Climate reporting will soon fall under the remit of chief financial officers as new legislation will mandate reporting on their organisation’s net-zero progress and sustainability risks. However, finance chiefs will encounter a host of challenges with this added responsibility.
“Climate reporting means new processes, hard-to-get data and tough calculations,” says Stephen Ferguson, who is a lead advisor in the finance executive advisory practice at management consultancy The Hackett Group. “If CFOs are not alert to the fact there’s a lot of work to be done, they need to wake up.”
The cost of inaction is a steep one. The less prepared CFOs are, the less likely they are to find value through measuring and tracking their sustainability efforts, an Accenture study has found. By falling behind, finance leaders risk missing out on potential profitable growth – so what’s holding them back?
Climate reporting is still an unknown
Ongoing regulatory uncertainty surrounding climate reporting is “slowing CFOs down” in getting started, Ferguson says. The UK government is preparing to release its Sustainability Disclosure Standards that will require UK-listed companies to report and audit climate-related information. But some of the details have not yet been confirmed and publication of the standards is not expected until the first quarter of 2025.
“Nothing is certain,” Ferguson says. “There has been a lack of communication from the regulatory bodies and standard setters on what is to be expected and when. It is still unclear when the auditing standard applied will move from limited to reasonable assurance and how onerous the audits will be. It may even be the case the auditors themselves are unsure.”
Staying compliant with evolving and diverse international ESG regulations requires constant monitoring and adjustments to reporting best practices. Meanwhile, it can feel like the further companies get in their ESG strategy, the more there is to learn.
“Keeping pace is a challenge,” says Martin Hargreaves, CFO of Alpine Fire Engineers, a UK fire suppression company. “Especially for businesses at the very start of their ESG journey, like us.”
When it comes to deciphering the acronym-heavy world of climate compliance, it can be hard to understand the requirements, he adds.
The data challenge
Many CFOs simply do not have the data they need for accurate climate reporting. There’s a slew of complicated new metrics to get to grips with, from carbon accounting to water and waste in production and consumption of products, each of which will need to be audited. Finance chiefs are therefore having to start from scratch – building up a high level of control around these new data processes.
“It’s not a straightforward measurement in terms of profit and loss and cash generation, which is what a CFO is typically used to,” Hargreaves explains.
It’s difficult to view climate reporting as anything but a regulatory burden
A lack of data means finance chiefs have problems adapting to the growing demands of ESG measurements and struggle to meet expectations in identifying and quantifying climate-related risks.
Establishing robust reporting frameworks can be another obstacle when striving to ensure widespread data accuracy and integrity. Having to rely on suppliers for scope three emissions data is particularly challenging. This is the measurement of indirect emissions that occur in the value chain – and can account for up to 70% of a company’s carbon footprint.
“This is a real struggle for large global organisations with extensive supply chains because you tend to lose data granularity and quality the further down the supply chain you go,” says Oliver Inow, CFO at Pentatonic, a climate tech startup.
There’s an emerging set of technologies and tools that can help with scope three data, but measuring and reducing these emissions relies on engagement from suppliers. As Inow says: “These companies have been working with their supply chains for decades and suddenly they have to convince them to change their whole dynamic.”
CFOs need to make ‘smart moves’
Significant investments in technology, data, processes and people are needed to handle enhanced reporting requirements. And yet, finance chiefs have got to be pragmatic – they do not have unlimited budgets. As Ferguson points out: “They need to make smart moves when it comes to sustainability. There is a lot of pressure on them to make it work.”
This comes as CFOs have to contend with an increasingly complex finance agenda. New reporting requirements are continually being added, such as procurement, investor relations, digital transformation – and now sustainability.
“It is yet another plate for CFOs to spin,” Inow says. “This makes it difficult to view climate reporting as anything but a regulatory burden.”
It is yet another plate for CFOs to spin
But the benefits of becoming ready for climate assurance go far beyond mere compliance – they include greater market share, decreased costs and the creation of new business models. Companies that are further ahead in the ESG process also report seeing a greater number of benefits, including decreased costs, better service quality and reduced business risks, according to a study by KPMG.
To capitalise on this, Inow believes CFOs need to start approaching the problem with a much more strategic and commercial mindset, rather than through only a compliance lens. The companies that are sincere about sustainability, he says, have woven it into planning and performance management. In some cases, management incentives have been recalibrated to include sustainability targets.
CFOs would do well to view sustainability as a strategic imperative and an additional dimension to their existing processes and not as a separate part of the finance function, Inow advises.
The challenge for CFOs will be to move from interpreting and planning for regulatory change to operationalising and implementing it. Only then can they hope to reap the rewards.
This is the second instalment of a three-part deep dive into the CFO’s role in climate reporting. Read part one, here.
