In recent years, there has been a significant shift in the business world, with investors, regulators, and stakeholders urging companies to enhance their transparency in environmental, social, and governance (ESG) disclosures. This shift has far-reaching consequences, including a transformation in the role of the Chief Financial Officer (CFO). Matthew Needham, FCMA, CGMA, the CFO of Kāinga Ora, New Zealand’s largest public housing provider, is embracing this change with enthusiasm.
What is ESG Reporting and Why Does it Matter?
Now traditionally speaking, finance has been primarily associated with numbers, but the increased emphasis on ESG reporting is changing that perception. For CFOs like Needham, ESG reporting offers a unique opportunity to focus on the real-world impacts of investment decisions and their potential to improve lives for generations to come.
This push for more comprehensive ESG disclosures is being driven by investors and regulators alike. Across the globe, reporting requirements are rapidly evolving to standardize and mandate ESG disclosures. In 2022, the US Securities and Exchange Commission proposed rules that would compel public companies to disclose standardized climate-related metrics.
Similarly, the UK began requiring climate-related financial disclosures from public companies and large private companies. Additionally, in 2023, the International Sustainability Standards Board (ISSB) is expected to release global sustainability standards, catering to the growing demand from investors for ESG information.
The demand for ESG information has also surged in recent years. A Deloitte analysis indicated that professionally managed assets considering ESG issues more than doubled from 2016 to 2021, reaching an estimated $46 trillion. Deloitte also projected that ESG-mandated assets would surpass $96 trillion by 2025, constituting over half of all global assets under professional management.
Among the various developments in the ESG landscape, the ISSB’s global standards are expected to have the most significant impact on finance professionals. Jill Klindt, CFO at reporting platform Workiva and a member of the UN Global Compact’s CFO Taskforce, emphasized that these standards would bring climate change to the forefront for every CFO and their organization.
To meet regulatory requirements, satisfy investors, and demonstrate progress towards ESG goals, organizations need consistent, transparent, and accurate reporting. Kāinga Ora, for example, utilizes ESG disclosures to illustrate to investors how their capital investments improve the lives of vulnerable people. This includes showing how providing warmer and drier homes reduces healthcare costs and enhances children’s education by keeping them healthy and able to attend school.
In response to the demand for increased ESG disclosures, organizations are reassessing their internal processes, appointing ESG-specific roles, and establishing task forces to determine what to measure and how to measure it. However, much of the responsibility for gathering and reporting ESG information falls on the shoulders of CFOs, despite this data traditionally residing in various teams and departments.
What Is The Response?
To support comprehensive and accurate ESG reporting, many organizations are investing in technology that can collect, analyze, manage, and report data from across the business.
Technology therefore plays a vital role in ESG reporting, offering various tools such as ESG data platforms, smart sensors, geospatial data, and artificial intelligence to collect and analyze data. However, some technologies can be expensive, making tracking certain ESG metrics, like carbon emissions, a more complex endeavor.
It is therefore expected that as ESG reporting becomes subject to increased scrutiny by financial regulators, CFOs will most likely have to be more vigilant in avoiding errors in sustainability data. Implementing accounting and reporting systems that can be verified through sophisticated auditing processes could help mitigate reputational, financial, and compliance risks.
Now while the drive for more ESG reporting is crucial, there is a risk that it may distract boards from strategic decision-making. To address this challenge, CFOs are encouraged to adopt an integrated mindset. The International Federation of Accountants (IFAC) for instance suggests that CFOs play a pivotal role in enhancing the connectivity of sustainability information across different functions and external sources.
This integration could allow for a more comprehensive view of performance and value creation. For CFOs like Needham and Matt Miller, CFO at the UK’s National Nuclear Laboratory (NNL), taking a holistic approach to value creation has therefore become paramount. Together they emphasize that ESG should be incorporated into business strategy and investment decisions rather than treated as a separate compliance task.
By considering economic, social, and environmental value alongside traditional financial metrics, organizations could make more informed and responsible decisions, benefitting not only their bottom line but also society and the environment.
So in summary, it could be conjectured that the increased emphasis on ESG reporting is reshaping the role of CFOs. As the demand for transparent and accurate ESG disclosures continues to grow, CFOs will most likely have to adapt to new reporting requirements, collaborate with various teams, invest in technology, and adopt an integrated approach to value creation.