Unlocking Value: CFOs as Leaders of ESG Efforts
Environmental, social, and governance (ESG) reporting will become mandatory in the UK by 2025. To prepare for it, CFOs must come forward and work with other business leaders in developing long-term sustainability strategies.
ESG regulation in the UK
In November 2020, the British government published a roadmap for mandatory climate-related disclosures across financial and non-financial sectors of the UK economy.
The roadmap adapts the recommendations of the Task Force for Climate-Related Financial Disclosures (TCFD) which are structured around the four basic areas of business operations: governance, strategy, risk management, and metrics and targets. It lays down comprehensive recommendations to guide entities in disclosing climate-related financial information. In turn, it can help investors better assess risks and opportunities associated with the disclosed information.
With the TCFD-aligned reporting requirements, the UK established itself as the world leader in delivering standardised climate-related regulation. Following its timeline, a significant portion of mandatory requirements may take place by 2023 and will be fully implemented by 2025.
Will it affect your business?
Yes, it might, especially if your company falls under these seven categories of organisation:
- listed commercial companies,
- UK-registered large private companies,
- banks and building societies,
- insurance companies,
- asset managers,
- life insurers and FCA-regulated pension schemes, and
- occupational pension schemes.
But even if your company doesn’t belong to any of these, you must still consider adhering to the UK’s ESG reporting requirements for the reasons provided in the next section.
Why is ESG important?
In a survey from Deloitte Global and Forbes Insights, more than half of the 350 executives across the globe say ESG investments have a positive impact on their company’s revenue growth and profitability. Many of them also reported higher customer satisfaction and better recruitment outcomes.
Also, sustainability is becoming a major concern among CFOs given its impacts on investor relationships, risk management, and financial reporting. In fact, 83% of them are already involved in setting sustainability strategies. Going forward, sustainability issues may even influence audit and capital raising processes.
Investing in ESG initiatives brings a long-term competitive advantage. On the contrary, engaging in unsustainable business practices may result in reputational damage, consumer backlash, and high employee turnover.
The duties and responsibilities of CFOs in leading ESG efforts
As a financial leader and the main advisor to the CEO and key stakeholders, you are responsible for preventing such incidences. Part of your evolving role is to promote sustainability awareness, communicate its benefits, and coordinate strategies with other leaders such as the Chief Human Resources Officer (CHRO) and the Chief Information Officer (CIO).
Related: What’s the Role of Accountants in Sustainable Financing?
Essentially, here are the duties and responsibilities you may expect when handling ESG projects:
1. Spearhead ESG projects
When it comes to ESG, the British government puts more emphasis on its environmental factors due to the negative impacts of climate change on economic and human health.
“Financial disclosures are a key part of tackling climate change,” John Glen, Economic Secretary to the Treasury and City Minister, said in a statement.
In other words, sustainability is a financial issue — a field within the bounds of your skills and expertise as a CFO. It’s an area you must track and measure. Your ability to see the big picture as well as the performance of each business unit gives you leverage over other leadership roles in your company. This makes you, then, the best person to handle ESG projects.
2. Align your organisation’s strategies with sustainability goals
Moving forward, you must also plan for your organisations’ short, medium, and long-term goals and make sure they’re aligned with the TCFD recommendations.
In particular, TCFD listed down the areas you may want to consider when developing strategies:
- Products and services
- Supply chain
- Value chain
- Adaptation and mitigation activities
- Investment in research and development
- Business operations
For financial planning, you need to disclose information on the following areas:
- Operating costs and revenues
- Capital expenditures
- Capital allocation
- Acquisitions or divestments
- Access to capital
While TCFD-aligned reporting requirements are yet to take effect, you can start creating strategies around them to test if they are realistic and financially viable.
3. Explore sustainable finance options
With four more years to go before its full implementation, it will pay to investigate the available green finance options for the business such as green loans or sustainability-linked bonds. By doing so, you can improve your ability to invest in more decarbonisation measures in the future.
4. Identify the impacts of developing sustainability goals
Focusing on profit without considering how it will affect humans and the environment won’t bring you satisfying long-term business results.
With the right tools, you can consolidate internal (dashboards) and external (forecasts, models) data to identify opportunities for strategic investments.
Next is to compute its associated costs, including the profits and potential losses. Once you have the needed information, you can now figure out which sustainability projects are worth pursuing.
5. Inform the management of possible ESG implications
You must let the management know about the possible implications of sustainability to the entire organisation. Be the storyteller; make sure they understand what your metrics and KPIs mean to the bottom line. Put them into action by providing them with actionable insights and relevant examples. This way, you can work with them in developing effective ESG strategies.
6. Protect the business against risks
Taking risks is inherent to businesses. Without it, there would be no growth. But if left unaddressed, risks become damaging.
When developing sustainability goals, you must look into the possible risks you may encounter. Make sure everyone complies with all relevant regulations — from supply chain management to data security — to minimise risks as much as possible.
7. Make sure your organisation is ready
See to it that the company has the needed infrastructure in place, the right framework, a good understanding of its role, and the requisite reporting tools to secure the success of your sustainability projects.
If the situation calls for it, figure out your organisation’s capabilities in transforming the finance department and improving technological processes.
On 30 September 2020, the International Financial Reporting Standards (IFRS) Foundation proposed the creation of the Sustainability Standards Board (SSB) which aims to standardise global sustainability reporting. If this will come to fruition, investors and key stakeholders can have a clearer view of a company’s financial performance.
For more information, you can refer to the consultation paper published by IFRS. Click here.
Take note: The TCFD framework focuses on managing climate risks. If you’re also interested in exploring industry-specific risks, you can refer to the ESG guidance framework developed by the Sustainability Accounting Standards Board (SASB). You can see it here.
Becoming a socially responsible and environmentally conscious business is a concept worth exploring. If it means playing your part in saving the planet, with an added bonus of generating more profits and attracting top-notch talents, what more can you ask?
Do you need help in managing your expanding CFO role? D&V Philippines can lend you hand. Read our Finance and Accounting Solutions for UK CFOs whitepaper or talk to our experts to learn how we can help you improve your finance department.