The role of the CFO in ESG performance is changing
ESG performance is rapidly becoming a critical business issue for companies of all sizes. Boards and audit committees are increasingly interested in ESG reporting, and Chief Financial Officers (CFO) are increasingly being asked to deliver ESG data to investors. As ownership of ESG reporting shifts towards the CFO there will be a steep learning curve on how to collect, analyze, and report impeccable data metrics along with ownership of a vision for continuous ESG performance improvement and ratings.
Regulations are quickly driving mass adoption of ESG
The fast-evolving regulatory agenda in the U.S. presents serious implications for companies and financial teams to stay ahead of regulatory developments. Perhaps the biggest driver is the recent SEC proposal for mandatory climate disclosures that will require most companies to report information about climate-related risks that are reasonably likely to have a material impact on the business, its operations, or financial condition.
Why ESG matters now for CFOs
ESG offers opportunity for the CFO to continue to partner as a strategic collaborator across the enterprise. In the traditional finance worldview, preserving tangible corporate value through good accounting practices, risk management, control setups, and ERP systems is the norm. Today, however, finance’s role has broadened to include more focus on intangibles – with a sizable part of a company’s value residing “off balance sheet.” Rather than the machines, buildings, and capital resources of yesteryear, value creation is now linked to brand equity, IP, customer loyalty, agility, ability to retain and attract best talent.
Accordingly, a focus on ESG (environmental stewardship, societal responsibility, and strong corporate governance practices) becomes a measuring stick for just how good a company is at intangible value creation. As a result, the finance role will need to assume controls to measure, improve, and signal intangible asset value creation as investors clamor for high-quality, audited data on these very intangibles.
Top ESG challenges for financial professionals
The current level of ESG disclosure at most companies is still largely voluntary, aspirational, and ad-hoc. While large enterprises are hiring resources a to enhance the quality of the information feeding into ESG reports, most companies lack the resources and technology to get started on ESG and to deliver on investor expectations. Among the challenges financial professionals face:
Many companies are resource-constrained when it comes to ESG. With no central ownership of the ESG responsibility, finance is playing a larger role in managing the data collected for sustainability reports, and processing, controlling, and reviewing that data.
Financial teams are still unsure where to begin. Typically, the early efforts of ESG target setting, performance baselining and action planning fall to a sustainability professional. As do reporting on CO2 performance and complying with SEC climate regulations. Increasingly, companies are hiring consultants to activate and accelerate these ESG endeavors on their behalf.
ESG data collection remains messy. ESG data comes from almost every operational area of a business and is often siloed. Companies still rely on excel, email and PPT or report on ESG using systems that differ from those used in financial reporting in terms of metrics used, data synchronicity, or reporting schedules. Accordingly, the entire ESG data landscape remains a chaotic and manual process for most companies, and C-level leadership can lack visibility into performance and operationalized targets and plans for improving ESG performance.
What’s next and how can CFOs win on ESG
Moving forward, companies that create a credible approach to ESG reporting and act before required to do so will come out ahead.
CFO should anticipate a convergence of ESG reporting
For financial professionals, getting a handle now on reporting on ESG activities with the right resources and technology is essential. ESG reporting will likely become integrated with standard financial disclosures, meaning that reporting will need to meet investor-grade standards and could become part of a companies’ compliance and controls program.
CFO teams should implement convenient and easy-to-use ESG software
Financial teams should advocate for ESG technology solutions that help them keep pace with required disclosures and reporting, with transparent data collection and management, the ability to assess potential risks, benchmark against industry peers, and quickly gain an understanding of the company’s current ESG situation and easily identify what actions to take next.
CFOs must work towards a desired ESG outcome
Financial teams need a better way to manage their intangibles, from evaluating loyal customers, to attracting the smartest engineers, to building brand equity, goodwill, and supply chain resilience. Better ESG management is a way to measure intangible value and should drive toward the outcome of improving overall company ESG performance.
Good.Lab is pleased to be attending the inaugural IFRS Sustainability Symposium which convenes global businesses, investors and policymakers to discuss progress towards a global baseline of sustainability disclosures. Are you a leader in your field or at a company that is currently navigating ESG? If you’ll be in attendance, let’s schedule a time to meet! […]
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