ESG principles, covering issues such as climate change, pollution, employment practices, consumer issues and corporate behaviour have influenced business decisions and investment strategies for over three decades. The reporting pack has evolved over time to incorporate these factors but more recently the breadth of reporting has accelerated, due in part to expanding regulatory requirements, but also investor demand for sustainable assets.
Today, the assets under management of ESG-related funds range between $3 and $31 trillion, but according to Bloomberg Intelligence, ESG assets are expected to hit $53 trillion by 2025, a third of the total global assets under management.
Millennials make up the largest demographic interested in sustainable investing, however a 2021 study found that 70% of U.S. investors also believe that sustainable investing implies a financial trade-off, and US lawmakers agree. They are urging the SEC to withdraw a proposal mandating companies disclose greenhouse gas emissions, arguing that stringent regulation restricts the free flow of capital and undermines vital National Security industries such as energy.
While some politicians launch a counter-offensive against the growing movement for more regulatory disclosures CFOs still need to prepare for ESG reporting and audits. They must find a balance between the demand for quality stakeholder information and the benefits of full and transparent disclosure against the high cost of providing this information and the distraction from the company’s core competencies, such as serving customers and returning value for investors.
Research by McKinsey has determined that the CFO has a very meaningful role to play in developing their companies’ ESG program. For all three areas, environmental, social, and governance, CFO involvement supports greater alignment between these programs and the company’s strategic and financial objectives.
How can finance be better prepared for ESG reporting?
A company should develop compelling polices and adopt these across the entire enterprise. In a dynamic regulatory environment, it is better to lead and be prepared rather than wait for statutory requirements to be imposed.
Policies should address critical risks in key areas, such as standardising ESG investment terminology, and consistency of disclosures and standards. Third party providers of ESG scores aim to provide standardised assessments but businesses should understand their specific stakeholder expectations and report on and articulate ESG performance clearly.
What do finance teams have to change in terms of reporting ESG?
Investors are scrutinising factors beyond traditional financial analysis to support their investment decisions. So, reporting packs must include not just the ESG metrics and disclosures, but it must also be easy for stakeholders to compare performance against other industry players. The CFO may need to retool their annual reporting processes to ensure the new metrics are included in the reporting pack and regulators, investors, customers, and the public can use verifiable and comparable ESG metrics so that they can make decisions based on the issues that concern them the most.
What happens if companies can’t report accurately?
Historically, finance communicated performance completely with financial information, now, ESG data will add more value and depth. Businesses that can pivot to accurate holistic metrics and communicate effectively will establish competitive advantage.
Outside of statutory and regulatory requirements the need to accurately report on ESG data is growing in importance. Stakeholders are under pressure from many sources to deal with companies compliant with the latest ESG factors. Companies that are slow to adopt ESG reporting polices may lose investment, customers and specific talent that chose to align with companies that support their own ideologies.
Right now, organisations can prepare themselves for change. ESG reporting can be complex, and finance may have to rethink its annual reporting processes so it can confidently collect and analyse data from sources that may not have been relevant in the past. Increasing integration and control should enable them to manage the developing ESG requirements without any major upheaval to the business.
The CFO knows that if ESG is done right it has the potential to make a company outperform. Technology can streamline the process and provide better visibility of the expanded annual reporting process. Control over a single, centralised system is possible with technology solutions such as CCH’s Tagetik ESG & Sustainability Performance Management. To explore the benefits of configurable pre-built ESG software or review a quick guide to ESG compliance with CCH click here.
Sources and references:
ESG reporting – KPMG United Kingdom (home.kpmg)
Workiva Inc. – Infographic: New Workiva Survey Identifies Top Trends in ESG Investing for 2021
6 ESG Questions Answered: What is ESG Reporting, and How is (3blmedia.com)
Image – Mastering change: The new CFO mandate | McKinsey