The Emerging role of CFO as the Driver of Sustainability
Recent KPMG research emphasises how financial reporting may assist organisations to more effectively incorporate ESG into strategy and operations while strengthening the strategic role of CFOs in achieving their ESG objectives.
The ESG performance of a firm is becoming increasingly important to investors, customers, and company management alike.
Investment and rating agencies are looking for ESG data. Customers and staff are more likely to stick with organisations that put an emphasis on ESG factors.
Instead of benefiting a company’s bottom line, poor ESG practices can do damage to its brand, legal status, and financial stability.
ESG reporting is voluntary in most countries at present. Although recently, most of the local bodies and stock exchanges have become very stern in implementing ESG related regulations within their jurisdictions.
According to surveys, consumers prefer to support organizations that are ecologically friendly, socially responsible, and well-managed in their operations. For the right projects, they’ll even pay more.
And CEOs are aware that they will be judged on their commitment to ESG issues.
Many businesses do not have a comprehensive ESG strategy in place. In the past, others have made broad promises but have not taken action or monitored their progress. Furthermore, even among those that have started, many fail to connect ESG data to other quantitative performance measurements.
ESG is based on finance.
Increasingly important will be the position of CFO as ESG problems gain traction. As the organization’s “reporting gatekeepers,” the CFO, and the finance staff have extended responsibilities.
Financial measurements and terminology are required for ESG reporting. Financial management also has expertise in reporting KPIs to stakeholders and shareholders in its role as fiduciary leader. CFOs are well-versed in regulatory filing requirements.
ESG strategies and reporting can also be tracked by finance within the company. Revenue, supply chain, customer, and other ESG metrics are all visible to finance. Finance can also drive ESG reporting and data management programs and work across functions and business units. ESG data can be linked, insights generated, and progress tracked by the financial planning and analysis group.
What should CFOs know as they begin to face ESG issues?
There are four ways that finance can help an organization’s ESG agenda.
1. Business plan: Metrics reveal where an organization has been, not where it wants to go. Businesses must also show growth. Therefore, ESG efforts must be aligned with corporate strategy. Prioritizing strategic efforts by adding ESG drivers into business cases and measuring sustainability impacts are some of the ways ESG can be integrated into strategy and value management.
2. Investments: Companies that exhibit ESG commitment attract more money. On ESG topics like climate risk, BlackRock has utilised its proxy votes against management. Goldman Sachs said it would invest approximately $750 billion by 2030 to help clients speed climate change and achieve inclusive growth. This ESG investment can increase top-line growth, lower expenses, and reduce investor, regulatory, and legal interventions.
3. Reporting: Organizations must show the results of ESG activities to stakeholders. Delivering on ESG promises needs iterative reporting to stakeholders. Non-financial criteria can be given equal weight as financial results when evaluating ESG development. Common ESG metrics include air quality, water management, and environmental footprint.
4. Risk: CFOs should grasp the financial and non-financial risks associated with ESG concerns, as well as the possibilities that come with recognising and managing ESG risks successfully. ESG should be monitored, mitigated, and handled as part of an organization’s broader enterprise risk management plan.
It is possible to build an ESG strategy and reporting technique by asking the below questions.
• What ESG themes and concerns do your stakeholders want to know about?
• Where can you make the greatest environmental, social, and governance (ESG) impact? Does this align with the company’s material goals?
• How can ESG be used to identify and assess value?
• Is your finance department appropriately involved in ESG initiatives?
• Is finance involved in project design to guarantee financial and ESG goals are met?
• Is your organization able to track and disclose ESG impacts, as well as to measure progress and identify gaps?
•As a business, are you able to track and disclose your company’s ESG impacts?
Generally, firms can examine their operations in terms of ESG and focus on three to five categories. Some reporting systems may be unable to accurately capture the required data. Investing in tools, technology, and personnel to comprehend, capture, evaluate, and report on ESG data, measurements, and KPIs may be required to achieve this goal.
Best practices for CFOs
The CFO is not only the financial leader of the company; he or she is also in charge of communicating the company’s financial results and translating those results into any other metric or KPI. When it comes to best practices, the company must ensure that it has adequate infrastructure in place and that it has a clear understanding of how it is progressing and where it needs to go in order to measure it objectively over time.
By using detailed financial systems, the CFO has access to all the parameters and line items he needs to accurately calculate his company’s carbon footprint.
An organization’s financial systems have a significant impact. Companies should focus on developing robust systems for collecting ESG data, similar to the mechanisms they currently use to collect financial data. Since the process is so complex, a detailed outline of every expense is required.
Controlling the procedure
Generally, the governance side of ESG is most often owned by the CFO. The rest can be distributed among the executives.
The first step is to define what ESG success and compliance mean for your firm.
It’s important to have a clear definition of what success looks like, as well as a system in place to track that progress over time, rather than extracting all the irrelevant data.
Collaboration among the top executives and managers is the key to streamlining the ESG reporting process.
There is no better time than now to begin enhancing ESG. As a CFO, you have a unique chance to step up and lead the charge. There’s a perception that the CFO is just a scorekeeper, but this is the ideal type of scorekeeping, where the CFO has the opportunity to demonstrate leadership to all stakeholders and employees.
Think about the big picture.
Rather than focusing on the end result, focus on optimising the process generated by ESG reporting. Changing the culture of an organization while still achieving desired results is a win-win situation that leads to long-term success.
I have handled entities with approximately a few hundred employees each, and it has had very little impact on the footprint in terms of physical goods and services.
People analytics is a major priority in ESG reporting. Instead of focusing on specific quotas or targets, we removed bias from our people processes, such as hiring or remuneration, while also increasing our analytics and data management expertise.
After anonymity is applied to the data, the main problem will be making sure that ESG analytics can still provide insights that help the organization to improve.
Companies frequently fall short of their ESG targets because they don’t put in place the proper capital allocation models and governance frameworks while implementing their plans.
Involving the finance team from the beginning of the ESG planning process is essential if the project’s design is to be financially sound and to be successfully communicated to corporate decision-makers and stakeholders.
It’s also necessary to revise present standards to take into account the advantages of long-term sustainability initiatives. In order to improve the industry’s reputation and reduce climate risk, finance leaders need to invest in meaningful short- and long-term financial sustainability measures.
In order to improve the industry’s reputation and reduce climate risk, finance leaders need to invest in meaningful short- and long-term financial sustainability measures. These quantitative success indicators motivate teams to develop and collaborate across departments.
Priority Key Performance Indicators
The current environmental sustainability reporting system is unable to effectively collect the required data to quantify the financial benefits.
Because of this gap, financial leaders have fewer opportunities to report on indicators such as energy price volatility, water scarcity threats and waste restrictions, and the carbon impact of their supply chains. Businesses must increase their long-term visibility into these KPIs in order to drive ESG programmes and make informed decisions.
Because assessing ESG-related performance can be difficult, it is useful to divide financial communication and reporting into four distinct types of KPIs.
1. Investments in long-term projects (both in terms of the total dollars spent as well as as a percentage of overall corporate investments)
2. Indicators of financing, such as the use of sustainable corporate finance instruments such as green/sustainable/social bonds and loans.
3. Indicators of governance, such as board composition,
4. Operational metrics, such as reduced financial exposure to climate-related risks.
Finance executives should avoid getting hung up on the absolute values of ESG-related KPIs.
Instead, CFOs should focus on evolution and momentum throughout the year, as most ESG and sustainability goals are long-term, making specific benchmarks difficult to quantify.
Compliance is the primary concern.
A quick search reveals that there are no publicly available industry-wide KPIs or guidelines.
Various ESG frameworks and standards are still in the early stages of development. Still, there has been tremendous progress recently, with GRI, SASB, VRF, and IFRS focusing on standardizing guidelines across industries and countries. IFRS, CDSB, and VRF recently merged to form ISSB, strengthening and standardising ESG guidelines for greater compliance.
New ESG norms and regulations may be implemented depending on the industry. As a company with a voluntary ESG focus, there is room to adapt and adjust, which must also be factored into budget allocation.
CFOs are under pressure to produce, and they should always look at the numbers, but for an ESG programme to be successful, it must become part of the company culture.
It is more important when everyone is on the same page. Consider it an opportunity rather than a responsibility that will benefit the entire company. In this light, implementing a long-term strategy becomes much easier.
Can be reached via email – 01prashanth@gmail.com or a private message on LinkedIn.
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