Navigating ESG: strengthening governance for long-term success

CFOs play an essential role as companies gear up to comply with the growing demand for disclosure of climate-related data and other environmental, social, and corporate governance (ESG) metrics. CFOs will be responsible for integrating sustainability practices into their companies’ policies, procedures, financial reporting, and decision-making processes.

Long-term success

Effective governance is essential for the long-term success and sustainability of a business. It involves looking hard at the internal processes, systems, and structures that govern a company to provide accountability, transparency, and responsible decision-making.

Some key aspects of governance that companies and their CFOs should consider include:

Board of directors: Having an independent and diverse board with appropriate expertise is key when it comes to overseeing management and ensuring adherence to ethical standards. The CFO, along with other C-suite executives, works with the board to align financial and ESG objectives to establish and integrate sustainable practices into the company’s overall strategy and risk management.

Risk management: Companies need to evaluate their risk management reporting and governance processes to identify and assess ESG-related risks and opportunities and integrate them into their processes. Identifying, mitigating, managing, and monitoring financial risks, environmental risks, and potential reputational impacts to protect long-term financial viability is an integral role for the CFO.

Data collection and analysis: Sources for ESG-related data, including environmental (greenhouse gas emissions and energy usage), social (employee diversity and community engagement), and governance (board structure and executive compensation), are likely numerous and varied throughout the company. It falls on the CFO to oversee the collection, validation, and analysis of financial and nonfinancial data related to ESG elements.

Transparency and reporting of ESG-related metrics: Companies that have transparent reporting practices and provide accurate and timely information to stakeholders, including financial reports, sustainability reports, and other disclosures, will be well-positioned to comply with evolving disclosure requirements and give stakeholders a comprehensive understanding of the company’s ESG performance and its impact on ROI.

Stakeholder engagement: Active engagement with stakeholders, including employees, customers, communities, and investors, is important in evaluating the ESG strategy. CFOs play a critical role in the facilitation of identifying material ESG-related risks and opportunities across the company and incorporating them into the risk management processes and reporting framework.

Compliance and legal frameworks: Implementing effective internal controls and mechanisms to monitor compliance with applicable laws, regulations, and industry standards, as well as to address any legal or regulatory violations, is a critical governance component. The CFO function is often tasked with the responsibility of ensuring the company adheres to relevant ESG reporting requirements, guidelines, and industry standards.

Executive compensation: Aligning executive compensation with the company’s ESG performance and setting performance metrics related to ESG goals can motivate management to prioritize sustainability and responsible practices.

Ethical practices and code of conduct: Establishing a code of conduct and ethical practices that incorporate ESG-related elements will guide employee behavior, promote integrity, and prevent unethical practices. This is an essential piece of a strong governance framework.

Strategy execution

Regardless of whether you’ve produced a robust sustainability report previously or are just beginning on your journey, it’s important to develop an ESG strategy that is aligned with your corporate strategy. It should include identifying ESG-related priorities and metrics, setting measurable goals and targets to track progress, and developing action plans inclusive of the resources required to achieve your objectives.

Understanding the roles of risk management and board oversight related to ESG is critical. Establishing a governance infrastructure that incorporates ESG is the first step. The next is to evaluate the ESG-related knowledge and skills of your team. Identifying the gaps and providing the education necessary for the support teams — management, board, accounting, and operations — is crucial for addressing ESG elements and strategy execution.

Companies that have integrated ESG elements into their corporate governance practices will not only be poised to comply with climate-related disclosure requirements from regulators and key stakeholders but will be better equipped to manage risks, attract investors, enhance their reputation, and contribute to long-term sustainability and responsible business practices. The ability to report on ESG elements will not only give a leg up on competitors, potentially unlocking new sources of capital or business, it’ll be a must-have to engage in business.

Adapted from: “Navigating ESG: Strengthening Governance for Long-Term Success”, by Mallory Thomas, partner in the risk advisory practice at Baker Tilly, published on CFO News on 29 August 2023.