Finance professionals stepping up to the challenge of ESG reporting

How finance professionals are helping to advance ESG reporting.

In brief

• Finance teams may need to expand their focus into areas outside of traditional financial reporting.
• Senior-level finance professionals are becoming more involved in ESG reporting efforts.

Finance professionals are playing an increasingly significant role in helping their organizations respond to heightened scrutiny from regulatory bodies, investors and other stakeholders on a wide range of environmental, social and governance (ESG) issues. This undertaking is expected to continue to become more prominent considering the Securities and Exchange Commission (SEC) proposal on climate-related disclosures, which if adopted as proposed, would require public companies to disclose greenhouse gas emissions and other climate-related metrics both inside and outside the audited financial statements.

To help their companies comply with the new disclosure rules, finance teams may need to expand their focus into areas outside of traditional financial reporting. While this evolution is still underway, finance professionals are stepping up to the challenge notes a report issued by Ernst & Young LLP and the Financial Education & Research Foundation (FERF): How finance professionals are helping to advance ESG reporting. The findings in the report are based on survey responses from 72 chief accounting officers and controllers from US-headquartered publicly traded companies.

The report found that few finance teams claim to own the ESG reporting process, which is understandable, given that the demand for ESG reporting is new. At the same time, senior-level finance professionals are becoming more involved in ESG reporting efforts. While only 7% of chief accounting officers (CAO) and 3% of chief financial officers (CFOs) were reported to have principal responsibility for the ESG reporting process at their organizations, more than 60% of respondents indicated that either the CAO, CFO or another C-suite level executive is either highly or moderately involved with the collecting, processing, reviewing and reporting of ESG data.

This is a step in the right direction. Given the rising importance of ESG in the eyes of a broad range of stakeholders, and the fact that many of these metrics will be included in public filings to the SEC, finance professionals are expected to begin applying the same rigor to ESG reporting as they do for financial reporting.

Responses to the survey, which included interviews with financial executives from eight public companies, also revealed the need for alignment in three key areas necessary to achieve world-class ESG reporting:

• Governance
• Processes and controls
• Data and technology

Governance

Many companies are still determining how ESG reporting ties into their governance structure. With many ESG initiatives focusing on sustainability, it is no surprise that the principal responsibility for ESG reporting resides with the chief sustainability officer (CSO) (45%). In addition, 89% of respondents said that CSOs were either highly or moderately involved with ESG reporting. 

The survey also found that many organizations are adopting a multidisciplinary approach, but the way in which the shared responsibility of ESG reporting varies between principal data owners and function heads. These roles continue to evolve, and many companies are still considering who should “own” ESG reporting. 

Board oversight over ESG is also increasing, with 75% of respondents indicating that their audit committee or other board committee has asked about policies and procedures for ESG reporting. 

Processes and controls

Even though 75% of respondents indicated their board is asking for ESG processes and controls, only 8% of respondents indicated that they have a complete and robust set of procedures in place to drive the consistent application of ESG data across the organization.

Inventorying and aggregating ESG information may be a critical first step. Many companies said that ESG data is disbursed, residing in various databases and applications. For example, approximately 60% of respondents indicated that ESG information resides in a patchwork of software applications and 55% of respondents house their ESG data in spreadsheets. Finance teams can find ways to bring order to the existing data collection process.

The cadence for aggregating ESG information also varied widely, with more than half of the respondents saying they collected information quarterly, with another quarter of respondents gathering the information annually. The SEC proposal would require climate reporting to sync with financial reporting, which means organizations will need to evaluate their processes for data gathering to report the required information in regulatory filings.

Data and technology

The bespoke and disparate nature of ESG data represents a significant challenge. With so much of that data collected manually, many finance functions anticipate spending more time and resources to address this issue, including development of appropriate new technological tools to complement existing ones. 

In addition, companies are still grappling with the question of how to gather data from across the value chain. Some are beginning to plan for this eventuality and are discussing how to approach Scope 3 reporting when some suppliers provide the data and others do not. Still, even if a metric does not rely on significant estimation or judgments, many are considering documentation as a step toward audit readiness for voluntary ESG disclosures, as well as for disclosures that may be required. 

At this time, slightly over 40% of respondents are using a third-party non-audit firm to provide assurance over ESG data, while only 22% of respondents said they use an external auditor to provide assurance. The proposed SEC requirements could shift this trend as companies begin or continue to implement SOX-like controls to report in regulatory filings. 

Conclusion

Looking ahead, finance teams should view ESG reporting as an opportunity to not only help their organizations comply with potential new regulatory requirements but also as a mechanism to communicate ESG strategy to external and internal stakeholders. The skill set of the finance function can help elevate ESG reporting from an initial, less mature iteration to a more established process backed by necessary levels of rigor, automation, and consistent policies and procedures.

The views expressed by the author are not necessarily those of Ernst & Young LLP or other members of the global EY organization.