Growing pressure from investors and consumers to protect the environment, create inclusive societies and uphold good governance is changing how companies do business and report results.
While a business’ value was traditionally calculated (and reported) purely in rands and cents, investors now expect greater visibility on nonfinancial factors, notably: environment, social and governance. ESG reporting is becoming an integral part of the modern CFO’s role.
What is ESG reporting?
ESG means using environmental, social and governance factors to report on a company’s sustainability. Metrics are not standardised, but can include how much water or electricity is used in the manufacturing process or how many business flights are taken annually or the diversity of a workforce. Potential investors increasingly consider this information when contemplating an investment.
Why CFOs must take ESG reporting seriously
1. Investors recognise the link between sustainability and profits
Dan Kemp, CIO at US-based Morningstar Investment Management, says the link between financial returns and ESG is becoming increasingly apparent. “Strong returns have been paired with the growth of products purporting to be ESG-based, particularly passive funds.”
Sustainability efforts are a good business strategy as consumers increasingly choose environmentally and socially conscious products, and investors decide to invest in businesses with good ESG results.
CFOs must play a significant role in preparing their companies for a new regime focused on sustainability and climate change and report on their progress to entice investors.
2. International efforts are underway to standardise ESG reporting
Although ESG reporting is currently voluntary, it will likely become mandatory soon. Internationally, the establishment of the International Sustainability Standards Board (ISSB), announced at COP26 in Glasgow late last year (2021), promises to standardise nonfinancial reporting once it has been accepted.
In an interview with CFOTalks, Daniel Raubenheimer, CFO at USA-based Silon, explains that the new ISSB standards create a bridge between IFRS accounting standards and sustainability disclosure standards. “This is the first big global step in sustainability and value reporting… It’s really a reflection of the world that we live in, a world where any long-term thinking and sustainability is really at the core of business,” he says.
3.Local standardisation efforts are underway
It’s not only on the international front that there are moves to regulate ESG reporting. In South Africa, the JSE has recently launched its Sustainability and Climate Disclosure Guidance papers. These guidelines will help listed companies navigate sustainability thinking and disclosure more confidently and meaningfully.
The JSE recognises that, “Climate change is a mega-trend impacting all sectors of the economy. We aim to guide our issuers and investors on understanding the climate crisis and how disclosure can be used not only to anticipate risk, but also to identify opportunities.”
The president has also formed the Presidential Climate Commission, an independent, statuary, multi-stakeholder body tasked with overseeing and facilitating a just and equitable transition to a low-emissions and climate-resilient economy. Currently, the commission’s just transition (JT) framework is out for public comment.
3.Big data will assess your ESG information for investors even if you don’t
Jones Gondo, a senior credit strategist at Nedbank believes ESG reporting is inevitable as big data will force CFOs to get ahead of this problem.
He told Accounting Weekly, “..the way data collection and big data is going, in about 12 to 18 months, I won’t need your reporting to estimate some of your measures. We can impute a result for your company on my Bloomberg screen. So I will have data, whether I can trust it or not is a different story, but the fact is that analysts are going to start making investment decisions about the stock based on the data they see. And your challenge (as CFO) is to make sure you’ve got some sort of narrative that can explain that alternative data.”
You may want to consider ESG training
With ESG increasingly relevant to CFOs and accounting professionals, you may want to consider training and certification.
The executive education and license in climate and sustainability reporting, developed by SAIBA and Regenesys School of Accounting Science, equips CFOs to fulfil this role confidently and proves competency in this field. You can sign up and read more here.