Building blocks of sustainability in corporate ESG

Dismissed in some sections of industry as “woke capitalism” and described in a recent Wall Street Journal article as “the latest dirty word in corporate America”, ESG – short for environmental, social and governance – is receiving a hard time in the US at present.

In the UK and Europe, the shift towards sustainable business is changing the landscape for organisations across all sectors, bringing an ever-increasing need for change, compliance and accountability that should place it firmly in the sights of leaders at all organisations. However, in the midst of tightened budgets and challenging economic conditions, not all organisations have it high on the agenda. In fact, very few do.

The recent fourth edition of EY’s long-term value and corporate governance survey found that just 10% of board members at European companies are satisfied with the business case for ESG. What’s more, just one in four (24%) reported they had a clear strategic view of how tackling the organisation’s material ESG priorities will achieve value-creating objectives.

Soon, however, the decision on whether or not to approach sustainability seriously will be taken out of companies’ hands.

In Europe, companies will need to comply with the European Sustainability Reporting Standards (ESRS) for use by all companies subject to the Corporate Sustainability Reporting Directive (CSRD). These are the criteria organisations will have to meet to satisfy strict regulations designed to ensure the business world is playing its part in the world’s efforts to tackle the climate crisis. The new regulation will require large corporations to report on both the impact of the environment on the organisation and its own impact on the environment.

In the UK, the Department for Business and Trade has set up a Technical Advisory Committee to determine sustainability reporting standards in this country.

Nowhere in any organisation will that be felt more than at the door of chief financial officers (CFO). There was once a time when a CFO’s role was simply about providing accurate numbers to an organisation. Over the past decade that has evolved significantly, moving from financial control to strategic decision-making, risk management, stakeholder engagement, and ensuring organisations meet sustainability responsibilities and satisfy the regulators.

I recently spoke to Chris Barber, CFO at ICAS, the global professional body and qualifications provider for chartered accountants, who told me the makeup of what’s required as a CFO has already shifted significantly – and will continue to do so as sustainability regulation evolves.

A Deloitte framework describes the four faces of the CFO, Barber explained: the steward – to protect the assets of the company, ensure compliance with financial regulation, close the books, and ensure communication of value and risk to investors boards; the operator – ensuring an efficient and effective finance organisation, including planning, tax, treasury, and operations; the strategist – ensuring business and finance strategy are aligned; and the catalyst for change – that unique position that comes from a broad view of everything that’s going on across the company.

However, he believes these attributes are now often taken for granted – a “low watermark” – as increasing regulation, rapid change in technology, and globalisation, geopolitics and supply chain management take precedence.

“All these factors create risk for an organisation, and risk is increasingly at the door of the modern CFO,” according to Barber.

So where does sustainability fit into this? Increased regulation and required compliance brings with it reporting, analysis, and disclosure requirements that must be overseen by the CFO and their team. CFOs need to be across this, but so do those on track to one day become a CFO – and it needs to start early, right from their early years as a chartered accountant.

A good CFO always needs good people around them, and increasingly, those with a deep knowledge of sustainability and the regulations around it will find themselves in increasing demand. Leaders will also place a greater emphasis on experience and aptitude in sustainability for succession plans.

Embrace and application of the latest developments in technology – including AI – analytics, reporting, and the ability to digest and put sustainability information and other information into perspective will be essential to the makeup of any CFO.

Barber stresses peer networks will also be crucial to CFOs as they navigate increased regulation, broadening the pool of challenges to be addressed collectively.

It’s also why ICAS has updated its training and qualifications for accountants at all levels to bring in learning on modern data analysis tools and approaches essential in managing sustainability compliance. It shows how seriously this area is taken by the finance industry, and how central it will be going forward.

Ambitious, young CAs with their eyes on the top job – anybody on the career ladder looking to improve their skill set and set themselves up for the future – cannot take the risk of being left behind on developments in sustainability. It will rapidly become a non-negotiable, if it isn’t already.

While some organisations may seek to diminish the importance of sustainability in certain parts of the world at present, the impact of climate change, and the responsibility the corporate world must play in helping address it, will reach them eventually. Those who cried ‘woke’ will be those ignored by their customers in years to come, and fall foul of regulators, if they do not take it seriously.

The modern CFO will help any organisation avoid that outcome.

Mark Lewis is Managing Director at Rutherford Cross, a market leading search and selection business focusing exclusively on senior finance professionals in Scotland

rutherfordcross.com