The current climate reporting system is notoriously complex, with many different frameworks and standards demanding the disclosure of messy, and often imprecise, data.
And there are serious repercussions for oversights and omissions, from regulatory penalties and loss of investment, to brand and reputational damage. In 2020, for instance, car manufacturer Fiat Chrysler was fined $9.5m (£7.5m) by the US Securities and Exchange Commission for failing to disclose the full scope of its internal emissions audit. Then, in 2023, the UK’s ExxonMobil Pension Plan was slapped with a £5,000 fine by The Pensions Regulator for failing to report on required climate regulations.
Businesses can also suffer long-term damage as a result of ESG-related misconduct. A 2022 study by accountancy firm Grant Thornton found that reporting missteps can cost the average FTSE 100 firm more than £1bn in lost value. And, as reporting and disclosure regulations become increasingly stringent, the consequences for nonfeasance will only become direr.
In the year ahead, new international and domestic regulations will add layers of complexity to climate reporting. Finance leaders must understand what they can do to get ahead of these changes – or, at the very least, avoid falling behind.
How to prepare for the unknown
Incoming standards such as the International Sustainability Standards Board (ISSB) and the Sustainability Reporting Standards (SRS), which are being structured in line with the EU’s Corporate Sustainability Reporting Directive regulation (CSRD), are still being finalised.
The regulatory uncertainty is leaving many firms unsure about how to prepare. While it may be tempting to delay taking action until more details are announced, Stephen Ferguson, a lead advisor in the finance executive advisory practice at management consultancy The Hackett Group, says this is a mistake. “New standards tend to build upon existing requirements so there is more clarity and comparability than CFOs might think,” he reasons.
ESG reporting is not an entirely new practice and while standards are becoming more stringent in terms of quality, detail and transparency, the underlying purpose of disclosure requirements remains unchanged.
The best way to prepare is by looking at what is already out there, Ferguson explains. “Some of the more proactive CFOs are taking the view that if they comply with the EU’s CSRD, which is the hardest standard to align with, they’ll be in a good position for any future requirements.”
Take stock of the data you already have
Preparing for the unknown can feel like a daunting task, but CFOs can ready themselves for future reporting requirements by assessing, then improving upon, the processes and systems already in place.
Read more about climate reporting
Finance leaders should ask whether they have access to all of the important data, how that data is gathered and verified and where roadblocks might exist.
It is essential that CFOs build a strong foundation of knowledge, says Janice Lingwood, consulting director at brand agency Design Bridge and Partners. “With this kind of work, the devil is in the details and investors demand clarity. There are no shortcuts in climate reporting.”
She recommends first getting accounting and financial statement disclosures in order. This means understanding which climate-related impacts need to be measured, which of the relevant accounting standards need to be applied and the impact on financial statements.
At the early stages, the most important thing is to maintain an open dialogue with colleagues and stakeholders about the organisation’s priorities, Lingwood says.
Create a finance culture that embraces sustainability
Although climate reports are typically released separately from annual financial reports, combining the two can create a more coherent story of how they are linked, she says, adding: “There’s traditionally been a disconnect between the two. CFOs need to focus on bringing it all together.”
For Vineta Bajaj, CFO of online grocery delivery service Rohlik Group, developing a culture of sustainability in the finance function is the key to effective climate reporting. Sustainability, she argues, should be integrated into existing processes, strategies and reporting methods, not left as a separate component.
“Factoring ESG considerations into your financial planning will bring your core business operations in line with your long-term sustainability objectives, while reducing the risks associated with climate change,” she explains. “It’s important for the finance team to recognise the ways in which financial choices impact environmental outcomes.”
With reporting requirements still in flux, ensuring the finance team understands how sustainability impacts finance and business strategy will make it easier to accommodate any changes.
Develop credible disclosure practices
ESG data will be discounted if it does not conform to certain standards. “Embrace openness in your climate reporting by adopting globally accepted frameworks such as the Task Force on Climate-related Financial Disclosures,” Bajaj recommends. “This will boost your credibility and help to gain investors’ trust.”
Alternatively, ask investors which disclosures or frameworks they prefer and why. Climate reporting can unveil some uncomfortable truths about the organisation’s practices and it is important that finance leaders remain transparent about these realities. All communication about climate-related risks must be honest and coherent, ideally with a plan for how those risks will be addressed.
Bajaj stresses the importance of continuous learning and flexibility in keeping up with evolving regulatory demands. “By remaining up-to-date on industry best practices, engaging with professional networks and seeking counsel from respected experts, finance directors can more effectively contribute to sustainable financial management practices,” he says.
Furthermore, using a third-party sustainability assurance service can strengthen stakeholder confidence in the organisation’s climate reporting and reduce the risk of greenwashing.
Sustainability is a team effort
Sustainability reporting should not be handled behind the scenes; it requires a company-wide effort. Employees have to understand, for instance, why they are being asked to adjust their practices or how a particular climate policy could impact company performance.
“It helps to encourage teamwork among the various financial, operational and sustainability departments,” Bajaj says. “Bringing these disparate groups together should result in a more comprehensive and holistic approach to climate reporting.”
Some larger companies have appointed a climate-specialist in the finance team, Lingwood says. “They act as the eyes and ears for the CFO when it comes to new climate-related policies or legislation that might impact the company’s revenues or operating costs.”
Other firms have established an ESG steering committee or hired a chief sustainability officer to advise the wider C-suite on their climate strategy.
Climate reporting is about more than compliance
Although navigating the reporting landscape can be challenging, there are many potential benefits, says Koen ter Mors, finance director at Mars Wrigley UK.
As climate reporting is embedded into the organisation’s normal governance practices, the distinction between sustainability strategy and business strategy begins to blur, leading to a greater appreciation of how sustainability can generate value. “Your company can enhance its reputation, build stakeholder trust and achieve superior financial returns over the long term,” he explains.
According to BDO’s 2024 ESG Risk & ROI Survey, CFOs are starting to recognise this. Whereas compliance topped last year’s list of ESG goals, it now ranks eighth, with finance leaders instead focusing on how sustainability initiatives can drive tangible business value and competitive edge.
Discussion on climate reporting is often skewed towards compliance, but it is worth remembering that business outcomes and value creation are the ultimate goal.
This is the third instalment of a three-part deep dive into the CFO’s role in climate reporting. Read part one and part two.
A timeline for climate standards
Mandatory reporting requirements are phased in for certain EU companies (to begin in January 2023).The taxonomy is a classification system designed to distinguish between what is sustainable business and what is not.
Public and private companies of a certain size are required to disclose their climate-related risks, in line with the recommendations of the Task Force on Climate-Related Financial Disclosures. The first reports are not until April 2023.
The International Sustainability Standards Board publishes its first two voluntary standards, intended to be a global baseline for climate disclosures, which enable investors to assess and compare businesses.
The UK Government announces it will develop standards for corporate sustainability disclosures in the UK, with an expected deadline of July 2024. The introduction date is later revised to Q1 2025.
The current climate reporting system is notoriously complex, with many different frameworks and standards demanding the disclosure of messy, and often imprecise, data.
And there are serious repercussions for oversights and omissions, from regulatory penalties and loss of investment, to brand and reputational damage. In 2020, for instance, car manufacturer Fiat Chrysler was fined $9.5m (£7.5m) by the US Securities and Exchange Commission for failing to disclose the full scope of its internal emissions audit. Then, in 2023, the UK's ExxonMobil Pension Plan was slapped with a £5,000 fine by The Pensions Regulator for failing to report on required climate regulations.
Businesses can also suffer long-term damage as a result of ESG-related misconduct. A 2022 study by accountancy firm Grant Thornton found that reporting missteps can cost the average FTSE 100 firm more than £1bn in lost value. And, as reporting and disclosure regulations become increasingly stringent, the consequences for nonfeasance will only become direr.
