5 reasons why finance leaders should get involved with ESG

Five reasons why finance leaders should get involved with ESG

Organisations globally are facing similar challenges in their ESG (Environmental, Social & Governance) efforts: determining what issues to focus on; integrating ESG into the business; setting appropriate goals; organising to execute their strategy and achieve goals; and telling their ESG story amid a complex dynamic of ESG regulations, reporting frameworks, and ranking agencies.

Ultimately, the goal for any organisation is to demonstrate that the company is a good steward of all forms of capital, not just financial, but environmental and social as well. However, ESG reporting is a huge challenge for organisations, mainly because it is new, impacts seemingly every aspect of the organisation and expectations from stakeholders are high.

In addition to the obvious, such as the regulatory disclosure requirements, there are five reasons why finance should be taking ESG more seriously.

1. Creates deeper connections with customers: being able to authentically demonstrate ESG credentials and progress is an important way to engage with consumers. And, given that many consumers are changing their preferences based on these issues, it will have a direct impact on the bottom line.
2. Strengthens relationships with business partners: ESG is an increasingly key factor in procurement decisions and business partnerships, with organisations looking for partners who can demonstrate strong ESG credentials.
3. Attracts and retains talent: ESG commitments are a competitive differentiator in the labour market. Both existing and prospective employees want to work for an organisation with a purpose, so organisations that are able to communicate their commitment to sustainability will gain the advantage.
4. Access to markets and capital on favourable terms: organisations are finding that ESG is playing an increasing role in attracting capital on preferential terms. Lenders are increasingly adopting ESG screening policies and ESG is being integrated into bond analysis.
5. New opportunities for innovation and resilience: companies that integrate ESG into business strategy and planning will gain visibility into emerging opportunities and risks and be able to more effectively pivot their business models to capture new opportunities.

For some companies, the upside of ESG is reframing challenges, such as climate change, from risks into opportunities for innovation. By being upfront and disclosing progress, both positive and negative, builds trust with stakeholders (not just shareholders). And, by disclosing methodologies alongside results, companies can contribute to a communal knowledge of best practices as reporting standards and measurement practices evolve.

This chance to explore novel solutions and innovation is a key reason why organisations should consider strengthening the relationship between the ESG and finance teams. Not just because finance often owns the core planning and budgeting processes, but because they are key to identifying and pursuing future business opportunities.

Organisations that recognise how ESG, financial and operational results intersect set themselves up to create value in the long term.

Finally, the finance function’s responsibility goes far beyond just reporting, they also need to ensure that the strategy is supported by sufficient budgeting to implement the required initiatives and plans. ESG and finance teams have an opportunity to collaborate to build value and identify risks, as well as new business opportunities.

Scenario planning supports identifying and sequencing ESG initiatives

Data-driven decision-making supports companies to make confident, transparent, and consistent decisions with fact-based reasoning.

Organisations have many options available to them as part of their ESG journey but may find it difficult to compare the impact or merits of each when evaluating which option to move forward with. Being familiar with the levers that are available to the organisation is a good start, but it is not enough.

Many companies struggle with implementation and balancing the trade-offs between options. Scenario planning is a well-established method for developing strategic plans that are more flexible or robust to a range of plausible future states.

A robust plan needs to factor in various potential pathways that are critical to success and enable leaders to understand the best path available to them. Evaluating multiple factors involved in a range of future possibilities helps decision-makers better understand uncertainties and key areas of vulnerability.

Business impacts may also vary significantly depending on the following:

• the geographic location of the organisation’s value chain (both upstream and downstream).
• the organisation’s assets and nature of operations.
• the structure and dynamics of the organisation’s supply and demand markets.
• the organisation’s customers.
• the organisation’s other key stakeholders.

By assessing the feasibility and trade-offs between multiple potential paths, leaders and decision makers are better equipped to select the most appropriate pathway for them to achieve their strategic goals within ESG. A more risk-aware vision of the future also allows leaders to plan management options, innovate, collaborate, and differentiate the organisation from other companies, giving them a competitive edge.

For further information, including best practice tips, download our ESG best practice guide here