Embracing ESG transformation in the new normal

For CFOs, ESG considerations are an issue of urgent priority not only because of compliance and regulatory obligations, but also because they are a means to drive new business opportunities and create a competitive edge.

The widespread impacts of the COVID-19 pandemic have highlighted the high degree of interconnectedness that exists between business, society, and nature, as well as the importance of mounting concerted, collective responses to world-scale problems – a recognition that is also increasingly being extended to other global challenges, such as climate change and sustainability.

In particular, with growing demands for companies to increase their level of accountability on environmental, social, and governance (ESG) issues, we are witnessing an increasing urgency to identify common ground on the ESG themes and metrics that matter to enterprise value creation, and improve the ways in which companies measure and demonstrate how they are integrating considerations relating to people, planet, and prosperity into the core of their business.

In Thailand, for example, the Securities and Exchange Commission (SEC) recently announced the consolidation of the annual registration statement (Form 56-1) and annual report (Form 56-2) into the new “Form 56-1 One Report”, in a measure that will now require listed companies to disclose information on their sustainability, corporate governance, as well as environmental and social initiatives, including their carbon footprint and human rights commitments. 

From the perspective of CFOs, however, ESG considerations are an issue of urgent priority not only because of compliance and regulatory obligations, but also because they are a means to drive new business opportunities and create a competitive edge. Indeed, companies that are more adept at integrating ESG with their corporate strategy and business outcomes stand to benefit from an enhanced ability to manage risks, deliver shareholder value, and increase their organisation’s overall resiliency.

ESG considerations for CFOs
At this juncture, it is worthwhile acknowledging that several fundamental challenges continue to pose roadblocks for CFOs pursuing an ESG agenda. Apart from the lack of consistent sustainability reporting standards, CFOs often find ESG reporting criteria to be insufficiently well-defined to capture the intricacies of their organisation’s complex relationships with environmental and social systems. 

Furthermore, at most organisations today, data collation processes and calculation methodologies for non-financial information continues to lag that of financial information, and CFOs have to grapple with the use of inconsistent and incomparable information across their organisations. 

But imperfection is not an excuse for inaction. As a start, we believe that CFOs can begin to make headway by focusing on the following three priority areas:

1. Make ESG a strategic priority
As sustainability and corporate performance are inextricably linked, CFOs have an important role to play in developing a clear and precise vision of what ESG means to the organisation, and how financial strategies will encompass ESG initiatives. This should be guided by the organisation’s overarching purpose, and cascaded down into performance models and frameworks across the enterprise. 

2. Connect performance metrics to ESG goals 
To ensure greater accountability for ESG initiatives, CFOs should consider how they can better align financial targets with ESG goals, and integrate key performance indicators (KPIs) with ESG impact. Accountability should begin from the top, and organisational ESG goals should also be reiterated and reinforced as long-term priorities for the organisation. 

3. Measure and share impact
In order to assess and communicate their progress on ESG initiatives, CFOs should develop a framework to measure the cumulative effect of their ESG efforts, ensure regular assessment of ESG impact, and commit to transparency in reporting. This requires an in-depth understanding of the definition of ESG regulatory criteria, as well as the necessary capabilities for the gathering, aggregating, and interpreting of sustainability-related data for decision-making.

The road ahead
As pressure continues to mount on organisations to deliver on ESG, CFOs must act quickly to support their management and board in driving their organisation’s agenda to improve top and bottom lines. Given their roles as the head of finance, CFOs are in a unique position to view the organisation’s full picture of sustainability – and therefore must be responsible not only for ensuring the organisation’s ESG regulatory compliance, but also communicating its sustainability story to investors, boards, and other stakeholders. 

But even as CFOs double down on running the numbers and reporting them, they would also do well to remember to focus on seeking sustainable value creation – that is, identifying new ways in which ESG initiatives can contribute to the organisation across the value creation continuum, from cost reduction to new business models, as well as marketplace differentiation.

The views and opinions expressed are those of Suphamit Techamontrikul, Lead Partner, Center of Corporate Governance, Deloitte Thailand, and do not necessarily reflect Deloitte’s view.

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