Ready or not, here they come. Mandatory regulatory disclosures regarding environmental, social and governance (ESG) factors are on the horizon for businesses everywhere. Governments worldwide have already adopted reporting requirements aligned with recommendations by the Task Force on Climate-Related Financial Disclosures (TCFD), including those in Canada, Brazil, the EU, Hong Kong, Japan, New Zealand, Singapore and Switzerland. Additionally, the German Supply Chain Due Diligence Act went into effect in January 2023. In the US, the Securities and Exchange Commission (SEC) is considering new requirements for public companies that could take effect as early as January 2024.
ESG disclosures require companies to analyze and report on a wide and evolving range of factors. The SEC regulations would require public companies to disclose greenhouse gas emissions (in the near term for their own operations and utilities, and in the future for their entire supply chain), as well as their targets and transition plans for reducing emissions. And companies would need to report potential exposure to extreme weather events, including hurricanes, heatwaves, wildfires and drought, and also identify how they’re assessing those risks.
In the EU, the Corporate Sustainability Reporting Directive (CSRD), which will take effect in 2024, demands even more detailed disclosures about how a company’s business model and activities affect sustainability factors like environmental justice and human rights. “You can’t wait for the regulations to kick in,” says Adam Thompson, Global Sustainable Finance and ESG Reporting Offerings Lead, IBM Consulting. “You need to be on this journey now.”
CFOs at the helm of transformation
CFOs are now responsible for transparent communication about how a company’s sustainability performance and sustainability metrics are tied to financial disclosures. That speaks to a larger evolution in the role of the finance function in business. “Finance leaders have gone from being bean counters to storytellers,” says Monica Proothi, Global Finance Transformation Lead for IBM Consulting. “They are not merely informing the business, but partnering with the business to transform data into insights that drive strategic ambitions, including leadership agenda around sustainability.”
The pressure is on for CFOs to build the capability for high-quality ESG reporting and communications into their finance departments. Underperforming in this capacity comes with material risk. “Access to capital is going to change,” Thompson says. A 2022 study by IBM’s Institute for Business Value found that the majority of CEOs surveyed were under intense pressure from investors to improve transparency around sustainability factors such as emissions, resource use, fair labor and ethical sourcing. As ESG reporting becomes more prevalent, details like these will be used to determine the quality of an investment. “You’re going to have an ESG risk rating, just like you have a credit rating,” Thompson says.
It’s important that we continue to make sustainable finance and ESG reporting efforts relevant for the CFO. The increasing focus on data transformation must integrate sustainable finance efforts in the process. We know that the CFO will be at the helm of this transformation too, yet some currently view sustainability more narrowly, as an operational or compliance issue only.
How CFOs can keep pace with high-quality ESG reporting
Thompson warns that many companies are taking shortcuts, cherry-picking data for reports or relying on estimates and secondary sources. It amounts to greenwashing, which is a reputational risk, and it won’t prepare businesses for increasingly comprehensive disclosure requirements. High-quality ESG reporting requires real visibility, not only into a company’s own operations but into those of its suppliers.
Thompson calls this “getting under the hood,” and while it requires new technologies and capabilities, it will ultimately drive value and unlock opportunities. CFOs must rise to new challenges and expectations brought on by rapidly evolving regulations.
Take it step by step
Proothi advises CFOs to “think big, start small and act fast.” Quick wins will generate value that can be reinvested into larger initiatives, and breaking transformation into small steps helps employees adopt change. Proothi says it’s often helpful to set up a dedicated transformation office to orchestrate the process. That might involve managing upskilling, coordinating the cadence of new initiatives, evaluating employees’ experiences and ensuring progress isn’t derailed by “change fatigue.”
Untangle your processes
Process mining is one of the first steps Proothi and Thompson recommend in financial transformation. “It shows the optimal path, and then all of the variations that clients are seeing, which ends up being this big ball of spaghetti,” Proothi says. Optimizing processes gives your workforce the bandwidth it needs to tackle the high-value work of data orchestration and interpretation. One approach Proothi recommends is using solutions provided by Celonis, which can operationalize sustainability by giving real-time schematics of how a business actually works. This helps to identify supply chain bottlenecks, recalibrate workflows and spotlight hidden inefficiencies.
Build a data foundation
Enterprise Resource Planning (ERP) systems are a good tool for collecting quality data, “but they don’t have any de facto sustainability or data objects built in,” Thompson says. “Look at how you can extend, enhance or augment your ERP.” And legacy data storage will no longer suffice. “Data lakes are more like data swamps now,” Proothi says. Data mesh and data fabric solutions help ensure data is clean, current and accessible.
Build diverse teams
The evolving needs of the finance department require a range of skills that many finance professionals don’t have yet. “You’re never going to find a unicorn of a person who has all the skills required,” Proothi says. Combining individuals who have traditional accounting skills with people experienced in sustainability and communications will empower teams to handle new responsibilities as they help one another upskill.
Leverage technology to increase visibility
Integrated AI-powered platforms like IBM Envizi ESG Suite encompass asset management and supply chain management solutions to help organizations collect and compile a wide range of environmental data. Perhaps more importantly for CFOs, they transform that data into legible outputs that provide the visibility required to make effective decisions about sustainability risks and opportunities. IBM also partners with FRDM, a platform that uses data science, machine learning and AI to highlight ESG risks across global supply chains and provide real transparency, even when it comes to complex issues like fair labor.
Gone are the days when the finance department was just responsible for closing the books each quarter. “The role of the CFO has completely changed,” Proothi says. What was historically an accounting role now holds opportunities for strategic leadership and balancing sustainability and profitability. CFOs of the future can reshape financial functions to drive performance and tell compelling stories to align an enterprise’s operations with its high-level goals and values.