Zeroing in on ESG performance

As businesses strive for ‘net zero’ global carbon emissions by 2050, financiers, investors and society are demanding transparency of environmental, social and governance (ESG) performance. Financial controllers and CFOs are perfectly placed to meet that demand, by enhancing financial reporting frameworks to incorporate ESG elements. Who else is better suited to identify value drivers, gauge the resilience of business models and supply chains, and determine what broader risks your company faces?

In Deloitte’s new report, we discuss how to incorporate the 4 P’s – participatory governance, planet, people, and prosperity – into a future-proof ESG strategy. Our ESG Strategy Wheel can help begin the process that leads to integrated reporting, by encouraging you to examine long-term financial and non-financial value drivers, specifically focused on carbon emission targets. The wheel aligns with leading global standards of sustainability reporting, such as World Economic Forum guidance, EU Directives and the Task Force on Climate-related Financial Disclosures framework. Here’s a taster of its four main elements:

Setting up for success

You’ll need to envision a low-carbon future, to base strategy and risk appetite on where value is likely to be created – and destroyed – down the road. Your focus should be on integrated stakeholder value and long-term timeframes. Addressing risks, and unearthing material sustainability value in your operating model will require new ways of working and integrated thinking among departments and the supply chain. (Think new partnerships and revised agreements with suppliers and customers.)To fully prepare for success, consider your staff. When accountability and responsibility are expected of employees, there tends to be a boost in commitment, morale and motivation, leading to higher performance in meeting sustainability targets. Empower your staff, and lead by example.

Establishing boundaries

The right boundaries will signify to your internal and external stakeholders how you intend to carefully integrate a new net-zero strategy. An ESG-focused policy framework helps your business operate responsibly, and also promotes long-term value creation via sound ESG practices, encouraging transparency, accountability, and positive development impacts (eg, the UN’s Sustainable Development Goals, or SDGs).

To commit to those SDGs with actionable and manageable efforts, business requirements must be operationalised and clarified based on specific targets that ensure future value. These targets cover a range that extends from a circular economy (eg, recycled-content products/materials) to diversity (eg, of race, nationality, and gender).

Risk management is obviously going to be critical, and you may be required to integrate specific sustainability risks into the same control environment and Enterprise Risk Management (ERM) processes as are used for financial information. This can be achieved by categorising risks as related to the transition to a lower-carbon economy or related to the physical impacts of climate change. You can then add the common risk categories (strategic, financial, operational, compliance), enabling you to assess, prioritise and integrate specific climate-related risks into an ERM framework.

Aligning goals

When it comes to budgets and operating targets, climate-related targets should be quantified; these targets are based on a set of recognised current metrics, which you need to translate into future targets. They should reflect historical, current and forward-looking risks and opportunities. Let the targets inform your budget, and incorporate internal carbon pricing as an incentive to drive energy efficiencies that will reduce costs, and guide capital investment decisions.

Consider, also, how you can reflect those targets (and metrics) in incentives and remuneration for directors and managers. Investors and other stakeholders will increasingly monitor sustainability performance and hold executives accountable.

Finally, embed the 4 P’s in the targets, and connect them to financial returns through performance management: metrics/key performance indicators, information collection, and the enhancement of managerial accounting and reporting.

Governance

The many stakeholders in your organisation have their own unique information (reporting) needs. Good governance of an ESG strategy will be rooted in management information and clearly dictated roles and responsibilities of businesses and functions, to avoid duplicated efforts and wasted time. This includes automation; when business processes and the reporting environment are automated, we often see immediate efficiencies through preventive control frameworks that feature (near-) real-time reporting.

Governance also involves strengthening the assurance of sustainability information. Regulatory bodies advocate a progressive approach; you’ll likely be required to certify that an adequate risk and control framework has been established, safeguarding and governing reported ESG information. Make sure that information is qualitative and quantitative, forward-looking and retrospective, and spans various time horizons.