The CFO’s Role in ESG Strategy

68% of CFO’s say that finance takes ultimate responsibility for ESG performance within their organisation, so how interconnected is financial and ESG data?

ESG stands for Environmental, Social and Governance.  These three entities encompass the main pillars of sustainability for most business and investing. As sustainability becomes increasingly important in the modern economy, there is an increased demand by investors and other stakeholders to incorporate ESG into a business strategy.

As more regulation and legislation is introduced in this area, the importance of ESG to the Chief Financial Officer (CFO) grows. This is due to the fact that non-financial metrics such as sustainability metrics are becoming more stringent and linking into the wider financial strategies. For example, the incoming EU Corporate Sustainability Reporting Directive (CSRD) will require companies to audit their non-financial data, to ensure clarity and comparability of this data for investors and other stakeholders.

Therefore, CFOs have a key role in ensuring that these sustainability ESG metrics are accurate and comparable, for both internal and external stakeholders. ESG is now a top priority for CFO’s as they play their part in supporting the implementation of the overall sustainability strategy, with a recent Accenture study stating 68% of CFO’s say that finance takes ultimate responsibility for ESG performance within their enterprise.

Here are several reasons why ESG must remain a priority for CFO’s:

Non-financial ESG data and financial data are symbiotic

Increased regulation and stakeholder pressure in the ESG space has led to a more detailed focus by many organisations on sustainability data. Non-financial data is interconnected with financial data, as they both impact on one another. Under the CSRD non-financial data in the form of a sustainability report will be required to be published within the management report, in the company’s annual report.

Sustainability metrics impact finance KPIs

Sustainability metrics offer value in the form of long term value. A CFO should understand its organisation’s ESG metrics as they represent a baseline to compare how well the organisation is performing against competitors in the space. These metrics will then allow for a starting point to create new opportunities for cost savings and other benefits.

Risk management involves ESG

Risk management is a key part of a CFO’s job in regards to financial information and strategy, this should be extended to ESG data also. Both forward-looking and retrospective ESG information should be considered when implementing strategy. These ESG strategies should have short, medium and long-term time horizons to ensure that ESG risks such as climate change are measured and mitigated to futureproof the business.

Reporting frameworks managed by CFO

There are a significant amount of differing frameworks, ranging from basic mandatory reporting to wide-ranging frameworks such the Sustainability Accounting Standards Board (SASB), or the Global Reporting Initiative (GRI). These frameworks aid organisations in reporting on their ESG metrics but it can be difficult to decipher which specific framework to use. CFOs are in the best position to determine which measurements are the best fit for evaluating and reporting their company’s ESG performance.

ESG is a company-wide endeavour

The monitoring, measuring and reporting of ESG metrics requires knowledge and co-operation from various sectors across an organisation. There are many moving parts involved including:

·         Business modelling and strategy to incorporate sustainability matters and their impacts

·         Setting targets and measuring progress made in achieving those targets

·         Ensuring that management is aware of their roles and responsibilities in this area

·         Setting and carrying out the company’s sustainability policies

·         Carrying out quality reporting, using both quantitative and qualitative data, to ensure information is comparable and useful for investors and stakeholders.

These multitude of tasks require management and input from the CFO to ensure that ESG metrics are valued alongside financial metrics. CFO’s must examine their roles and identify how prepared they are in the ESG space, as they will have a major influence on their organisation’s financial and sustainability performance.

CFO’s must ensure that the company appropriately mitigates risk by addressing security and environmental, social and governance challenges, whilst also setting the climate agenda, as well as measuring the decarbonisation journey of their firms.

The time to take action on ESG has firmly arrived and CFOs everywhere will be key players in this action and providing company leadership.

Sources:

https://www.accenture.com/_acnmedia/PDF-145/Accenture-CFO-Now-Research-2021-FullReport.pdf#zoom=40