Is your finance team ready to begin reporting a new level of environmental, social, and governance (ESG) information? Globally, regulators and standard-setters are establishing requirements on where and how ESG data is reported. The new International Sustainability Standards Board (ISSB), created by the IFRS Foundation in 2021, brings together numerous existing ESG-related standard-setters under the auspices of a global financial standard-setting organisation.
On the regulatory front, the US Securities and Exchange Commission's proposed climate disclosure rule will certainly have an impact on many companies globally as will new requirements for some of the largest UK-registered companies based on recommendations set by the Task Force on Climate-related Financial Disclosures (TCFD).
In the European Union, EFRAG issued in May exposure drafts for 13 proposed standards across the ESG spectrum that would apply to most listed and large companies under the EU Corporate Sustainability Reporting Directive (CSRD).
Those developments, coupled with increasing demands for ESG transparency from investors, customers, supply chain partners, employees, and other stakeholders, will require finance teams to adapt to new levels of reporting and transparency.
Investors, in particular, have been outspoken in many cases about their interest in quality ESG data. Almost 80% said ESG was an important factor in their investment decision-making, according to PwC's 2021 Global Investor Survey, and around 50% said they would consider divesting from companies that weren't taking adequate action on ESG issues. At the same time 34% said they believed that the quality of current ESG reporting was poor.
Finance will clearly need to upskill to meet new reporting requirements and stakeholder demands. The knowledge and expertise a team will have to gain vary widely. The skillsets needed will depend on the jurisdiction where a business is located and related regulatory requirements and stakeholder expectations, and on existing competencies within the finance team and the organisation. They will also depend on the extent of company involvement in activities that fall under the ESG umbrella. However, no matter what their organisation's situation, there are common steps that finance team leaders can take to prepare their teams.
Assess your strengths — and needs
A review of potential new ESG reporting requirements or procedures should include an evaluation of what knowledge is already available within the finance team and what new expertise may be needed. A majority of senior executives (82%) aren't fully confident that their organisation has the right staffing to comply with increased ESG disclosures, according to a Deloitte study. These concerns are greater amongst finance and accounting executives and non-C suite executives.
Finance leaders may uncover gaps in their teams' skills, but they may also find that current expertise can be applied to address ESG considerations. For example, finance teams may have to grapple with a variety of ESG standards or guidelines in different jurisdictions and potentially for multiple subsidiaries.
That may sound daunting, but companies already monitor currency exposures across different territories and comply with laws and regulations in other countries in which their company does business, noted Rebecca Self, ACMA, CGMA, founder and managing director of Seawolf Sustainability Consulting in Zandvoort, the Netherlands. She said that getting up to speed in many cases may be simply a matter of using familiar data or skills but applying them in a new context.
An organisation's skills assessment should evaluate whether current team members are ready to work with enhanced or upgraded controls and processes and technologies that may be needed to meet changing ESG requirements or expectations. At the same time, because ESG considerations are so multifaceted, finance leaders should also look outside their teams to determine which competencies may be available in other departments, including sustainability, human resources, operations, and legal.
Recognise the overlaps
With ESG reporting, companies will have to collect and report nonfinancial data as well as traditional financial information. But the term "nonfinancial" is a misnomer, Self said. In fact, using that term could make the learning curve seem steeper than it really needs to be. She recommended instead describing it as "extra-financial data", noting that the numbers are already often being used in financial statements.
For example, to determine carbon emissions under greenhouse gas emission protocols, companies would need to know their energy consumption. That may sound like an extra or complicated step, but, as Self pointed out, this data is already being collected from energy bills and recorded as a company expense. "People often question how you can trust nonfinancial data, but in many cases it's the same data you're using in financial reporting," Self said.
The same is true for some of the information that organisations might collect in the social category of ESG. To develop metrics on diversity, equity, and inclusion; labour rights; or on the company's impact on its communities, a company could use data it likely already has on customer and employee demographics, complaints, and other characteristics.
Be ready to look ahead
ESG reporting will require not only familiarity with new standards but also a new way of presenting information. As one example, greenhouse gas testing in the UK is based on on-site physical testing that is performed during one day once every three years, explained Paul Ash, FCMA, CGMA, immediate past chair of the Association of International Certified Professional Accountants and immediate past president of CIMA. "That means all of the reporting you see today on carbon emissions is estimated and based largely on historical data," he said.
Ash is chief executive of London-based EMERGE Earth Limited, a technology company founded to enhance greenhouse gas emissions reporting using automation and real-time reporting. He said that as they work to meet new ESG information demands, many organisations will have to shift from historical to more current reporting and to forecasting target goals, which may require new training and competencies for team members. Ash is also chief executive of Basalt Global Limited, which supplies heat and power to clients in the UK agricultural and horticultural sectors and electricity for the UK National Grid via its combined heat and power engines.
Prepare for audit
Up until the emergence of a wider range of mandatory guidance, organisations have been able to choose from a large array of frameworks or guidelines for reporting ESG data. That has made it difficult for stakeholders to compare the efforts and results of different companies or to feel confident that they are getting a comprehensive or objective picture of an organisation's performance. Not too surprisingly, only 33% of investors believe the quality of current ESG reporting, on average, is good, according to PwC.
As ESG information increasingly becomes subject to audit, team members will have to get up to speed on auditor expectations. Ash said that if the data that organisations supply doesn't meet auditors' standards, audits may be qualified. Not only will training now help spot or alleviate any audit-related risks, it will also reassure investors. A total of 79% of investors told PwC they have more trust in reported ESG information if it has been assured.
Accept ambiguity and uncertainty
Self said that finance teams racing to get up to speed should remember that this is a new area. "No one has all the answers," she suggested. The best response is to maintain an open mind and accept the uncertainties and ambiguity that often accompany a new approach. "Pick an initial focus area and get people trained," she advised.
Keep in mind, as well, that the finance team is well suited to make sense of new sources of data. "We as accountants are wired to tell the truth and to get beneath what's on the surface," Ash said.
— Anita Dennis is a freelance financial writer based in the US. To comment on this article or to suggest an idea for another article, contact Oliver Rowe at Oliver.Rowe@aicpa-cima.com.