Joe Fitzgerald is Senior Vice President of Lease Management Strategy at Visual Lease.
Over the past three years, environmental, social and governance adoption has become more ubiquitous, sweeping across industries. ESG policies are proving to be good for business, aiding in talent recruitment, improving fundraising and increasing revenue and investment returns. In fact, according to data from EY, last year more than a quarter of investors chose not to partner with fund managers that lacked an adequate ESG strategy.
The reality is executing an ESG strategy is difficult. Companies must thoroughly track metrics and transparently report progress. Cross-functional teams must implement procedures to measure, as well as understand, the financial reporting implications. However, many finance teams are unprepared, with 27% of CFOs saying that ESG reporting guidelines were among their biggest challenges in the first half of the year.
Let’s take a closer look at the connection between ESG adoption and accounting practices, and how the office of finance needs to evolve to master proper measurement guidelines.
Accounting Teams Take The Reins
For the past decade, corporate finance departments have played a larger role in driving business initiatives and making strategic decisions that impact a company’s core objectives. ESG reporting is the next step in this evolution of the office of finance because it has implications on financial reporting and even revenue.
For example, S&P Global found that in 2021, 53% of revenues of the 500 largest U.S. companies and 49% of revenues of the 1,200 largest global companies are generated in business activities that support sustainable development goals.
According to the Financial Accounting Standards Board, financial reporting can impact ESG strategy, including how related amounts are disclosed in financial statements, the associated environmental-related risks and how sales are impacted by a company’s ESG efforts and resulting reputation. Accounting teams are now tasked with managing, tracking and recording all pertinent information to support a company’s goals, putting them at the forefront of this critical initiative.
ESG Adoption, Easier Said Than Done
Unfortunately, finance professionals will find little guidance on how to proceed. The International Sustainability Standards Board recently unveiled the first-ever global ESG reporting standards, which Bloomberg notes will pave “the way for companies across jurisdictions to disclose uniform climate and sustainability information,” and the SEC is expected to follow. In addition, the government frequently changes its greenhouse gas mandates.
Research from the Visual Lease Data Institute found that a staggering 94% of companies have not fully established their own ESG policies. Siloed data is one of the biggest challenges companies are facing in establishing proper reporting standards. For example, less than half of senior real estate executives polled cited that they were involved with reporting on the environmental impact of their organization’s commercial real estate leases.
Companies must encourage cross-department collaboration and improve communication with the finance department. By clearly defining responsibilities, finance departments will know exactly where to collect essential ESG data and create uniform reporting guidelines across the organization.
Investments To Support ESG
Dedicated technology is a must to provide finance teams with confidence in the accuracy and timeliness of their data collection. Technology can effectively track ESG metrics, which include a wide range of data points, from sustainability and carbon consumption to businesses’ diversity and broader social impact. Tracking such metrics gives businesses a clear understanding of their ESG program goals and the progress being made toward them over time.
Organizations can also consider partnerships. Those with the right expertise will be equipped to guide an organization through these unchartered territories with best practices and recommendations on processes and tools to support those best practices.
Tips For Choosing ESG Technology
We are living through a technology revolution with no shortage of options—but there are a few key characteristics that reflect quality ESG reporting technology.
Most critically, the solution should be able to house pertinent data across departments. To achieve this, all stakeholders must be able to input and access data. Solutions with this functionality facilitate cross-departmental collaboration between the key stakeholders involved with ESG execution, including sustainability and finance teams, real estate and operations.
Any technology investment should also automate simple tasks to allow an organization to focus on strategy and other critical core business functions. It’s important for the technology to be able to integrate with other solutions within the organization’s technology landscape to enable critical data flows between systems. This capability will provide businesses with even greater insight into how their ESG program is performing and where they need to make changes to achieve stronger results.
ESG reporting is not a trend; it’s a new standard business practice. The new ISSB standards are just the start and will set the stage for other governing bodies as they consider their own regulations. So, while government environmental regulations are being negotiated, there’s no time to waste. The office of finance must urgently create a measurement and reporting framework to ensure long-term success. Their organization’s relationship with prospective employees, investors and customers depends on it.