It should come as no surprise that ESG (environmental, social and governance) issues are top of mind for Board of Directors, CEOs, CFOs, Financial Planning & Analysis Teams and other line of business and finance and accounting leaders:
- Back in May, an activist hedge fund shocked Wall Street in securing three seats on the Exxonmobil board, with its mandate to deliver a “lower-carbon future.”
- Investors are paying attention. According to Deloitte, the percentage of investors who factored ESG in determining at least a quarter of their portfolios grew from 48% in 2017 to 75% in 2019. Moreover, institutional investors are increasingly considering ESG risks and opportunities in constructing their portfolios. A 2020 global survey by Natixis found that 72% of institutional investors are implementing ESG strategies.
- According to the recruitment firm The Weinreb Group, the demand for a Chief Sustainability Officer (CSOs) in Fortune 500 companies has grown 228% over the last ten years. More CSOs were hired in 2020 than the past three years combined.
This represents important challenges and opportunities:
- Implementing ESG strategies and requirements necessitates a leadership mandate and proper infrastructure to execute. That might start with the hiring of a role such as CSO, but also include the technology backbone to properly evaluate, select and budget required capital investments.
- With investors, regulators, competitors, suppliers and the public watching every move, systematic reporting is essential for management to create transparency and accountability to measure progress toward goals and keep stakeholders informed.
- Leadership needs the data and insights needed to understand how the cost of capital can decrease with increased ESG performance.
In many ways, capital planning and capital investment (Capex) and management are at the center of these initiatives, which shines a bright light on the value of a purpose-built enterprise Capex software solution:
ESG and Reporting: Matching Talk with Evidence of Action
It’s easy to write about your commitment to ESG in your annual report. Actually reporting your ESG-related capital expenditures in public filings is one of the most concrete ways to provide “evidence” of the actions your organization is taking.
Currently, there are no set global standards for ESG reporting, but regulators such as the SEC have introduced a preliminary set of guidelines on investment product reporting and disclosure recommendations. Can guidelines for individual companies be far behind?
What can you be doing now to be both proactive and strategic? Well, since most environmental and sustainability projects often involve significant capital investment, you need a purpose built Capex system to plan and track ESG activity. The ability to appropriately identify/classify projects as either ESG-specific or ESG-related is only the first step. You’ll want to be able to publicly share details regarding projects in progress, and those that have been completed and put into service (and the positive outcomes generated).
With an integrated capex system like Finario, you can plan, prioritize and track ESG related project proposals from the idea stage, approval stage, and build stage, and conduct a post completion review of its outcome all in one tool. Along with prebuilt dashboards and reports, Finario offers ad hoc reporting to view and manage spend by entity, location, activity, or any other view a user selects. No more spreadsheets to update, no more version errors of outdated data; all information is housed and reported in one integrated application with a fully discoverable audit trail.
Strategic Evaluation: Embracing ESG Requirements Opportunistically
For many companies, investing in environmentally responsible technologies and capabilities is not just a necessity, but can provide competitive advantage and endear their brands to an increasingly watchful investor and consumer community.
To better understand how a particular Capex investment can add strategic value, having the ability to model ROI and risk at the project level can be indispensable. For example, if two projects are competing for budget, one that fits within your ESG framework, can drive efficiency, and/or appeal to ESG-focussed communities, can and should get preference from those that don’t. This objective decision making framework provided by Finario removes the politics, jockeying for project approval and squeaky wheel syndrome that hamstrings many organizations from making the right decision about where to deploy capital.
Moreover, one of the biggest issues facing enterprises that are anticipating regulations, is the issue of timing: do you make required updates/changes/additions in advance of an anticipated regulation, or wait? It’s incumbent on leaders to be able to articulate the opportunity cost of a “do-nothing” approach to looming ESG requirements vs. taking a more proactive approach, as they can be considerable. Additionally, if your ROI analysis resulting from using a tool like Finario reveals a strategic advantage to proactivity, then that can be acted upon to drive the business forward while being ESG responsible.
Approval Workflow: Ensuring that ESG Strategies & Requirements are Being Appropriately Considered
The manual, slow, and often disconnected nature of capital project planning, prioritizing and approvals is a common pain point in the Capex process. Now, with ESG initiatives and requirements to consider, another layer of approvals is required — or even mandated by the Board, CEO, CFO or Chief Sustainability Officer. In the latter case, projects with potential environmental impact or ESG commitments have to be flagged and routed through the CSO for review and approval.
A true approval workflow system is dynamic and allows different routings for different types of projects depending on activity involved and not just dollar thresholds. It also houses a standard submission template with sections for project rationale, costs, attached support documents, and P&L and ROI information. In the case of ESG projects, you can require specific environmental impact estimates and costs/savings. All this data, in a consistent format, means leadership can compare and evaluate projects on a level playing field and ensure money is allocated to the right projects at the right time.
ESG is a “Hot” Issue … and Getting Hotter
With the constant drumbeat of new reports envisaging calamity, such as the one released by the UN’s Intergovernmental Panel on Climate Change (IPCC) that characterized the situation as a “code red,” the pressures on business to do their part will only increase.
In short, ESG is here to stay.
For Boards, CEOs, CFOs and FP&A, it raises the bar on their responsibilities related to investment analysis, competitive advantage, reporting and compliance. Which only magnifies the need for digitally transforming the finance function. Having the right tools to meet that task is increasingly more important.