Middle-market finance leaders surveyed by Rabin Research Company voiced two primary sustainability trends: Environmental, social, and governance (ESG) risks are impacting their businesses to varying degrees depending on sector risk profiles, and the vast majority view investments in ESG strategies and initiatives as a buoy amid challenging macroeconomic conditions, according to the 2023 BDO ESG Risk & ROI Survey. Even as their companies face heightened scrutiny from regulators, credit rating agencies, and ESG raters and rankers, many CFOs still categorize ESG risk mitigation as a compliance exercise, but BDO found that they increasingly recognize how those efforts can also drive growth and profitability.
In fact, the report found compelling evidence of the link between business resilience and ESG strategy: The Rabin survey found that CFOs of companies that saw increased profitability and revenue in 2022 are more than three times more likely than their competitors to say that ESG is either ingrained in their business model or an imperative. While 66% of middle-market CFOs say they either consider ESG primarily a compliance exercise or are just getting started, even CFOs who say their ESG programs are less mature have begun to see ESG investments as a must-have: Nearly 80% of those surveyed plan to maintain or increase their ESG investments even if macroeconomic conditions were to worsen, according to BDO.
Data management is key to setting and charting the organization’s progress toward strategic sustainability objectives. Effective collection, analysis, and reporting/disclosure of sustainable business information/metrics can improve organizations’ enterprise performance and relationships with stakeholders.
“You can’t manage what you don’t measure—data collection, analysis, and reporting are critical components to advance supply chain sustainability and resilience, drive more cost-effective resource and waste management, and other high-value opportunities,” says Karen Baum, managing partner of sustainability and ESG services at BDO. “In addition to building trust with key stakeholders like employees and customers, disclosure also advances transparency with investors and prepares organizations for forthcoming regulatory developments that are becoming a license to operate globally.”
Karen Baum, BDO
Tightening credit markets and recessionary global economic conditions have encouraged C-suites across sectors to rethink their growth strategies. Up against business-critical material risks and challenges, investments in ESG programs, Baum argues, can improve access to capital while remediating product sourcing and logistics issues and softening recruitment and retention woes.
Accountants’ Role in Sustainable Business Management
Accounting and finance professionals have a key role to play in their organization’s sustainable business management and ESG initiatives. In particular, CFOs are well-positioned to orchestrate the integration of ESG considerations into their organization’s operating and growth strategies, Baum says.
“Responsible for data collection, financial reporting, and key external communications, CFOs are critical to successful implementation of sustainability strategies and initiatives,” she says. “They can also ensure that sustainability goals and activities align with the business’s overall growth strategy and objectives. In collaborating to assess the financial materiality of ESG risks, CFOs are also a key partner to the organization’s risk management function.”
It’s crucial for finance executives to collaborate with leaders of other departments to execute the organization’s strategic plans related to sustainability. In recent years, the office of the CFO has broadened to include oversight of activities beyond the finance function, including corporate strategy, operations, risk management, corporate social responsibility, and sustainability/ESG. While the CFO’s principal role in the finance function includes the management, reporting, and disclosure of the business’s financial performance, it also includes navigating financially material risks.
Chief sustainability officers (CSOs) typically create cross-functional leadership teams that include members of the finance team to work together in the development and integration of ESG into the business’s growth strategy and operations. At the same time, the CSO can support the finance team’s efforts to measure the ROI of ESG investments in support of longer-term business performance and growth, Baum notes. The CSO will also oversee ESG initiatives to a degree that may transcend the finance function’s purview, such as project management, community engagement, outreach with standard setters, and logistical deployment of resources, she says.
Preparing for Mandated Climate Disclosure
The U.S. Securities & Exchange Commission (SEC) proposed rule changes would require companies to make climate-related disclosures in their registration statements and periodic reports, including climate-related risks that may have a material impact on their businesses, operations, or financial conditions. In addition, SEC-registered companies will likely have to disclose certain climate-related financial statement metrics in notes accompanying their audited financial statements.
As a first step, companies’ finance executives should familiarize themselves with the proposed rule changes, as well as the Task Force on Climate-Related Financial Disclosures (TCFD) framework, which forms the basis of the SEC’s proposed rules, as well as sustainability disclosure standards developed by the International Sustainability Standards Board (ISSB). In addition, the European Union (EU) Corporate Sustainability Reporting Directive (CSRD) is another important regulation that will impact U.S. corporations doing business in the EU that meet certain size thresholds and require more comprehensive disclosures than the proposed SEC rules.
“Organizations looking for a head start should also conduct a readiness assessment to understand material climate risks to the organization and identify gaps in governance, data, and resources that need to be addressed once the rule is finalized,” Baum says. “Some may benefit from an SEC or SOX [Sarbanes-Oxley Act] readiness assessment, and it may be valuable to engage partners to understand what achieving regulatory compliance will look like for your business.”
The ripple effects of the TCFD framework, ISSB standards, and SEC and CSRD disclosure mandates are likely to impact smaller and privately held companies that aren’t directly beholden to them, Baum predicts. Suppliers to organizations subject to disclosure requirements will eventually find themselves with reporting requirements imposed by their customers as Scope 3 greenhouse gas emissions reporting requirements begin to work their way through global supply chains.
“As private companies join the ranks of sustainability reporting, the quality and availability of relevant peer benchmarking data will continue to improve, which will better inform sustainability business management for smaller organizations,” Baum says. “The bar for corporate transparency is rising for companies of all shapes and sizes, giving stakeholders and shareholders alike information they need to evaluate the organizations they choose to engage.”
January 2024
