Why ESG Ecosystems Are Key to Financial Reporting Success

The Importance of ESG Ecosystems for Successful Financial Reporting

By Steve Soter, Senior Director of Product Marketing at Workiva

The rise of collective social consciousness, coupled with a growing desire to minimise the environmental impact of industry practices have resulted in environmental, social and governance (ESG) factors shooting to the top of corporate agendas. This has been supported by accelerated changes to regulations including the recent Sustainable Finance Disclosure Regulation (SFDR) mandate and the all-but-certain adoption of the Proposal for a Corporate Sustainability Reporting Directive (CSRD), both signalling a shift toward more standardised ESG disclosures for public companies in the EU.

Historically, the responsibility of managing the underlying data has sat with the chief sustainability officer or the general counsel. The task is now migrating to squarely include the chief financial officer (CFO) who must wrangle data from different departments to satisfy ESG requirements both today and tomorrow. It’s critical that this is done well and accurately, as ESG performance can be a key differentiator for a company – especially when seeking investment. Creating an ESG ecosystem within the organisation helps to simplify processes and make reporting more straightforward and trustworthy in the long run.

ESG reporting brings challenges 

Traditionally, financial reporting has been limited to numbers on a balance sheet, with sustainability metrics neatly captured in the company’s annual CSR report. ESG reporting has upended processes, as it requires the amalgamation of financial and non-financial data. The growing interest from stakeholders and shareholders in ESG performance metrics means that robust and accurate reporting can’t be ignored. In fact, a great performance can catapult a company ahead of its competitors and make it attractive to investors.

The challenge is that ESG data is rarely held in one place; it can be captured in unstructured documents spread across different departments and siloes, creating a thorny reporting issue. This challenge now lies at the door of the CFO, for them to consider and incorporate new metrics into the annual financial report. To support this, the organisation must develop internal systems to enable the CFO to consistently report accurate and relevant data, which is where the ecosystem comes in.

Creating the ecosystem needed to drive reporting forward

Organisations must first establish standards and metrics for what they want to report on. These can be based on sustainability issues that are known to affect the financial condition or operating performance of companies within an industry. Material issues that stakeholders believe are relevant and important to them can also be included. It’s important to pull this data into one place – consolidated and combined – to establish a baseline. Then look around the market at competitors, to see if there is anything missing.

Once these factors are agreed, organisations can devise processes to efficiently collect and categorise necessary data that are integrated across departments. Using automation can speed up these processes and relieve bottlenecks, but it’s critical to ensure that the data is properly prepared first. Frameworks which create a taxonomy to enable unstructured data and disclosures to be tagged, captured, and managed centrally will be lifesavers. Terms related to ESG can be made machine-readable, stored, analysed, and reported. When deployed, these mechanisms will enable organisations to be ready for auditor scrutiny that will undoubtedly be required for ESG disclosures in the future.

Lastly, organisations should look to set up a strong ESG reporting structure, including the final destination for the report. For example, will it live on the company website or in financial filings? Understanding where the metrics will end up will dictate the underlying processes and help reduce unnecessary steps.

With all of this in place, the CFO will naturally be in a better position to see how ESG metrics are landing with investors and instigate important conversations to create change internally. It also aids in the ever-critical analysis of ESG performance that leads investors to invest or divest.

Take one process at a time to achieve results

Creating the ecosystem can appear to be a daunting task at first, as it may be the first time that the organisation has had to report in this way. It’s key to approach this task methodically to avoid overwhelming the system; for example, implementing a reporting scheme which addresses one factor at a time. Eventually, setting up processes will become easier and the ecosystem will grow.

Organisations will be under increasing pressure to demonstrate their ESG performance and it’s worth investing the time and money to ensure that the right processes are in place to effectively collect, integrate and analyse data. In this way, the CFO will be armed with the most relevant information needed to satisfy reporting requirements – for regulation, stakeholders and shareholders.