Environmental, social and governance (ESG) reporting is rapidly rising on the corporate agenda as investors look beyond traditional financial performance to evaluate the longer-term growth opportunities and risks for companies.
According to a PwC report, institutional investors view ESG as critical to understanding the full risk profile of a company and evaluating how prepared it is for the future. And they want standardized, rigorous data to support their investment decisions.
In a CFA Institute survey, two-thirds of investors said their motive for taking ESG issues into consideration was to help manage investment risks. A survey of professional fund buyers carried out at the end of last year also shows that this trend has accelerated over the past year, with 60% of investors saying they increased their focus on ESG during the pandemic.
When examining a company’s ESG data, investors look at everything from diversity and cyber threat defense strategies through to labor practices, resource scarcity and environmental footprint.
Another reason why ESG is gaining prominence is the rise of global regulation for climate change targets. Regulations are likely to require formalized ESG reporting, and impose penalties and fines for organizations that fail to report or meet targets. ESG is also starting to impact brand perception and reputation as consumers increasingly put their trust (and money) into companies they see as ethical and sustainable.
Mega-corporations are already taking note of ESG. At the World Economic Forum in Davos this year, for example, 61 global companies – including Bank of America, Dell, Heineken, Royal Dutch Shell, Salesforce and Unilever – have committed to the common set of ESG metrics developed by the International Business Council.
Geraldine Matchett, co-CEO and CFO and member of the managing board at Royal Dutch Shell, said: “This will be one of the fastest ways to accelerate the systemic change the world needs, putting investors on the right track, helping to change consumer behavior for the better and helping companies to do the right thing.”
A tipping point is looming – though we’re not there yet – where ESG reporting could become as important as the traditional month-end and quarterly financial statements. Investors will want to see both the immediate financial performance in the here and now, and track where that company is heading in the future, based on current ESG activity.
PwC warns there is currently an ESG gap, where many corporates aren’t able to provide the information that investors want. The risk is that investors will then rely on public information and third-party sources, instead of filings from the companies themselves. This means companies could lose control of their ESG story.
Why does this matter to CFOs? CFOs and finance already hold a natural leadership role for the stewardship and processes around collecting, analyzing, manipulating and reporting data. Incorporating ESG data into traditional financial reporting is a logical next step.
Greater reliance on ESG data will require greater use of automation and analytics, something that many CFOs are already familiar with through finance automation. In a survey of CFOs on 2021 priorities by analyst Gartner, 82% of finance leaders said they expect to devote more time to advanced data analytics technologies and tools this year.
Collecting and analyzing ESG data presents the perfect opportunity to take advantage of automation tools. It’s a new process, which presents a blank sheet of paper without the usual change management issues associated with automating some legacy processes.
It makes no sense to build manual processes around such a dynamic reporting requirement that is going to evolve rapidly over the next few years. Instead, let the automation do the heavy lifting of data extraction, collection, analysis and transformation so you can report as frequently as necessary and meet the increasing ESG data demands of investors, regulators and consumers.
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