The Environmental, Social and Governance (ESG) landscape is changing quickly, and with it the risk and opportunities ESG issues bring to an organisation.

It might be a regulator investigating greenwashing or an investor worrying about climate change impacting asset value. Maybe it’s new incoming environmental reporting requirements or lenders demanding action on boardroom diversity. Whatever it is, ESG issues are fast moving up CFO’s priority list. As the ESG landscape is evolving so too is the finance function’s role in driving ESG.

How a CFO responds to the changing landscape will dictate if an organisation takes advantage of the upsides – like access to new capital and new premiums - while avoiding the downsides - like regulatory action on greenwashing. Will the CFO’s response be proactive, moving ahead of the pack, or reactive, responding to external events as and when they come?

Factors driving the changing ESG landscape

The most immediate and imminent factor driving the ESG landscape is a broad regulatory push. The European Union’s Corporate Sustainability Reporting Directive (CSRD), the UK’s Sustainable Disclosure Requirements (SDR), the USA’s Climate Disclosure Rules and other sustainability disclosures are leaving companies scrambling to stay onside.

There is a global ambition to achieve a 50 percent reduction in emissions by 2030, which means the next 10 years will see further significant reaction from government, regulators and society.

But simply staying compliant is not enough. Investor and consumer pressures are growing, demanding companies be proactive about how they integrate ESG into their business strategy. Showing positive outcomes and demonstrating a purpose-driven organisation is key to matching investor expectations.

Organisations are responding

The changing landscape means both the risks and opportunity for organisations are increasing quickly.

Environmental and climate risks to organisations are often categorised into physical risks – such as the impact of droughts, fires and floods – and transition risks – like policy and regulation, legal, and reputational. These risks are now materialising for organisations on a daily basis and are only increasing. Social and governance risks are similarly appearing all the time – whether these are strikes, health and safety issues or fraud and corruption.
To manage and mitigate these risks some organisations are taking the lead and leveraging the finance function to embed ESG throughout the organisation. New roles are appearing in finance such as sustainable-finance manager, ESG-reporting manager and finance-for-sustainability director. Those organisations that are leading the way are well placed to capture related opportunities through the “purpose premium” and improving their competitive advantage.

The Purpose Premium: why a purpose driven strategy is good for business

• Companies that met stakeholder expectations achieved a 6.4 percent higher return on equity.
• High-purpose brands could double their market value 4 times faster.
• 64 percent of companies with product sustainability programs achieved lower logistics and supply chain costs.
• Sustainability-marketed products saw a 39.5 percent price premium compared with conventionally marketed products.
• 78 percent of consumers were more likely to remember companies that exhibit a strong purpose.
• Brands with a strong purpose were 6 times more likely to be protected in the face of negative publicity.
• 50 percent of workers and 75 percent of millennial worker would take a pay cut to work at an environmentally responsible company. 78 percent of people indicated they would prefer to work for a purpose-driven company.

The role of the CFO in ESG

So why are CFOs and finance functions well placed to drive the ESG agenda in their organisation? We believe the CFO has four faces that capture the various priorities of a CFO and the role of the finance function - each of which will be important to drive the ESG agenda.

What CFOs need to do now

CFOs need to be acting now and integrating ESG into their finance function to take full advantage of the opportunities. In the immediate future CFOs need to:

• Ensure compliance with the existing ESG reporting standards, create transition plans and related KPIs.
• Identify upcoming ESG reporting standards that impact the organisation
• Start your journey to an ESG-mature finance function, which will take the following steps:
  1. Assess your external environment and the ESG maturity of your finance functions to spot areas for improvement
     
  2. Create a comprehensive strategy to implement ESG into your finance function
  3. Transform your finance function and implement new processes and solutions to respond to ESG risks and opportunities
  4. Measure and subsequently respond to your sustainability performance through integrated financial and sustainability data
  5. Communicate ESG issues and related reporting regularly with all internal and external stakeholders

If you’d like to discuss the topics of this article in more depth please contact one of our team.