ServiceNow, Inc. (NOW) Earnings Call Transcript & Summary

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Hello, everybody. Good morning, good evening, good afternoon. My name is Svetlana Zenkin. I'm a Senior Product Marketing Manager at ServiceNow. And I'm delighted to be joined today by my expert colleagues to talk about ESG regulations and specifically, "What technologists need to know about ESG regulations." So just a little bit about why did we select this title for this event. You may have already seen or can easily see there's a lot of information out there online from various organizations. And regulators themselves about the regulations, lots of content, white papers, webinars. And we -- it is not our intent to do a deep-dive overview about the regulatory landscape today. What we want to do is dig a little bit deeper and a little bit more kind of to the side, I guess, to get into how different parts of companies, organizations, technology, IT departments, in particular, as well as other compliance risk departments as well will be affected and what they'll need to do as a result of the ESG reporting regulations. So that is our goal today. To accomplish that goal, we'll run through this agenda, we'll have some introductions and maybe learn a little bit more about you, the audience as well. Provide a fairly quick overview of environmental, social and governance regulations, including a spotlight on the proposed U.S. SEC Securities and Exchange Commission Climate role as well as a highlight on the EU Corporate Sustainability Reporting Directive, or CSRD and how it will affect companies globally. We will move into a panel discussion to dive into and explore how different departments across companies and organizations, as I mentioned, will be affected by these regulations and how to do about them. And a quick discussion of what ServiceNow has in terms of its offerings and solutions to support this compliance, and we will have some time for Q&A. So let's get into some introductions I will ask the speakers to introduce themselves in alphabetical order. So Vilasinee, then Saurabh, then Carri and then I'll just do a little bit on myself. So Vilasinee, please.

Hello, everybody. Good morning, good evening, good afternoon. My name is Svetlana Zenkin. I'm a Senior Product Marketing Manager at ServiceNow. And I'm delighted to be joined today by my expert colleagues to talk about ESG regulations and specifically, "What technologists need to know about ESG regulations." So just a little bit about why did we select this title for this event. You may have already seen or can easily see there's a lot of information out there online from various organizations. And regulators themselves about the regulations, lots of content, white papers, webinars. And we -- it is not our intent to do a deep-dive overview about the regulatory landscape today. What we want to do is dig a little bit deeper and a little bit more kind of to the side, I guess, to get into how different parts of companies, organizations, technology, IT departments, in particular, as well as other compliance risk departments as well will be affected and what they'll need to do as a result of the ESG reporting regulations. So that is our goal today. To accomplish that goal, we'll run through this agenda, we'll have some introductions and maybe learn a little bit more about you, the audience as well. Provide a fairly quick overview of environmental, social and governance regulations, including a spotlight on the proposed U.S. SEC Securities and Exchange Commission Climate role as well as a highlight on the EU Corporate Sustainability Reporting Directive, or CSRD and how it will affect companies globally. We will move into a panel discussion to dive into and explore how different departments across companies and organizations, as I mentioned, will be affected by these regulations and how to do about them. And a quick discussion of what ServiceNow has in terms of its offerings and solutions to support this compliance, and we will have some time for Q&A. So let's get into some introductions I will ask the speakers to introduce themselves in alphabetical order. So Vilasinee, then Saurabh, then Carri and then I'll just do a little bit on myself. So Vilasinee, please.

Thanks, Svetlana. Hi, everyone. My name is Vilasinee. I am also known as V. I oversee the ESG reporting disclosure function, working cross-functionally here at ServiceNow. I've been here for 2 years, but prior to that, I helped midsized and large-sized company either stand up their ESG programs and reporting or to operationalize what's already existing. So turning strategy into operations and delivering on impact, but I did come into the ESG space by way of financial services or spend, I would say, at this point, most of my career. And that's pretty much it. I'm really looking forward to seeing some of your questions as well.

Saurabh?

Thanks, Svetlana. Hi, everyone. My name is Saurabh Dubey. I'm a Managing Director with Deloitte. One of my key focuses is taking the ServiceNow based ESG solutions to market. My entry into the space of ESG has been kind of a mixture of a bit of educational entry and a bit of a personal in. My family lives in Gurgaon, New Delhi, pollution levels are fairly high. So everyone might go back to visit, I used to have conversations with my dad about the need for a more sustainable world for the future. And then kind of from a technologist perspective, when I was a grad student, one of my professors and I were kind of looking at this back in we published an early paper on applying some agree with sustainable practices towards with the lens of ITSM actually IT service management. So the paper kind of started my journey and in the conversations we might had kind of kept that going. And coming from a family of teachers and professors, the curiosity got better of me and went deeper and deeper. So at hard I am a technologists myself, I was tend to see things with that mindset with those guys. So looking at what role can technology play towards achieving the SDGs, what role with the different parts of IT play helping clients think through how to navigate the journey. That's where I spend most of my time. And looking forward to sharing some of that thoughts with you as well.

Great Carri.

Nice to meet you. I'm Carri Thompson, Senior Director of Operations Compliance and ServiceNow. I've been at ServiceNow for quite some time these days, almost 13 years. But prior to that, I came into the space from health care and medical device spend some time there and then moved into what I will call my journey in the cloud. And in my role, in my current role, I sit over basically governance, risk and compliance. And have helped to build that whole program here at ServiceNow in the very beginning back when we were under 200 employees, very small company at the time to where we're at today. And so this journey that we're going into with ESG and the pieces and parts as they ebb and flow and change until they mature out, it's -- to me, this is fun. I might be a little bit twisted in that way, but really to talk to you guys about this and hear your questions as well.

Great. Thank you. So you can see we have a very wide range of expertise and perspectives represented which is fitting for this very complex and broad topic and the fact that ESG management ESG reporting an impact is really an organization-wide endeavor. It's not just one department and that technology reporting legal compliance risk, are very, very key aspect of it. I we'll apologize for potentially some background noise. My husband is getting my kids ready for school, and there might be some screaming, not how much I can do about that. So sorry about that. But a little bit about me other than the not personal tidbit is that I spent before ServiceNow before going into marketing, I actually spent several years in a few different companies, mostly in the technology sector working on their corporate sustainability, ESG programs, focused on reporting, goal setting, environmental stuff. And actually, I was reflecting before webinar on one of my first experiences there was a summer internship at a kind of large home goods company headquartered in San Francisco, one the first couple of weeks during that internship, my supervisor and I went to visit the company's owned data centers further up in Northern California just to see how they operate it and learn how the head of those data centers was super invested and meticulous and innovative really with all of the things that he and his team did to increase power use efficiency to make the cooling related topic, just to take advantage of all of the optimization and the cooling to optimize the server operations, and it was a very cool experience and introduction to how technology, again, is a really, really key part of a company's sustainability goal, sustainable agenda. That was more than 10 years ago. And at that point, the efforts were fairly voluntary kind of marketing and brand based and now 10 years later, it's pretty much a requirement, especially for big companies to be certainly disclosing -- they're disclosing their environmental and social and governance topics as well as actually doing something about those things. So that's what we'll be getting into. But first, we'd like to learn about you, the audience, just to see who is being represented during this event so that we can tail our commentary as much as possible to your interest. So please select which 1 of these best describes [the role]? Is it IT or technology? Is it risk? Is it legal or compliance? Maybe you are representing a ServiceNow partner organization. Like the one that Saurabh represents, Deloitte or maybe something else, we tend to get a variety of roles in these webinars. And while you're answering, I'll just remind you to please put your questions in the Q&A field to also, as we mentioned earlier, to please fill out the survey after the webinar, it really, really helps us. And finally, you should be able to access some resources as well, to help you learn more about the topics that we are discussing today because there's definitely a lot to learn there. I'm just going to wait a little bit more. Okay. We're getting some responses here. So Okay. So it looks like we've got a pretty even coverage. We have some technologists, IT folks, risk compliance or legal, some partners and others. So great. Thank you for engaging and letting us know your background. Okay. Just to really focus the discussion because, again, this can be such a broad topic. We want to emphasize a few key points that we will address throughout. But one is that regulations are here. ESG reporting regulations are here. They're not somewhere off in the future. So prepare early and actually prepare now, start preparing, it's really important. The other is that data is at the core of -- good data at the core of these regulations. That is why technology, we believe is super important to their compliance, and we will talk about how to optimize your ESG data collection and verification a little bit why that's important to do to actually keep up for these regulations and you can take advantage of the ServiceNow platform to do so. And then finally, because many of these regulations require reporting that covers the supply chain and vendors are in scope, you need to be partnering with your vendors, with your suppliers and other third parties actually as well to ensure full compliance. And again, that takes time, and you need to be starting now, rather than waiting. Okay. So another question to gauge your familiarity with ESG reporting regulation. So what is your level of familiarity? Maybe you have kind of briefly part of that, maybe heard some of the many acronyms but not a lot of detail. Perhaps you're familiar with the major ones, but still trying to figure out what to do about them. Or maybe your company has done something to prepare for compliance and you have maybe specific questions on how to do that and what service now is doing or some of our some of our other partners and customers are doing this. And perhaps some of you feel that your organization is fully prepared to respond, which I would imagine that would place you in the minority because it is such a evolving landscape, but we'd love to hear what or see where you are with respective regulations. Okay. I'm just waiting a little bit. I think we gotten most of the responses we'll receive. So okay. So it looks like some familiarity, some taking steps -- and yes, as expected, I don't know. I don't know if anybody could say they're fully prepared to respond, but I would love to speak to them if they do feel that way. Okay. So now let's get into our overview of these regulations. So this is -- there's a lot. There are a lot of them. It's constantly evolving. As I've mentioned, they're all over the world. This webinar is focused on the Americas. So that's kind of what we are highlighting today, but it's still helpful to get a global view. This is happening everywhere, companies are operating in many different jurisdictions internationally, so it's important to know. Now the global landscape. But for Americas and U.S.-based companies, the most the closest regulation that is coming as the SEC climate rule, the proposed climate rule that will dig into a little bit. There's also a climate disclosure rule on regulation in Canada. There's something happening in California that's still in the proposal stages. We have also outlined or highlighted rather in yellow the EU Corporate Sustainability Reporting directive or the CSRD because this regulation, while it is -- has been published by the published by the European Union, it applies to companies globally for various reasons that we will be discussing. And then the other point, you'll see the acronym TCFD, it's the task force for climate-related financial disclosures. It's kind of the de facto standard for climate risk disclosures. There is actually some movement with that as well. the IFRS foundation is going to be kind of in charge of the implementation and the enforcement sort of, maybe enforcement is not the right word, but the implementation of these standards. But the key thing about TCFD is that this is what a lot of other or almost all of the climate disclosures are at least partially based on whether it's the SEC, whether it's the CSRD or all of these other regulations more broadly. And so that's also -- that's just kind of at the core, though, we will not be getting into that one as such today. So that's the regulations. Any comments from the panel? Anything you want to add on these or confirm or clarify?

Yes. Svetlana, I think one quick thought. You mentioned this earlier, but the speed at which these regulations are coming out. I think about, today's the 12, 4 days ago or 5 days ago, we had IFRS, S1 and S2 were also published. So the speed at which these regulations are now coming out and the guidelines are coming out is in itself, something that we have to constantly keep up with understanding what's coming out, then understanding the new interpretation of those. That's a whole enable itself. So kind of it's almost like saying we prepared more of these are going to come out. What you see on the page is just a start.

Yes. Exactly. Thank you. All right. So a little bit detail on the SEC regulation. This regulation was proposed over a year ago now, and it has been very, very hotly contested by lots of different groups and was actually supposed to be finalized last October, I believe, but now the latest plan and it does seem [fairly likely that] it will be finalized in October of 2023, which -- and there will be another common period. But what this means is that companies will need to be complying with the SEC climate rule starting in 2024. So it has a few different components. The first one I won't spend as much time on because there are some consensus that because one was so bitterly contested it may not make it into the final. Of course, I'm not an attorney. I'm not going to make these predictions, but that's kind of what we're seeing. But it's the disclosures that need to be appearing in the financial statement, the financial statement aspect of it was what was particularly contested, but it's metrics and disclosures impacts of severe weather events as well as goals and efforts to reduce emissions and efforts to mitigate transition risks regardless of though, whether or not this makes it into the final regulation, that is what comes from that TCFD framework that I was mentioning. And many investors, institutional investors, especially as well as governments globally are still requiring companies to disclose these topics in some way, shape or form, even if it's not in their financial statements. But that's that piece. What we will spend more time discussing and that's the part that is actually more most applicable to IT organizations, is the greenhouse gas emissions disclosure that can be disclosed in a separate section. The greenhouse gas emissions are Scope 1, 2 and 3 greenhouse gas emissions. I'll just define those terms quickly. As well as other disclosures that are kind of more qualitative about climate governance, strategy, risk management. So risk management is still a big piece, the approach to managing risks as well as targets, goals and baseline. So these qualitative disclosures are -- they're still highly related to the top five specified metrics and disclosures. They may just end up being more [quality active]. We'll see how it shakes out. But the back to the greenhouse gas emissions, just to provide a quick overview, you can find lots and lots more information on these online, including in some ServiceNow materials that we'll be providing in our resources that are on our website. The emission Scope 1 means direct emissions as a result of company operations. So it's a really good example is natural gas that's being burned on site for any kind of heating, not a source of Scope 1 emissions, diesel, from backup generators, that's another source of Scope 1 emissions. So things that are being burned as that's the most typical example, also fuel used in transportation like delivery vehicles or something like that. Scope 2 emissions are also referred to indirect emissions that are resulting from purchase electricity from electricity providers. So for example, a data center, the electricity that is being used from a utility or something like that, to power the data center, that will be a source of the Scope 2 emissions. That's a super common example, huge source of emissions and any kind of renewable energy that is being used any renewable electricity or wind power that is typically what gets factored into the Scope 2 emissions calculations. Now the Scope 3 emissions are the value chain emissions. They're super complicated. They can include both the emissions in the supply chain, transportation, again, for a company that has a lot of logistics involved. It could be like transportation, of goods from a warehouse to the final point of sale. They also include the emissions resulting from the product use base. So for example, a company that provides a computer PCs or print or something like that, computer hardware. They use the electricity resulting from the use of that hardware will be captured in the downstream, the product use space of those emissions. And this is very important to understand because this is where the data challenges especially come in because they can be even just identifying the sources of those data can be really difficult and capturing all those data requires going into all these different systems, making -- including things like HR systems, making estimates, integrating or collecting data from -- sorry, from external systems. So that's -- we'll talk a little bit more about the ServiceNow platform and how it helps with that, but Scope 3 emissions are really, really important, and that's a challenge. So that's that. That's the SEC rule. I will move on to the CSRD. Since SEC is still in the proposal stages, the CSRD, the Corporate Sustainability Reporting Directive is here, and it will be applicable to companies in the EU primarily, but also globally, starting in 2024. The first disclosures that will need to be happening will be happening starting in 2025. However, the disclosures, the data will need to cover 2024 data. So really work needs to begin in 2024 to collect these data because it takes time to put all these different systems in place. And the applicability of the CSRD is kind of complex, depending on whether the company is based in the EU, depending on the size, pretty much most companies based in the EU are covered in some fashion, unless they're very, very small. Global companies are covered if they have significant subsidiaries in the EU they are covered if they're listed on European exchanges. If they have -- ultimately, they'll be covered if they have significant operations. But the really important [SOP] is that even if your company is not in the EU, let's say, your company is in Canada, like somewhere in the U.S. for anybody from Latin America here, any of those companies, it's likely that you have customers in the EU who are directly subject to these regulations, they are gathering these data in 2024 if they aren't already, and they will need you to provide your Scope 1 emissions, for example, or your certain social metrics so that they can include in their reporting because the CSRD requires value chain reporting, not just operations. And CSRD has a very broad scope. The goal of this illustration here is to show you that it's not just Scope 1, 2 and 3 emissions unlike the SEC rule that we were just talking about, the climate rule, it comprises lots of other environmental topics. You'll see here kind of in the bottom left by diversity and ecosystems. circular economy, so like reuse, recycling materials. In the social sector, you need to be disclosing information about workers in operations as well as workers in the value chain and also governance topics like business, like kind of core corporate governance topics, like business conduct, anti drive or driver interruption. That's kind of where those that in even products and services and relationships with business partners. So it's super wide-ranging. It's not just climate, that not everybody has to report on every topic for CSRD. Companies need to perform a materiality assessment to determine which topics are most important. And the CSRD house guidance on how that's to be done. Again, lots more information that we can really cover today, but please pose your questions if you have them. And -- but yes, it's very broad, much broader requires value chain reporting is broadly applicable. And that is CSRD. Carri since you are working on the -- since you're representing compliance here, do you have anything to add about especially the global nature of it or also just how broad it is and how it can apply to lots of different topics. I know we've talked about things in IT specifically that, for example, companies are already doing for other types of compliance that then also end up being applicable to ESG regulations. And we'll talk about that more, but anything to CSID specifically.

Yes. What I would say for CSRD, even though like we're saying it's EU and it's new. But by the nature of it, it will push down through everybody because those folks who are in business in the EU have to require that all of their vendors have these things in place. So you need to be prepared for that. And because everything is kind of changing as it may, in the past, we were all kind of just doing self-attestations, doing the right thing, if you will, where now that this is coming through and going to be pushed down and it has some pretty hefty fines to it. So people are going to take it serious. It really now comes back down to, hey, people need to start moving from self-attestation to third party out of station. And right now, because everything is changing, you have to think of it in the context of do as much as you can right now to do what's best for your company, and it will give you some time to practice, if you will. So that by doing those things and you get to mature out your controls a little bit, when there's a little bit more stability where we can kind of see countries harmonizing on the control set, which will take years. But at least as things start to mature out, you'll be ready, you'll have to practice it. And then you can just do the small tweaks for any of the things that are solidified through some of the changes that are coming down the pipeline. That would be my advice.

Great. Thank you. Vilasinee or Saurabh, do you have any things to add at this point about these regulations? I know we, again, are going to have more discussion. But if there's anything that again, you want to make sure to emphasize or clarify about the regulations themselves or their scope.

What I would add is, I agree with a lot of the things that Carri has said. And 1 thing that's becoming really clear to us, too, is the importance of working cross functionally. I mean for the first time, Carri and I began working together several months ago, specifically because of this. We'll talk more a little bit later. But because we are moving into this kind of mandatory environment now for reporting where the data is reaches so many parts of the company and technology just play such a key role because we're looking to technology to basically help us translate all this information that we're keeping and you now have a lot of people in the company that's also going to be looking at this information, not just maybe actually the ESG function or our colleagues in the environmental function, it really spans across the company now. .

Yes. Exactly. So this is just a little bit of a zoom and I actually didn't fast forward through the slide, but this is just a little bit more on CSRD. Just an example, again, lots of different topics and social governance topics covered for climate change specifically, you'll see that there is a big to the conversation about compliance and all these other things other than the missions. CSRD requires policies related to climate change mitigation and even adaptation requires information about targets related to climate change mitigation information in addition to the energy consumption, the Scope 1, 2 and 3 emissions. And you'll see potential financial effects from material physical transition -- physical and transition risks and potential climate-related opportunities. So it's again, this is where the risk comes in and then earlier the top where compliance and policy comes in. I want to note here that in our resources that we're providing, there should be a link to a like 7 minutes, I believe, video on the CSRD that digs into this more and a little demonstration of the ServiceNow capabilities for that as well as a solution brief. So we have more information. It's very complex. It's hard to cover again today, but more that you can read and of course, ask more specific questions.

I see there's a question in the Q&A that I actually want to address before we get into the panel discussion. So the question is, is the SEC in alignment with GRI. I'll try to just take a quick stab at that question, but velocity, if you can comment just our much bigger GRI expert, that would be really helpful as well. It is a little bit, but it's really focused on just climate. I think it borrows some stuff from the GRI climate portion, but the GRI like the CSRD covers a huge variety of topics based on materiality. I think it probably aligns more with TCFD because, again, a climate focus, but Vilasinee and CSRD aligns much more with GRI. But Vilasinee, do you have anything to add about that?

Yes. I think GRI is definitely more kind of a broad framework that companies report to. And it is -- the Scope, I think, of a lot of the climate room right now is kind of focused on emissions information and then these pieces of risk, governance of climate. So some of those things shows up in the GRI, but it is, I would say, it's definitely more TCFD and if it's kind of 1 framework that everybody should kind of be familiar with is the TCFD. I hope that answers your question.

Yes. let us know.

I'm going to add 1 little tidbit to it. So I don't know if anybody seen this, but there was, I think, on SEC's website, there was a document published, which is essentially GRI's response to the SEC regarding the disclosures. And they basically highlight exactly what we just said. The specific thing around this is they've highlighted 3 things. that are relevant in this broad thing. One is that whose responsibility it is to determine materiality, which is more of a minor thing. But more specifically, they talk about the use of GRI as the existing standard, and therefore, kind of trying to be the global, I want to say, the global baseline. But what we are seeing is that with respect to specifically climate-related topics, TCFD is more playing that focused role now. And there is though they claim very clearly that there is general alignment between GRI and SEC and how they both look at these topics.It's an interesting read if somebody is -- if anybody is interested.