By Laura Kelly, Chris Grant
Finance teams have an important role to play to help deliver their organisation’s ESG priorities in the same way they deliver corporate strategy. Boards are also looking to Finance to bring sustainability reporting up to an auditable ‘investor-grade’ standard as the business world moves towards fully integrated reporting.
This latest shift in the Finance remit takes business into uncharted territory and puts significant pressure on skills, systems and organisational design. But it’s also an opportunity to take the strategic initiative on ESG and be part of turning climate ambitions into action.
ESG is redefining value creation and adding a whole new dimension to performance evaluation, management and reporting.
The key driver isn’t regulation. Tackling the climate emergency and building greater trust and equity in society cannot wait until the latest disruptions have run their course. Action is needed now. Embedding positive change into business strategy - so profit and purpose are not mutually exclusive - requires understanding, insight, leadership, and robust data and reporting against consistent metrics.
Looking ahead, this is an opportunity for Finance to help put their business at the forefront of a new industrial revolution, with the transition to net zero providing the catalyst for a fresh wave of technological innovation and business growth.
Credibility gap
With so much investment, credibility and shareholder value at stake, Finance should play a key role in helping to deliver ESG priorities.
For reporting to be effective, it must be relevant and reliable. Yet PwC’s Global Investor Survey 2022 found a gaping trust deficit: 89% of UK investors surveyed perceive that company reporting on sustainability performance contains greenwashing.
The gap is heightened by the lack of consistency and comparability in what have been voluntary and largely qualitative ESG disclosures. Further challenges stem from the fact that unlike financial reporting, key ESG data often comes from suppliers and other third-parties within the value chain (where often the majority of carbon emissions are produced).
Heightened scrutiny
A major step up in statutory reporting will require much more active Finance involvement in ESG strategy and reporting. Key developments include the UK’s introduction of the Task Force on Climate-Related Financial Disclosures (TCFD) requirements which will form the foundation of the UK’s new Sustainability Disclosure Reporting (SDR) framework and are expected to be built on through the adoption of IFRS Sustainability Disclosure Standards.
For businesses with international operations, further challenges include global moves to create a baseline for sustainability reporting, along with the EU Corporate Sustainability Reporting Directive (CSRD) and US Securities and Exchange Commission (SEC) proposing rules to enhance and standardise climate-related disclosures. This wave of new reporting demands will not only increase the breadth and depth of published ESG information, but also raise the quality thresholds for disclosure and open it up to far closer stakeholder scrutiny.
Independent assurance
The other big challenge is the need for independent assurance – limited at first, but eventually to a reasonable level akin to financial audit.
Three-quarters of respondents to our PwC’s Global Investor Survey 2022 also said their confidence in sustainability reporting would receive the biggest boost if it were assured at the same level as companies’ financial statements (i.e., reasonable assurance). The main challenge however is that much of the underlying ESG data in areas such as Scope 3 emissions, isn’t currently going to clear that bar. As a result, assurance providers may refuse to give an opinion or may qualify it, which could cause reputational damage.
The business needs Finance
Finance has the track record needed to make sure all those numbers stand up to audit review and eventual public scrutiny.
The strategic role of the CFO is of paramount importance which we explore in our new study, How CFOs further value creation by leading on sustainability. Finance’s financial insight, expertise in scenario modelling and bird’s-eye view of their organisation and its value chain, coupled with a controls and risk mindset can help to understand the strategic implications of ESG. They can also help an organisation to balance the potential trade-offs between people, planet and profit.
Five priorities for Finance when taking on the challenge
So how can Finance step up?
Secure buy-in from senior leadership
This is a new and extended mandate for Finance. It’s likely to call for investment in both systems and skills. That’s why it’s so important for the CFO to make the business case to the board, stressing both the need to meet investor and wider stakeholder expectations and the risks associated with audit qualification or being called out for greenwashing.
Understand where you’re starting from
Assess what you’re currently reporting and how robust it is. Then get a sense of how future demands may expand your organisation’s reporting needs.
This will need to be an interactive exercise as the sustainability reporting landscape matures. Finance is used to regulatory change and navigating the ambiguity that this brings. Acknowledging that you won’t have all the answers on day one is important. The financial markets have had over 100 years to get to a level of financial reporting maturity that is now being mandated for sustainability reporting in the next five.
With a clear sense of the requirements ahead, you can begin to work out what skills and systems capabilities are needed to meet ESG demands and then identify the gaps and how they can be bridged.
There’s no need to overextend or overcomplicate systems development. A lot of the data capture and other systems capabilities you need may already be available via the latest ERP systems, so work with IT to find out what is there and how you can apply it.
Third-party capabilities are being developed to support the reporting process, but will still need customisation and expert implementation to apply and interface them within your business.
The roadmap for change should look at both current demands, while planning for what’s on the horizon. The TCFD provides an important test bed for the more complex requirements of the ISSB and CSRD down the line.
Invest in upskilling and specialist expertise
There is still a critical role for sustainability functions in setting and delivering on an organisation’s strategy, however Finance professionals should look to upskill on ESG reporting requirements.
Some Finance professionals may be reluctant to take on additional responsibilities, but embracing ESG could also help to attract and retain talent at a time when employees are looking for greater meaning and purpose in their work.
From a leadership perspective, attributing ultimate C-suite and Board Committee responsibility for addressing the disparate demands of sustainability reporting will be a key initial step. Sufficient and appropriate upskilling will be fundamental to enable those charged with the responsibility to discharge it effectively.
Break down silos
Finance can’t work in isolation. It’s important to collaborate closely with colleagues in Sustainability and Net Zero change management teams, with the partnership between the CFO and the CSO becoming a key axis within the management and governance of the business. Both should reach out to Risk, Compliance and Investor Relations teams as part of what is a steep learning curve for all.
Build ESG into budgeting and business planning
With improved information, it will be possible to build key areas of ESG such as carbon emissions into the financial planning and analysis (FP&A) process in the same way as other business priorities such as investment and return. The benefits include a more informed basis to allocate resources, measure progress and hold business teams to account.
Making a difference
This extension in the Finance remit is a big task. But it’s also an opportunity to enhance the status and influence of Finance in a changing world and attract and retain talent. The earlier and more decisively you act, the more you can shape the future on your own terms and the more of a difference you can make.
