Environmental, Social and Corporate Governance Will Drive a Redefinition of Accounting Value Delivery

Environmental, Social and Corporate Governance (ESG) is Here.

Climate, emissions, sustainability, diversity, human rights, fair trade, employee relations, worker pay, inclusivity.

Look at a set of company financial statements from a couple of years ago and you will see limited detailed disclosures in these areas. Examine an organization’s transformation initiatives and few, if any, would be focused on improving and transforming the processes, data and business unit level reporting in these areas. Review an organization’s measurement and compensation systems from that same time period and you would see little that is aligned to these areas.

That is changing — fast.

A global consensus is forming. Powerful momentum is behind sentiments that are influencing consumers. Regulatory bodies are issuing new requirements and challenging companies to disclose or explain. New standards across the board are expected, and a wave of new sustainability standards are anticipated. Investors are asking company boards difficult questions.

Organizations need to proactively address this in a comprehensive way quickly.

ESG Recommendation #1: See the Strategic Value in ESG

ESG is a movement away from the traditional near singular focus on shareholder financial return. ESG will necessitate a focus on wider measures of performance beyond financial ROI. Company management will need to give increased focus to the needs, desires and concerns of a broader stakeholder community beyond investors and financiers (e.g. employees, producers, suppliers, consumers, communities and NGOs).

This gives companies an opportunity to think strategically about how they define and deliver value. The corporate identity they want to convey. The goodwill they want to create. The finance and accounting organization must be positioned to provide executive management with pertinent insights into the opportunities and risks to the organization related to ESG policies and operations.

A thorough, comprehensive approach is needed to address current and anticipated ESG needs.

ESG Recommendation #2: Don’t Underestimate the Degree of Change to Key Finance and Accounting Processes

ESG will require that organizations focus on an array of core processes and on complexities that did not exist previously.

Key processes will be impacted, including:

• Strategic planning cycle: strategic direction needs to address the benefits and risks the company is having on the outside world and how this impacts the broader stakeholder value proposition.
• Transaction processing: finance and operations-driven activity and the associated data may need to be tagged, tracked, consolidated, and analyzed to substantiate important disclosures in key areas (e.g. diversity, inclusion, fair trading transparency, emissions, energy usage, waste, carbon footprint).
• Performance management: ESG will impact how companies allocate resources, what investments are considered and how companies appraise those investments, and how they measure enterprise performance. A raft of new performance measures and targets should be expected.
• Regulatory reporting: Major countries, and supra-national groups like the EU, have already made moves under the watchful eye of the G20 and in accordance with the UN sustainable development goals. As countries move at different paces and scopes in their ESG demands, multinational organizations will need to manage different, and changing, requirements over time.

Finance and accounting must be proactive. It must understand the essence of what frameworks like the Task Force on Climate Disclosures (TCFD) are proposing. Companies must design processes, capture data and report against new dimensions of stakeholder value. It must do all this in a systematic way that will stand up to audit scrutiny.

ESG Recommendation #3: Unlock the Brain Power of the Finance and Accounting Team

ESG compounds the challenges organizations are already facing – to unwind complexity – and to infuse automation so that the brains of finance and accounting can be unleashed.

There is an opportunity to design world-class ESG processes from the beginning. A template approach should be developed that engineers the processes and data at the onset so that finance and accounting is not in a reactive “firefighting” position.

Finance and accounting must be a key party in a cross-enterprise effort to anticipate and predict ESG requirements, and to form the company’s ESG messaging and programs. Finance and accounting must develop a roadmap to design processes, capture data, and provide reporting on the ESG message and programs.

Final Thoughts: Anticipate. Watch Out for Complacency.

ESG is, in many jurisdictions, essentially close enough to see. ESG will require that organizations evolve their existing service delivery models to provide the necessary capacity and infrastructure agility. And they need to do so without a complete roadmap from the regulators.

Near-term steps include:

• Self-identify those ESG areas that are impactful and material enough to the organization. Investigate impacts on policies, processes and data
• Work with ESG experts, internal and external, to develop and validate a program of change and implementation
• Develop a measurement system focused on these areas and begin to track from an operations and compliance perspective
• Enhance the data and systems infrastructure to ensure repeatable, accurate and timely measurements
• Establish baselines and develop improvement target levels for internal stretch targets and for what will likely be publicly disclosed
• Execute a program to deliver on a new operating model that efficiently and effectively delivers ESG compliance information

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This is an incredibly interesting time. ESG is big. It is not a fad that will run its course. Organizations are facing a whole new dimension of enterprise operations management and reporting. Finance and accounting must advocate for the right approaches and investments to deliver against ESG.

Written by: Bill Marchionni, Account-to-Report Advisory Global Program Leader, The Hackett Group & Stephen Ferguson, Account-to-Report Advisory, EMEA Program Leader, The Hackett Group