How CFOs are handling the push for more ESG reporting
Investors, regulators, and other stakeholders are urging companies to step up their environmental, social, and governance (ESG) disclosures. The increased emphasis on ESG reporting has potentially far-reaching consequences that include transforming the role of the CFO.
As CFO of Kāinga Ora, New Zealand's largest public housing provider and a Crown agency, Matthew Needham, FCMA, CGMA, is ready to embrace the increased emphasis on ESG reporting.
"For too long, finance has always been about numbers," Needham said. "Increasing ESG disclosure is exciting because it's an opportunity to focus on impacts of investment decisions and improving lives for generations to come."
The push towards more ESG disclosures is driven largely by investors and regulators.
Reporting requirements across the world are changing rapidly to standardise and mandate ESG disclosures. In 2022, the US Securities and Exchange Commission proposed rules that would require public companies to disclose standardised climate-related metrics, and the UK started to require climate-related financial disclosures by public companies, large private companies, and limited liability partnerships (LLPs). In 2023, the International Sustainability Standards Board (ISSB) is expected to release global sustainability standards. The ISSB was formed in 2021 to cater to demand from investors for ESG information.
That demand has risen considerably in the past five years, a Deloitte analysis suggested. Globally, professionally managed assets where ESG issues are considered more than doubled from 2016 to 2021 to an estimated $46 trillion. And Deloitte projected that ESG-mandated assets will increase to $96 trillion in 2025, making up more than half of all global assets under professional management.
Of all recent ESG-related developments, the ISSB's global set of standards will have the most impact for finance professionals, said US-based Jill Klindt, CFO at reporting platform Workiva and a member of the UN Global Compact's CFO Taskforce. The taskforce brings together finance leaders who want the finance function at the forefront of sustainable growth.
"[The ISSB's set of standards will mark] a critical shift that brings climate change up the agenda for every CFO and their business," Klindt said. "It will bring more consistency as CFOs help their companies shape credible sustainability strategies, aligned with the UN Sustainable Development Goals [SDGs]."
Organisations need consistent, transparent, and accurate reporting to meet regulations, satisfy investors, and clarify progress towards ESG goals, she added.
Kāinga Ora, for example, uses ESG disclosures to show investors how their capital improves the lives of vulnerable people, Needham said. One example is showing that living in warmer, dryer homes reduces diseases such as rheumatic fever and subsequent healthcare costs and makes children healthier and better educated because they can attend school.
"The more open we are, the more [investments] we will likely attract," he said. "So, we welcome standards for improving transparency."
Responding to reporting challenges
In response to the push for more ESG disclosures, organisations are increasingly assessing internal processes, assigning specific ESG roles, such as head of sustainability, and establishing task forces to figure out what to measure and how, Klindt said.
Much of the responsibility for gathering and reporting ESG information will rest with the CFO. Emissions calculations will play an increasing role in investment decisions, Needham said. "Measuring carbon emissions is not the traditional domain of finance functions," he added.
That can create challenges.
In most companies, ESG information sits in disparate teams and offices. Collecting the information requires that finance works more closely with those teams.
"Our finance team works closely with our sustainability, reporting, and treasury teams to understand what we are collecting and why," Klindt said.
Also, comprehensive and accurate ESG reports require dedicated resources, she said. To support this, more organisations are investing in technology to collect, analyse, manage, and report information from across the business.
"It's up to CFOs to build the right team and skills," Klindt said. "As the finance team typically has the historical financial reporting knowledge, it may be best for them to lead the charge and educate other members of the business on best practices.
"Then they can combine that with software that does the heavy lifting accurately and efficiently to save money and time," she added. "I urge other CFOs to embrace the technology available."
Technology's role
In addition to ESG data platforms, a plethora of technologies can help — from smart sensors that measure emissions in vehicles and buildings, to geothermal satellite data and artificial intelligence that can connect and fill data gaps.
This technology can be expensive, however.
Tracking recycled waste is relatively straightforward, Needham said. For example, Kāinga Ora aims to reuse 80% of the demolition materials from large-scale development projects rather than take the materials to the landfill. But collecting emissions data is harder, as it would mean installing sensors in thousands of Kāinga Ora's properties.
Avoiding errors
With new rules coming in, sustainability data will be coming under the microscope of financial regulators for the first time, said Darren Anderson, CPA (Canada), who is CFO of FigBytes, an ESG data reporting and strategy platform in Ottawa, Canada.
That means errors can become headaches for finance teams, Anderson said.
Technology can help here, too.
Accounting and reporting systems, verifiable by sophisticated auditing systems, "will avoid exposure to reputational, financial, and compliance risk", Anderson said.
An integrated approach
The added ESG reporting carries a risk that the board spends its time on reporting metrics rather than strategy, suggested Matt Miller, FCMA, CGMA, who is CFO at the UK's National Nuclear Laboratory (NNL). (Also see the sidebar, "Case Study: Scope 1, 2, and 3 Emissions at the UK's National Nuclear Laboratory".) One way to help avoid this risk is to make ESG reporting more actionable by applying an integrated mindset — something the International Federation of Accountants (IFAC) is urging CFOs to do.
IFAC suggests boards turn to CFOs to enhance the connectivity of sustainability information from different functions and external sources.
CFOs can use their expertise in systems, controls, compliance, and reporting to connect information around governance, risk, ESG, and finance into a more integrated reporting process. This provides a comprehensive picture of performance and value creation, according to IFAC.
"ESG is not a tack-on," Needham said. "It should be incorporated into business strategy and investment decisions, rather than just saying, 'We want to do something, how do we make it ESG-compliant?'"
At Kāinga Ora, such integration improves the link between finance and operations, such as understanding which properties are at risk of coastal inundation and the available mitigation strategies.
A holistic approach to value
Miller said that an NNL team is looking at how to take a more integrated approach that "joins the economic and social value of our activities with a balanced scorecard-type method".
The NNL is using consultant EY and the Embankment Project for Inclusive Capitalism's (EPIC's) long-term value framework to guide its integrated reporting. The EPIC framework provides metrics, guidance, and tools to help companies measure long-term performance and activities that create long-term value.
"This outlook has widened my role far beyond traditional financial metrics, towards more holistic considerations in investment and strategic decisions," Miller said. "For example, not just building our [organisation], but building local businesses around us to increase total value in the community.
"This holistic approach challenges the grey matter for CFOs. It can help remove some of the burden of existing reporting requirements by using management information from other business areas. But if you can be open to alternative processes, and where they could take you, there are benefits beyond this."
For example, allowing time for employees to support community groups benefits the community and the business through reputational improvements, as it is seen to be giving back.
Another benefit comes from increasing diversity of people and thought — for example, through neurodiversity, which refers to natural variations in learning, sociability, attention, and other neurological functions. Increasing employee diversity in such ways can improve long-term decision-making.
"Considering value, not just profits or cash, ensures a blended approach to decision-making," Miller said. "However, you need to stay the course and not revert to profit and cash when times are bad."
Case study: Scope 1, 2, and 3 emissions at the UK's National Nuclear Laboratory
Matt Miller, FCMA, CGMA, is CFO at the UK's National Nuclear Laboratory (NNL). The organisation has a head of sustainability, but Miller leads on measuring scope 1 and 2 emissions; structuring review, assurance, and audits to meet sustainability reporting requirements; and working with procurement to help suppliers cut emissions.
Scope 1 covers direct emissions from sources owned or controlled by the reporting company. Scope 2 are indirect emissions from purchased sources, such as energy suppliers. Scope 3 covers all other indirect emissions from the company's value chain.
"We've spent huge amounts of time over the last 18 months thinking about sustainability goals," said Miller. "We're engaging with third parties to help us with the initial scope 1 and 2 targets and measurement.
"Scope 3 measurement is still out of our range. But we are thinking about how we bring that alongside. For example, I'm working closely with HR and trade unions to make our travel policy as sustainable as possible."
The NNL aims for net zero in scope 1 and 2 emissions by 2030, which means decarbonising operations in its four laboratories. It is doing this through a range of measures aimed at promoting best practice on energy management and reducing environmental impact. These include educational initiatives; refurbishment, improvement, and maintenance of facilities; and accreditation with international energy management standards (ISOs 50001 and 14001).
The effect has been to steadily reduce energy usage per £1 million of revenue, as stated in the NNL's 2021–2022 annual report.
The organisation also aims to maximise social impact by, for example, enabling employees to give back to the community as much as possible.
This includes running a science, technology, engineering, and mathematics (STEM) outreach programme that allows employees to go into schools and engage on the future of science and technology. NNL also encourages individuals to contribute to local community boards and charities, such as Age UK Lancashire.
The UK started requiring climate-related financial disclosures from public companies, large private companies, and limited liability partnerships in 2022. Though the NNL does not have to submit them, the organisation is in the early stages of voluntary Task Force on Climate-related Financial Disclosures (TCFD) reporting. (The requirements proposed by the ISSB in its IFRS S2 draft are consistent with the TCFD's recommended disclosures on governance, strategy, risk management, and metrics and targets.) The NNL follows other ESG-related government reporting requirements, including the Streamlined Energy and Carbon Reporting regulations.
— Tim Cooper is a freelance writer based in the UK. To comment on this article or to suggest an idea for another article, contact Oliver Rowe at Oliver.Rowe@aicpa-cima.com.
Learning resource
Fundamentals of ESG Certificate
This course is designed to help you learn how the ESG landscape has developed and the key role CPAs and finance professionals have to play.
The course is available in the AICPA Store and the CGMA Store.
Resources
"Preparations Pick Up for ESG Reporting Requirements", FM magazine, 20 October 2022
"5 Steps for Finance Teams to Upskill on ESG Reporting", FM magazine, 22 August 2022