From Compliance To Strategy: How Finance Can Lead The Way In ESG

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By Russ Banham


Financial professionals haven’t historically been expected to establish organizational strategy. So, it’s not surprising that many view environmental, social and corporate governance (ESG) largely as a reporting and compliance exercise. These days, however, it’s critical for them to embrace ESG reporting as a strategic imperative.

Here’s why.

There’s An Opportunity For Strategic Differentiation

The Security and Exchange Commission’s proposed climate disclosure requirements are raising the stakes for how companies approach ESG. A strong ESG reporting strategy has the potential to unlock new investments, lower the cost of capital and create new business by identifying opportunities as well as risks. The key to this approach is engaging professionals across the company in the discussion. Given the broad nature of the proposed rule, the more individuals brought into the conversations, the higher the likelihood of understanding the impact on the organization and the better the ability to identify areas within the company to create value in response to this proposal.

By reporting on ESG, companies are taking an active role in developing how the public views their impact beyond just the financial statements. In fact, the *NYU Stern Center for Sustainable Business in collaboration with Rockefeller Asset Management recently released a report examining the relationship between ESG and financial performance from 2015-2020. The report cited a positive relationship between ESG and financial performance for over half of the corporate studies focused on operational metrics such as return on equity (ROE), return on assets (ROA) and stock price. Therefore, those that embrace ESG as a strategic asset can reap competitive benefits by differentiating themselves in the eyes of investors, customers and employees.

How Finance Professionals Are Optimally Positioned

“Organizations need to determine who will be accountable for setting the reporting strategy,” says Maura Hodge, KPMG ESG Audit leader. Although finance professionals haven’t historically taken on this responsibility, in this case Hodge believes it is critical for them to do so as more and more companies embrace ESG reporting as a strategic asset.

With the need to disclose risks and opportunities, the finance function and its external auditor are best positioned to lead reporting and deliver success for an organization. Finance is uniquely positioned because it is familiar with and has the ability and access to collect information across the organization to meet reporting requirements. Furthermore, finance professionals understand how to convert ESG metrics into financial reporting language and financial metrics through their experience in compiling and reporting other information.

Financial, accounting and auditing professionals can assist the entire organization in the following areas:

  • Education — Educating internal and external stakeholders on ESG topics about where a company is in its ESG journey, where it wants to be and how to get there.
  • Governance — Participating in cross-functional steering committees and working groups.
  • ESG Strategy — Developing a clear reporting strategy that provides consistent, comparable, timely and decision-useful information.
  • Risk Assessment — Determining the specific areas that are relevant for a business.
  • Process and controls — Leveraging previous reporting experience in other areas to establish reliable and tested processes.
  • Reporting — Delivering thorough and reliable reporting.

Steps Companies Can Take Now

While changes are likely to be made to the SEC’s climate risk proposal, there is strong momentum for its adoption and implementation. Organizations that want to lead in a new era in which ESG concerns have added importance must seize the initiative. “There are definitely some no-regrets movesthat companies can be taking now in preparation,” Hodge says. Here are some of those activities:

  1. Gain an understanding of what your company is doing in relation to ESG climate-related reporting and associated commitments your company has made.
  2. Educate management and the board on the current ESG reporting landscape and new regulatory proposals.
  3. Have the financial statement disclosure committee review and understand current climate-related reporting and start developing what reporting is appropriate for the 10-K and what is not.
  4. Begin assembling a working group that will be responsible for project managing the reporting.
  5. Calculate your Scope 1 and 2 greenhouse gas emissions and get them assured by a third party.

It is clear: Because of investor pressure, consumer behavior and international regulations on ESG reporting, ESG isn’t going away. The opportunities that lie ahead position finance well and give that function the chance to rethink how it views its role in ESG. Companies should not assume they can wait until the final rule is in place and the way forward is clear. Steps can be taken now to both position finance in a leadership role and develop a company’s ESG reporting strategy to deliver benefits far beyond what can be achieved through compliance alone.

Russ Banham is a Pulitzer-nominated financial journalist and best-selling author.

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