ESG Reporting: 5 Climate Disclosure Considerations

Jim DeLoach, Managing Director Host, The Protiviti View

The SEC’s adoption of additional climate-related financial reporting disclosure requirements looks like a matter of “when,” not “if.” And while we’re all waiting for SEC Chair Gary Gensler and his team to come down from the mountain with the stone tablets in a few months, let’s face an undeniable fact: The CFO’s role in environmental, social and governance (ESG) reporting is no longer a question of “if,” either.

ESG reporting — what’s the CFO’s role?

Leading finance chiefs recognize the formidable forces driving the demand for ESG reporting, particularly on the climate front. In response, these CFOs are consummating their role in this next-generation data collection activity while laying the groundwork to maximize the business value the organization derives from monitoring, managing and reporting ESG-related performance metrics.

I’ve written columns for Forbes.com concerning ESG predictions (Part 1 and Part 2) and practical steps to initiate ESG reporting. I feel compelled to continue the discussion given the flurry of ESG-related questions we respond to each week.

The upsurge of ESG interest is well-founded. To date, three of five SEC commissioners, including Mr. Gensler, have expressed their intent to move ahead with climate-related disclosure requirements. While those rules likely will not be finalized until the end of this year (making an implementation date of Q1 2023 possible), more and more public and private organizations are using existing carbon and sustainability frameworks to report environmental metrics, regardless of the state of the rules.

Voluntarily sharing ESG disclosures is wise given the rising demand by a variety of stakeholders for climate-related and other ESG information. In addition to responding to pressure from several of the world’s largest pension funds and other activist investors, leadership teams recognize that more investment firms are choosing to invest only in ESG-friendly companies. And there are some big numbers backing that assertion: Sustainable investments driven by ESG screening criteria are on track to represent more than a third of the projected total assets under management by 2025. These asset managers are making themselves heard. During the recent proxy season, for example, BlackRock voted against almost five times the number of directors the firm voted against the previous year because of failure to act on climate issues.

Organizations pursuing green bonds and similar financial vehicles also understand that interest rates may be lower when their ESG posture is better. And major customers and ecosystem partners are requiring an understanding of the ESG positioning of their counterparties. Not to be outdone, talent is migrating to companies committed to meaningful ESG objectives.

Additionally, any private company contemplating going public via an IPO or de-SPAC transaction also needs to be prepared to establish an ESG reporting program. Human capital disclosures on “material” human capital metrics — the “S” in ESG — have been required of SEC registrants since January 1, 2021.

CFOs have earned a seat at the strategic data table by helping to secure and govern data and by creating the data analytics that the rest of the organization uses to drive business behavior. Climate-related ESG reporting will push finance teams even further beyond traditional financial reporting boundaries.

This year, for example, CFOs discovered that a significant portion of human capital disclosure data resides within familiar payroll applications and human resources information systems (HRIS) that are already supported by internal controls. By contrast, climate-related disclosures require data culled from disparate sources, including operations (concerning production and materials, transportation, and more), HR (business travel), third parties (firms that specialize in calculating greenhouse gas emissions), and other new stakeholders. CFOs are working closely with investor relations, legal, compliance and sustainability partners to transform climate data into relevant metrics. It’s a big job involving a moving target, as no one knows for sure what the SEC will require, and there are a variety of available approaches.

That said, far-flung climate-related data ultimately will wind up in a tabular format in the financial reports and statements signed by the CEO and CFO (as opposed to the chief human resources officer or sustainability leader), who will assert their responsibility for (1) the design and maintenance of disclosure controls and procedures to ensure that material information pertaining to the company is disclosed, and (2) the evaluation of the effectiveness of such controls and procedures. In other words, as a certifying officer, the CFO is on the line — hardly a reason for a passive interest in the veracity of climate data disclosures. While climate data may not be entirely financial data, ensuring its relevance and accuracy most certainly ranks as a CFO responsibility.

In recent months, finance groups have moved beyond setting up ESG reporting capabilities to elevating the maturity of those capabilities — often by integrating more climate-related data and insights. As they have done so, finance teams have discovered the following five actions and considerations to be helpful:

  • Fine-tune the data collection process while collecting the data: Initial data-gathering for climate disclosures typically involves scores of emails and a heavy reliance on spreadsheets as a summary tool. No finance group will want to repeat that ad hoc data gathering process every quarter, so it is important to begin identifying better and more advanced processes and technology tools as soon as possible. The purpose of these improvements is to ensure the accuracy, efficacy, consistency and efficiency of all ESG data gathering activities moving forward.
  • Leverage existing historical data: Plenty of environmental and human capital data resides in past financial statements. This data often can be repurposed to produce formal ESG metrics in line with standard reporting frameworks. Employee turnover and logistics activities are good examples of historical data that are mined for ESG reporting use. Similar mining may be possible for climate disclosures.
  • Help producers of climate data understand the need for rigorous controls: As finance teams obtain climate-related data from business colleagues and third parties, they should keep in mind that few, if any, of these partners are familiar with the exacting controls financial reporting requires, much less the importance of materiality considerations and consistency of presentation. These collaborators will need to be educated in producing ESG data of the same quality, and at the same cadence, as financial data.
  • Expect resource shortages: Given the number of new stakeholders involved and the amount of manual legwork required, initial data gathering activities for climate disclosures will require significant time and personnel during a period when the finance group’s priority lists—from the manager level up to the CFO — are overflowing.
  • Know that audits are coming: Companies active in the capital markets know that anything in a public filing is fair game for a “comfort letter” request from an underwriter. The best way to ensure the validity, accuracy and applicability of climate data is to remember that an auditor ultimately will need to confirm that the data is just as reliable as the financial data they are accustomed to reviewing.

Make no mistake: The purpose of reporting climate disclosures is not to check a compliance box or pass an audit review. The ultimate goal is to increase business value — by accessing more capital, qualifying for better lending terms, driving higher profitability and attracting higher-quality talent.

To get there, many finance groups will have to put their collaboration skills to the test with operational and functional groups across the organization and achieve swift improvements after starting from scratch. Keeping the endgame in mind will help lay the groundwork for generating strategic value from ESG activities in the future as finance teams address tactical data gathering activities and logistics today.

This article originally appeared on Forbes CFO Network.

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