Why Irish CFOs must embrace the winds of change in sustainability and AI

The survey, conducted among 150 CFOs and finance leaders in Ireland, reveals that the majority of the respondents are confident in relation to growth prospects for their organisations in the year ahead. On average, expected growth is a very healthy 11%, broadly in line with last year’s survey result.

What growth are you anticipating in your organisation this financial year?

Despite this optimism, a surprising 47% of respondents are unsure of expected growth levels in their businesses. This may reflect continuing uncertainty in relation to the inflation and interest rate environment as well as ongoing geopolitical tensions that could impact business performance in the period ahead.

That uncertainty is evident in the diminishing focus on expanding into new markets to drive growth. Just 13% cited it as a top priority for growth this year, down from 20% in 2023. That could indicate a near term concentration on maintaining and improving margins as opposed to increasing market share and exploring new routes to market. The emphasis, therefore, remains resolutely on the bottom line.

However, for the longer term, a positive outlook has fed into a shift in attitudes of finance leaders towards M&A, with 13% of the respondents citing growth through M&A as a strategic area of focus over the next five years, up from just 4% last year. Following two years of depressed M&A activity this indication of green shoots in the market is very welcome.

Cost reduction along with improved efficiency continues to trump everything else when it comes to organisational priorities, with talent coming next.

This is the third successive year that cost reduction has topped the priority list for CFOs. Given the spike in inflation and the surge in energy costs during the period, it is not altogether surprising that CFOs continue to grapple with an increased cost base.

It may also suggest a strategic shift on the part of organisations. The focus was firmly on the top line and increasing revenue during a long period of near zero inflation and interest rates, but it may now be shifting to the bottom line to rebuild margins that have been eroded over the past two years.

Talent remains a top priority: The changing skills requirements driven by the rapid advance of technology along with extremely tight labour market conditions are both in evidence in the high priority given to talent. Irish organisations are prioritising upskilling existing talent and acquiring new skills through recruitment, although to a slightly lesser extent than last year.

Priorities for Driving Growth in the Year Ahead

What are your priorities for driving growth in the year ahead?

To meet the increasing demands being placed on their teams, there’s a pressing need for CFOs to focus on the two “Ts” – of talent and technology. Rapid advances in technology and a changing regulatory landscape are driving the need to invest in upskilling existing talent as well as to acquire new skills by hiring. 50% of CFOs cited lack of talent / talent retention as one of the key challenges likely to affect the desired level of growth in the next five years.

This reflects the extremely tight labour market conditions in Ireland at present as well as the ever-widening remit of the finance function.

Interestingly, talent does not appear as a strategic area of focus over the next five years. The apparent contradiction suggests that organisations see the technology challenges and labour market issues as short term in nature and it’s likely that CFOs are taking an optimistic view regarding the potential impact of finance transformation and the power of AI in the long term.

Among the growth agendas for the coming year, 25% of respondents recognised opportunities in sustainability and decarbonisation as a priority. However, that doesn’t appear to be matched by investment or effort in identifying or capitalising on the opportunities.

Growth challenge: With the evolution in the CFO’s role in recent years due to the ever-changing business landscape, finance leaders find themselves grappling with multiple challenges. Notable among the key challenges likely to affect desired levels of growth in the next five years are the revenue impact of inflation / prevailing economic conditions, lack of talent and talent retention, and the revenue impact of energy prices (as seen in the chart below).

Another key challenge that has been cited by respondents is customer expectations around sustainability. 28% of respondents in this year’s survey say they represent a challenge to achieving growth targets over the next five years versus just 11% who said so in 2023.

Main Challenges to Achieving the Desired Level of Growth in the Next Five Years

What are main challenges to achieving your desired level of growth in the next five years?

Also worthy of note is the relatively low priority given to transformation programmes. Organisations could be missing out on an opportunity here. Technology driven transformation offers a clear pathway to addressing the talent deficits in finance functions.

With an eye on the bottom line and long-term value creation, finance leaders need to sharpen their focus on sustainability goals and ESG reporting. Our survey reveals that awareness of the opportunities presented by sustainability and decarbonisation has increased significantly this year with 25% of respondents citing this area as a priority for growth in the year ahead – up from just 10% last year.

Attitudes towards ESG compliance and reporting are either positive or broadly neutral. There is an air of acceptance that new regulations and reporting requirements are coming, and they will need to be dealt with.

“A lot more is going to come into the CFO’s domain. For example, they will in future want to know what steps have been taken to ensure human rights are respected in the supply chain and what contractual arrangements are in place to verify suppliers’ credentials in that regard. Many people in the finance function will see sustainability reporting as a great opportunity to do something different, broaden their skillset, and add more value to the organisation,” elaborated Derarca Dennis.

Compliance ranks third overall as an area where CFOs and their teams will intensify their focus in the coming years, so its importance is clear.

The findings in relation to proactive ESG reporting are interesting in this light. While the level of proactive reporting is relatively high at 56%, the reality is that it is mainly driven by compliance factors.

According to the survey, 62%¹ do it for compliance reasons or because of other external push factors. Just 38%² (21% overall) are doing so because of a focus on sustainability as an organisation. This number is likely to grow over the next two to three years as ESG reporting becomes a reality and pressure from customers and investors to become more sustainable increases.

Measures Taken to Prepare for ESG Requirements

Which of the below measures, if any, have you taken to prepare for future ESG requirements?

When asked to name the areas where time is used least efficiently in the finance function, just 16% named new reporting requirements with ESG being just one of those. This suggests that while ESG reporting is a priority area, it is not seen as overly challenging.

Barriers to ESG reporting: A lack of buy-in from leadership and competing business priorities are still cited as key barriers to undertaking effective ESG/non-financial reporting.

Barriers to Undertaking Effective ESG Reporting

What do you see as the barriers to your organisation undertaking effective ESG/non-financial reporting?

Very encouragingly, 22% say there are no barriers in their organisation to undertaking effective ESG reporting.

It’s clear that organisations are anticipating greater pressure from consumers to become more sustainable. What is less clear is what they are doing about it. Indeed, if consumer expectations represent a challenge to growth, it would suggest that organisations will struggle to meet them in the coming years. Only a very small increase in the budget allocation for non-financial reporting is anticipated over the next two years.

Cross-functional collaboration: Irish organisations are taking steps to improve cross-functional collaboration in key areas like sustainability. 34% of the respondents claim they are building more cross-functional alignment to make stronger connections between CFOs, CTOs and CSOs while the same proportion claims to be reassessing existing finance and sustainability roles and responsibilities for greater collaboration. In addition, 25% say they are creating new roles and responsibilities in an effort to foster collaboration.

Overall, the findings suggest more of a neutral attitude rather than a positive or proactive approach to the sustainability agenda. There’s possibly an underestimation of the scale of the task ahead. That, coupled with economic factors like skyrocketing energy prices and high inflation, could make businesses focus on costs rather than the potential return on investment from sustainability measures.

The evidence thus far suggests that there is little or no price premium to be gained as a result of enhanced sustainability credentials. Customers are demanding more sustainable products and services but don’t appear to be willing to pay more for them. It is brands that tend to benefit in this situation which may deliver value in the medium to long term, but at present there is no evidence of a short-term return.

As CFOs in Ireland step up to future-proof the finance function and the business, their role in leveraging technology to improve efficiencies becomes pivotal. Finance leaders are not just looking to elevate business performance, they are also actively seeking to tap into the potential of technology while simultaneously strengthening their collaborative alignment with Chief Technology Officers (CTOs). There is no let-up in technology budget, with organisations intending to press ahead with investment in increasing sophistication of data and analytics to drive growth over the next five years.

The continued focus of technology investment is unsurprising considering the finding that manual processes and controls have been identified by 47% of respondents as an area where time is used least efficiently in the finance function.

It is somewhat perplexing that such a high number of respondents continue to cite manual processes and controls as an area for improvement in the finance function. This suggests that organisations have some way to go in their automation efforts and significant further investment in technology will be required in the coming years.

Despite the investment in technology, the survey results for AI indicate that it is a low priority for organisations at present. Finance leaders in Ireland are still at the very early stages of Generative AI (GenAI) adoption and are firmly focused on cost reduction and efficiency gains to realise growth ambitions. Usage of AI remains modest with just 26% claiming to have leveraged it for enhanced efficiency, automating manual tasks and risk detection among other use cases. The use of GenAI is even lower at just 15%.

This may come as a surprise to some. While GenAI has been commanding the headlines over the past 15 months, the technology is still not at the stage where it can be employed to carry out advanced functions in finance departments. CFOs are naturally exercising caution until they see some proven applications where GenAI can be trusted both in terms of its outputs and security.

Just 6% say they will leverage advanced AI to enhance the finance function or acquire AI skills in the next two years, with that getting only slightly better over the next five years with just 9% saying they will integrate AI and advanced AI into the finance function. The results of our survey indicate that organisations are still at the discovery and use case definition stage in relation to AI.

It is, however, somewhat surprising that greater use has not been made of the technology for automation purposes given the continued inefficiencies created by manual processes and controls in finance functions.

It is very welcome, therefore, to note that there is a fairly significant budget increase anticipated, albeit from a low base with the allocation for advanced AI (including GenAI) expected to increase from 1% to 3.2% in the next two years. This does suggest an openness to applying the technology as soon as use cases are identified and better understood.

Not all AI solutions are expensive or require custom development. To get their organisations to accelerate the AI journey, CFOs can recommend adopting pre-built AI solutions that drive cost efficiency.

When asked to assess their readiness to deal with existing and near future digital reporting and real time data quality management (including e-Invoicing, BEPS reporting and other digital reporting regimes), 27% of respondents say there is a clear data and technology strategy in place, and clear visibility of appropriate technology solutions and AI propositions to deploy for their business. While another 18% have commenced work on one, more than half do not have a clear strategy or none at all.

Eyes firmly on cybersecurity preparedness: In their role as strategic business partners, CFOs must do more than just comprehend the organisation’s risk tolerance. They must also be responsible for meticulously steering the budget towards areas that need more attention.

Just 39% of the respondents say they have ramped up investment in security tools, compared to 60% saying the same in 2023. This may indicate a degree of complacency in relation to cybersecurity or it could be that investments have begun to plateau following significant increases in recent years.

In a very welcome finding, 31% of the respondents this year say they instituted a cybersecurity task force versus the 8% who said so in 2023.