The need for finance and accounting leadership

Investors are seeking more information on sustainability risks and opportunities, so companies must properly assess their business strategy and enterprise risk management (ERM) to determine the long-term risks and opportunities that affect their growth and performance.

As strategic allies to the executive team, the CFO and the accounting leadership team can bring a measured perspective on the ways companies can unlock financial value and mitigate enterprise risk through ESG investments.

A strategic view on ESG can bring a variety of market opportunities. With specific ESG metrics or KPIs identified, companies can access capital at lower costs and preferential rates from traditional lenders in addition to sustainability-linked bonds tied to KPI performance. A thorough assessment of ESG performance across a set of ESG rating agencies and scoring methodologies can help companies identify gaps and material topics that can be addressed to enhance ESG disclosure and scores. By achieving improved rating scores, companies are more likely to be considered for inclusion in exchange-traded funds that require baseline ESG scores.

The finance function also has a unique opportunity to focus on traditional business practices, such as more effectively managing costs related to energy efficiency and resource management.

The role of accounting and finance will be critical to ensure the quality and consistency of ESG reporting. This will include establishing rules for ESG data governance, assigning responsibilities across finance and sustainability teams (among others), and designing the necessary internal controls to implement on the sustainability reporting process.

Internal audit teams can be invaluable partners in driving ESG reporting efforts regardless of whether the team has specific ESG expertise or not. Internal audit professionals know how to dive into data and ask challenging questions that will help identify gaps in process and controls.

Companies may also implement a recurring data aggregation and consolidation process for ESG data that aligns to financial reporting cycles. For this investment to be useful, organizations need to consider the tools, processes, and people that can help execute an effective ESG reporting process from initial sources of data through to external reporting (see Sidebar B at the end of this article).

How to take the lead on ESG

Organizations can take four first steps to guide their ESG strategy and road map, with accounting leaders and experts playing a pivotal role:

1. Engage with a cross-functional ESG oversight committee

Companies that have successfully embraced ESG have created a cross-functional steering committee. Typically, the group includes the CEO, CFO, and general counsel in addition to leaders from accounting, investor relations, sustainability, and across the business.

The CFO’s leadership is critical to determine where investments can be made to create value with ESG and to consider relevant sustainability risks and minimize financial exposure. In collaboration with accounting leadership, the CFO also helps to ensure compliance with regulatory and investor demands, and to co-develop an investor-grade reporting process.

Executive compensation targets set by boards and leadership teams have begun to link sustainability performance and financial performance. Companies can be most successful when executive decision-making is incentivized to consider ESG goals aligned to business strategy, financial growth, and long-term sustainability. To execute the steering committee’s ESG program, senior leaders from these functions are nominated to help drive cross-functional implementation. This is where leaders from the controllership, internal audit, financial reporting, and investor relations can implement best practices from financial processes.

2. Benchmark against industry peers and investor priorities

As in any endeavor, it is wise to start with understanding your business in relation to your industry peers and the priorities of your key stakeholders. Company leaders should ask:

• What are my competitors doing in the ESG space?
• How do I rank relative to my peers across various ESG rating agencies?
• Are there opportunities to differentiate in a way that is meaningful to customers, employees, and investors?

A thorough look at the industry’s landscape through the ESG lens can help uncover material factors and potential strategies to unlock financial value and strategic positioning in the market. A formal materiality assessment may help map business priorities with internal and external stakeholder priorities to focus the ESG program.

The CFO is uniquely positioned to think through value creation with the executive team and must lean on accounting professionals to develop new policies and procedures that manage sustainability risks, operationalize ESG reporting infrastructure, and collaborate with investor relations to craft the company’s ESG narrative for investors.

3. Build a strategic ESG roadmap

With a shortlist of priorities and key programs identified, successful companies can invest in building a strategic road map to improve ESG communications, risk management, and reporting processes.

Companies can begin by assessing voluntary frameworks that align to regulatory requirements in an effort to start building the foundational processes and datasets for regulatory reporting. Focusing on frameworks like the ones developed by the multinational Task Force on Climate-Related Financial Disclosures (TCFD) and the Sustainability Accounting Standards Board (SASB), which are the basis of the new IFRS sustainability standards and the most adopted frameworks within the investor and business community, is a great starting point.

Similarly, the Carbon Disclosure Project (CDP), established more than two decades ago with the aim to get companies to disclose climate-related information, will incorporate IFRS S2 into its global environmental disclosure platform in the 2024 disclosure cycle. That means, CDP’s 17,000+ voluntary users will disclose data structured to IFRS S2. Until regulatory requirements are effective for companies, these frameworks require quantitative and qualitative disclosures that will benefit from accounting and finance expertise.

For example, with the SEC’s climate disclosure rule expected to have a sequenced adoption timeline, companies are preparing by building an inventory of greenhouse gas emissions and drafting qualitative disclosures on risk management and strategy that align to the TCFD framework. Under the SEC climate disclosure rule, assurance must be provided over greenhouse gas emissions data—initially, with limited assurance in the first two years following disclosure, and then through reasonable assurance, which involves more substantive testing of data. Similar mandatory assurance will be required in the European Union, and assurance requirements under the SEC’s proposal may change in the final rule.

The SEC’s proposed climate disclosure rule itself is largely based on TCFD, and building the infrastructure for baseline data collection at inception will enable the company to be prepared for assurance over the climate data reported in the 10-K. This is where accounting leadership is essential.

4. Focus on quality

After companies have tackled what ESG information to report and where to report it, it’s essential for quality and auditability to be a top priority. In the US, companies are initially focusing on climate data and disclosures, given the SEC rule timeline.

Currently, very few public companies disclose climate data in the Form 10-K, but many organizations — public and private — are including such information in corporate sustainability reports (CSRs), reporting packages to institutional investors, and in response to information requests from significant customers. In these cases, the relative infancy of the disclosures and the diversity in practice used to source and report the data suggest that few organizations have reached the status of assurance-ready climate reporting.

In the United States, for public companies, as climate data from the CSR is incorporated into a company’s Form 10-K, it will be subject to disclosure controls and procedures. For private organizations reporting on this information, the expectation that any reporting of data is complete and accurate is no different than financial reporting information. It will take significant effort for most companies to identify, collect, and evaluate the right data, to properly segregate duties across accounting, legal, and sustainability teams, and to ensure disclosures are complete, accurate, and supportable.

In March, COSO’s paper on achieving effective internal control over sustainability reporting (ICSR) outlined how to apply its framework for financial reporting to the emerging areas of sustainability and ESG reporting, reinforcing the unique role for accountants in ESG.