As reported in Global Banking & Finance Review, the rise of collective social consciousness and ESG regulatory requirements, coupled with the desire to minimize the environmental impact of industry manufacturing practices, have resulted in environmental, social, and governance (ESG) factors rising to the top of corporate agendas. Supported by changes to regulations, noted in the Spring 2021 Unified Agenda of Regulatory and Deregulatory Actions, there is a major shift toward standardized ESG disclosures for public companies.
This poses a challenge for many companies as the information used to support ESG activity is rarely saved in one location. In most cases, documents are currently captured across various departments and managed by different teams. Historically, a chief sustainability officer (CSO) would manage this objective – but the challenge now lies at the door of the chief financial officer (CFO), who must collect information from various departments and combine these new metrics into an annual financial report.
“To meet our mission of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation, the SEC has a lot of regulatory work ahead of us,” said SEC Chair Gary Gensler. “I look forward to collaborating with my fellow commissioners and the dedicated staff to propose and finalize rules that will strengthen our markets, increase transparency, and safeguard investors.”
This is where creating an ESG ecosystem within the organization will help simplify the collection processes for the CFO and streamline future reporting. Creating the ecosystem can appear to be a daunting task at first, as it may be the first time that the organization has had to report in this way. But it is critical that this reporting is done well and accurately, as ESG performance can be a key differentiator for a company – especially when seeking investment. Here are three steps to help companies get there.
Step 1. Establish standards and metrics for what to report on Metrics and standards can be based on sustainability issues already known to affect the financial condition or operating performance of a company. It’s important to pull this data into one place – consolidated and combined – to establish a baseline. Then look around the market at competitors, to see if there is anything missing.
Step 2. Collect and categorize necessary data Using automation can speed up these processes and relieve bottlenecks, but it’s critical to ensure that the data is properly prepared first. Frameworks to create categorization will allow unstructured data to be tagged, captured, and managed centrally, and will become lifesavers. Terms related to ESG can be made machine-readable, stored, analyzed, and reported. When deployed, this system will enable an organization to be ready for auditor scrutiny that will undoubtedly be required for ESG disclosures in the future.
Step 3. Set up a strong ESG reporting structure This includes allocating a final destination for the report. Understanding where the metrics will end up will dictate the underlying processes and help reduce unnecessary steps. For example, will it live on the company website or in financial filings?
Moving forward with these steps in place, a CFO will be in a better position to see how ESG metrics are settling with investors and be able to initiate conversations to create necessary change internally. It’s worth investing the time and money to ensure that the right processes are in place as organizations will be under increasing pressure to demonstrate their ESG performance in the near future.
By creating an established ESG ecosystem, a CFO will be armed with the most relevant information needed to satisfy reporting requirements – for regulation, stakeholders, and shareholders alike.