
by Bethany Cheshire, Consultant – Wharton BC
The emergence of Environmental, Social and Governance (ESG) reporting has created a new challenge for finance leaders; how do they collect, measure and operate with non-financial data related to ESG factors. Given that ESG mandates have grown by 74% in the last 4 years, finance functions are under growing pressure to meet these requirements and transform their processes, systems, and skillsets to analyse this data and incorporate it into their financial reporting[1]. This change requires finance leaders to reconsider how they build the requisite capabilities across their organisation.
The growing importance of ESG factors in business success: Why CFOs, investors, and regulators are taking notice
ESG has become a mainstream topic in the finance industry. Over the course of the last decade CFOs, companies, investors and regulators have all become increasingly aware of its importance to businesses’ long-term success. Measuring of these factors can help businesses in various ways:
1. Doing the right thing:
Businesses are increasingly called upon to take a stance and act on environmental, societal and political issues. The perceived ethics of a company can also influence investors decisions both from the perspective of having an alignment in values and enhanced longevity and adaptability.
2. Customer acquisition:
Customer opinion can be shaped by a company’s responses to current issues, which has the potential to make or break a business. In a PWC study, 76% of consumers agreed with the statement, “I will discontinue my relationship with companies that threaten the environment, employees, or the community in which they operate poorly”[2].
3. Talent attraction and retention:
Measuring and publicising data on ESG can help attract talent and assist employers to stand out against competition. 84% of employees are more likely to work for a company that stands up for environmental, social and governance issues[2].
Building new capabilities: The role of finance functions in integrating ESG factors into financial reporting
Integrating ESG factors into financial reports will require finance professionals to develop new capabilities beyond their traditional financial reporting and analysis skills. Some can be built from existing capabilities while others will need to be newly developed or brought into the function.
So, what additional capabilities should finance professionals be building?
- ESG methodologies: Finance functions need to have a robust understanding of ESG data and the surrounding sources and rating methodologies that are used by investors and other stakeholders.
- Digital capability: ESG data may be stored and recorded by different areas of the business which may utilise different technology stacks. As a result, these varying systems need to be navigated by ESG professionals in order to source and maintain relevant data. Establishing a data centralisation point will streamline the ESG reporting and integration processes[3].
- Data quality and reliability: Finance professionals must be confident in identifying relevant ESG data and assessing its quality and reliability.
- Data analytics: Similarly, the function will need strong data analytics as integrating ESG factors into financial reporting requires the ability to analyse large amounts of data, identify trends, and develop actionable insights.
- ESG strategy: Finance functions will also need to be able to help devise the business’s ESG strategy, using the data to set goals and targets as well as defining the metrics and monitoring progress. This requires expertise in stakeholder engagement, risk management and sustainability reporting.
- Communication: Strong communication skills culminating in the development of clear and concise reports, presentations and other communications that convey ESG-related risks and opportunities are critical to fully achieving the benefits of ESG integration. The ability for finance leaders to articulate and measure the value of more than just money is a key skill of the Rational Value Creator; one of four key mindsets identified for future finance leaders. This is a leader who pursues long-term business value beyond traditional finance metrics, venturing into non-financial KPIs[4]. Finally, finance functions need to be able to develop ESG-related disclosures and reports that are in alignment with international reporting frameworks such as the Sustainability Accounting Standards Board (SASB)[5].
Building a high-performing finance function for ESG reporting: The importance of a finance capability programme
The need for new capabilities triggered by the change in responsibilities and strategy highlights the requirement for a finance capability programme. A finance capability programme is a structured approach to identifying and addressing gaps in the finance function’s skills and knowledge. A capability programme follows on a number of steps to build a high-performing finance function that adds value to the business:
- Define the capabilities: identify and define the capabilities needed to enable successful ESG reporting and integration. An initial point of reference would be the CGMA Competency Framework, which outlines the role of finance professionals and breaks down key capabilities into five groups: technical, business, people, leadership, and digital skills[6].
- Assess the levels: For each capability the current level within the function must be assessed. If detailed sustainability reports are already being created, the finance function may be familiar with the data sets and may have ESG expertise in the function. Alternatively, they may assess their ESG methodologies as poor if reporting is not robust or sits distinctly outside of the finance function.
- Identify the gaps: A full capability assessment will help functions to understand the gaps in capabilities needed to fulfil ESG expectations and maintain key investor relations.
- Address the gaps: Capabilities can either be built, bought or borrowed, and the best technique for each function will vary from business to business depending on factors such as budget, the size of the capability gap, the size of the team, time available. These skills are increasing in demand across all functions in nearly all industries and markets[7]. Regardless, a plan needs to be devised in order to obtain the necessary capabilities required for the objective.
- Assess programme effectiveness: Ongoing evaluation of the capability programme implementation, alongside identification of emerging capabilities is key to maintaining momentum and assessing the function’s current state against the desired level of capability.
Concluding thoughts:
There are both ethical and financial incentives for companies to measure and report on ESG factors, such as aligning values with investors, attracting talent, and providing a more holistic view of the company’s performance. As ESG compliance becomes a baseline requirement for businesses, they can differentiate themselves by making it a key part of their strategy and considering it a means of value creation[7]. Finance functions must develop new capabilities beyond their traditional financial reporting and analysis skills. To truly achieve the benefits of financial reporting integration, functions require capability in ESG data analysis, strategy development, stakeholder engagement, risk management, sustainability reporting, communication, as well as alignment with international reporting frameworks.
If you’re interested in understanding more about how we’ve helped organisations to build capability for the future finance function, contact us at info@whartonbc.co.uk
Or if you would like to read further, check out this case study on our website:
https://whartonbc.co.uk/experience/building-capability-for-the-future-finance-function/
References:
1. https://www.perillon.com/blog/esg-statistics
3. https://www.pwc.com/mt/en/publications/technology/esg-digitisation.html
4. https://whartonbc.co.uk/wp-content/uploads/2022/03/influence_the_future.pdf
7. https://www.bcg.com/publications/2023/finance-talent-acquisition-needs-upgrade
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