5 Valuable ESG Insights for CFOs

The “Role of the CFO” is evolving – and it is being transformed by the business imperative to integrate, manage, and monetize ESG impact.

‍

Last September, AccountAbility convened a virtual panel of experts - leaders of their fields - to share their perspectives, insights, and future outlook on several critical business developments, including:

• The evolution of Sustainability / ESG in the Finance and Accounting professions;
• The management challenges, market opportunities, and business drivers that have emerged as a result; and,
• The “Role of the CFO” in understanding, managing, and capitalizing on ESG as a driver of performance, risk, reputation, valuation, and impact.

As part of the 2021 CARE Accounting for Sustainability and Responsible Investing Conference, the panel was hosted by the Center for Accounting Research and Education (CARE) at the University of Notre Dame’s Mendoza College of Business, in conjunction with the Sustainable Investment Forum North America 2021, in partnership with the United Nations Environment Programme Finance Initiative (UNEP-FI).

Click here to watch the video.

The panel, Monetizing ESG Impact – A CFO Imperative, featured the following global leaders:

• Mr. Sunil (Sunny) A. Misser, (Moderator), Chief Executive Officer of AccountAbility
• Mr. Adam Barsky, Executive Vice President, and Chief Financial Officer, New York Power Authority
• Mr. Sanford A. Cockrell III, Former Global Head - CFO Program Leader at Deloitte
• Ms. Elyse Douglas, Former Chief Financial Officer of Hertz and Senior Scholar at the NYU Stern Center for Sustainable Business
• Mr. Robert H. Herz, Former Chairman of the Financial Accounting Standards Board (FASB) and Board Member of the Sustainability Accounting Standards Board (SASB), Value Reporting Foundation (VRF), Morgan Stanley, Fannie Mae, and AccountAbility

We believe the thinking and takeaways shared by our esteemed panelists provide valuable perspectives and will continue to shape the “Role of the CFO” as the ESG mandate becomes increasingly integral to business performance. The abundance of collective experience across our panelists’ government, corporate, advisory, and academic backgrounds – all with a shared focus on Finance and Accounting – made for a highly informed discussion around several key trends and themes.

1. Intensifying pressures from Institutional and Activist Investors are forcing changes in corporate behavior

• Ahead of COP26, an investor group worth an estimated $4.5 Trillion raised concerns that more than 70% of audits by the Big 4 accounting firms – Deloitte, PwC, KPMG, and EY – did not adequately recognize and account for climate risk and that the group would vote against their reappointment if expectations were not met.
• Activist hedge fund Engine No.1 successfully convinced shareholders that a reconstituted board could improve organizational performance and rethink the energy transition strategy for the oil giant, ExxonMobil, flipping 3 of 12 board seats in a proxy battle.  
• Larry Fink, CEO and Chairman of BlackRock, the world’s largest asset management company, has strongly championed ESG measurement and management – not carbon divestment – as a necessity for responsible risk management, corporate innovation, and meaningful progress on global ESG issues.
• 35 institutional investors managing $11 Trillion in assets have called on 27 of the world’s largest banks to stop financing carbon-intensive projects in alignment with a goal of net-zero emissions and to ensure that executive pay is linked to ESG performance targets.

2. ESG has become integral to the evolving and expanded “Role of the CFO”

• 69% of CFOs surveyed by a Big 4 accounting firm regularly deal with or manage Sustainability/ESG matters and/or reporting, in addition to enterprise risk, business resilience, corporate strategy – all of which have evolved to fall under the expanded remit of the CFO.
• The CFO has therefore become a forward-looking ambassador, responsible for strategic planning, reputation management, brand communication, and engaging with critical stakeholders, such as investors, ratings agencies, and regulators – all of whom have heightened their focus on ESG.
• As a “truth-teller and strategist”, responsible for interpreting and advising on financial risk and performance data that is accurate, consistent, timely, and relevant, the CFO has as a fiduciary duty to effectively quantify, understand, and respond to the ESG impacts that are increasingly recognized as financially material – and drive outcomes for the business.

3. Financial and Non-financial Materiality are converging - as critical stakeholders recognize the impact ESG risks and opportunities have on a company’s performance, valuation, and future

• Proxy agencies, such as ISS and Glass Lewis, are voting on the basis of ESG practices and performance; 95% of global credit agencies take ESG risk into consideration, and 72% of investment managers surveyed by EY in 2020 are using non-financial ESG data in their investment decisions (up from 32% in 2018).
• The emergent concept of “Double Materiality” requires a company to prioritize, address, and disclose issues based on the impacts that are, both “outside-in” (impact to business and stakeholders) and “inside-out” (impact to society and the environment) – placing stakeholders and financial impact at the heart of ESG-related management and decision-making.
• ESG issues will vary in materiality based on a company’s industry, geography, and stakeholders – but every company has ESG issues that will have a material impact on a company’s financial performance. The Sustainability Accounting Standards Board (SASB) has identified and defined the ESG issues deemed to be financially material for 11 sectors and 77 industries.

4. Management, Reporting, and Disclosure of ESG impact will increase in rigor, standardization, and quality “to match the trustworthiness” we are accustomed to and rely on in Financial Reporting

• 96% of Global Fortune 250 companies issued Sustainability/ESG Reports in 2020, and 33% of national governments and stock exchanges have either encouraged or mandated some level of ESG reporting.
• Sustainability Reporting is now recognized as a platform, not merely for marketing, but for transparency and value – which will serve as the wellspring that drives accountability, and ultimately, behavior and outcomes.
• The proliferation of ESG Frameworks and Standards are converging, with an emphasis on integrating ESG disclosures with Financial Reports and Filings.
  • SASB and the International Integrated Reporting Council (IIRC) have merged to form the Value Reporting Foundation (VRF).
  • The International Financial Reporting Standards (IFRS) Foundation has established the International Sustainability Standards Board (ISSB), a standards-setting board for sustainability, consolidating the Climate Disclosure Standards Board (CDSB—an initiative of CDP) and the VRF by June 2022.
• Regulatory bodies are focused on eliminating “greenwashing,” and – the mandate for ESG disclosure is happening.
  • The European Commission’s Corporate Sustainability Reporting Directive (CSRD) envisages the mandated adoption of a singular set of standards, presently being developed by the European Financial Reporting Advisory Group (EFRAG).
  • The Securities and Exchange Commission (SEC) is coming out with expanded disclosure requirements related to climate change and human capital.

5. Adaptation will require a fundamental rethinking of Corporate Value – which will require a cultural and longer-term transformation

• Until recently, Legal and Finance departments have defaulted to a conservative hesitancy to report or disclose anything that was not mandated to avoid any potential exposure and unnecessary liabilities. This mindset is changing as stakeholders now judge a company by the degree to which they understand, manage, and demonstrate progress around the breadth of material issues that matter to them.
• Accounting and Finance students are choosing to attend courses on ESG and Sustainability Reporting rather than Financial Reporting – the workforce is becoming increasingly values-driven, and CFOs are feeling the pressure to remain competitive in the “War on Talent” to improve attraction and retention rates.
• Integrating sustainability has been a challenge as it has historically sat outside of the accounting world, been subject to data limitations, and with intangible benefits. All of this is changing, with integration becoming a competitive necessity.
• CFOs will need to embark on a transformation journey to effectively manage ESG issues facing the business “from the ground up”. This will include:
  • Understanding stakeholders
  • Broadening the spectrum of “Materiality Issues”
  • Defining “Sustainability” for the company
  • Fundamentally rethinking Corporate Value
  • Embedding the gathering and monetization of ESG data in the processes, systems, and controls used to manage and report financial data
  • Including ESG data in the scope and cycles of regular independent auditing and assurance

As our shared understanding of Impact continues to develop, it will only become increasingly integrated into our definitions of capital, value, and risk – and it will be up to the CFO to ensure businesses are learning, adapting, and evolving in response.

The Financial Times has recognized AccountAbility as a Leading Management Consultant for the 5th Year in a Row. AccountAbility received a premier Sustainability Consultant ranking following a survey of 5,200 partners and executives of professional services firms and has ranked as a Leading Management Consultant every year since the FT’s rankings inception in 2018. Read the press release here.

To sign up for our AA Insights Newsletter, click here.

Follow us on LinkedIn and Twitter.