How do CFOs measure ESG in a meaningful way?
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In this series, we're exploring the role of the modern CFO and the way in which the parameters of that role are expanding.
ESG is one of the most important new frontiers for the CFO. As we saw in the last article, environmental, social, and governance-related commitments and activities are of foundational importance if we are in the business of building sustainable organizations - and, as CFOs, that is our number one priority.
ESG is still emerging
While the ESG naysayers have now been more or less silenced, there remain many fundamental issues facing this newly emerging field.
ESG metrics and commitments need to be comparable, transferrable, and rationalized in order to be meaningful. This means that we need standards for their measurement. Those standards are still in the process of being set - and, today, there is no denying that the nascent ESG 'industry' remains a little like the Wild West.
But there is positive movement in this area. There are concerted efforts to create an internationally-agreed framework for the measurement of ESG commitments and a sensible way to compare and interrogate them. Organizations such as the IFRS Foundation are dedicated to doing exactly this and are developing the standards by which ESG efforts will be codified.
The focus on ESG as a recognized and foundational set of metrics is sharpening in the run-up to Cop26. Held in Glasgow at the end of October, this will be the most important climate change event since the signing of the Paris Accords. The field of ESG will be a key point of discussion, and Cop26 is an invaluable opportunity for industry and policymakers to establish shared rules in the space.
Investors want certainty
More immediately, CFOs need to navigate the realities of ESG as it currently exists - and one of the most pressing ways in which that manifests is through investor relations.
ESG is a major factor in an increasing majority of investment decisions, and the modern CFO must have a deep understanding of the field, its practices, and the commitments that their own organization is making.
Although still in its relative infancy, ESG is now sufficiently well-defined that investors are no longer amenable to half-baked commitments or flaky language. They want to see concrete actions that are relevant to the business in which they are considering investing, and relevant to the most pressing environmental, social, and governance-related issues in the markets in which they operate.
They also want to know about the methodology behind ESG commitments and how CFOs and other leaders have arrived at their decisions. In particular, why are these the actions that you have chosen to take? How are they being embedded within your organization's activities (or, to put it another way, how are you going to ensure the consistency of your commitments?)? In what way are they relevant and timely?
All these factors and decisions need to be clearly documented and justified - a challenge that will undoubtedly become simpler following the adoption of standardized frameworks, whether from the IFRS Foundation or elsewhere.
Don't forget the bottom line
Finally, although we are talking about the expanding remit of the CFO, we must also remember our key responsibility: to build and maintain profitable businesses.
When embarking on and quantifying the success of ESG activities, CFOs should always be able to make a clear and unambiguous link between the measures being enacted and the financial performance of the business.
Do this today
Take some time today to think about your existing ESG commitments. Do you have any? What are they, and how are they being measured? Have they already impacted your bottom line? And if not, how are you expecting them to do so?
If you haven't begun your ESG journey, think of some top-line commitments that you could make. Begin laying the groundwork for their adoption, beginning by seeking buy-in from other leaders across your business. Now is the time to act!
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This was the second article in my latest series "Beyond Finance" and you can read the previous article(s) below.
If you didn't get a chance yet then take some time to catch up on my latest article series "Changing perspectives on Finance". You can find all seven articles below.
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Anders Liu-Lindberg is the co-founder and a partner at the Business Partnering Institute and owner of the largest group dedicated to Finance Business Partnering on LinkedIn with more than 10,000 members. I have ten years of experience as a business partner at the global transport and logistics company Maersk. I am the co-author of the book “Create Value as a Finance Business Partner” and a long-time Finance Blogger on LinkedIn with close to 65.000+ followers and 140.000+ subscribers to my blog. Recently I became an advisory board member at Born Capital to help identify and grow the next big thing in #CFOTech.
Fractional CFO | Seed to Series B | Guiding Founders in Venture-Backed Start-ups and Scaleups
3yCould not agree more Anders Liu-Lindberg and this topic has to be grasped by FP&A professionals and CFOs alike. Wouldn’t it be great if we where treating ESG metrics in just the same way as any other KPI in our planning and forecast FP&A processes and routines
GRC | InfoSec & Cybersecurity (ex-CISO/BISO) | Audit & Assurance | Internal Control (SOX) | Project & Data Management | Operations Excellence & Resilience | Innovation & Transformation | Regulatory Advisory
3yAgree that ESG reporting has become an integral part of the CFO's domain. I have had the chance to contribute to the ESG reporting where I was appointed to provide a write-up on the 'G' (Governance) part of the company's ESG Sustainability Program which would be published in the company's Annual Financial Report. It's a good post, thanks Anders.
Founder CEO Management Consultant ,Advisor Complinity GRC Software, Mentor in VMentor ,MOC AIM Niti Ayog GOI.Former CFO RCW ,unit:Ultratech cement Karnataka. Circle Finance Head Idea cellular Ltd now VIL
3yThanks Anders for sharing this ! This was very useful !!
Fricke Recruiting Services, LLC (Senior to C-Suite, Financial Services & Banking, CPAs, CFAs, CFPs, MBAs) Bryan@FrickeRecruiting.com (952) 261-9033 (work line text connect) FrickeRecruiting.com
3yThank you Anders for this post. This very helpful desk information for me and great discussion topics for my candidates and clients. How do CFOs measure ESG in a meaningful way? GREAT POST - I will share your post with my network. Thank you again
Experienced Accounting Professional | IFRS & GAAP Expert | Skilled in SAP, Oracle, Zoho & Datev | 14 Years in Financial Management
3yHi