the relationship observed in our study.
• Because there are fewer companies with an ESG rating in some countries/industries, the results
may not be as meaningful as for broader geographic regions. This is also the case with the moregranular results for the seven individual ESG rating categories (i.e., AAA, AA, A, BBB, BB, B, and
CCC).
• The study only covers companies that had an ESG rating assigned by MSCI and therefore does notcover the entire universe of publicly traded companies around the world.

42

Where Could We see the Impact of ESG in Business Valuations?
Now: in Projected Cash Flows?
• Revenue initiatives• Brand reputation• Employee attrition / hiring costs /productivity• Property losses / Insurance protection• Stranded assets• CapEx• Long-term growth• Other43

Where Could We see the Impact of ESG in Business Valuations?
In the Future?

• Discount rates?
• Trading multiples?
• Acquisition/Transaction multiples?

44

45

46

ISSB – Corporate Disclosures• Finalized standards in June 2023:––

IFRS S1: General Requirements for Disclosure of Sustainability-related
Financial Information
IFRS S2: Climate-related Disclosures• Both standards will become effective starting on 1 January 2024. This

• The ISSB is working with a number of jurisdictions to ensure the IFRS
Sustainability Disclosure Standards can be adopted and applied
effectively around the world.
• The application of the standards, either voluntary or mandatory, willmeans that an entity would report its first sustainability-related disclosures

be predicated on individual jurisdictions’ willingness to incorporate

in 2025, if under scope. Some transition relief is available in first year ofthem into national laws. Several African, Asian and Latin American

application (e.g., limited climate-related disclosures).
• Early adoption allowed, but only if an entity applies both IFRS S1 and IFRS
S2 at the same time.
• IFRS S1 and IFRS S2 are built on and consolidate the TCFD
recommendations, SASB Standards, CDSB Framework, Integrated
Reporting Framework and World Economic Forum metrics. Requirements

countries have expressed interest in adopting.
• Even if the U.S. or the EU do not adopt these standards domestically,
U.S. and EU companies with operations abroad will still have to deal
with disclosure requirements in jurisdictions where the standards
become mandatory.

are interoperable with Global Reporting Initiative (GRI) standards.

• The European Commission, EFRAG and ISSB confirmed a high degree• Disclosures should be as part of a company’s general purpose financialof climate-disclosure alignment and will continue to work jointly toreports that include its financial statements.
• Additional industry-specific disclosure standards to follow.

optimize the interoperability of their respective standards.

47

European Union – Corporate Disclosures
CSRD/EFRAG’s ESRS• The rules introduced by the NFRD remain in force until companies have toapply the new rules of the CSRD. Under the NFRD, large companies have to
publish information related to environmental matters, social matters andtreatment of employees, respect for human rights, anti-corruption andbribery, and board diversity. CSRD introduces more detailed reporting
requirements on companies’ impact on the environment, human rights andsocial standards.

European Commission(EU’s executive arm)

Non-Financial Reporting Directive(NFRD)[Still Effective]• The EC adopted the European Sustainability Reporting Standards (ESRS) in
July 2023. Sector-specific standards to follow. Currently considering somerelief by phasing in requirements.

Impacts 11,700 large public-interest
companies:• Disclosures subject to limited assurance. Double materiality applies(‘financial’ and ‘impact’).

1) Listed companies
2) Banks / Insurance3) Other Public-Interest Companies• The rules will start applying between 2024 and 2028:*

Corporate Sustainability Reporting
Directive (CSRD)[Entered into force: 5 January 2023 /Member ratification within 18 months]

Impacts 50,000 companies:
1) Large EU Companies(listed/unlisted)
2) Listed SMEs
3) Non-EU Cos. w/ EU Rev. > €150
million– From 1 January 2024 for large public-interest entities (listed companies, banks, andinsurance), with over 500 employees - already subject to NFRD. Reports due in 2025.
– From 1 January 2025 for large companies (including non-listed) not currently subject to
NFRD (large undertakings meet at least two of the following criteria: >250 employees

Standards Developed by EFRAG:
European Sustainability ReportingStandards (ESRS)

and/or >€40 million in revenue and/or >€20 million in total assets). Reports due in 2026.
– From 1 January 2026 for listed SMEs and other undertakings, with reports due in 2027.
SMEs can opt-out until 2028.
– From 1 January 2028 for non-EU parent companies with EU revenues >€150 million andhave (1) a large or a listed EU subsidiary, or (2) large EU branch. Reports due in 2029.
Some exceptions apply. Sources: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32022L2464 andhttps://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A32013L0034. Revenue and total assets thresholds subject to change.

There are 12 ESRS:
1) General = 22) Environment = 53) Social = 44) Corporate governance = 148

United States – Corporate Disclosures
Securities and Exchange Commission (SEC)• In 2022, the SEC proposed for public comment, “The Enhancement and Standardization of Climate-Related Disclosures for Investors,” amending
rules that would require registrants to provide certain climate-related information in their registration statements (e.g., S-1, S-4) and annual reports(e.g.,10-K, 20-F).
• The SEC indicated plans for further rulemaking on human capital management disclosures, with a proposal originally expected in 2023.
• By the end of the climate proposal’s comment period, the SEC had received more than 11,000 comment letters—a significantly higher volume than it
typically receives—from a broad range of constituents, both in favor and against various aspects of the proposal.
• In April 2023, the SEC signaled it could issue the final climate rules in the fall of 2023, but that seems to have been delayed to April 2024.
• The proposed rules would be phased in for all companies, with the compliance date dependent upon the status of the company (e.g., large
accelerated filer) and the content of the item of disclosure. As originally proposed, the earliest impact of the new rules would begin to be felt andseen in 2023-2024. However, given that the final rulemaking has been pushed out significantly, the timeline for compliance would likely also be
extended.
• Some attestation would be required.

49

Example: Assessing Climate Impacts and Risks• Much of the existing and upcoming regulation
requires formal assessment and managementof climate risk, which includes:

Examples of Climate-Related Risks (Non-Exhaustive)(1) Establishing adequate processes for
identifying and assessing climate risk (thiscan be part of the materiality assessment
process)(2) Establishing adequate processes for
managing climate risk
(3) Integrating climate risk into broader
enterprise risk management systems• Given the anticipated prevalence andpractical import of the ISSB S2, mostorganizations would benefit from expressly
adopting that framework, which are fullyaligned with this approach.

Source: TCFD
Available at: https://assets.bbhub.io/company/sites/60/2021/10/FINAL-2017-TCFD-Report.pdf

50Scenario Analyses and theTaskforce on Climate-Related Financial Disclosures (TCFD)• All of the three major disclosure initiatives based their
proposed standards in part on the TCFD
recommendations.
• An essential recommendation of TCFD is to undertakeclimate-related scenario analyses to assess companies’
resilience to climate changeof Companies disclosed the useof climate-related scenario
analyses in2021• Both the CSRD and the ISSB will require companies touse scenario analysis in some form to assess theirclimate resilience.
• Unclear if the SEC will make it mandatory in somecircumstances.
• To the extent a company is subject to either the CSRD
or the ISSB, it would have to develop a system toconduct climate-related scenario analyses to meet theassociated disclosure requirements.

of Companies disclosed the useof climate-related scenario
analyses in

2019

Based on an AI (artificial intelligence) review of reports from over 1,400 public companies from five geographic regions over a three-year period (fiscal years
2019, 2020 and 2021). Source: “2022 Status Report: Task Force on Climate-related Financial Disclosures”, Financial Stability Board, 13 October 2022.

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Preparing for Evolving Assurance Requirements
Regulators are increasingly requiring limited or reasonable assurance over sustainability information, necessitating adequate andeffective internal controls with same methodological rigor involved in financial reporting.
3. Control Activities
1. Control Environment Commitment to integrity and ethical Control activities selected and developed
values General IT controls selected and Independent board of directors’ oversightdeveloped Structures, reporting lines, authorities,
 Controls deployed through policies andresponsibilities
procedures
 Attract, develop, and retain competent
4. Information & Communication
people Quality information obtained, generated, People held accountable for internaland usedcontrol Internal control information internallySource: COSO Internal Control—Integrated Framework

2. Risk Assessment
 Clear objectives specified
 Risks identified to achievement ofobjectives
 Potential for fraud considered Significant changes identified andassessedcommunicated Internal control information externallycommunicated

5. Monitoring Activities
 Ongoing and/or separate evaluations
conducted
 Internal control deficiencies evaluated andcommunicated52