No Match Found
It’s happening to CFOs more often: An investor asks about the firm’s exposure to climate risk on an earnings call. Or the Board or Audit Risk Committee is asking about governance matters like board diversity, board performance, and ethics. Boards and the C-Suite are increasingly nervous after reading article after article on climate litigation risk resulting from greenwashing, and want to understand more about the company’s measurable targets and KPIs for net zero.
The process of conveying a false impression or providing misleading information about how a company’s products,approach and performance are more environmentally or socially sound or otherwise sustainable than they actually are.
Interest continues to pique globally from customers, employees, investors and regulators regarding ESG, with thanks to COP conferences and evolving regulatory announcements such as the SEC’s Statement on Proposed Mandatory Climate Risk Disclosures and the establishment of the International Sustainability Standards Board (ISSB).
So, what does this mean for the CFO and the role they should be playing in an organisation’s response to, and reporting of, climate risks and opportunities?
Managing climate risks and opportunities and reporting on such, has typically been the job of the Chief Sustainability Officer (CSO) or the General Counsel. However, the level of scrutiny over ‘non-financial’ and ‘financial’ reporting is increasingly being questioned, with transparency of reporting (i.e. reporting the good and the bad, and how this information was derived) being key to investor confidence. This fact necessitates a clear role for CFOs - to explain the ESG impact on enterprise value, and to be able to validate the framework and methodology applied. Given the growing interest from investors, robust and accurate ESG reporting can both differentiate a company and elevate the role of the CFO.
‘Net zero emissions’ refers to achieving an overall balance between greenhouse gas emissions produced and greenhouse gas emissions taken out of the atmosphere.
Despite the increasing focus on ESG, many CFOs have yet to recognise the value that can be created from corporate sustainability. In recent PwC analysis, less than half of Australia’s top 200 companies (by revenue), identified ESG opportunities (versus 68% who identified ESG risks). Indeed, no longer are a company’s value and risks driven purely by financial performance, but a much broader set of KPIs.
In practice, we’re seeing increasing pressure from a variety of key stakeholders for sustainability reporting, including:
government regulators for compliance with a broad range of non-financial requirements, including those focused on ESG;
investors and analysts that demand sustainability reporting and disclosures;
suppliers that need detailed emissions information to manage their supply chain and meet their own ESG-related targets;
customers changing their buying preferences towards ‘green’ or sustainable products; and
talent, where the embracing of a strong ESG strategy may be a critical way to combat the great resignation by keeping the employees you have.
Climate change and other ESG topics are rightly known to be complex and require a very unique qualification and capability, one that is not always aligned to the study undertaken by CFOs. However, who better to take on the opportunity to invest in upskilling to enable a broader perspective be given to risks and opportunities. Sustainability teams and Finance teams need to meet in the middle and start to speak each other’s language to be able to clearly articulate the impact on enterprise value and society.
The expansion of the role of the CFO to include sustainability is vital if companies want to continue to meet the needs of their internal and external stakeholders, as well as ensure the creation of long-term enterprise value.
To meet the ongoing challenges associated with increasing stakeholder demands, CFOs need the following to take the lead on sustainability and drive meaningful change:
an understanding of the core ESG concepts, e.g. net zero commitments, asset decommissioning obligations, carbon regulation, financing;
recognition from key internal stakeholders, including risk managers, that ESG risks are material to the organisation;
the incorporation of data on sustainability metrics and measures into the organisations ERP and operating systems, which will also provide a clear audit trail for internal and external verification with varying degrees of data integrity;
cross-divisional, scenario-based consideration of ESG-related factors, e.g., the risks that climate pose to core operations and supply chain;
the integration of ESG-related metrics and link to performance management frameworks into KPIs, providing a clear internal incentive to drive change; and
an ability to monetise non-financial sustainability data, creating a competitive advantage relative to peers and giving internal and external stakeholders the information needed to make operational and investment decisions.
Proactive measures are needed for companies to address the knowledge and skills that CFOs are lacking and ensure that strong sustainability credentials are achieved and maintained.
Our Assurance ESG team helps organisations understand the risks, controls, governance and reporting capabilities of the organisation, underpinned with a comprehensive understanding of a fast-paced changing regulatory landscape, with a view to drive positive change and meet growing stakeholder expectations.
For a more in-depth discussion on how to address ESG within your organisation, please reach out to one of our experts below.