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CFOs Should Ask These Strategic Questions About ESG Reporting

Aug. 24, 2022, 8:46 AM

According to a review by the Center for Audit Quality in August 2021, 95% of S&P 500 companies made detailed environmental, social, and governance information available in some form. But some regulators, investors, and other stakeholders are clearly not satisfied with those efforts.

Organizations seeking to disclose their ESG activities have faced a wide range of reporting options. There are more than 600 ESG reporting provisions globally, and not all share the same interpretations of sustainability, according to an EY report. Some focus specifically on climate-related concerns, while others have a broader scope. The types of organizations setting the requirements also vary. Companies may be subject to federal, state, or local regulations, or even stock exchange requirements and voluntary guidelines set by ratings companies.

These factors have made it difficult for investors and company management to evaluate the ESG data’s value and to feel confident in its accuracy, completeness, and reliability. In light of this situation, organizations face investor and regulatory pressure for more transparency, reliability, and comparability in their ESG reporting. Several recent developments are signaling a significant change in this area, and CFOs should be asking some specific questions.

What are some essential ESG reporting developments?

Three examples offer a sense of where ESG reporting is headed.

Climate-related disclosure. While much of ESG reporting is now voluntary, a climate-related disclosure proposal from the US Securities and Exchange Commission would be a significant new mandate if adopted. It would require public companies to disclose specific climate-related information in registration statements and periodic reports, including “climate-related risks that are reasonably likely to have a material effect on their business, results of operations or financial condition,” along with specific financial statement metrics, in their audit financial statements. Extensive information on greenhouse gas emissions would be required, including those from the entity’s owned or controlled operations (scope 1) and purchased or acquired sources (scope 2). For some companies, it would also include indirect greenhouse gas emissions from the company’s value or supply chain (scope 3).

EU taxonomy. With the EU taxonomy taking effect in January 2023, all public companies with more than 500 full-time employees must make the relevant taxonomy disclosures as part of their non-financial statements. This EU regulation aspires to provide companies, investors, and policymakers with standard definitions for what’s considered environmentally sustainable. This would prevent companies from greenwashing their products or activities, incentivize sustainable activities, and funnel investments to the most sustainable organizations.

ISSB. The International Sustainability Standards Board consolidates other organizations in a step toward creating a global baseline and greater uniformity. The ISSB was created by the IFRS Foundation and has proposed two standards that it plans to finalize by the end of this year. IFRS S1, the General Requirements for Disclosure of Sustainability-Related Financial Information, would ask entities to disclose material information on significant sustainability-related risks and opportunities. IFRS S2, the Climate-Related Disclosures, would address reporting on climate-related governance, risk, and opportunities.

What are the potential benefits of this new guidance?

A more coherent and cohesive reporting landscape can provide several advantages to organizations.

Greater confidence in data. The trustworthiness of ESG data has been one main concern; even company leaders apparently doubt the reliability of their own organization’s data. A total of 58% of global executives admitted in a Google Cloud survey that their companies had overstated their sustainability efforts, a practice known as greenwashing. And while 86% believe their companies are making a difference regarding sustainability, only 36% had measurement tools to gauge the exact impact.

Enhanced risk management. Organizations face ESG risks whether or not they identify and report them. While new requirements or guidance can add a layer of complexity and effort, they can also drive companies to gather data that reveals threats that otherwise might have been overlooked or omitted from strategic planning. ESG encompasses a wide range of considerations, such as climate concerns; diversity, equity, and inclusion; human rights issues; and supply chain concerns. In seeking to report on these numerous ESG factors, organizations may get a more profound and more comprehensive sense of their overall risk environment.

Cost savings and economies. The requirements could result in cost savings if the information gathered reveals new ways to make the best use of resources or to cut costs in energy or water consumption, for example. A review of supply chain agreements and procedures could also identify opportunities to minimize expenses and redundancies. Ratings agencies may also take ESG credit factors into account in their decisions on creditworthiness, which can affect the cost of borrowing.

Entry into new markets; stronger customer and employee connections. A robust and transparent climate effort can attract new customers who have more confidence in the organization’s ESG financial data or that seek to work with companies that can quantify their commitment to ESG concerns. It can also enhance customer and employee loyalty.

What are some ESG reporting challenges?

Getting up to speed. Companies will have to spend time and money gearing up to gather, assess, and accurately report ESG data; instill the proper internal controls and processes; and focus on audit preparedness. That will include investments in staff training and new technologies to properly report nonfinancial data. It may also be necessary to expand the staff to take on new reporting demands, including bringing in new employees with expertise in ESG issues to complement existing financial competencies. And despite consolidation efforts, companies may still face divergence in rules from different countries or jurisdictions that apply in different ways to the global parent and its subsidiaries.

Determining who’s in charge. There is not necessarily uniformity today in who oversees ESG within an organization, but the new financial reporting guidelines put finance in the spotlight. In driving the organization’s ESG efforts, finance can use its existing skills and processes in internal and external reporting, cross-functional integration, financial management, governance and risk management, process efficiency and investor relationships, according to a KPMG report.

Getting beyond compliance. For many organizations, ESG issues may have always been a compliance sideline that had little impact on overall strategic concerns. That should change because of the developing reporting requirement landscape of the important and continuing impact that environmental, social, and governance issues can be expected to have.

Amid the changes in the ESG reporting environment, this is a good time for finance leaders to consider the answers to these and other strategic questions.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

James Paterson is vice president and general manager, CCH Tagetik at Wolters Kluwer. He leads the corporate performance management software solutions business unit in North America and consults with clients in the office of finance.

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