By: James Paterson, Vice President and General Manager, CCH Tagetik at Wolters Kluwer
Chief Financial Officers with Environmental, Social, and Governance (ESG) on their 2023 “to-do” list are probably occupied with disclosure, reporting, and regulation thoughts. And it’s no wonder; frameworks and regulations like Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), and the EU Taxonomy are big loads to carry. But it does beg the question: if you’re only focusing on these obligations, are you using ESG data to its full potential?
Because ESG reporting can be so much more than disclosure, looking ahead to the next 12 months, your ESG reports and the processes you set up to complete them can do much more for your business than set you up for regulatory success.
This is not to play down that getting ESG reporting right is critical to meeting emerging regulatory requirements, influencing ESG credit ratings, and improving your reputation among sustainably-minded investors.
But this is only half the battle that ESG data can help you win. The other half is to use ESG performance data to improve sustainability planning and impact and to examine how ESG efforts correlate with your business’s financial performance. And most companies are missing this opportunity to use critical ESG performance data as a vital planning tool for long-term sustainable growth.
So how can the CFO use ESG data beyond reporting to improve sustainability initiatives?
When ESG data is integrated into a converged reporting framework as a part of an extended Planning and Analysis strategy, you can see how ESG data interacts and affects financial and other operational information to produce budgets, variance reports, and predictive forecasts.
For example, let’s say you worked for a fashion company that wanted to switch to recycled materials as part of an enterprise-wide initiative to combat waste. The decisions you’d make to realize this goal would have significant consequences across the production line. You’d have to adapt production plants, which would have a financial impact, a supply chain impact, and a delivery impact.
The ability to see ESG data in context with financial and other planning data is critical to making ESG initiatives sustainable — and profitable. When you can add ESG data into the same processes you use to plan your workforce, capacity, sales, and inventory; you can run what-if analyses and simulate scenarios to determine the course of ESG action that yields the best outcome for sustainability and your bottom line. As you can see, It’s hard to overestimate the importance of the CFO’s role in ESG when ESG data has such relevance for decisions.
Use ESG data to transform your business model to support sustainable growth.
Where we only used to see dollar bills flying out the window when thinking of sustainable business models, we now see revenue streams. While climate change presents a potentially catastrophic threat to humanity, the global call to combat climate change offers organizations an extraordinary opportunity to appeal to investors and tap into new markets — all while doing right by the Earth and humanity.
ESG data can shed light on critical drivers. Like how changing your mix of energy sources to renewable sources would impact your costs or use of sustainable materials would affect your sales. Organizations can use these insights to transform their operations and business model into one that pushes and achieves sustainable development goals.
For some organizations, that can mean identifying areas of operations ripe for sustainable change in specific social aspects. For example, you could analyze workforce planning data to determine areas in your organization that lack gender or racial representation or suffer from significant wage gaps and take steps to build a more diverse, inclusive, equitably-treated workforce.
For other organizations, ESG data might point you to new product opportunities. Look at the electric car, for example. There was a time when many of us thought the global transition to electric vehicles was preposterous. ESG data can help you identify areas in your business ripe for sustainability investment and whether your customers will likely grab hold of your sustainable innovations.
Even more, organizations might use ESG data to commit to mergers, acquisitions, or investing in sustainable companies to strengthen their ESG efforts and make their portfolio more sustainable as a part of overall governance.
All these examples have one thing in common: using ESG data to identify sustainable growth areas via analysis and predictive planning.
ESG data mitigates risks
To speak about ESG is to speak about risk. Risk to the planet, human well-being, ethical risk, and credit risk. While there are so many ways to shoot yourself in the foot with ineffective ESG practices, there’s equal opportunity to use ESG data to combat risk.
Let’s say, for example, you had started a project to reduce carbon emissions. Your enterprise disclosed its goals to shareholders, and even while your deadline for that goal is still far off, your ESG performance monitoring is telling you things aren’t going to plan. You’re going to miss the mark. With early warning alarms ringing, you can take mitigation steps early, change course and reallocate the budget accordingly. So when you disclose performance, you’ll preserve your ESG score.
Moreover, you can use ESG data to reduce credit risk by modeling scenarios affecting your ESG rating. A low ESG rating can threaten your share price, stock options, access to capital, and ability to entice investors, so your ESG rating presents a large risk to your organization. With the ability to use ESG data to model the outcome of sustainability activities, and their potential effect on your ESG score, you can choose to pursue ESG initiatives with the most desirable impact.
To allay risks, ESG must be built into a broader risk management framework. Data and governance controls, transparency of communications, predictive planning, and foresight when it comes to preparing for threats and evolving regulations — ESG risk must be taken as seriously as liquidity risk.
An ongoing commitment
The solution you use to manage ESG data should check all compliance boxes. But we must remember, sustainability isn’t just about running a single clothing line that uses recycled plastics or setting a single-year goal to reduce emissions. It’s about becoming a sustainable enterprise.
As you contemplate the coming year, remember that in the minds of those important stakeholders, the public, companies that aren’t producing ESG results now and for the foreseeable future aren’t a good investment. They’re not sustainable, meaning they won’t stand the test of time. Thus, ESG data shouldn’t be limited to disclosure in sustainability reports. By using ESG data to build plans, forecasts, risk mitigation, and overall strategy, companies can serve themselves while serving others, bettering the planet and the way we do business.
With this in mind, we strongly believe in using the full potential of ESG data. So for 2023, consider extending that information to enrich your decision-making, long-range plans, and reputation through a solution that facilitates XP&A, reporting, improvement, and disclosure.
About the author:
James Paterson, Vice President and General Manager, CCH Tagetik at Wolters Kluwer. James leads the Corporate Performance Management software solutions business unit in North America and consults with clients in the office of finance, assisting them in making faster and better-informed decisions in financial close & consolidation, integrated business planning, and regulatory compliance processes.