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.

Face 1: Catalyst

The CFO can build on existing financial structures and approaches to catalyse sustainability and drive ESG performance throughout the business, through a sustainable performance management approach.

Existing finance roles can be adapted to allow CFO’s and the finance function to catalyse ESG and sustainable approaches, drive performance and ensure the purpose premium is captured by all parts of the organisation. These include:

• Business partnering to spread ESG expertise into different areas of the operation
• Collating metrics from across the business using advanced digital capabilities to drive performance
• Setting KPIs, budgets and internal pricing
• Monitoring KPIs, balanced scorecards and management information to drive performance

If the CFO sets clear strategies, KPIs and data needs, with the right digital platforms and finance team upskilling, they can be the ESG catalyst.

Face 2: Strategist

The CFO has a key role to drive an organisation’s strategy by aligning financial and business strategies. An important focus is helping to set the future direction of the company to enhance business performance and shareholder value. CFO’s can drive the setting of ambitious but realistic targets that align with scientific principals and are backed by adequate funding.

Integrating ESG into business strategy and future direction is now considered fundamental to business performance and shareholder value. For example, our 2022 survey of CxO found that 97 percent of companies have already felt the negative impacts of climate change and 73 percent of leading organisations expect climate change to have a high or very high impact on their strategies over the next three years.

As a strategist the CFO will be:

• Integrating ESG and sustainable performance management into strategic decision making and capital allocation
• Driving a strategy to optimise green tax opportunities
• Linking enterprise and financial value
• Creating a credible ESG story to raise capital and capture the ESG premium
• Strategic M&A planning
• Appraising investments for ESG opportunity
• Ensuring an appropriate ESG risk appetite
• Developing leaders with holistic systems approaches to drive sustainability throughout the business units

Face 3: Steward

With the right knowledge and support the CFO and finance teams can pivot existing skills in risk management and collating, assuring, and reporting financial information to meet ESG requirements. As a Steward, CFO’s have increasing ESG related responsibilities which include:

• ESG related external reporting such as Task Force on Climate-Related Financial Disclosures (TCFD) and the Task Force on Nature-related Financial disclosures (TNFD)
• Streamlined Energy and Carbon Reporting (SECR) and gender pay gap reporting
• Preparing for other upcoming reporting requirements from governments, regulators and international standards setting bodies such as the International Sustainability Standards Board, or the UK’s transition planning requirements
• Driving the provision of high confidence and quality data through internal control and governance frameworks for external reporting, audit and assurance and management information through internal control and governance frameworks
• Accurately reflecting the impact of ESG on financial statements, including ESG related risks, impairments and premiums
• Preventing greenwashing and associated risks such as negative press and regulatory action
• Preserving the value of existing assets which might be affected ESG issues such as climate change, biodiversity loss, poor diversity, or bad governance
• General management of ESG risks throughout the organisation

Face 4: Operator

The CFO must also create an optimal operating model for the finance team to ensure it is effectively and efficiently driving ESG in the organisation. The CFO must balance the cost, risk and service level when delivering the finance function’s ESG responsibilities. The CFO will ensure:

• There are ESG and sustainability skills available to them including in ESG reporting, scenario planning and forecasting including a training and upskilling agenda for the finance function
• The right digital infrastructures for collating ESG metrics, forecasts and information
• The right operating model and governance structures for the finance team to support the delivery of an organisations ESG responsibilities and strategy
• The right control environment and framework proportionate to the ESG risks and opportunities

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.