Over the past year, chief financial officers increasingly have taken responsibility for measuring environmental, social and corporate governance (ESG) performance within their organization. At Gartner’s CFO & Finance Executive Conference Tuesday, panelists discussed why ESG should be on every board, C-suite and finance leader’s agenda, and what the metric’s growing popularity means for the CFO and finance function.
“There's a new public awareness of important issues like climate change, habitat loss, water scarcity, social and economic inequality,” said Alistair Smith, a managing director at Accenture who focuses on strategy, long-term planning and performance management capabilities. “Regulators and governments are also starting to recognize the opportunities and risks.”
As an example, Smith pointed to Mark Carney leading an initiative at the World Economic Forum, which is exploring the systematic risk posed to global financial systems associated with the energy transition. He also noted that President Joe Biden recently laid out, in his address to Congress, some key opportunities to transform America’s industrial economy with a progressive ESG agenda.
“I think it's clear to most economists and most business leaders that ESG will create and destroy value on a scale that we've probably not seen before,” Smith said. “It's not just purely about the financial measures like revenue and profits. Boards also need to reassure their stakeholders that they deliver value in a much wider sense to their communities and the environment. We're seeing, across all of my clients, a shift from value to values.”
Moving from value to values
The value-to-values shift is a return to foundational economic principles, Smith said. Three factors are driving the shift. First is the pandemic, which has reminded companies of the importance of resilience over efficiency and short-term profits.
Second is the realization that ESG considerations are fundamentally changing consumer behaviors; doing the right thing is more frequently aligned with the best economic outcome for shareholders. Companies with consistently high ESG ratings delivered 2.5 times the annual total returns to shareholders than peers in the same sectors, Smith said.
Third is politics. Recent changes in policy direction both in the U.S. and China are ensuring ESG is prioritized by every leadership team and executive. “Ten years ago, technology came from really being a back office discussion to being at the top,” Smith said. “I think we're now about to see the same happen with sustainability. It'd be no exaggeration to say sustainability is the new digital.”
“It’s quite generally agreed upon that you can't manage what you don't measure,” said Ambrose Shannon, a managing director at Accenture who focuses on supporting CFOs with their ESG measurement, analytics and ledger agenda. “When every major company already reports ESG metrics as part of their annual reporting cycle, the principal challenge [becomes creating a] system framework for those disclosures. We're now seeing positive momentum, and the five leading ESG standards-setting bodies have issued a statement of intent to facilitate alignment across the respective standards, with the goal of creating a comprehensive corporate reporting system.”
In addition to this, the World Economic Forum, in conjunction with the four major accounting firms, has released a set of universal ESG metrics, also with the intent of establishing a single global framework, Shannon said. Additionally, the International Accounting Standards Board continues to build out its proposals for how the accounting profession might play a role.
Smith sees a direct parallel to the larger actions corporations have taken and the new responsibilities of CFOs. Accenture’s latest research found 60% of CFOs globally now have ESG as part of their responsibility or mandate.
“There's definitely a strong controllership accountability here for the reporting and monitoring of ESG metrics, and, as Ambrose said, that's only going to increase,” Smith said. “But it’s a mistake to think finance’s role in relation to ESG is limited to reporting and monitoring.”
ESG topics that play a pivotal part in strategy are capital allocation and portfolio structuring, processes the CFO “owns,” and often facilitates for most organizations.
New agenda guidelines
CFOs should create a new agenda around “the three R's”: risk, regulation and returns, in an effort to better understand the trade-offs between economic outcomes and broader value outcomes, Smith said.
At a macro level, there are three immediate questions that CEOs should be supporting their CFO in answering, the panelists said. First, can the company quantify all its upside potential with regards to an ESG agenda? Where is it today on the transition? Is it able to monitor the ongoing evolution of ESG policies, regulations and standards? What are the likely impacts on its financial position? How is the company capturing, analyzing and reporting ESG-related metrics, how can it embed the resultant insights into its business strategy and delivery operations so it can become more sustainable?
“I have a tremendous sense of optimism,” Smith said. “I think we've definitely learned this year, that when communities and societies and governments and companies work collectively, we can achieve amazing things. We are on the brink of a fundamental step change, driven by an ESG agenda, and it's not a moment too soon.”
Finance leaders across the globe have an “absolutely crucial role” in moving the needle forward, both through their role in strategy for relation, risk management, and monitoring, reporting and progress towards ESG targets, Smith added.
“I appreciate that governments and organizations are in a tough spot right now,” Shannon said. “The pandemic is far from over, and the ultimate ramifications on businesses are yet to play out. But I believe decarbonization tends to go hand in hand with digitalization, and I believe that the finance and accounting profession has a pivotal role to play."