How Irish CFOs can up their ESG reporting game

Future focussed CFOs can mitigate risks by considering a well-designed ESG operating model that is integrated with other parts of the business.

In brief

• To simplify the reporting process and establish internal controls around ESG data it is imperative to create a centralised data management system for ESG data owners to feed into.
• There’s a need to integrate non-financial reporting data into financial reporting data processes and controls to ensure that data is complete, accurate and of a high quality.
• Upgrading reporting systems to collect both financial and non-financial information will create efficiencies and streamline reporting against all mandated requirements.

Irish organisations of all sizes will be affected by an ever-increasing volume of environmental, social, and governance (ESG) reporting requirements. Even businesses that fall outside the scope of the regulations and reporting standards are likely to be required to align with them to meet customer and stakeholder expectations and requirements.

The EY Ireland CFO Survey 2023 points to ESG still being perceived as a compliance and regulatory issue rather than an opportunity. Only 6% of the respondents say increasing the sophistication of non-financial reporting is one of the top strategic areas of focus over the next five years, down from 15% in 2022.

Irish finance leaders will, therefore, need to increase the sophistication of their non-financial reporting and prepare for the advent of new and more exacting regulations in the coming years. They must also put in place the systems which will enable them to move the dial from compliance to value creating opportunity for their organisations.

An evolving regulatory landscape

The European Union’s pursuit of its goal of achieving climate neutrality by 2050 is underpinned by an ever more stringent policy and regulatory framework to govern the ESG landscape. Each new piece of regulation brings a new set of responsibilities and reporting requirements for organisations operating both within and outside of the EU.

Central to this framework is the EU Taxonomy Regulation that creates common language for the classification of sustainable investment activities across the EU.

The latest piece of ESG reporting legislation in the EU is the Corporate Sustainability Reporting Directive (CSRD) which sets out which organisations must report on ESG and how. Independent third-party assurance is mandatory for all CSRD mandated reports while a new reporting framework, the European Sustainability Reporting Standards (ESRS), has been established to form the basis of such disclosures.

And there are other non-EU ESG reporting standards and requirements that may apply to Irish businesses. For example, Irish organisations operating within the UK must report against the Task force on Climate-related Financial Disclosures (TCFD), which has become a globally acknowledged framework for ESG reporting. The US Securities and Exchange Commission (SEC) has proposed new requirements for climate-related disclosures further human capital disclosures under consideration.

In addition, the International Sustainability Standards Board (ISSB), which was established by the IFRS Foundation to develop a set of standards to serve as a global reporting baseline, is in the process of finalising IFRS sustainability standards. These standards will require adoption by authorities in local jurisdictions before compliance becomes mandatory and several countries, including the United Kingdom, have indicated they expect to adopt them.

What organisations should do to improve their ESG reporting

It is vitally important for every Irish organisation to assess their current and potential obligations under both existing and upcoming regulations and reporting standards. To prepare for what will be an ever-increasing compliance burden, Irish organisations need to take the following steps :

Pivotal role CFOs can play in this new reporting landscape

CFOs and finance leaders need to take some critical steps to increase the sophistication of their non-financial/ESG reporting. Future focussed CFOs will need to consider a well-designed ESG operating model that is well governed and integrated with other parts of the business with robust processes and control frameworks in place to manage and mitigate ESG risks.

CFOs, therefore, have an opportunity to leverage the regulatory obligations to create long-term value for their organisations by formally integrating ESG into finance and controls.

Here are some of the key considerations CFOs should think about to get ahead of the ESG agenda.

• Data integration: Integrating non-financial reporting data into financial reporting data processes and controls to ensure that data is complete, accurate and of a high quality. This will allow for a smoother non-financial reporting process and enable future alignment to ESG regulations that will require the related financial impact to be reported alongside ESG disclosures.
  
  
• Upgrade reporting systems: Upcoming regulations will impose a high volume of new disclosures. Putting in place the correct reporting controls and systems early will create a robust framework for comprehensive ESG reporting. Upgrading reporting systems to collect both financial and non-financial information will create efficiencies and streamline reporting against all mandated requirements.
  
  
• Quantify financial impact: Quantifying the financial impact of non-financial and ESG-related metrics will be fundamental to future reporting obligations. Irish organisations will be expected to demonstrate how their ESG progress is integrated into their financial planning, evidencing capital investments, mitigation and adaptation measures, and operational expenditure.
  
  
• Evidence through detailed scenario analysis: Reporting requirements have advanced and businesses will progressively be required to disclose their ESG targets, defined timelines, and risks and opportunities, using specific and detailed scenario analysis. These scenarios are intended to support ESG integration and long-term value creation for organisations, the environment, the economy, and society at large.