By Kate Dishman, CFO Consulting Partner, EY and Suzanne Chatley, CFO Consulting Senior Manager, EY
Previously published in The Digital CFO magazine (Summer 2023)
So, your company has set ESG targets and more requirements are becoming mandatory – are you ready for ESG reporting?
It feels like companies, and especially finance functions, are constantly on a regulatory change journey, implementing regulatory reporting changes from International Financial Reporting Standards (IFRS) 9 to IFRS 17 and many others along the way. Now it’s environmental, social and governance (ESG) reporting requirements, and we’ve done it before, so surely, we can do it again?
Of course, it can be done again, and finance functions are wellversed on how to respond. However, ESG reporting has its own suite of challenges, ranging from complex reporting across a plethora of standards to a wider range of interested stakeholders.
It may sound daunting, but the complexities it brings also unlock opportunities many have been striving for in achieving the “finance of the future.” It breaks down barriers between functions as data will need to come together in a more dynamic way, and finance will be able to play a pivotal role strategically. It’s the catalyst CFOs and finance functions have needed, and it doesn’t get much more important than this to really make it happen now.
What new challenges will we face?
Many financial services companies have been reporting ESG metrics for years to meet listing rules defined by the Taskforce on Climaterelated Financial Disclosures (TCFD) or voluntarily under frameworks and EU disclosure requirements such as Sustainable Finance Disclosure Regulation (SFDR).
As the requirements span more than one ESG reporting framework and continue to develop over time, many organizations are spending time to decipher which regulations are applicable to them and how data will be sourced to meet these needs.
The operating model will need to evolve to cater to this non-financial driver unlike any other we’ve seen before, and many acknowledge the need to invest in building a more sustainable operating model going forward for ESG reporting. Let’s take a look through the different lenses:
The biggest hurdle for companies to overcome in their quest to capture and report ESG information is data. With all regulatory change comes data challenges, either new requirements or more granular data needs. For many, even as a starting point, legacy data issues continue to hamper finance’s ability to make meaningful improvements on a larger scale.
For ESG reporting, data requirements are expected to rely on new external sources which brings a whole new complexity to the operating model, as well as new data sets being required at a greater level of granularity. The challenge is in both sourcing the required data and bringing the datasets together in a controlled manner which will pass the audit requirements of external reporting.
Similar to prior regulatory changes, interpretation of the requirements will be key and a complex challenge for data. Many of the requirements will be going through consultation, meaning the data model to support ESG reporting will need to remain flexible and able to absorb new requirements over time.
Given the myriad of data sources, it will be essential to leverage existing solutions, and many will implement new solutions to support data handling, data quality, calculations, and reporting processes.
Many of the traditional finance vendors are demonstrating ESG use cases or adapting their offering to support ESG reporting. There are also sustainability-focused solutions in the market which are already established to meet the needs of parts of ESG reporting, and the solution landscape continues to progress with new entrants regularly. Some organizations are using this as an opportunity to streamline the solutions handling core datasets across functions.
These solutions provide the functionalities to not only enable organizations to be compliant, but many also assist with decision making, which is key for ESG reporting providing management information, analytics and forecasting capabilities.
The breadth of stakeholders interested and involved in this topic is much more far-reaching, and that is both a benefit to the business and a challenge operationally.
Internally, product owners, strategy, risk, investments, procurement, sustainability, and finance teams all need to align their objectives to enable a cohesive operating model to exist.
Externally, in addition to regulators and investors, customers and employees too will be taking an interest. There will be a greater need to be “with the pack” or “ahead of the pack” in terms of positive action taken to meet ESG targets. The need for timely and accurate information will be key to enable teams to make
meaningful change year after year. In finance, with this increased focus on non-financial reporting requirements, capability within the team will need to upskill on the key drivers and metrics for ESG to support this need.
While processes and controls are usually well understood and embedded in existing financial reporting, the introduction of ESG reporting has meant that there are new inputters and functions involved on the critical path and a need for more efficient reporting increasing the pressure on an already overburdened working day timetable (WDT).
Finance will need to define processes at a practical level that support the delivery of common data and reporting across a number of different regulatory standards. They will also be responsible for ensuring an effective end-to-end control framework is in place as there is a need for high-quality disclosures and detail on ESG outcomes. It will be critical for finance to consider how they seek assurances over non financial data quality and how and when these data points will be audited in the future.
When is the right time to invest?
Unlike other non-financial drivers, ESG is no longer in the optional domain or “nice to have.” It’s moving front and center for many interested stakeholders, particularly investors, and is expected to be a key area of interest globally. There is still time for organizations to get ready and develop how they will report on ESG metrics in the longer term.
Many organizations who have already established their ESG strategy are moving forward to implement the reporting aspects by:
- Understanding stakeholder expectations and baselining a view of which ESG reporting frameworks will be followed, as some are market practice but not mandatory.
- Capturing the key requirements, including those from impending mandatory regulations, and embarking on data discovery activity to identify key data gaps or inconsistencies that need addressing which can be time-consuming.
- Assess current technology capabilities and scan the market for technology solutions that may be required to fill capability gaps, considering the key trigger points on when it will be critical to invest.
- Define the ESG delivery target operating model determining responsibilities for 1. Regulatory oversight 2. Methodology definition, 3. Target setting and 4. External reporting delivery.
- Identifying the future skillsets to report, plan, forecast, and support decision-making against ESG metrics and the approach to building these skills.
- Understanding which ESG ratings are important to focus on and how to create reporting outputs to impact these ratings over time.
ESG is a new domain for many in finance and will need time to be fully understood and embedded. As with prior regulatory change programs, the breadth and volume of activity to undertake may seem overwhelming but breaking it down into manageable milestones and staying abreast with changes will be key.
The views reflected in this article are the views of the authors and do not necessarily reflect the views of the global EY organization or its member firms.