Read this blog to find out how the CFO’s office can combine accounting and sustainability.
A wave of sustainability reporting initiatives is heading our way to encourage companies to adopt more environmentally and socially responsible policies and practices. Whether mandatory or not, the public, investor, regulatory and political mindset is pushing to demand more accountability and action. This means that finance functions of all sizes and in all geographies will be overwhelmed with new reporting requirements. It’s only a matter of time, and if so, what are the implications for the CFO?
Compliance burden or opportunity?
At some level, CFOs might see ESG as a simple compliance burden – a “box” to tick, alongside many other regulatory and compliance obligations. But savvy CFOs know that finance is uniquely positioned to accelerating sustainability benefits and savings. This is something that is front and center in the minds of institutional investors and various ESG indices can have a profound effect on market capitalization, access to capital and corporate reputation. This is a situation CFOs ignore at their peril. They must not only be in the “game”, but must be able to positively differentiate their businesses on ESG criteria.
Reconciling ESG and accounting
Although ESG compliance primarily relates to non-financial information (e.g. supply chain emissions), understanding how ESG activities impacting the bottom line is critical to creating ESG reports that attract investors, impress financial institutions and appease regulators. But translating environmental results and natural phenomena into accounting language is far from simple. This will require a complete shift in mindset as well as reporting systems, processes and decision-making.
Changing the basis of decision making
Part of the change in mentality will be a profound change in the basis of decision-making. Historically, CFOs have made decisions based on maximizing monetary returns and those decisions have been based on historical financial transactions that are well understood and can be audited. In the new era of ESG, CFOs will be immersed in an environment of environmental data and other unknowns, which are more forward-looking, unaudited and frequently estimated.
In this new world, the CFO will support the C-suite on decisions that are not necessarily designed to make money, but also to have a social or environmental impact or a mixture of these. The fractured legacy systems of the past will not be able to support this more complex basis for decision-making.
The need for a platform approach
At a time of ESG reporting, CFOs will need to demonstrate an explicit link between, for example, sustainability results deeply embedded in operational data and their financial implications. Historically, it has not been easy. Reporting and disclosure management systems (or even worse disconnected spreadsheets) have often been decoupled from the underlying accounting and many organizations have struggled to merge granular operational and financial data into a single environment. .
The breadth of ESG guidelines will add to the challenges. From diversity policy and recruitment to sustainability and social initiatives, ESG will be characterized by a cross-functional and multi-disciplinary effort involving a large number of different stakeholders. Merging these different perspectives and delivering unified reporting will require a platform or hub approach, where all interested parties can collaborate in a unified and cohesive reporting environment.
This is discussed in our webinar “ESG Accounting. Can CFOs really help fix the planet? which you can catch at your convenience with the on-demand version.
From now on
ESG timelines dictate that an early start is necessary, but of course these initiatives are not just about compliance, but about competitive advantage and differentiation. However, it will take time to bring about the cultural change and align the appropriate systems and processes.
One of the lessons of the Covid era is that organizations that transformed key financial processes before Covid took hold were far more resilient and outperformed their contemporaries in the face of extreme change. The parallels with ESG are striking. Organizations that adopt ESG in a timely manner will be better prepared to weather the wave of regulation and capitalize on the competitive advantages that ESG offers.
ESG represents one of the deepest and most far-reaching regulatory changes the CFO has faced in recent times, although its impact will be felt far beyond the realms of pure compliance. This will require accounting innovation, a new approach to decision-making, and changes in the technology of enabling platforms. However, it offers opportunities for competitive advantage for organizations that seize it.
To dig deeper into the many ideas raised in this blog, you can watch our on-demand webinar “ESG Accounting. Can CFOs really help fix the planet?