Corporate attitudes towards environmental, social, and corporate governance (ESG) typically lie on a spectrum between obligation and opportunity. Those with the dial set at obligation tend to focus on disclosure, reporting, and regulation. And yes, there are plenty of frameworks and regulations to deal with, from the Global Reporting Initiative and the Sustainability Accounting Standards Board to the EU taxonomy for sustainable activities, which are essential considerations and commitments. But it is becoming increasingly clear that ESG matters to stakeholders in ways that go way beyond regulatory success alone, and here lies the opportunity.
ESG compliance can be a strategic tool to develop a business rather than merely a box to be ticked. However, investors are only one example of a stakeholder interested in ESG. The following is a comprehensive, if not exhaustive, list.
1. Internal stakeholders. The same instincts driving operations and finance closer together in more forward-looking organizations are also pushing for a less siloed approach to ESG. From chief executives to department heads, operational leaders, and whole finance teams, internal stakeholders can unearth insights from ESG data to inform critical business decisions.
These ESG insights can, for example, direct finance teams to improve profitability, contain costs, identify new business opportunities, improve reputation and recognize areas for investment and divestment.
2. Investors. Investors have an understandably sensitive radar for risk. At an altruistic level, ESG investing can be a strategy through which investors reassure themselves that their money is going to companies that make the world a better place. But unlike sustainability, which looks at how businesses impact the environment and society, ESG looks at how environmental, social, and governance initiatives affect their financial performance. ESG investing relies on an independent rating, or ESG score, based on an assessment of a company’s environmental performance, social impact, and governance policies. Altruistic and risk-sensitive investors have reason to want companies they invest in to have good ESG scores.
3. Banks and financing. Banks, capital markets, and wealth managers also pay attention to company ESG scores when considering their customers for investments, loans, and other products and services. An organization seeking to renew loans, financing approval, and additional support from a bank should be prepared to have its ESG performance scrutinized. It’s another reason why ESG performance should be prominent on a company’s CV.
4. Insurers. Research indicates that the overwhelming majority of insurers monitor ESG. Some insurers have limited coverage and investments in specific sectors due to ESG considerations. Indeed, a call to action.
5. Consumers. ESG reports give consumers an idea of a company’s values and whether these align with their own. Consumers will vary in their grasp of ESG awareness and terminology. But whether they are experts or casual observers, they increasingly engage with ESG data, from climate to diversity and equality, to inform their purchasing decisions.
6. Talent. Employees and talent looking for the next position have a choice of where they want to work. How a company communicates its priorities impacts how current employees and talent-seeking employees feel about the company. Prominently displaying ESG scores with appropriate descriptors of real impact demonstrates the company’s culture and values – two important factors in determining where talent wants to work.
The CFO With the Opportunity Mindset
With all these stakeholders taking such a keen interest in ESG, there is a strong case for CFOs to take a strategic view of ESG compliance and reporting, whether it is compulsory or not. The forward-looking CFO doesn’t think ESG is just another compliance burden. They realize that finance is looking at an opportunity to gain and secure business while accruing other benefits and savings that go way beyond regulatory success.
What is the Best Approach to Track Your ESG Performance?
There are plenty of third-party scoring bodies to calculate ESG scores based and metrics and reported ESG performance. Among the biggest ESG-rating providers are MSCI and Sustainalytics, with extensive coverage. At the same time, Bloomberg, Refinitiv, JUST Capital, Dow Jones Sustainability Index Family, and RepRisk, plus credit ratings agencies such as Moody’s S&P and Fitch, all provide ratings.
With the data at your disposal, the key is to include it in your corporate performance management platform. That way, you will be primed to respond to changing regulations and all set for accurate and automated reporting and disclosure, ensuring controlled, validated, and auditable data. You can also establish and monitor ESG KPIs and see their impact on other financial and operational plans and vice versa.
The role of technology CFOs who have already engaged in filling the gap between financial data and operational impacts will know that legacy accounting and management reporting systems are not always up to the task. ESG reporting will likely highlight the same issues and the limitations of silo solutions. To leverage the power of ESG and support collaboration across the enterprise and beyond, companies may need an information hub or platform approach, particularly with the shift in emphasis from historical data to forecasting and reliance on data from sources throughout the supply chain rather than just within the organization. The ideal solution will provide streamlined regulatory reporting with automated, scalable processes which simplify compliance.
Compliance is non-negotiable, but beyond compliance lies the opportunity for better, faster decision-making, which can, in turn, contribute to sustainable growth and combat risk through the unification of ESG data with financial results, integrated plans, and scenario analysis. Stakeholders will be watching with interest.
James Paterson is vice president and general manager of CCH Tagetik at Wolters Kluwer.