Hi, welcome to evaluation podcast.com, a podcast and video series about all things related to business and valuation. My name is Melissa Gragg and I provide divorce mediation and valuation services in St. Louis Missouri. Today, we will actually discuss environmental, social and governance policies or ESG policies and its effect and valuations with Mark Zyla. Mark Zyla is a valuation expert in Georgia, and he's the managing director of[inaudible] valuation advisors and Atlanta evaluation and litigation consultant. He's also the chairman of the standards review board for the international valuation standards council. He was also one of the primary authors of the education program that the AI CPA and the Royal Institute of chartered surveyors for the certified, for the credential, which is certified in entity and intangible assets or the CEI V which basically, um, certifies valuation professionals in the valuation for financial reporting purposes. Welcome mark. How are you doing
Mark Zyla:Well, thank you for inviting me to your podcast.
Melissa Gragg:Yeah, this is awesome. I think it's, you know, we're really talking about an area that may be a little nuanced in valuation, but that's what we're here for. Right. Um, and it may be an area that is kind of up and coming. So there's, there's more infant emphasis on this environmental, social and governance policies and investing, but how do you see this start to even impact the business valuation profession?
Mark Zyla:Sure. Um, I think this is an area that business valuation specialists need to be aware of. Um, it's, it's something that we're seeing trends in other areas like investment funds, um, the accounting profession starting to take notice and it's eventually going to impact valuations and how we do our work. So I think valuation specialists, while it's still evolving, need to be aware of, of this trend in and out professions, responding to it
Melissa Gragg:Well, and, and trends are great, you know, like we always want to stay on top of it, but like even I don't totally understand what we're talking about, right? Like I get the words, environmental or social or governance policies, but what specifically is ESG and its implication for business owners?
Mark Zyla:Well, ESG is a trend is a nomenclature that encompasses the trends for socially responsible, um, corporate policy. So it can, you know, we're all familiar with the park environmental part with, you know, how core policy may impact the environment in terms of, you know, carbon emissions or[inaudible] patients or use of water use of energy. Um, but there's also components of social components. For example, the, we saw in the last year, year and a half, the social justice movement and trends like more diversity in the workplace and, and those have impacts on corporate policy and also have impact on eventually on cash flows and valuation. And then lastly there's governance, which is how companies respond to these particular trends through their own policy. So it may be things like, uh, setting up, uh, a, uh, sustainability program or having a things like a whistle blower program or executive compensation in each of these. The reason why we lump it altogether as being lumped together under the umbrella of ESG is that there are different impacts. Um, on one area, it may have an impact on another. So for example, environmental issues may have the direct impact on corporate governance and corporate governance band and impact on the social aspects of a business.
Melissa Gragg:Well, and I think that it's, it's interesting because I think the world is shifting and, you know, there are a lot of times just like in a traditional valuation, right? Just normal formal, we say, oh, you have contributions or you have, um, you know, so you're giving back to the community, are those business related or are they not business related? And a lot of times you will see that they're trying to combine, you know, like, okay, we're going to invest in this area because it benefits our practice, you know, but is it necessary for the business operations? Are we, are we kind of talking about some of that or is it even different? Like, do you have specific examples of these types of policies in business or is that, is, are they connected or am I,
Mark Zyla:No, I think, I think you're right on, I think that's a large part of it, but some examples, like for example, um, would be, uh, uh, examples like a DuPont is, is, uh, has a goal of, um, reducing their carbon emissions by a certain percentage by 2030. And they're doing deals with, uh, renewable energy firms to power their plants. Um, we see Volkswagen, uh, has made a effort to convert to all electric cars by 2030. We're we're seeing things like activists, uh, investors, um, becoming more active on boards. Like for example, it will mobile Exxon to reduce the carbon footprint print of oil companies. And so we see these trends and these trends are starting, you know, will eventually impact corporate policy, which will impact cash flow, risk growth, the three traditional basic measurements that determine valuations. And so we as evaluation profession need to be aware of this, these growing trends and how it impacts on the work we do.
Melissa Gragg:Yeah. And part of it is directly related to financial reporting, you know, so a lot of this is all directed to this and I'm trying to even figure out in regular business valuations, um, like how it impacts, because in my mind, in some capacity, you know, we've talked a lot about business valuations in the past of how like the past is no longer indicative of the future. And we also have metrics and benchmarking, right. That kind of talk to what is normal expenses like? Do you see some of these, um, basically, or maybe in, in some other, do you see these corporate policies impacting the valuations? Like, or are we looking at that companies are going to have to spend more in general to be like active corporate responsible participants in the world. And is that going to eventually change the benchmarking because of some of those issues?
Mark Zyla:Yeah. I mean, all of that, um, CLI I'd like to think of it in terms of, again, the, the, you know, the three key components of valuation, it's the cashflow, the company generates so corporate, these corporate policies will likely impact cash flows. So in some areas be increased investment, which increases capital expenditures, which may initially reduce cash flows, but have a long-term positive impact. Uh, it may impact risk. It may lower cost of capital, their academic studies that purport to show that having a social positive social policy w essentially reduces cost of capital, which increases value. And then long-term growth rates. There may be things such as simply as if you don't have these policies, how's this going to impact that your long-term viability as a company? Um, so each of these factors eventually impact the three basic components of valuation and there's ways as valuation specialists, we can look at got those right now, the professional we're looking at frameworks, like how does it impact the top line? Um, w if, if we have favorable policies, will people buy more product from us? So we have a better higher revenue. Um, if we're more aware of energy costs or costs of use of water, does that lower our cost structure? So we have a better bottom line eventually because of, of these policies, um, you know, some factors may be is our workforce. Um, they, our training costs, our hiring costs may be lower because they want to work for companies that have these positive policies. So our retention of our skill workforce. So it reduces, perhaps reduces our, uh, company's labor costs. So each of these, these policies eventually have a cashflow impact, which, you know, obviously, um, has an impact on the overall valuation.
Melissa Gragg:Okay. That, that is really helpful to understand, because I think as we're talking about it, you know, basically these are going to be corporate values that are going to potentially be more valuable going forward then, but there's still a cost involved in it. Um, and so if we took like one particular one, so I know you just talked about a lot of them, but if we could, could we take one and kind of walk through how it could, you know, like if there's something that you've seen a lot, you know, how does one of those corporate policies kind of go through and impact the valuation of that firm? Could you kind of walk us through, because I, I mean, to me, this is like all in CA I mean, this really is changing currently how business is done and, you know, going forward, are you going, not only are you going to want to work for certain companies, but are you going to want to buy their products? Are you going to want to invest in them? Are you going to want to do all of this from a corporate standpoint, they have to focus on this. But if we look at any of these corporate policies and maybe one that you've norm that you see more often, can you walk us through the impact?
Mark Zyla:Sure. Yeah. I mean, an example might be, um, like Volkswagen and their, their shift to entire a manufacturing, electric cars. So that's a pretty substantial change in business model. And so it's going to require an investment in different types of, of, um, auto parts for their cars. It's gonna, it's going to require some retooling. It's gonna require, um, an investment in, if not Volkswagen, somehow by society, in investment, in charging stations, um, as the, as the, uh, automobile transfers more to, um, electric type vehicles. Uh, so it requires, uh, uh, an investment in, in, in initial investment in infrastructure, but they may be able to charge more for cars. And again, may benefit the top line. Um, it may be, um, induce investors to invest in that company because they want to invest in, in those types of policy. So it may eventually reduce the cost of capital. Um, other examples might be, uh, um, um, impact on supply chains. For example, apple wants to, um, wants their suppliers to be carbon neutral by 2030. So if you're a supplier to apple, you to start implementing processes in place, um, to, to achieve that goal by 2030, or, or you may not be able to work with apple. So it's, we're seeing ripple effects on different companies because of these policies.
Melissa Gragg:Well, and so if we follow that same logic is that all of this investment or capital expenditures, or, you know, research and development, all of these are kind of categories of expenses in the business valuation. And so what you're telling me is right now, for them to invest in the future and or some profitability in five or 10 years, that there's going to be a huge outlay of cash at this point. And in just like simple, basic valuation theory, less cashflow, less value. So what does, what, what does that even mean? Like these businesses are less worth less because they're, they're focused on the future or,
Mark Zyla:Or they, they actually may be worth more. It's going to be it's so wood it's up, it's up to the valuation specialist to work with management, to understand the impact of these policies on, um, the expectations, the cashflow expectations, the risk expectations going forward, which are, you know, the, the basics of, of valuation. So, you know, it sounds like there may be a lot of upfront investment in some certain cases there may be, but there's also a cost. If you don't do that, what happens or you had a, this, um, you know, you can't just have cash flows into perpetuity. If you're, you know, making, um, gas powered cars, when the, when the world changes away from gas powered cars, you're not going to be in business. Um, if you don't have a, if you're a technology company and you can't, and you don't have a social, um, policy to attract a diverse workforce, right, you're not going to attract the best and the brightest. So it's impact, um, not only your hiring costs and your retention costs, but it may impact your, your developments because you're not hiring people who can develop the next couple of generations of products. So it may impact your longterm viability and your competitiveness if you're unable to do that. So it has a lot of ripple effects. So some, there are some direct, uh, impact on valuation. There are some that are indirect, and then there's some that establish a framework for the, the continued viability of the company. And what so evaluation specialists need to be aware of is, is this change is happening, and eventually it's going to impact valuation. So you need to start thinking about it in terms of a framework and thinking about it, how it eventually might, uh, impact your, your work and, um, uh, and what questions to ask.
Melissa Gragg:Yeah. Cause it really, like if I'm thinking conceptually, how do we put this into play? It is questions about what are you doing, but in some capacity, this is also in how you project, like, if you're doing a discounted cashflow method, which a lot of times in financial reporting you're doing right. So you're actually not only just, it's not only just like, Hey, do you have this policy in play? It's more, so this policy requires certain influx of money or outflow of money or something happening over time. So you're also trying to categorize, like at what point will we have completed the first part of, in an investment. And then when will we see the cashflow and then when will we see the next round, you know, cause nothing ever is forever. So is, is that part of, some of the questioning is important to also help do some of the projections as well.
Mark Zyla:And it's, it's, um, it's just an awareness of kind of going back to some of the things that were we saw with the mandatory performance framework in terms of, of responsibility of the valuation specialist and projection. So understanding to make sure that the, uh, forecast are appropriate for use in the evaluation. So it may be things just asking, you know, what is your, you know, Mr management, whatever mismanagement, what is your ESG policy? Um, and how do you see that impacting these cash flows? Here's what we see other companies in your sector doing, how do you compare to what they're doing? And if you don't compare favorably how's, that can impact your business in a longterm.
Melissa Gragg:Well, because, you know, and that's what I'm trying to get out a little bit is that we don't have the proper benchmarks. So if you have, if now all of a sudden you've hired an executive, right. For diversity and, and you have, or even an owner, you now have sort of a different, um, cost structure that if you looked at and compared to other people who are like, oh, we're 10% or 5% more in our salaries and our wages, when the reality is you might not be completely like that might be the normal going forward. So what are some of the challenges of how we actually measure this impact of these policies on value? And do we even have benchmarking or anything out there yet to kind of help with that?
Mark Zyla:Yeah, that's, that's, uh, an excellent question. Um, the, the trend in, in a lot of ways, even though it's 10, 15 years, you know, some cases, uh, it's still on its infancy, so it's, it's occurring, it's occurring quickly. The economic impacts of the pandemic have accelerated this trend. Um, however, the, the biggest challenges which you just hit on is, is standardization of measurement. First of all, if you think about measuring ESG and how it relates to valuation, there's, there's three parts. One is measuring the impact of these policies themselves. And there are rating agencies that rate various environmental, social, and governance policies of companies and provide benchmarks for that. Um, however, the challenge with that first is, um, when you compare, say rating agency for like corporate bonds, so like a Moody's or Fitch or a steering ports, generally they're they come to very similar conclusions. So there's a lot of correlation between those agencies, um, in rating for rating debt risk. When you S when you have the rating agencies for ESG, at least currently these agencies have different focus, so they're not nearly as correlated. And so there are some challenges, first of all, just measuring impact of ESG. The second challenge is how is that disclosed? And right now the accounting profession is becoming more heavily involved in disclosures and financial reporting of ESG, which is great news for valuation experts. However, they're not there yet. So, but, but some examples from very positive examples is the IRS, the, um, international financial reporting system. The, from the IIA international accounting standards board, um, is prepare, is developing in a international sustainability standards board. That would be a sister board to the organization that, um, issues accounting standards. So they're going to set up reporting standards for ESG or sustainability measures, so that there's consistency across financial reporting for these type of these type of issues. So that's the good news. The, um, international organization of securities regulators I ASCO is, has endorsed this process and they're actively, um, focused on, uh, these kinds of these kinds of standards. So more reporting, better reporting of, uh, sustainability efforts by, by corporations now, consistency and reliability across companies. So that's good news for evaluation experts now, like issue for evaluation X, um, for us as a profession is okay, once we have all this information place assume that, that you, we start getting better information is how do we utilize that information? How does it impact valuation? So I think once we start getting better reporting, better disclosures, we can assimilate it in basic framework of valuation that, that currently exist. So it's not going to change how we do the work, but it's going to change the inputs and things like, um, questions that we ask and making sure we're comfortable with the efforts and how it's gonna impact, um, eventually on the inputs to our evaluation.
Melissa Gragg:But realistically, I think what you said was, was two pieces. And we've just talked about the one piece, but there is an implication for cashflow, and we've kind of talked about that, and that seems logical. You know, we have to invest in these areas to be better, and they're places that even our consumers didn't put heavy importance on and now, and now everybody's, you know, I mean, single use plastics, for example, you know, like it's always been an issue of, we use too much plastic, but now it's more of a focus of like, okay, how can we remove that while you have more people actually buying cups that they can reuse? Right. Well, it takes us to be involved in it. But I think the piece that maybe we didn't talk about that you also said was that this, if this has an implication for risk, and I think that's the harder one. And realistically, even if you have bodies that are putting together benchmarking, you know, this comes kind of in with companies specific risk premium, right. Then you're going to have to have your own sort of internal, consistent, somewhat consistent measurement of how that impacts risk, because you're going to see a bunch of different valuations, you know, like I, instead of going and saying, oh, well, it should effect, it should make you a 2% less risky. It's really going to be like, totally how much do I see that this impacts the risk from a bigger, do you want to talk about any of them?
Mark Zyla:Yeah, no, those are, those are excellent points. Um, one example, as far as cost of capital is one issue is, or an example of, of the impact of this is Morningstar did a study and looked at funds that had a sustainability or an ESG focused and compared rates of return on those funds compared to peer groups that didn't have that particular focus. And they found in some cases, um, the rates return may be in 20% higher for the socially responsible funds. So there can be a lot of different reasons for that could be, um, you know, people want to invest in those funds as tracking more capital. It could be that, um, uh, investors are aware of the risk of not implementing these policies. So they're looking at those companies as, as riskier, but there are some empirical evidence of rates of return for social responsibility. And to your point, that practical use for valuation specialists is things like, um, how we develop our cost of capital. Um, it may not be just company specific risks, but maybe things like beta. So for example, if we're using, um, guideline companies to develop beta, if all the guideline companies have strong social policies in place, and we think in general that their risk is less, their, their rates are turn maybe maybe higher if we're using it to value measure, um, develop a cost of capital for a company that doesn't have a strong policy. How do we make adjustments for that? Um, you know, things like that. So it, it just increases it's, it's part of the normal stuff we should be doing anyway, but it, it, it's just a different set of questions or different issues that we as valuation specialists need to think about.
Melissa Gragg:Well, and you've said before that this was something that you were pretty passionate about and it could be, you know, and like you said, it's not like, you know, 10, 15 years people have said that some sort of, um, social and environmental kind of investment is a good process, but, you know, the valuation expert needs to be aware like that is a perfect example of guideline company. You know, like I think as it continues to be important to even know that there have been studies done that said that these are more profitable, you know, like that is very helpful information, but also then determining how you apply it. Um, I think one other piece is that what are the assets that we normally, so to me, this is kind of like, uh, uh, a guidepost of, Hey, valuation expert. You maybe haven't dealt with us in the past. So you need to look at the impact on cashflow. You need to look at the impact on risk, depends on whether you're doing, you know, a, uh, whatever, whatever model you use for your risk factor, right? Weighted average cost of capital, whatever it is. You need to understand it. I don't know if I would have even thought so far of the guideline company, because we're also doing that for, um, transactions. Right? Sure. That's an important piece, but are there certain assets which may be directly impacted that you're seeing very often by these ESG corporate policies that we should also be looking at?
Mark Zyla:Yeah, there are. Um, and, and to your point about, um, cost capital in this trend, just a couple of antidotes, um, there are of the, there was this, there was a study done of the S and P 500 something like 90% of those companies have a ESG policy or there a social policy. So it's becoming more and more prevalent among companies. And there's another one found that interesting is that, um, the sheet manufacturer, Albert w they underwent an IPO recently and their perspectives. Um, according to one article, they use the term ESG 91 times. So we're seeing trends that companies are focusing on these policies. So it's, it's something that's happening. It's not some esoteric, you know, just a feel good kind of thing it's, it's actually occurring. Um, but as far as particular assets that are impacted by corporate policies, uh, if you think about the companies, there's a framework, the IVC, the international valuation standards council has put out a series of perspective, papers written primarily by Kevin Paul on the, um, on these issues. And their suggestion with the IDC is develop a framework, um, to think about these policies on valuations and think about it in terms of, of assets like brands. So the, the, the stronger accompanies brand has, the more impact in ESG policy would have on its overall valuation, um, human capital technology companies that need to retain workforce. The more you have, uh, a need for human capital and, and, and a highly trained workforce, the bigger, the impact, uh, ESG policies, um, how on things like customer relationships, if you're directly to consumers, and you're seen as a socially, socially responsible entity, you may be able to charge higher, higher prices because people want to watch your product or your, your, your cost structure may be lower because you're more efficient in how you use your, your, uh, resources, um, tangible assets. If you've used a lot of tangible assets, it's, it's, that's a little bit more difficult to, to implement stronger policies, but, but, um, but there are intangible assets, um, indications that environmental buildings and such, you know, are, um, can charge higher rents and, and have hierarch occupancy, um, in technology, if you're more technology driven, you might be able to, um, focus more on ESG policy. So they think about it in terms of framework and at the end of the day, it, it, it primarily impacts intangible assets. And so if you think about environmental policies, it may impact your brand, that people are attracted to your brand, which tracks human capital, your, your workforce wants to work for you because you're a socially responsible company and people want to work for the good guys. So you're, you're, you know, indirectly, it impacts human capital. It may impact your customers because they, in addition to the brand, it strengthens your relationships with your customers. So we see a lot of the enhancements in value from ESG impacting those types of intangible assets, but also it could impact, um, tangible assets, things like, as I mentioned, buildings, um, there's studies that show, in fact, tangible assets may be a little bit further ahead, uh, in as far as the impact of these policies, because they're, there's studies that show, you know, they're higher occupancy in green buildings, um, um, you know, higher risks that, those types of things, which, you know, obviously enhanced values.
Melissa Gragg:Well, and I think that to your point, you know, these things have been around for awhile, but I think that we have society is catching up. And the reality is it doesn't really matter if I build a green building or a neighborhood of green buildings, if there's nobody buying green buildings. And so I think we just have had a disconnect for a long time of like, companies are actively investing in these programs are actually doing them maybe at the behest of the, uh, employees or, or management, but from a value perspective, we haven't had the consumers put value in place for that, right? Like you can always shop around, you can always purchase based on your value system, but you haven't really always had to. And we haven't put a lot of pressure on that. It's like, eh, I don't care. I like their chicken. I don't care what their belief system is. Right. You know, those types of things. Um, but have you even seen, um, corporations start to reevaluate, you know, almost like have a pool of money that they're saying, okay, we're going to need to do something with this. What is it that, that is going to have the most impact? Like, do you see companies actually start, look and say, okay, well, we've seen that social things have more impact we're going to do that. Have you seen that kind of thought process go through companies? Yeah.
Mark Zyla:Forget if you look at, um, corporations in their public disclosures, they're now disclosing their, their ESG policies. So you can follow it from those disclosures, their thought process and what they view as the most important. And I think in most situations, they see the interrelationship between the S and the G you know, for example, uh, you know, if you're, uh, if you're, um, DuPont and you don't pay attention to the E part, the G part, the government's going to S you know, governance, if, you know, you might face increasing regulation. Um, so your governance issues may, may change. Uh, if you don't have, um, the appropriate environmental policies, you may not be able to track employees, those kinds of issues. So it's all, it's all interrelated. Um,
Melissa Gragg:You, have you seen any delay in, uh, corporate ESG policy? You know, because, and I'll give the example, like, um, I had an electric car, I've had electric cars a lot over the past 10, 15 years. Right. Currently they don't, but in the past it, and in the past, you, as an automaker, you could be like, we're going to do electric or not. Right. You could make that decision. And now I think it's shifting that, you know, a lot of makers, car makers, uh, automobile makers that maybe didn't choose to lean into that are now being dragged in some capacity, you know? So do you see a lag in being proactive start to, um, basically lower the value of a company?
Mark Zyla:Yeah, I think so. I think companies are being more proactive. So I think there, the policies are being implemented today. Um, I think the, the measurement of the impact of those policies is a buy rating. Agencies is a little bit of a catch-up the counting standard setters are just starting to determine what needs to be disclosed. And then valuation professionals need to know what's, what's going to, once we get all this data, how do we, how do we utilize that to, to measure its impact on value? So I see that the policies are being implemented. So it's, you know, as valuation specialist, the message you want to convey to them is, you know, this stuff's coming. So start thinking about it. Um, even though the information is not perfect at this, at this particular point, but it's just an example that the companies are looking at the impact of these policies on pricing. And so they're there, they've done marketing studies that show that measure at what level are consumers willing to pay a higher price for a product that is viewed as socially responsible product compared to a peer. And there are certain price points that consumers are willing to pay. And so companies are seeing the benefits of implementing these policies.
Melissa Gragg:So even asking those questions, I think are important is, you know, have you done a recent pricing analysis? You know, have you considered changing your prices for something, because there, there could have been, it also makes me think that, like, there's going to be like the threshold of what you should write. I don't like to use that word, but what, what we think corporate responsibility is about is going to shift and you're now, you know, maybe there was like a threshold of do nothing, right? And now you're going to have this expectation. So I almost think at some point you're going to have companies that do not have some sort of ESG policy and people are going to be like, oh, well, you're only part of that 10%. That's not doing it, you know, eventually. And I think that we, as valuation, people have to say, okay, we'll will investors say, well, if you're part of that 10%, that has no policy, how can I actually warrant putting money into this company? If I know at some point it's going to affect you, if it hasn't already, because the, the, the implication is that it has already, you know, that there are either less people purchasing your products or you're hitting a price, um, competition issue. Right? So,
Mark Zyla:Yeah, I think one, one of the questions that evaluation specialists, but even more importantly, the companies themselves need to ask is what, what happens if you don't implement these policies? I mean, are you, you putting your company at risk, you know, for, for its actual survival, if you're, if you don't implement these, cause you may, you're fighting priests regulation, you may not be able to track the workers. You know, your people may not buy your stuff. You know, you may see, you know, your revenues declining, um, because you have a bad reputation. Things like, things like that.
Melissa Gragg:But as we come in, if we're the valuation professionals and you know, what else can we do to kind of help assist other than coming in, you know, to accompany and saying, Hey, this doesn't look as good. And a lot of these, a lot of these, um, financial reporting is for a transaction, right? And so you have maybe one company that is more fi more environmentally sound than the other and the implications. So what else do we need to do to really understand the, the, the amount of effect, right? I mean, because we're asking questions, but are we really saying, Hey, you guys could be worth less because you didn't do this. You know, arguably these are large companies. Like they should have a clue, right. So what else should we be doing to even understand, um, how it affects our work?
Mark Zyla:Yeah. I think from a valuation specialist standpoint, you need to be aware, you know, these trends. I mean, and I think, you know, you see them in the media, so we know these are, these are happening, but, but you need to be understand that corporations are taken as very seriously, and they're in implementing policies to address these issues. And those policies are likely to have cashflow you either cashflow or risk or growth impact. And obviously that's going to have an impact on the valuation. So as evaluation specialist, you need to start thinking about incorporating that in your normal evaluation process. You know, it's, it's, it, it's not expanding or changing anything the way you do your work, but it's, it's, it's thinking about it in a different manner or thinking about these other factors and in thinking about a framework, okay. You know, this company is, is a, you know, computer manufacturer, something, you know, here's their ESG policies. Let me think. Let's look at what other companies are doing in the, in this particular sector. Let's see if this stuff makes sense. And let's talk to management, how they see it impacting their eventual, you know, their expectations of cashflow.
Melissa Gragg:Um, well, and is this part of what we are going to maybe, you know, like this is, this is part of this C I V credential. So is this credential going to start to address some of these things like in the framework? Because I think, you know, at a minimum, we can say, if you're, if you're in this line of work, you need to have questions. You need to be asking them about it. You need to say, what is your policy? What is the impact of your policy? What is your action items of the policies? You know, what, what are, and in some capacity, like, are you even monitoring this? Like, okay, you say, you're going to have diversity and you say a goal, but is any anybody monitoring it? Is anybody paying attention? Have you reached the, you know, like, to me, it's sort of like how private equity comes in and says, okay, did you meet your goals? You know, um, did you, did you hit your first milestone and things like that? Like, are we seeing that the CIB credential kind of gives some framework for us or is it all kind of a work in process?
Mark Zyla:You know, if from the, from that perspective, it's, it's a work in process, but I think what, um, valuation specialists should think about is the impact of these issues on valuation overall valuation of entities, but specifically as it relates to valuations and financial reporting, measuring the fair value of, of intangible assets and, you know, clearly these, you know, for what we've seen and, and the, the empirical data is showing is that, does, that does have an impact on intangible assets, which, um, relates directly to the CIB credential.
Melissa Gragg:Yeah. And I, and you know, the, the reality is that you have to internally quantify it, but you're also saying that there are resources coming out. So just sitting back and being like, well, I don't know if it really does anything, that's not the case anymore. You know, there is the data, but then in your own edification, you have to see, okay, we're valuing these trademarks, these patents, these, this, uh, you know, name and things like that. And in the value of that. Right. Because I mean, we have to also put that piece in. So it's sort of like, if you're not including it as part of your template, if you will, of things that you cover, you might need missing something. That's pretty significant.
Mark Zyla:Yeah. That's exactly right. So it's something to, to think about when you're doing your work. Is it just added to your issues that you think about when you're, when you're doing evaluation, because it's becoming more and more important
Melissa Gragg:And start to reach out in some capacity? Um, you know, obviously I believe that if people are doing financial reporting, that you should be consistent with it and know what you're doing, but this is another area that if you are in this space and you are not giving a lot of thought to ESG, there may be an issue there. Um, and it's going to continue to be an issue. Now, if we have other people that are on the podcast that do have more questions about this, um, cause it's not really my speciality. Um, you know, they could reach out to you. And, and I think that this is what's going to start happening, even if it's not happening now, it needs to happen more often because, you know, we, as valuation experts need to also help promote the valuation profession. Right. And so in some capacity of people are doing a lot of this work and they're like, yes, G not doing a lot about that. They could reach out to you. Could you tell us more about like your firm and where you're focusing? Um, because again, if you're doing financial reporting, I think you have to connect with other people around the country that are also doing it because there's a lot of places that you can mess it up. I don't want to, I don't want to sound scary, but I think there are right.
Mark Zyla:Uh, I think, you know, first of all, I think just evaluation specialists, um, you know, it has particular impact on valuations for financial reporting, just because of the nature of the valuation of intangible assets, but I eventually impacting all types of valuations just because of the nature. And so as a specialist, again, just be aware that you know, of the trend, but also it's, it's coming on pretty quickly and you will start seeing more guidance from the accounting standards setters, uh, w probably seek better measurement of impact of ESG. And therefore it's going to assist us in our work, in, in measuring the financial valuation impact of, of these policies. And so, um, just be aware of that, that that's occurring. Um, start thinking about when you're doing valuations, perhaps asking questions, get a better understanding of a company's policies. And, you know, there's, uh, some things that, you know, you could provide advice to your clients that, you know, if you're, if you're not, if your client is not, um, focused on this, that it may impact, you know, long-term viability, they may not be as competitive in the future. Um, so that's, you know, consideration of your cashflow protects risk. So it's just right now, um, in awareness stage, but it's been, it's coming pretty quickly. And it's something that the profession is starting, is working with other standard setters through organizations like the IBS-C and, um, and providing a voice of valuation, uh, impact on, on these policies.
Melissa Gragg:But also I think getting involved, you know, um, I think that, you know, we've clearly identified that you are involved in national associations. And so am I, and I think that, you know, if this is important, um, and, and I think that, um, environmental and social things are of even more important right now, um, given the climate and such that if it is important and you're doing this type of work, that one way to stay kind of ahead of the game, if you will, is to start putting your time into some of these boards and to get involved, um, because it's going to take input from people who are actually doing the work to make sure that, you know, because in my mind, absolutely you would encounter this and financial reporting, but is, it is a really, just a trickle down effect, right? You know, we talk about authenticity in marketing and, and, and putting yourself out there, right. Just as whoever you are. And isn't that really a form of authenticity for the company. You know, we're going to put our money where our mouth is, and these are the places that we deem it important. I don't know if we're always asking about those things in a regular valuation, you know, and, and as they become important for publicly held companies, the trickle down effect is that it's going, because I think it's going to raise the standard. I think you're not going to have, like, we can just sit back and make profits and do nothing. Right. It's, there's going to be sort of a requirement for you to do something more. If you're going to, you know, utilize people to make money or products or, or any of those things, then you need to start giving back to those same communities, um, or populations in general. So I think, I think it's going to be an area that all of us need to ask more questions.
Mark Zyla:Yeah, absolutely. I think, I think you, you know, society is, is in general causing these changes, which I think is good. It's not mandate by the government, um, which is, is good, but, but society has holes is changing that. And so, um, they urinated to know ride the wave, or they're not going to, you know, likely may not survive. Um, and that, you know, of course has impact on, on value. And I think one way, wouldn't you say that only one way to, to see the impact is just start noticing advertisements in, you know, just what city watching a football game or something, uh, on a Sunday, uh, just look at the advertisements and look at the focus of the advertisements. And you'll see, you know, companies are trying to enhance their brand, their intangible assets where we're good guys. Um, and here's what we're doing and which not. And it's not, I'm not saying it's lip service. I'm saying they're actually doing things, but yeah,
Melissa Gragg:I said the other day, such a good example, I said, the NFL has really come out with much better marketing and advertising and a message. And here's the thing is as the marketing switches to messages, messages from a social or an environmental standpoint is what is connecting with people. And so I think it, I think it is huge, but I also think that, you know, eventually it'll be like, okay, well, you don't the other pieces that eventually it will be CRE required, but it will not affect pricing. So I will not pay more for you to be socially responsible. And there's where I think you're going to start to see, okay, we need to still put this outlay of cash to do these things, but it's not resulting in premium pricing because everybody else has to do it too.
Mark Zyla:It'd be more like if I'm not going to buy from people that don't do this.
Melissa Gragg:Yeah. And what is the impact? And I think that we will have, you know, as we continue with that, we will have more metrics because, and it kind of falls within like, you know, uh, what we're seeing on social, which is a business owner, a person does something that goes against the brand name, right. And gets crucified personally. But then the brand also does it a nosedive. Um, and they could have had nothing. It was just an employee that was a jerk to somebody coming in and then they recorded it. And it's now on, you know, Facebook or something like that. So I think that, that the, um, the record in that recording it's, you know, like the documentation of it as well. So it's, can't just be lip service. It's gotta be actual actions. And then, you know, in, in your filings, you're going to say, okay, well, here was our, well, we had what we wanted to do and here's what we did. Yeah.
Mark Zyla:Yeah. It's to your earlier point, somewhere to private equity, AIG, meet your mark. And this is what you said you were going to do.
Melissa Gragg:Yeah, no, that's awesome. Well, I, uh, I was interested in this topic, but now I'm like, oh gosh, now there's more things I need to think about and each evaluation, but definitely from financial reporting standpoint, if you have questions about this, you know, I would definitely reach out to mark. Um, he obviously knows way more about it took me to the entire podcast to get really smart about it. So, um, so definitely reached out to him and mark, if there's other things that we can talk about in the financial reporting place, then let's do it because you're really, um, very helpful and very knowledgeable. And we appreciate all of your time and energy. Is there anything else you want to kind of share or offer or
Mark Zyla:Nah, just, uh, you know, uh, it's, it's a exciting opportunity. I think for evaluation, I think this is going to be a, a big impact in the future for evaluation specialist. So, so start thinking about it.
Melissa Gragg:Yeah. And younger people, and even people who are in like the middle of the, you know, the prime of their, um, of their valuation career, this is a really great time to get involved with being a part of it, you know, of how it's going to change of the nuances of it so that everybody gets it right. You know, everybody wants to sit back and be like, oh, that organization didn't get it. Right. We'll be a part of it, a part of making it. Right. You know, so, and then you can talk to mark about that. And I was thinking, well, this is awesome, mark. We appreciate it. And I'm sure we'll have you back soon to talk about more fun financial reporting, valuation topics. All right.