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How can CFOs stay ahead of the ESG agenda?

The increasing focus on ESG means it’s too risky for any firm to simply ignore, but the lack of clarity regarding what’s required, even on a company level. As such, it can be difficult, if not impossible, to measure how the ESG agenda may affect responsibilities within the organisation, says Susie Clements, partner at Heidrick & Struggles and regional managing partner of the Corporate Officers Practice in Europe & Africa

Many companies have now appointed a chief sustainability officer, which may give CFOs reason to consider ESG matters are outside of their remit. Regardless of whether a sustainability officer or similar role is in place, the role of the CFO is already inextricably linked with the ESG agenda.

However, the biggest issue with this responsibility is a lack of clarity regarding what’s expected of companies under the scrutiny of the ESG lens. How can CFO’s talk about “ESG-generated value” in any truly quantifiable sense without any unified reporting standards in place? And what are the risks of disclosing too much versus not enough?

While there are no hard and fast answers, there are several developments and examples of best practices that can help steer the way through these uncertain waters.

Legal and regulatory developments

One of the biggest challenges facing firms when it comes to ESG is a lack of standardisation. Although investors are clamouring for more and better disclosures, firms are understandably unsure how they’re going to be compared with the competition in the absence of any meaningful yardsticks by which to determine ESG impact.

The good news is that there’s progress, the bad news is that it’s a marathon, not a sprint. In December, the IFRS Foundation launched a consultation paper on sustainability reporting in which it sought to assess demand for global sustainability standards. It also proposed the option of creating a Sustainability Standards Board under the remit of the IFRS Foundation, which would operate alongside the International Accounting Standards Board. The SSB initiative garnered early support from Mark Carney, UN Special Envoy for Climate Action and Finance, and former governor of the Bank of England.

The consultation paper concluded that a set of standards was necessary. The necessary governance steps to establish the SSB are now underway, as the IFRS needs to amend its constitution accordingly.

Elsewhere, individual jurisdictions may be taking steps of their own towards standardising compliance with ESG requirements. The EU Sustainable Finance Disclosure Regulation came into effect in March 2021, with specific rules for how and what kind of disclosures firms should make regarding sustainability. The US may be next to follow suit, based on the recent actions of the Securities and Exchange Commission, which has confirmed that climate-related risks will be among its 2021 examination priorities.

How can CFOs prepare?

Based on investor demand, firms can’t stand still and wait for the regulations to emerge. Moreover, getting ahead of the ESG agenda now means less pain in changing the mindset further down the line. There are several key pointers for CFOs regarding engaging with and reporting on the corporate ESG activities.

Firstly, materiality matters. What are your investors likely to care about the most? Keep all statements relevant to what matters the most to your firm’s performance and strategy, which will be industry and even company specific.

Similarly, know your audience. CFOs are used to addressing shareholders and analysts in their own language, and ESG discussions should be no different. Timing the reporting cycles will mean that ESG discussions can happen as part of broader financial discussions about the company’s prospects.

Choosing a reporting framework is also one means of introducing standardisation to your ESG disclosures. Some firms use the United Nations Sustainable Development Goals; others use the Sustainability Accounting Standards Board’s framework. Using the Taskforce on Climate-related Financial Disclosures recommendations as a guideline is also an option, as are industry-specific equivalents.

Given the increased focus on ESG matters in audit, it will also be necessary to start maintaining paper trails of ESG activities. This may mean including estimates on factors such as emissions, carbon footprint, or the impact of carbon offsetting activities.

Don’t lose the human touch

By introducing some internal structure around ESG matters, it will become easier to consider ESG activities and their impact on financial performance. Whether or not there’s a chief sustainability officer or equivalent in place, the roles and responsibilities for ESG activities and reporting will start to become more established.

However, one final word when it comes to ESG is to remember that it’s not just about numbers and standards. As with financial reporting, there’s also a story behind the numbers. Every firm should have its own story to tell, illustrating to investors that the organisation is striving to achieve and exceed its ESG goals.

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