The Financial Sector's Mission-Critical Role in ESG Reporting

Published on: 08 August 2022
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As ESG takes on growing importance, finance leaders must consider the technology, talent, and partnerships they need.

Business leaders are facing a new reality - an organization's environmental, social, and governance (ESG) strategy is now core to its business strategy. Almost half of CEOs now say increasing sustainability is one of their top priorities for their organization in the next two to three years. That’s up from about one-third in 2021, an increase of 37% in just one year, according to a 2022 IBM Institute for Business Value survey of 3,000 CEOs.

It’s clear to see why—today, a company’s value can be linked directly to factors such as climate action (not only from consumer expectations, but also to hedge against business threats) and fostering a sustainability-focused and inclusive workforce.

And ESG commitments not only serve a company’s sense of purpose and communicate that purpose to internal and external stakeholders, but they also bolster the bottom line. For 58% of corporations, there was a positive relationship between ESG and financial performance, according to a 2021 meta study by the NYU Stern Center for Sustainable Business and Rockefeller Asset Management. And that positive relationship likely will get stronger: The IBM study found the vast majority of CEOs (83%) expect sustainability investments to produce improved business results in the next five years.

Where Finance Fits

While big vision and external commitments are incredibly important to driving ESG strategy and purpose, equally important is being able to report accurate, auditable status of where we are to better understand where we need to go. Finance and accounting will play an essential role in ensuring a company’s ESG vision is reportable and that there is an ESG data governance strategy in place to support the information given to regulators and stakeholders.

Evolving disclosure policies across the globe will soon mandate new ESG reporting requirements for many organizations. The European Union already requires companies to report on how they address social and environmental challenges, and the Securities and Exchange Commission (SEC) has been considering a host of ESG regulations in the United States.

Finance and accounting will play an increasingly vital role in how organizations set targets, measure, and report their ESG initiatives. While only one-third of CFOs currently have responsibility for ESG reporting, over half (54%) of senior finance and IT leaders globally would like the CFO to take on that responsibility, according to a 2022 Workday survey of 1,060 senior finance and IT leaders.

As the key driver of corporate reporting, chief accounting officers also will be essential to their companies’ ESG progress. Once they have SEC guidance, chief accounting officers will need to incorporate those regulations into their normal reporting. They’ll be responsible not only for delivering more ESG data, but also handling additional controls and audits of that data.

All of which means that ESG reporting can’t simply involve big-picture vision statements or attractive presentations about the good things that companies say they do. Instead, it must involve clear governance processes based on reliable, reportable, and auditable data. Organizations where data is siloed will find ESG reporting a laborious and tedious task as they’ll struggle to combine employee data with carbon emission data or supplier data with financial data etc. On the other hand, with the right technology to access, blend, and verify data, finance and accounting teams will be well equipped to support ESG reporting requirements and new guidelines coming down the pike.

For finance and accounting leaders, the new world of ESG reporting will drive the evolution of three key areas: technology, talent, and collaboration.

Technology

Finance leaders need cloud-based financial management software that can access financial, people, and supplier data in one place to support ESG reporting. A company’s ESG profile isn’t just about what the company itself does—it stretches across the company’s entire network from employee commutes, to workplace waste, to the ESG strategies of vendors and suppliers. The financial management system must be able to pull in data from third-party sources and combine it with internal data. Access to this data will also make it easier for finance to model and plan for carbon emissions reductions and ESG investments.

Automation will also play a critical role in ESG reporting. For example, in the future when companies must report carbon emissions from their suppliers, every invoice might include a carbon emission number attached to its purchase. If it's on the invoice, it can automatically be logged into a finance system and analyzed.

Talent

Having access to the right ESG data is just the start. Finance and accounting teams will need to add ESG reporting and analysis to their toolkit, just as they’ve acquired any number of other skills, such as lease accounting standards or revenue recognition standards. Rather than having a breakout team specifically focused on ESG, team members will wear ESG hats along with many other hats. And as accounting continues to undergo a much-welcome automation revolution, these teams will be able to do more than report data. They’ll use data visualization tools to see and explore a wealth of ESG data. They’ll become empowered to tell decision makers the story behind the numbers.

Collaboration

As ESG reporting becomes more critical, so will finance’s ESG role—but finance won’t be alone. As EY reports, ESG reporting will require a collaborative, cross-functional undertaking that helps the organization reach its goals.

In many cases, the CFO or chief accounting officer will act as the orchestrator of collaboration across the organization as part of their data governance role. Accounting and finance leaders will work closely with legal, auditing, and the board, as well as HR teams focused on diversity, equity, and inclusion (DEI) and procurement teams working with suppliers. Moving forward, the coordination of these cross-functional teams will be one of the key ESG challenges and opportunities for finance.

While the effort is nascent for many organizations, ESG will become an entrenched part of most companies’ DNA and culture. So, as we look ahead, finance teams will play a key role in delivering on ESG initiatives by authenticating and building stakeholder confidence in ESG-related data for the overall health of the company.

Philippa Lawrence is Chief Accounting Officer at Workday.

Source: Workday newsroom

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