In this episode, we talk to two faculty members who are driving the effort to integrate sustainability and social impact topics into the curriculum at Haas through both the core curriculum and electives.
Dave Rochlin, the Executive Director of the Innovation, Creativity, and Design Practice at Berkeley Haas joins us first. He teaches a new applied innovation elective called Designing Tech for Good, recently featured in Haas News.
He shares why he created this class, the role business leaders play in shaping public policy, and his ideas for the future of sustainability at Haas.
We then sit down with Panos Patatoukas to hear more about how fundamental MBA classes like finance and accounting can transform the mindset of future leaders. Panos is an Associate Professor at Haas.
Can accountants save the world? (Panos)
36:51 – If I can find ways to make it easier for great people to get finance and execute their vision, and come up with great technology, I think that will be a success for me, right? But it’s going to be really, the question is how do we get these incredible people to innovate. And I think that’s really the role of management.
Where do you see the US markets going in terms of disclosure? (Panos)
34:23 – I don’t want to make predictions, but you know, the trend that I see is more convergence as opposed to divergence in the way we think, across the globe. And I think that’s driven by investors. I think the investor base is globalized and investors demand I think more clarity in terms of the way companies are reporting their activities and in terms of the way they fund portfolios and to make decisions.
What do you want students to take away from your course (Dave)
22:51 – How to be more creative around problem-solving. We do have some design thinking built into the course and some systems thinking. And so, suspending the idea that you can solve the problem right away and thinking much more creatively about possibilities is something that we definitely put into the course and make sure the projects consider.
- Dave Rochlin’s Faculty Profile
- Dave Rochlin on LinkedIn
- Panos Patatoukas Faculty Profile
- Panos Patatoukas on LinkedIn
- Panos Patatoukas on Twitter
(Transcripts may contain a few typographical errors due to audio quality during the podcast recording.)
[00:00] Adriana: Welcome back to the Sustainability at Haas, a podcast looking at how the UC Berkeley Haas School of Business is shaping the next generation of sustainable business leaders. I’m Adriana.
[00:14] Olivia: And I’m Olivia.
[00:15] Adriana: And today, we’ll be talking to Professor David Rochlin who is the Executive Director of the Innovation Creativity and Design Practice at Berkeley Haas. Also, we’ll have Professor Panos Patatoukas, Associate Professor and now Chair of the Penney Accounting at Haas.
[00:35] Olivia: In this episode, we’re talking to two faculty members who are driving the effort to integrate sustainability and social impact topics into the curriculum at Haas through both the core curriculum and electives. Our first guest is Dave Rochlin who teaches a new applied innovation elective at Haas called Designing “Tech for Good,” which was recently featured in Haas News. Welcome, Dave.
[00:55] David: Well, thank you. I’m very delighted to be here with you two.
[00:57] Olivia: Excellent. Well, let’s get started. We would love if you could first start by telling us a little bit about your background.
[01:04] David: Sure, I’d be happy to. So, I guess you could call me a pracademic. I’ve been at Haas for 12 years, but I come to academia by way of business. I had a few level jobs in both tech and the NGO space. I like many electives at Haas, actually. You have classes rise in response to student interests. So, I have a business degrees in both Haas, actually, as an undergrad in Kellogg. And I was a consultant in CPG Marketer, and then a tech executive. So, I’ve been in larger companies, built some of the internet pioneers. I also ran a FairTrade NGO and also currently run an NGO that focuses on climate and forest burns.
[01:43] Adriana: What an interesting story. So, we want to hear, maybe, a little bit more about you recently launch a new class, right?
[01:53] David: Yeah, it’s Designing “Tech for Good” Initiatives. Very exciting tech, very exciting new class, really successful inaugural edition last fall. And very delighted to be doing it again this year.
[02:04] Adriana: That’s pretty exciting. So, why did you decide to launch this class? Do you find a specific unmet need that made you trigger the proposal of this class?
[02:16] David: So, to put it back on the fact that Haas students were becoming more interested in the responsible side of tech, the more I saw that, the more I thought there was a need to put that into place here at Haas. In this case, a couple of trends at play. I’m going to go on for a while here, if you don’t mind. It’s going to be a little bit of a monologue. But Haas was really a trend-setter when they first launched the Center for Responsible Business (CRB) 20 years ago.
At that time, the impact of sourcing and supply chains on the world was a new concept. I remember back, for example, in 2007 when I was working the FairTrade NGO, we went to visit Walmart. Very interesting time for Walmart. There was something called the Walmart Effect that had been recognized in the early 2000s, which is they were so large that, if they made a decision on packaging or carrying a certain product, they actually had an external impact that was noticeable in the world. I think, at one time, they were something like 10% of the trade deficit with China, for example.
And so, somewhere in the mid-2000, middle of the first decade, they recognized, “Wow, we need to think more about that impact.” And so, I spent a fair amount of time in Arkansas with a lot of other NGO heads, working with them and trying to understand, how do you account for and improve the impact of your supply chain? Walmart has gotten quite good at that in the last 15 years. But at the time, it was a new thing, that the size of their impact was quite large. And their ability to manage it was, I would say, somewhat minimal.
If you look at where we are with tech now, 15 years ahead, it’s the same thing is happening with tech. So, all of a sudden, you’ve had firms that right now need to consider the impact of the decisions they make, much more than they used to. Think of something like Slack for example. A new app like Slack arises and, all of a sudden, it changes the way we all work. Sometimes, you have to think about how to have conversations in a way that you didn’t before. And of course, a company like Facebook, for example, where do you start with their issues? Their products have a direct impact on depression in young people. They have significant issues from a privacy. There’s a lot to think about in terms of the use of AI, the role in amplifying hate. And, of course, in their case, they’ve almost consistently got it wrong.
But in other cases, tech can have a major positive impact in solving social problems. We worked with Autodesk in the class last year. For example, they’re embedding sustainability tools into their design suite. And as a result, when someone is building design, they can now consider how their architectural and design choices impact the energy consumption or other issues around that building. And so, that’s a case where they’re considering the impact of their tech in a very positive way.
So, with that, again, as was the case with sustainable supply chain 15 years ago for responsible tech, it is something that needs a lot more attention. And I think Haas students certainly recognize that the effect in the class last year, I think, we’re really excited about trying to understand how to make sense of all that.
[05:14] Adriana: Wow. That was very impressive. So, I’m curious to know a little bit more about how is the class structure. Do you work directly with specific companies like Autodesk? Are there more than one company that you work with? What do you cover in lecture? And what do the projects give to the students in terms of critical skills and tools?
[05:35] David: It’s interesting, when you’re talking about responsible business and impact, the skills and tools are actually quite distinct. So, you can’t just really always—you’d like to borrow more from the normal management tool set, but there’s some things that are very different.
We spend about half the semester introducing key concepts. And we do that in a variety of ways—through cases, guest speakers, some lecture, a lot of discussion, flipped classroom. So, we have to talk about everything, from platform strategies because that’s what drives how large tech firms, in particular, make decisions, to the role of corporate social responsibility. But not just CSR on its own, but how CSR intertwines with strategic alignment. So, we have to spend time saying it’s not what you want to do, it’s what you do that actually supports the mission.
Those are things on the tech side. And then, on the social impact side, things like root cause analysis, theory of change, human-centered design, as it applies to solving social problems are all things you need to consider. We put all that in in a very rapid and fun way in the first half, which is, maybe, seven weeks. And then, we switch to client work. We typically work with folks that are working in the for good or social impact side of large tech firms. And they will give us a challenge to either consider or validate for them. As I mentioned, we work with Autodesk a little bit on how do they measure the impact of embedding sustainable design tools. With Electronic Arts, EA, we work on positive play. How do they actually create positive social interactions in gaming? And then, for example, with Dell, we were working with their research group that reports to the CIO on what some of their advanced technologies could do to solve civic engagement issues?
[07:17] Olivia: Those are some great examples of ways that your class takes theory and puts it into practice. I think one of the things that you said a moment ago really hit the nail on the head in terms of the almost love-hate relationship that Haas students have with tech. Similar to Walmart and retailers in the ’90s, tech has a bad rap these days. And at the same time, it can be a really great place to launch your career to new heights to gain valuable skills. I hear a lot of my peers and classmates at Haas grappling with this tension. Tech is also one of the top employers of Haas graduates. What advice do you give to students who are interested in pursuing a career in tech but are worried about selling out, almost in a more philosophical sense? What advice do you give?
[08:12] David: Well, tech can have a very positive—It’s like any large firm, not to harp on Walmart, but you could argue with Walmart you’re either having a massive impact, or with Amazon, or you’re selling down. The larger firms, part of the excitement of going in large firms is the impact you can have. Part of the reason to get an MBA is to live big in the world. And you live big by running big. And so, having a chance to work in large tech is an opportunity to make decisions and implement things that affect millions of people.
I think you do have to consider, though, how that fits with your own set of values. Every firms have different values. And the thing that probably—I’d like to say, okay, it’s just about culture, but you know—and culture is a huge part of it. But I think one of the things you need to do is understand the essence of how a firm competes. For example, for the class, actually, I just finished a Berkeley Haas case on Hopelab. Hopelab is a social enterprise. It’s funded by the Omidyar Foundation. And it’s all about mental for you. They developed an app for college students, basically, to address loneliness. You wouldn’t think loneliness matters to college students. You’re surrounded by your 2,000 best friends. But in fact, expectations are often not met in college environments. And so, they wanted to develop an app that would coach college students on making lasting friendships in college. Really, an important thing.
So, again, as a social enterprise, their key metric is teen mental health. And so, everything they built into the app is focused completely on, are they hitting that metric? And if you think about a traditional social media company, they’re competing on clicks or engagement or something else. And so, you have to feel comfortable with that. You can’t go work at, again, a company like Facebook if you’re not comfortable with wanting to increase engagement and have people spend more time in the app, or TikTok, or any of the social media, for that matter.
So, you have to just think about that and how you feel about those types of things. So, since we’re at the core of competition, everybody has got DE&I initiatives right now. Everybody’s doing for good. All of the companies want to prove that they’re tools to get things in the world and that they want to build positive cultures. But they do compete in certain ways. And so, even one of my favorite companies, and certainly one of the top Haas employers that we’ve worked with a lot in my Haas project class is Adobe. But I went to Adobe MAX virtually this year. And a lot of the engineers are working on subset tools that automatically can change reality. So, you don’t like, maybe, inconveniently your ex-girlfriend or ex-boyfriend sitting with others in a photo. Click a button and that person’s gone. A bird’s going across the screen. Click a button. There’s a ship in the background in the ocean.
A lot of these things alter the nature of what’s real. It’s pretty cool from revision view, but at the same time, you have to ask, well, am I comfortable? Does this have any impact that I’m concerned about personally? And if so, how is the company addressing that? The idea of personal truths and altered reality are becoming significant issues in tech. And so, you have to—depending on what part of Adobe you’re working, you’d have to come to grips with that.
Or again, with Adobe, in their marketing suite, surveillance marketing is a real thing right now. You go visit a site to look at a hat, and the amount of information that’s known about you by virtue of you stopping in on that webpage is massive. And that information gets to you. You have to decide if you’re comfortable with that as a business technique or not.
And so, again, those things are probably not changeable. So, definitely, focus on the things you can change. But also, understand the things you can’t change. And that has to determine what sort of tech you decide is right for you.
[12:04] Olivia: Thanks, Dave. I think one quick follow-up to that question, there was something that you said when we did our preview call. You said something about when you’re a Haas student, when you’re an MBA student evaluating potential future employers, to think about where they are now, recognize that, in the current state, there may be some dissonance in terms of your values and what the company is willing to do. But also, to think about where they could be 10 years from now, and whether you could be part of that journey or part of that process in driving the ball forward. Do you mind speaking to that a little bit?
[12:42] David: Yeah, absolutely. Particularly, sustainability and social responsibility classes with undergrads, I talk a lot about this, because they’re early in their careers and highly ideological Berkeleyans. Maybe, you’ve probably noticed, if you pass them in the hallways, right?
So, there’s always going to be a values gap between you and a company. It’s not going to be that your values are not as great as their values, because they’re going to do what they can to screen you out. If they don’t feel like you’ve mastered a value, they’re going to have a hard time hiring you. On the other hand, if you look at the other type of air, your values will probably—if it’s not the other way around, your values will probably exceed the values of the company in some way. Again, it could be some of the issues we talked about previously, or it could be something completely different around their approach to play health or DE&I or whatever that thing is. So, if you’re looking for the perfect match, that’s a really tough thing to do.
So, I think you need to think more about, again, I would hope your desire is to have an impact when you go work inside a tech company or another company. So, I think the real key is to look at where they’re heading. And that occurs in many ways. There are many firms that are making net zero commitments, but they’re 10-year commitments. And you don’t know if they’re going to get there or not. Many firms that are making commitments around the positive use of their tech or doing better, if you believe that that journey gets to where you feel good about the company, and you can help take the company on that journey, what better way to spend your time? Instead of being unforgiving at what you see as the shortfalls of particular companies, I think it’s worth taking a little time to understand what they’re trying to do and where they’re trying to go, and then think about your ability to be a change agent. Again, because of the size of these companies and their impact, the kind of impact you can have by doing that is really quite substantial.
[14:32] Adriana: It was very interesting to hear about the work that you’re doing with the Here@Haas and Adobe. And those are greatest market to me. So, a lot of companies are doing innovation and setting up the scene for new methods of doing X, Y, or Z, right? But there is also a role of public policy and how the top-down approach, like how policy really drives how to incorporate change, right? And we also know that this classes provide also the opportunity, like the Goldman School of Public Policy students to be part of it. So, I’m curious to hear, how do you see the transformation between business leaders, policy drivers, an all into one class in one space?
[15:22] David: That’s a great question. I have to start by saying that’s one of the great things about Berkeley, if I can say so humbling on behalf of the university, is we’re good at almost everything. And so, what’s interesting, I think, when folks make their decisions about business schools, they look at the business schools but they don’t look holistically at what the entire campus has to offer. We’re, obviously, in the top 10 across all other MBA programs. But if you aggregate all of the things that Berkeley does, we’re by far, as an aggregate score, number one. So, getting a chance to bring students from something like the Goldman School of Public Policy is a really rare lucky thing for us to do. Goldman is the number one public policy school in the country. There’s real benefit to working cross program like that. And we built that into the fabric of the course immediately. It’s interesting, your perspective is quite different. And so, it was incredibly valuable having them in because we have a different way of thinking about impact than Haas students do.
So, to the more detailed part your question, for CSR to work inside companies, their responsibility platforms, there are really only three drivers that make it sustainable and long-lived. The first is you’re doing things for risk avoidance. And so, a lot of climate activity is in that bucket right now. It’s like, well, we got to do it because, if we don’t, then maybe we’re going to be dropped from ESG fund, or maybe there’s going to be some accounting risk issues associated with it. Quite a few do it for reward. So, if we do this, our customers and employees will love us. And therefore, it’s worth investing in certain responsibility or sustainability platforms to do that.
But the third is simply regulatory avoidance. And it’s a huge thing. If you look at surveys, year after year, I showed this data in some of my classes, they ask CEOs, what’s your number one concern to your business? And every year, number one and number two on that list consistently is regulation. Every CEO on the planet believes that over-regulation is the thing that’s the biggest threat to their business. And so, understanding the regulatory piece, and particularly, regulatory avoidance, is really important.
Startups often ignore it. Their risk profiles are different. So, if you’re Uber, you’d say, “Well, we’re not a taxi company.” If you’re PayPal, you’re not a bank. If you’re Airbnb, well, we’re not a hotel. And so, you just ignore that. But sooner or later, you have to grapple with it. Regulation comes for you. There are plenty of approaches to consider. Some of it is straight out lobbying. There’s been several articles lately about the lobbying effort to big tech, actually.
One really large very prominent strategy used is called pre-competitive collaboration. And what that means is, this is going to be a risk. We don’t want to compete on it, but we don’t want anyone else to compete on in it. The best thing you can do is get everyone to agree, let’s not do this anymore. Some are really obvious, like the cocoa industry. Let’s get slave labor out of cocoa. That means we all have to agree that we’re going to source certain ways and nobody’s going to cheat because, maybe, they can get it cheaper if they do.
And so, thinking about effective pre-competitive collaboration, how do you build industry initiatives that accomplish what is normally a function of government is huge. And so, as far as the public policy piece, companies now are playing a central role in establishing public policy through these types of entities. So, if I gone to the World Business Council and say, “We all agreed that the way we’re doing privacy is not good. And so, will you help us facilitate a new way of doing privacy standards that makes it so that we can be effective, we don’t get into trouble with government, and we’re doing hopefully better than we’ve done?” But we don’t want to do it on our own because we’re just going to lose if we do that.
And so, managing that element of public policy is really a key. And again, having Goldman folks, they think about public policy in a different way. And so, that’s really helped. But we do talk about it a lot, this idea of pre-competitive work and what it means to get industry initiatives as opposed to individual initiatives going.
[19:15] Adriana: Wow, that’s very intriguing. So, is these pre-competitive collaborations driving towards the systems thinking and how to incorporate that systems view into innovation?
[19:28] David: It’s an interesting question. I think, if it’s done well, that would be the case. So, systems thinking is complicated. A good example I always use for systems thinking is there’s a fishing village in Mexico where there’s no other job. And so, they keep fishing. And as they fish, the waters are getting overfished. And as the waters get overfished, they have to do more fishing to solve that problem. You don’t just slap a ban on fishing. You have to think about creating other economic activity, or people are just going to go around it.
So, typically, with systems thinking, the root cause analysis, which is one of the things that we focus a lot on with Tech for Good class, is really important. It’s not the thing you think. It’s something else that’s hidden. And I think the struggle for pre-competitive collaboration is that companies don’t necessarily get as much credit for that. So, again, with the issue of forced labor and supply chains and cocoa, the issue is specifically lack of other options and lack of—it’s easy to say, “Well, we should send those kids to school.” There’s no school. Creating solutions, sometimes, is not obvious.
So, in some ways, systems thinking can help because firms, if they’re not doing it alone, can do a better job of that. On the other hand, I think they’re aware of wanting to do more visible things. And so, sometimes, some of the most important root causes don’t get covered. So, that’s one of the things that interplay between root cause analysis and corporate social responsibility alignment. It’s something we talk about a lot in the class. It’s like, what are the things that are broken? Which ones make sense for our company to deal with? And it’s hard, difficult, and frustrating because you know you’re leaving things on the table.
And there’s plenty of data. It’s very circular whether companies that did CSR work outperform, or because our companies outperformed, they get to do good CSR work. That’s the eternal debate that goes on. But I have plenty of data that shows you that if you’re a CEO and you have a strong CSR platform and your firm underperforms, you are almost certainly getting fired. The CEO of Danone, that’s a perfect example. Danone is a water and dairy company. From my point of view, I’m like, why are they even trying? It’s kind of hopeless. If you’re in the bottled water or the dairy business, it’s really hard to argue about your environmental impact. But he was determined to turn them into a model of social responsibility. He was moving along just fine until they started to underperform their competitors and then he was gone. And so, you have to choose to do things that have impact against certain root causes, but also are things that help the firm compete or at least are in the wheelhouse of the firm.
[22:00] Olivia: Thanks, Dave. So, just as we wrap up here, I’m going to take a little bit of a different tack with this next question. Thinking big picture, what are the three main takeaways that you hope Haas students have from your course? It could be a new or different perspective, a key learning from class. We’ve talked about a lot of them, I guess. What’s the, maybe, pithy one, two, and if you’ve got it, three takeaways?
[22:36] David: So, the first is, really, focusing holistically about tech and the impact, as we’ve talked about throughout this morning, to really consider not just what they’re building but the secondary impacts of that. The second is something that flows throughout all of my teaching, which is how to be more creative around problem-solving. And so, we do have some design thinking built into the course and some systems thinking. And so, suspending the idea that you can solve the problem right away and thinking much more creatively about possibilities is something that we definitely put into the course and make sure the projects consider. And then the third thing is this concept of figuring out where the best place for impact for a particular company is. You have to develop programs that are both competitively enhancing and positive for the world. And so, assessing different levers to pull and figuring out which ones are the best for the company to put on so they can keep doing it, if someone doesn’t come and cut that budget two years from now, is super key. You want to put things in place that are sustainable and permanent. And so, thinking about how to do that means your effect will be much more lasting as a tech executive.
[23:43] Olivia: Great. Thanks, Dave. I think your last point about thinking holistically about impact is so, so important. I think, even as someone who’s nearly completed a two-year MBA program, that’s one of my main takeaways from this experience overall, is that the tools of business only get us so far, and it’s really crucial to also be thinking about stakeholders in the policy realm, the nonprofit sector, as we try to tackle these major challenges.
[24:20] David: Absolutely. One of my colleagues, Tom Lee, we had a conversation a while ago about machine learning and algorithmic decision-making. And he pointed out, look, even with machine learning, the objective is set by a human. It’s not set by the machine. And so, there’s a human element that impact all of these things. Before we turn technology loose on optimization, we need to think hard about the impact of what we’re asking that algorithmic decision-making to do, the perfect example of that.
[24:50] Olivia: Yeah, that’s a great example. So, last question, tell us a little bit about what’s next. Do you have other ideas on the horizon for how Haas can better integrate sustainability and social impact into the student experience, other ideas up your sleeve for this class or others?
[25:07] David: Haas is obviously leaning very heavily into sustainability now. You now have a certificate program. And even in our normal core classes and other electives, there’s been a strong interest in making sure that we’re including sustainability as part of the conversation. And so, I think you’re going to see opportunities in many places within Haas to continue to integrate that in your thinking and your work, whether you’re going to be in finance or marketing or tech or whatever.
For me, personally, I have a couple of things I’m really interested in that we’ll see how they’re developing the curriculum. One is this concept of what the UN calls slow-onset disasters. We live in a short-attention span world, right? And so, things like climate change, for example, or PFAS pollution, these things happen slowly. And so, one of the challenges is hourly or daily or weekly information cycle, how do you get attention substantially putting out these slower and longer burn onset issues like climate change? And not just climate change, there’s many others as well. And so, that’s something I’m doing some doctorate, actually, which I’m very interested in.
And then, again, as I mentioned, there’s imposed digital piece. I think we talk about digital literacy in a different way than we talk about literacy, interestingly enough. When we talk about literacy, if you say someone is literate, you think that they can read. But it also means they’re right. When you think of digital literacy, you think it’s their ability to code or to create. But digital literacy is also a form of consuming. And so, digital literacy around how we consume technology is something that I think is incredibly underweighted. And so, we don’t teach kids how to interact with TikTok. We don’t, for ourselves, consider when to hit the Send button or to respond to something we’ve seen on email without understanding the intent of it. It’s all sorts of areas. I think that’s something that we really need to reconsider is, again, how is our relationship with tech?
[27:04] Adriana: So, now, we will transition to conversation with Professor Panos Patatoukas to hear more about how fundamental MBA classes like finance and accounting can transform the mindsets of future leaders like us. Panos is an Associate Professor at Haas, the L.H. Penney Chair of Accounting, and Distinguished Teaching Fellow. So, Panos, thank you for joining us today.
[27:28] Panos: Thank you for the invitation.
[27:30] Olivia: Panos, we would love to just hear a little bit more about your background. Can you tell us about yourself?
[27:35] Panos: Yeah, sure. I’ve been at Haas for the last 10, 11 years, I’ve lost track. But I’ve been around for a while. And over the last several years, I’ve been pretty active in the EWMBA program, did some financial information analysis. Every year, we have two sections—two full sections—of students who are interested in learning more about financial information analysis and how they use financial data to make more informed decisions. And that’s primarily what I do for my teaching.
And then in terms of research, I’ve been active in empirical capital market research. Really, the question is how we can use financial and alternative data to understand how prices are being formed, how the stock market is processing information. One of the things connecting my research and teaching is my keen interest in understanding how we can use data and education to promote individual investor protection. I believe in financial education, the power of financial education, and thinking of ways that we can provide easier access to everyone through the power of data and education.
[28:43] Adriana: Thank you so much, Panos. It is really exciting. And taking your class this semester, for me, has been really exciting to hear how you care about the individual investors so much. So, thank you so much for this brief introduction. So, I was going to ask you, as the Chair of the Accounting Department at Haas, what is your vision? How do you envision mobilizing change within the environment and within accounting and finance?
[29:08] Panos: To be clear, I’m not the group chair. I am a chaired professor, but I’m not the group chair. But leaving the details aside, which don’t mean much, I think in terms of our discipline in accounting and finance resource, I think I have real impact and real implications across many decision-makers, from regulators to policy-makers, to institutional investors, to the individual investors. And through our research and teaching, we’re trying to close the gap between practitioners, regulators, and, of course, academics.
[29:42] Olivia: One of the things that I’ve been doing during my time at Haas is working with Michele de Nevers, who’s the Executive Director of Sustainability, on understanding opportunities to integrate sustainability into the core curriculum. And accounting has actually been one of the disciplines where we see the most already going on. So, I would love to hear a little bit about what accounting at Haas is already doing on this front. How do you think about sustainability and how it integrates into the accounting curriculum?
[30:20] Panos: So, as a matter of fact, earlier today, I had a meeting with Michele. I talked with Michele about those issues. I was almost running late for this podcast because of my meeting with Michele. So, I blame her [laughs]. I think accounting and finance, we have so much to offer to this debate and inform issues around sustainability, the integration of sustainability.
The way I think about sustainability, actually, I’m thinking about sustainability through the lenses of ESG. So, I’m just going to focus on the ESG component because I’m thinking about measurement along the dimension of the environment, the social component, the governance component. So, the four things that come to mind immediately our discipline can contribute really to measurement, how do we measure ESG activities? And, of course, some dimensions are easier to measure than others. Some dimensions are more verifiable than others. For some dimension, we have more data and better data than others. So, there’s a measurement component. And then there’s a disclosure component. So, how do we actually disclose the things that we measure. And when we disclose this information, when we disclose information about the company’s environmental, social, and governance activities, how we will actually process this information. How do they use the data? How do they use the information? And how do ultimately those disclosures have an impact in real decision-making?
The third topic related to the measurement and disclosure is, of course, the issue of standardization. How do we provide information in ways that allow for comparisons for the same firm over time? But also, close different firms in the same sector? Because I think it’s very important. I think it’s one of the key issues now with SEC policy proposal with respect to the standardization mandating this climate-related disclosures to have a common baseline for corporations and investors in terms of disclosure. So, standardization is related to measurement and disclosure. Standardization, I think, is also the epicenter of the debates that are happening right now as we speak.
And I think the last piece relates to investments. So, how do investors, both institutional investors, from index fund managers to pension funds to get funds from passive all the way to active investors, but also, individual investors, use reports about sustainability activities, ESG issues, in their decision-making? So, I’m thinking about disclosure. I’m thinking about measurement standardization, and of course, the investment component. And then, with respect to the last one, it’s especially important because the way we measure things can have real implications to the extent that an ESG scoring system, for example, is mismeasuring what it’s supposed to be measuring, that can really have unintended consequences in terms of separating more from less responsible companies and the way capital flows in society.
Now, going back to your question, I think our discipline can contribute to all four of these dimensions. And I think this is reinforced by the fact that, only a few weeks ago, the SEC came up with this proposal with respect to climate-related disclosure. So, these are accounting issues. These are disclosure issues. And we’re going to have more to say over time.
[33:53] Adriana: Panos, really interesting to hear from you about these four components, measure, disclose, standardize, and how to invest properly. And I’m curious to know, where do you see the US market going right now or the impact of what already has happened in the European markets? How do those two worlds compare? Do you see more inclination for disclosure in a similar way? Or does it differ significantly?
[34:26] Panos: I don’t want to make predictions, but the trend that I see is more of convergence as opposed to divergence in the way we think across the globe. And I think that’s driven by investors. I think the investor base is globalized and investors demand and think more clarity in terms of the way companies are reporting their activities and in terms of the way they fund portfolios and make decisions. So, I think, if I had to guess, and it’s not a wild guess, I think I see more tendency towards convergence as opposed to divergence. And I think that institutional investors are playing a big role in terms of accelerating the convergence process.
[35:09] Olivia: Just to chime in there, I think those four areas—measurement, disclosure, standardization, and investments—really speaks to the centrality of accounting just in our financial and economic systems, and I think is a good segue to one of the next things we wanted to ask you about. Adriana and I were listening to a talk recently from—it was organized by the Yale Center for Business and the Environment. And one of the contributors quoted Peter Bakker who’s the CEO of the World Business Council for Sustainable Development. And he said, to save the world, we need two groups of people, in particular, accountants and business school professors. So, I’m just curious, what are your thoughts on that? Can accountants save the world?
[35:59] Panos: I think science is going to save the world. And I think, at best, accountants and business school professors, perhaps, can facilitate a little bit of flow of capital towards better ideas and innovation that may save the world. And I think, at the end of the day, it’s going to be scientist that come with incredible new technologies that will mitigate the existential risks that we might be facing now.
So, I don’t want to overstate the role that we might be playing, both as accounting profession and as business school education. I think, at best, what we can do is facilitate measurement disclosure, so that, eventually, capital is allocated in a more efficient way in ideas that are more likely to lead to social welfare improvements, so that everybody is very open and some of the existential issues are being addressed. But that’s really my personal view. If I can find ways to make it easier for great people to get finance and execute their vision and come up with great technology, I think that will be a success for me. But it’s going to be, really, the question is, how do we get this incredible people to innovate? And I think that’s really the role of measurement.
[37:17] Olivia: Yeah, I tend to agree. Even though a lot of my time at Haas has been focused on working with Michele and pushing for greater sustainability in the core curriculum, I also think that, in addition to business school professors and accountants, we can’t understate the important role of policy as well. And I think you spoke to the importance of science. And that’s a critical component, too.
[37:44] Panos: Investing in science and investing in new technologies. Another thing I want to point out—because I have many students and not everybody is affiliated with technology. We have many people in technology, obviously, but I do have students in sectors that are not considered as green as others. So, for example, we have some of our students in the oil and gas sector and the energy sector. And I know them, and they’re great students. And many of them are actually scientists, and they’re engaging in innovative projects. And what I see and what I hear is that a lot of innovation might be coming from great places that might not be as obvious to us.
So, for example, I was talking to some of our students affiliated with Chevron. And I learned about the kind of projects they are pushing right now and the investments they’re making. And what’s interesting about some of these company companies and some of these sectors, they might be very poorly rated by rating agencies in terms of their ESG score, but still, they may be investing heavily in innovation. Perhaps, not as much as many of us would like. But still, they’re taking active steps in terms of making real investments in technologies that, perhaps, if they’re banned out, might change the world for the better. And I know that because I know our students and I believe in our students and their capabilities. So, it was interesting to me to see that innovation might be coming from great places that we might be actually divesting right now or not investing as much.
And that’s why I think, in every sector, there will be leaders. In every sector, there will be great people and great innovators. And of course, in every sector there will be companies that are lagging behind, companies that are not able to attract or retain incredible people. And so, the question is, how do we compensate reward winners so that they continue to innovate? And how do we penalize the losers, so those who are falling behind, so that capital is allocated in more efficient ways. So, going back to the broader theme of who’s going to save the world, I think it’s going to be science. And at best, what we can do is create an ecosystem that is more likely to encourage people to be entrepreneurial, take action, execute their vision, and come up with new idea ideas and technologies.
[40:19] Adriana: That’s a great point. As an engineer myself, for the love of sustainability, I love this point because I really see that connection of not thinking only about what the capital markets, what they can do, and accounting in order to make the flow of money, but make it actionable. So, we can count, but we have to make the action happen in order to save the world. So, on that segue, what do you see are the keys to transforming accounting to help the flow of capital going to innovation or other specific sectors?
[40:57] Panos: To me, measurement is a big issue. So, for example, if we’ll look at the rating agencies, those that are some of the primary data vendors of ESG scores, the question is what do the scores actually capture? And I think that’s an important question because, when it comes to ESG scoring methodologies, many of these models and many of these data sources ratings, have become the basis for portfolio strategies and indices. And many of those indices have become the basis for financial products such as exchange-traded funds (ETFs) that are tracking those ESG-based indices.
So, to the extent that some of these ESG ratings may not capture where they’re supposed to be capturing, and to the extent that they’re not perfect in terms of separating more from less responsible companies, well, the question then becomes whether the financial products that are based on this course actually provide effective means for investors to invest with their values. So, how we measure things can actually have real implications. And it can have real implications to the extent that—and actually one mechanism or way to have real implications is that a lot of money is benchmarked to indices based on ESG scores, so to the extent that ESG scores are measured with error and this error is systematic that can lead to systematic distortions in the way capital flows. And ultimately, we want investors to have easy access at a low cost to portfolios and products that allow them to invest truly with our values, so that capital flow stores ideas that aligned with the values of the investors.
[42:52] Adriana: I remember doing class that you mentioned that we’re investing even if we’re not actively investing. So, putting our money into our 401(k)s or anything that money is being invested actively into other sources. So, it really opened my eyes in terms of, if I put my money into my 401(k) then that money gets flown and maybe someone else is making the decisions to my values. So, how do I really drive that decision-making from my perspective and democratize it in different ways is very critical.
[43:27] Panos: Related point, Adriana, is that when it comes to, for example, your pension fund allocations, so I think we need to have more transparency and standardization in terms of the way some of these pension funds, and what’d you get access to as an employee, perhaps. What’s the ESG footprint of your portfolio? And what are their characteristics? And of course, try to measure all of that in a proper way. So, I feel like measurement is a key issue. How do we measure sustainability, environmental, social activities at the front level, but also, at the portfolio level. And I think, even in class, we saw that what could actually use a simple vector of fundamental characteristics, a simple fundamental screen to reconstruct a portfolio that has a similar ESG score to an ESG-based index.
And that was eye-opening to many of our students because they say, “Wow, look at that.” So, I can actually build a very simple screen at a very low cost that effectively replicates the ESG profile of an index that may be marketed as an ESG-based index but cannot capture some of the fundamental accounting variables but transform through the lenses of an ESG score that may or may not be separating firms based on whether or not they’re more or less responsible. So, in a world where we see a lot of indexing happening and a lot of money benchmarked on indices, really, the way we measure things at the firm level can propagate up to the market level very, very quickly.
[45:10] Olivia: So, switching gears a little bit, in your research, you are integrating different methods and recommendations for the business community to start thinking about stakeholder capitalism, not just as a general idea but as more of an integrated business practice. So, can you tell us a little bit more about your research findings and recommendations, and then also speak to how you might bring those findings into the classroom?
[45:38] Panos: So, my most recent work, actually the one that we presented in class with Adriana last week, it relates really to ESG scoring methodologies and portfolio construction. And the idea there was that, from the point of view of individual investors, we need better measures and we need more transparency across index fund providers so that people really get access to low-cost portfolio so that they invest with their values. So, when it comes to stakeholder value creation, the way I’ve been thinking about stakeholder value creation is, again, through the lenses of financial information analysis, which is my class. I’m thinking about the return on capital but from the point of view of stakeholders relative to the opportunity cost of capitals of stakeholders.
So, while we have been thinking about the idea moving from shareholder value creation to stakeholder value creation is to internalize some of the costs related to the activities of the firm that are impacting the stakeholders. In class, we try to use carbon emission data for example and try to estimate what would be the cost of offsetting those and to what extent we can use those estimates to restate the numbers and get a better sense of value creation from the point of view of stakeholders.
I think one thing that I realize through my research and my classes that the transition from shareholders to stakeholders is broadening the scope to bring in more groups of decision-makers. Traditional finance can be expanding the straightforward way to incorporate these different perspectives. And in our class, we try to do it this semester. It’s interesting because, Olivia, one of the constraints in terms of actually shifting perspectives from shareholders to stakeholders is access to data, data that can give us more information about the different perspectives and the different points of view. And I think, when it comes to the recent SEC proposal mandating, it’s still not proposed whether the extent that they will go through in a few months from now. And the expectation is that it will go through, I don’t know whether in its pure original form or with after some amendments. But if it were to go through, one of the things that we’re going to get is access to more data. And that can actually change the way we measure things and the way we think about stakeholder value creation.
[48:08] Adriana: Yeah, that’s fascinating, how you can create action through the numbers and really make it happen, make a transition of capital money to other ways, other spaces. So, Professor, do you have any interesting—or are there opportunities for new students or prospective students to start learning more about these ESG? Anything that comes to mind?
[48:32] Panos: Yeah, absolutely. Well, first of all, if we have any prospective students, I would love to have them in class. And we had a few over in the last couple of weeks. But on top of that, I want to mention that, on June 1st, we’re organizing a conference. The title of the conference is ESG Accounting: The Present and Future of Environmental, Social, and Governance Disclosures. So, it’s happening on June 1st at the Speaker Forum. And we’re putting together four panels organized around the issues of disclosure—well, measurement, disclosure, standardization, and investing.
And we have a great lineup of panelists and moderators, many of the big four. Well, actually, I would say the Big N because we might have a few others represented. Many of the Big N accounting firms will be there together with our clients. We’re going to have an SEC commissioner to talk about the role of the SEC in terms of mandating climate-related disclosures and sustainability-related disclosures. We’re going to have the CEO of the Value Reporting Foundation, Janine Guillot, to talk about the sustainability accounting standards setting process. And we’re going to have people from the investment community, including the Head of Index and ESG Research from Bloomberg and the Global Head of ESG and Sustainable Investing from State Street Global Advisors, together with a senior columnist from the Wall Street Journal.
The set of panelists is not complete yet. We’re getting closer, but the conference is happening in June 1st. And I would encourage as many people to join as possible. I’m organizing this conference through our Center for Financial Reporting and Management, which is one of the centers at Berkeley Haas. And I think it’s going to be very timing. Actually, the timing couldn’t be better, to be honest with you. So, I’m pretty excited about it.
[50:29] Adriana: So, to end our conversation, which has been fascinating, and it has brought back so many good memories from our class, I want to know what do you hope Haas students will take away from, not only your course, but from taking classes that are fundamental business that are including sustainability or sustainable components into the discussion.
[50:52] Panos: So, when it comes to ESG-related issues and, more broadly, sustainability-related issues, I’m thinking of our portfolio of core classes and elective classes. I know now the emphasis is infusing more sustainability into the core curriculum, but I think we need to broaden the scope and think about the entire curriculum and how we can infuse cutting-edge research and topics that are relevant right now to our community—and sustainability is one of those issues—throughout the entire curriculum. And so, first of all, I feel like a distinction, perhaps, within core and electives is a little bit artificial, because, at the end of the day, all MBA students may not go through the same electives, but definitely, we’ll take some elective classes. So, I feel like that distinction probably shouldn’t be there.
But what I really hope our students to get is I want them to get everything. I want them to get a holistic perspective on everything. I want them to get the traditional core accounting and finance and operations and micro, very, very strong foundation. And then, on top of that, exposure to things that are currently happening, so that, by the time they graduate, they have the foundation, but also, they have the acumen to become effective communicators and leaders in fields that are growing. And of course, sustainability is one of those domains that is currently the top of the nation and is likely to continue to be the top of the nation for the years to come, given how central the issues are to our existence.
So, going back to your question, what do I want our students to get? I want them to get everything. I want them to get the foundation. I want them to get everything that is currently trending and growing and is timely and relevant, so that, by the time they graduate, they’re effective leaders.
So, going back to my class—and again, that’s my own biased perspective because I pretty much see everything through the lenses of financial information analysis—I want them to be able to grasp financial data and make decisions. But I want them to be able to overlay other source of data to make even more informed decisions. So, even in our class, we saw how we can use traditional accounting data with information about sustainability investments, with information from ESG, rating agencies, and create a bigger vector of dimensions through which we can make decisions. So, I feel like that’s my perspective. Hopefully, that covers your question.
[53:32] Adriana: Definitely, Panos. Thank you so much, Panos, for coming and talking to us and for giving us opportunity to learn in class, like for myself, learn on this course and have open conversations about what this topic means for accounting, for finance, and how we can make decisions. Thank you so much.
[53:50] Panos: Yeah, definitely. And my students have been a source of inspiration. And it was you, my students, pushing me to learn more about those topics and be able to form an opinion. So, Adriana and Olivia, thank you very much for leading this. And Adriana, I’ll see you in class.
[54:07] Adriana: Definitely.