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Why Should Finance Teams Care About ESG Reporting?

In the last 12 months, there has been a growing buzz in the market about environmental, social, and governance (ESG) reporting. What's behind it, and why should CFOs and finance leaders care about it? Continue reading to learn what ESG reporting is, what's new with ESG reporting standards, why Finance teams should care, and the five benefits of aligning ESG and financial reporting.

The Rising Importance of ESG Reporting

ESG reporting (also known as Sustainability Reporting) refers to the disclosure of data about a company's operations in three areas: the environment, social, and corporate governance. For investors, customers, and other stakeholders, it provides a glimpse of the business's impact in these three areas. ESG reporting is valuable because it ensures that companies assess their influence on sustainability issues and allows them to be transparent about the risks and opportunities they face.

For many years, ESG reporting was an annual, voluntary disclosure by public and private companies to their stakeholders about the impacts of their enterprise on the environment and society and how they are managing these programs. With a rising amount of capital (now roughly $35 trillion) pouring into "sustainable" mutual funds and ETFs, stakeholder interest in ESG reporting is growing, as is demand for more extensive and regular disclosures from public and private organizations.

As a result, many countries are rapidly migrating from voluntary to mandatory corporate sustainability and climate change efforts, and even the US SEC is working toward defining explicit disclosure guidelines for public corporations. Based on this inertia, there is a clear driver for companies to adopt robust sustainability and ESG strategies with transparent stakeholder reporting.

Converging ESG and Sustainability Reporting Standards

There are several competing standards for ESG/Sustainability reporting including the Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), Carbon Disclosure Project (CDP), and others. However, following the recent COP26 conference in 2021, there is now a push for a global standard.

At COP26, the International Financial Reporting Standards Foundation (IFRS Foundation), which supervises accounting standards in more than 140 countries, predominantly in Europe and Asia, announced the formation of the International Sustainability Standards Board (ISSB). The ISSB will be overseen by the foundation, which already oversees the International Accounting Standards Board, which was established two decades ago. It expects to release two reporting protocols on disclosures in the second half of 2022.

The main driver for the ISSB creation at COP26 was the fact that current ESG data is lacking clear standards. The data presented is difficult to audit, and it is not in accordance with the financial statements. This makes determining the true risk exposure from the data presented extremely difficult for investors and other stakeholders.

Involvement from CFOs and Finance Teams

While hundreds of organizations around the world have already begun to report on ESG and sustainability, data collection and reporting are frequently handled by Sustainability teams, Facilities, Human Resources, or other departments. But CFOs and Finance teams are now starting to become involved. Why so? Because as this type of reporting transitions from voluntary to mandatory it will require the same level of governance, control, accuracy, and auditability as financial reporting.

But other considerations, however, are pushing increased CFO involvement in ESG reporting. According to a recent Accenture survey, “the ability of companies to raise capital will increasingly be tied to sustainability objectives.” Yet “deficiencies in the ability of companies to target, manage, measure and report sustainability performance still hamper the ability of businesses to effectively deliver on their sustainability commitments.”

Despite increasing demand from investors, regulators, and lawmakers for disclosure on environmental, social, and governance (ESG) performance, fewer than half (47%) of large companies have established how to gauge the sustainability of their operations, according to the survey.

Key points from the survey:

  • Meeting demands for sustainability data will be integral to company performance – ESG matters to the market, and therefore to business value.

  • Companies with high ESG performance from 2013 until 2020 generated 2.6 times higher total shareholder returns than medium performers.

  • Making a CFO responsible for sustainability is essential for ensuring a company meets its ESG goals. Companies are much more likely to extensively embed ESG in core management processes when the CFO has accountability for ESG metrics.

  • Yet only 26% of finance leaders said they had clear, reliable data to back up their ESG metrics.

ESG and Sustainability Reporting Technology

As with any new data collection or management process, spreadsheets and email are often the initial tools of choice due to their accessibility, ease of use, and low cost. When it comes to control and accuracy, however, the spreadsheet and email approaches to ESG reporting rapidly show the same weaknesses as when these tools are used for financial reporting - they don't deliver.

In the market, there are an increasing number of purpose-built ESG/Sustainability reporting tools that can replace spreadsheets. While these tools can help with the process, they create a separate data collection, consolidation, and reporting process from the financial reporting process. And, if ESG metrics must be published alongside financial metrics, wouldn't it be preferable if this data was collected and processed in the same system?

The answer is yes, which is why an increasing number of organizations are seeking to expand the financial close, consolidation, and reporting capabilities of their FP&A platforms to handle ESG Reporting. This can be a viable approach for aligning ESG reporting with financial consolidation and reporting – provided the application has the required features to support the efficient collection, consolidation, and reporting of ESG metrics. The following features should be included:

  • Data collection from a range of internal systems, both financial and non-financial.

  • Support for forms-based data entry of ESG metrics

  • Support for complex conversion calculations for ESG metrics

  • Support for a variety of ESG reporting systems and indicators across industries

  • Consolidation of ESG metrics and textual commentary across multiple hierarchies

  • Data validations, controls, and audit trails are extensive.

  • Ability to capture ESG targets and goals for comparison against actual results

  • Produce a variety of output types including standard reports, interactive dashboards, and Excel-based analysis of ESG metrics

Five Benefits of Aligning ESG Reporting with Financial Reporting

ESG and sustainability reporting are rapidly transitioning from a voluntary to a mandatory process. CFOs and finance teams must be involved to ensure the accuracy and integrity of ESG and sustainability reporting to a wide range of stakeholders. Organizations can gain various benefits by integrating ESG reporting with their financial reporting process and system. These benefits include the following:

  1. Eliminates duplicate data collection, consolidation, and reporting processes.

  2. Improve the accuracy and integrity of ESG and Sustainability Reporting.

  3. Align environmental, social, and governance (ESG) and sustainability criteria with financial outcomes.

  4. Establish high-quality controls and audit trails over ESG and Sustainability metrics.

  5. Compare actual ESG and Sustainability metrics with goals and targets.

As ESG gains traction, corporate leaders will begin to realize how it affects their company's financial results, especially as new standards emerge. If you weren't already concerned about your company's environmental impact, now is the time to start. Otherwise, the ice caps won’t be the only thing in trouble.

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