Why Finance Must Focus on Sustainability and ESG
Sustainability and ESG (Environmental, Social, and corporate Governance) are important topics. They should already be near the top of company agendas around the world and this lens will continue to grow. The role of CFOs and their finance teams will be crucial in ensuring that businesses lean into this focus and are ready for what lies ahead.
Businesses are starting to realize that they need to understand sustainability, how it relates to their operations and how investors consider ESG risk if they want to be successful in the future. The global population is growing, and people are becoming more conscious of the positive and negative impact that businesses can have on the environment and in the communities they operate in. As a result, sustainability and ESG are becoming increasingly important to companies.
Stakeholders increasingly expect companies to have a considered approach to sustainability and transparency of ESG risk performance metrics. This is because they recognize the importance of these issues and want to make sure that businesses are prepared for the challenges and opportunities posed by climate change and the transition to a low-carbon economy. Many investors are asking questions about companies’ sustainability and ESG performance, and local governments are implementing policies to encourage more sustainable business practices.
In a discussion with Victoria Topham from Profit Impact, a Finance Professional led Sustainability Consultancy, she explains that “the social responsibility of business is considered an increasingly important topic. Gender gap, modern slavery, diversity, living wage, etc., are all included within the concept of business sustainability.”
Governments around the world are giving consideration to the future benefit of sustainable business practice and introducing new laws, regulations and policies to promote sustainability and ESG practices in the corporate world. There are a plethora of existing treaties, policies and goals including: The Paris Climate Agreement; The United Nations Sustainable Development Goals; The US Environmental Protection Agency’s initiatives on greenhouse gas emissions and renewable energy; The UK Department for Environment, Food and Rural Affairs’ sustainable development strategies; The European Union’s Sustainable Corporate Governance Code; The US Securities and Exchange Commission’s rules on disclosure of climate change-related risks for publicly traded companies.
Reporting bodies are following suit to address measurement and transparency of sustainable action. On 15 November 2022, the EFRAG’s Standards Board submitted 12 new ESG Standards to the European Commission, with an expected adoption by mid-2023. These contain 84 disclosure requirements containing 1,144 data points across four reporting areas: governance; strategy; impact, risk and opportunity management; and metrics & targets. There is an expectation that many venture capital and private equity investors may need to report consolidated ESG performance against these standards, which may create significant reporting requirements from their investment portfolio companies.
This list of existing and expected government policies for sustainability and ESG is not exhaustive but illustrates the wide range and varied nature of new legislation being produced around the world. These rules are likely to capture many companies, particularly those operating in specific industries or geographies. Most businesses will be impacted one way or another and companies will need to carefully monitor many factors such as their shareholders and ultimate controlling parties to determine which rules are applicable to them.
Victoria Topham also highlights “where the regulation isn’t directly applicable there will also be increasing pressure for compliance and disclosure for any business, including SMEs, operating within responsible supply chains and government procurement frameworks.”
The expanding role of finance
The CFO has a critical role in setting sustainability strategy and implementing government policies to comply with regulations and guide the executive team and the workforce towards delivering compliance. The responsibility to ensure that reporting is accurate and transparent will be a challenging task as new regulations evolve, and reporting is both qualitative and quantitative. The CFO should also check that the company engages external stakeholders such as investors, banks and rating agencies to keep track of progress against sustainability goals set out by the government and other organizations.
Victoria Topham from Profit Impact advises that “collaboration to learn alongside professional and industry peers will be essential as the sustainability reporting landscape evolves.”
By doing so, the CFO can help ensure that the company adheres to its ethical principles while staying competitive in a rapidly changing environment. The goal is to create a balance between compliance with government regulations, protecting stakeholders’ interests, and promoting a culture of sustainability within the organization. With effective leadership from the CFO, companies can be well-prepared for future changes in regulation and remain competitive in the long-term.
Furthermore, CFOs should provide useful insight into the impact of these policies on their organization and competition, as well as identify potential risks that might arise from implementing them. The goal is to make sure that businesses are prepared for the challenges and opportunities ahead. CFOs will need to work hand in hand with their executive teams and investors to develop strategies for growing social and environmental value. The success or failure of a business depends on how well it adapts to this new reality, and the CFO’s leadership will play an integral role in making sure that happens.
Finance teams will need to invest significant time identifying which data sets to monitor, how to capture them and the best way to report them within the requirements of both new legislation and stakeholder requirements, including the public. There are many challenges to overcome, such as identifying and implementing the required technology solutions, processing data sets in the right format, building automated workflows, and reporting data effectively.
Chris Tredwell from Accounting / Postmodern ERP Solution Aqilla states: “In 2023, we will see a lot of new energy-efficiency regulations coming into place but – with costs rising exponentially – ESG budgets are the first being cut. Yet, consumers are more environmentally aware than ever and I imagine these expectations will only grow. So, it is essential that business leaders keep ESG policies as a priority. Monitoring expenditure and managing it effectively from an accounting and finance perspective will ensure businesses have long-term security and profitability, meeting stakeholders’ expectations both financially and morally.”
The CFO’s role in supporting sustainability and ESG is crucial for organizations to remain competitive and compliant. The CFO must be knowledgeable on the topic, monitor potential risks associated with it, develop strategies that promote sustainability and ESG, and identify countermeasures to address any issues.
By staying abreast of new developments in this area and anticipating future changes, the CFO can ensure that the company remains compliant and drives sustainable practices that will deliver stakeholder expectations and create tremendous opportunities for growth in the years ahead.
What could our next steps be?
Make time to understand what ESG is, what organizations should be doing and could be doing, and start thinking about how it applies to your organization. There are courses which can help you get to a baseline understanding and start to think through the specifics of your situation.