High inflation and economic headwinds have taken focus away from ESG initiatives for now, but CFOs will be expected to give the latter more attention over the next 12 months. Varun Dewan and Paul Middleton from Protiviti UK outline key areas for finance leaders to consider in 2023
According to Protiviti’s 2022 Finance Trends survey, which gathered views from 1,064 finance leaders globally, ESG – while still a top-20 priority – is not as highly rated as concerns over data security, inflation, and profitability.
But, looking ahead, CFOs suggest that ESG will become more important as the trend toward ESG regulation and reporting continues to gain momentum, compelling firms to direct time and attention to this burgeoning issue.
In the next 12 months, “ESG metrics and measurement” is expected to become a top-10 priority, according to the survey, alongside automation, financial planning, and investments in cloud technology and mobile finance.
CFOs are adept at disclosing the financial health of their businesses, and as such, they are also uniquely well-placed to respond to growing demands for non-financial and financial information about ESG.
In November 2021, the IFRS Foundation launched the International Sustainability Standards Board to develop a baseline for disclosure standards; and the Financial Stability Board and United Nations are pursuing similar goals. At present, however, there is no single framework or standard for ESG reporting.
Nevertheless, many CFOs understand the growing imperative for more disclosure in this area. According to Protiviti’s survey, 98% of CFOs are planning to increase the focus and frequency of ESG reporting in the coming year.
To achieve this, in the coming months CFOs must find people to help navigate the ESG journey, the quality of data, processes, and controls, and leveraging technology to help them improve ESG measurement.
According to Protiviti’s survey, 42% of CFOs say they need additional skills and resources to prepare for increased disclosure.
ESG introduces a wide-ranging set of skills requirements, which draw on different disciplines – including finance, technology, and project management, for example. It touches on a variety of environmental and social issues, many of which are intertwined through data, reporting and metrics and, in some cases, scientific measurements. Understanding and disclosing ESG issues will therefore require working with people in roles not traditionally involved in financial reporting, as well as training and development.
For CFOs who find themselves shorthanded, it makes sense to focus on defining the ESG transition journey for their respective companies. Instead of building a team of 20 people to work on ESG, for example, they might nurture four or five team members to work on a specific roadmap or project, based on an understanding of (and ideally enterprise alignment around) the most material ESG imperatives for the company. During this time, as formal ESG-related education becomes more available, they will be able to expand on the skills they have now.
There is a sign that ESG will become an important recruitment consideration in the future. Executives across Asia, Europe and North America are almost unanimous in viewing ESG as either “somewhat” or “extremely” important in their recruitment and retention strategy in the next 10 years, according to another recent survey by Protiviti and Oxford University – even though the survey highlighted significant regional differences about the importance of the ESG agenda and other issues.
For example, 50% of leaders in North America expect the costs to manage operational and compliance ESG activities over the next 10 years to remain the same as today or even decrease, while more than 80% in Europe and Asia-Pacific expect the costs to rise.
It is not too early for CFOs to start building teams to help them understand and report on ESG-related issues; with it becoming significantly harder to access people and build teams when regulation is at the door.
Perhaps the biggest challenge for ESG is data: good quality, well-sourced, and well-managed data. To obtain this new kind of data, firms are measuring their own emissions and resource usage by evaluating suppliers for human rights issues, and tracking employee diversity metrics, compensation, and data privacy measures, for example. All of these non-financial metrics need to be reported with the same rigor as financial metrics – meaning the data needs to be reliable, accurate, and auditable – and CFOs, as experienced data custodians, are well placed to help.
In the beginning, data-gathering for ESG disclosures will likely involve scores of emails and a heavy reliance on spreadsheets. But to avoid replaying this process every quarter, CFOs can identify better processes and tools to improve the accuracy, efficacy, and consistency of measurement. According to Protiviti’s survey, 41% of CFOs are investing in technology to help them with ESG reporting.
As finance teams obtain ESG data from colleagues and third parties, they will recognise that few, if any, of these partners are familiar with the exacting controls that financial reporting requires. Nevertheless, this cross-collaboration can also help producers of environmental data and other ESG measures to embrace and integrate more rigorous controls, which will benefit not only ESG reporting but the control environment overall.
Attitudes toward ESG are evolving, alongside the more immediate concerns of operational stability, profitability, and inflation. Post-pandemic dislocation, increasing energy prices, the Ukraine war, and subsequent responses by governments to shore up their supplies, are adversely impacting ESG efforts. In some cases, these factors could force firms to reconsider their spending on ESG-related initiatives or defer them in the short term.
But behind the scenes, CFOs do acknowledge the growing impact of their businesses on the environment and society, and the changing attitudes of their stakeholders. A focus on talent, understanding the role they can play in gathering data, and technology will help equip them for the future – and greater scrutiny from regulators, investors, customers, and employees.
