ESG Reporting for CFOs and Finance Teams

ESG Reporting for CFO's and Finance Teams

Demand for clear, transparent corporate environmental social governance (ESG) disclosure has grown significantly in recent years due to evolving pressures from investors, regulators, and customers. As stewards of a company's financial accounting and reporting, CFO's and finance teams are now taking a more active role in structured ESG data management and disclosure.

An ESG report is a non-financial disclosure report published by a company or organization about its ESG strategy, performance, accounting, targets, and future plans. ESG reports are typically released annually, coinciding with the firm's financial reporting cycle, so they can be reviewed by investors and other external stakeholders. Today, thousands of companies in every sector track, measure, and report on their ESG performance.

While ESG reports are 'non-financial' in most countries, there's been a growing convergence between ESG and financial reporting in 2022. Increasingly, filers are expected to address financially material, business-related topics and themes within ESG reports related to:

As well as include ESG disclosures in financial reports.

Due to this convergence, the International Financial Reporting Standards (IFRS) Foundation is establishing guidelines for IFRS sustainability reporting, designed to give companies clearer guidance on environmental reporting and disclosure within ESG communications. Since CFOs and finance teams are already well-versed in financial IFRS compliance, we expect these new IFRS standards will increasingly serve as a bridge between finance and operational, ESG-oriented teams.

IFRS sustainability guidelines require boards, executive leadership, and CFOs identify their business's financially material environmental risks, opportunities, and business considerations, then create a report addressing the organization's sustainability governance, strategy, risk management, metrics, and targets in a structured disclosure format.

For a more detailed overview of IFRS and International Sustainability Standards Board (ISSB) disclosure guidelines, please see our guide here.

What CFOs and Finance Teams Need to Know About ESG

For many finance leaders and teams, ESG can seem like a broad, vague topic area. It may also feel like a distraction or additional accounting and reporting burden on top of core responsibilities.

However, at the same time, ESG considerations are increasingly financially material for companies - and ESG is an emerging corporate discipline (or really, set of disciplines) that needs to be resourced and taken seriously.

Here's an executive summary of what CFOs and finance leaders need to know about ESG - and why you should care if you are one. Then we'll briefly explain each point.

Now let's unpack and walk through each one.

ESG has clear positive and negative financial implications for companies and CFOs

Even the best financial statements can't express a company’s full value and risks:

Initially, internal ESG investments may look like loss-leaders. Longer-term, ESG has power to become a revenue-driver and margin-improver, not just a cost center.

For example, in consumer goods, from 2015 to 2019, sustainable and sustainability-marketed products accounted for 55% of total CPG market growth, despite representing around 15% of the category, according to research from NYU Stern's Center for Sustainable Business.

Both positive and negative P&L examples and company case studies abound in ESG:

And, given growing supply chain attention on ESG matters by large purchasers like Disney, Nike, Target, and Walmart, strong ESG performance and transparency can preserve — or open up new — customer relationships and de-risk revenue.

ESG initiatives and innovation certainly require CAPEX, and may entail longer return horizons or lower hurdle rates initially in some cases. Nonetheless, when executed thoughtfully and effectively, ESG delivers ROI, operational cost savings, and long-term competitive advantage(s).

CFO's should also be mindful of the financial implications of ESG projections and public statements. In 2022, shareholder audit resolutions are pending at companies like Bank of America, Chevron, Citigroup, Duke Energy, ExxonMobil, Marathon Oil, and Valero Energy related to the companies' climate projections. While these audits sit outside of routine financial reporting, they could ultimately lead to financial and governance changes within these organizations.

Accounting is critical for directing capital flows. This makes CFOs and finance teams the best-positioned in the company to reflect the true financial consequences of climate change or decarbonization.

Strong ESG performance and disclosure de-risks access to capital

From institutional ESG investors like BlackRock and State Street to private equity and banking lenders, more capital providers are using ESG indices, scores, and ratings signals to assess the risk-return profile of their allocation decisions. Emerging evidence suggests better ESG and sustainability performance translates to a lower cost of capital for companies, plus broader liquidity access. If nothing else, strong ESG performance certainly de-risks access to capital vs. the alternative.

In total, Fortune 500 companies alone carry an estimated $2 trillion+ in financial risk from climate impacts, based on outside-in analysis and company ESG reporting. Across the global economy, ESG risks range from supply chain shocks and severe weather to energy price inflation and business model transformation. Companies that understand, act on, and transparently disclose their ESG and climate-related risks and opportunities stand on much stronger footing that companies that score poorly with ESG rating firms and analysts.

ESG is a growing source of compliance and investment risk

In a growing number of countries, regions, and jurisdictions, ESG reporting and disclosure is transitioning from voluntary to a mandatory (scrutinized) process for certain material topics and indicators.

Other regions like Australia, Canada, and Singapore are also developing and refining ESG reporting requirements, and the ESG regulatory landscape continues to evolve rapidly.

Failure to keep up with ESG regulatory requirements - or worse, misstate or omit material ESG information - may incur fines, penalties, and financial risk for filers.

As disclosure standards shift toward ESG, and criteria for 'ESG investments' become stricter and more standardized, institutional investment and capital flows will follow the regulatory trends.

Many capital markets participants already view ESG performance as synonymous with management quality. And on the debt side, green and sustainability-linked bonds are one of the fastest growing debt categories, with over $1.5 trillion issued in 2022 according to S&P.

Growing alignment between capital and ESG objectives should motivate CFOs, finance, and accounting teams to work more closely with sustainability and ESG peers to sharpen the company's data, disclosures, and narratives for banks and lenders.

ESG boundaries differ somewhat from the traditional entity scope in financial reporting

Unlike traditional financial accounting, ESG, carbon accounting, and climate risk assessment require a broader and potentially more forward-looking lens on opportunities and risks. Climate risks may be linked to suppliers, customer preferences, or even extreme weather and natural disasters - all examples that occur externally to the reporting entity itself in different segments of its value chain.

This can be frustrating for finance leaders, as it broadens the scope of ESG KPIs, potential ERP and financial systems integrations, and data collection.

But, from a risk management and decision-making perspective, these capability investments pay off. Target's Chief Risk Officer Don Liu backs up that assessment:

"We find ourselves not only learning the political environment in which we work, not only at the national level, but the international level. We have to invest in technology because responsible sourcing requires us to know the ingredients that go into our products and to be able to do due diligence on the vendors [and] the conditions under which vendors’ employees are working."

On the environmental side, emissions measurement and other sustainability KPIs will ultimately need to operate across the entire value chain boundary. Most organizations can get away with only measuring Scope 1 and Scope 2 greenhouse gas emissions today, but Scope 3 mandates are around the corner.

ESG does in fact have clear, standardized, and measurable KPIs

In many ESG areas, there are already established, industry standard KPIs. For example, in environmental sustainability, measuring your greenhouse gases (GHG) in terms of Scope 1, 2 & 3 emissions of carbon equivalents (CO₂e) generated from operations is an established, material indicator. For most companies, annual, quarterly, or even monthly Scope 1, 2 & 3 GHG emissions is a ESG KPI that needs to be tracked.

On the social and governance side, EHS (Environmental Health and Safety), HR and employee demographic data also have established KPIs. Common examples include:

Chances are, many of these metrics are already being measured somewhere in the organization. The key is doing the internal audit work and breaking down of data silos to bring it all together into unifed ESG reporting.

Your next steps as a CFO in ESG

It's important for CFOs and executives to recognize every organization follows a different path to building ESG capabilities and maturity. Most companies start with mandatory compliance and reporting, such as complying with Corporate Sustainability Reporting Directive (CSRD) disclosures in Europe, or Calfornia state laws around board-level diversity and inclusion.

From there, ESG is a progression past legal requirements and peer pressure toward genuine culture improvements, operational efficiency, innovation, and trust-building.

By definition, every company can't be an ESG leader - and doesn't necessarily need to be. What matters is recognizing where your organization is on the ESG maturity curve, then taking the steps internally and externally to align your strategy, targets, investments, and systems with material ESG initiatives, improvements, and tranparent reporting.

For further reading, we recommend looking at our guide to ESG reporting strategy, or browsing our other latest ESG articles.

Disclaimer: ESG and environmental compliance, accounting, and disclosure standards and laws vary by country, state, and city - and are evolving quickly. This ESG reporting and disclosure overview is intended as a framework for planning and structuring your organization's ESG reporting strategy, sharing examples, best practices, and practical considerations around ESG and sustainability reporting. The information on this website does not, and is not intended to constitute or serve as legal or regulated financial accounting advice. Instead, all information, content, examples, and materials available on this site and within this toolkit are for general informational purposes only. Please consult with your corporate counsel or accountant to obtain advice with respect to any particular legal or accounting matter, respectively.