ESG & The Capex Connection:
What recent changes mean for
leaders in finance and operations
The implications of environmental, social, and governance (ESG) policy moves at a breakneck pace, and it can be challenging for capital allocators to stay up to date. That’s why, about a year ago, we hosted a webinar covering the latest trends. But a lot has changed since then.
In this blog post, we’ll cover what’s new, and what finance leaders can expect going forward regarding ESG.
ESG reporting becomes more stringent and standardized
The first generation of ESG reporting featured grandiose claims supported by dubious data. For today’s investors, talk is cheap: they’re much more discerning when it comes to “greenwashing,” and are demanding better transparency and tangible actions that align with a company’s ESG claims.
As Bloomberg states, “pressure is mounting on companies to “walk the walk” on sustainability commitments and investing, in order to stay on top of a growing trend of greenwashing accusations from environmental groups and investors.” JTC Group agrees, saying “Investment firms touting themselves as being ESG compliant…now need to provide evidence to back up their assertions. Investors and regulators have run out of patience with managers who make spurious claims about their commitment to sustainability.”
These shifting sentiments have led to a flurry of changes in ESG reporting standards. Here are a few of the most important ones:
SEC’s Climate Risk Disclosure
In March 2022, the SEC proposed new rules that would require public companies to disclose more information about their climate risks and greenhouse gas emissions.
Some of the highlights include:
- Making it easier for investors to compare ESG risks across different companies by standardizing climate-related disclosures. Today, many companies report their greenhouse gas (GHG) footprint, but there are discrepancies in how it’s reported, even within industries.
- Granting flexibility around Scope 3 emissions, which are by far the hardest to track and report, especially for smaller companies.
- Companies in the “large accelerated filer” bucket will have to begin reporting their disclosures for fiscal year 2023. That leaves limited time for companies to get their ducks in a row in regards to emissions data.
EU’s CSRD initiative
The European Union (EU) also approved the Corporate Sustainability Reporting Directive (CSRD) in 2023. The objective here is similar to the SEC’s proposal: to provide all stakeholders with standardized, objective reporting on ESG metrics.
Here’s what you need to know:
- The CSRD will replace the EU’s existing reporting standard, the Non-Financial Reporting Directive (NFRD). While the NFRD was mainly concerned with carbon emissions, the CSRD will cover categories “including pollution, water, waste, and biodiversity.”
- Beginning in 2024, qualifying companies will need to provide a CSRD report for the full fiscal year.
The trend is clear: reporting requirements are becoming more standardized and robust, and finance teams will need to work closely with CSOs to ensure they have relevant, organized data to report.
Chief Sustainability Officer (CSO) hiring continues to accelerate
As we noted in our prior blog, CSO hiring has taken off considerably as companies look for senior leadership to oversee sustainability efforts. This trend has accelerated since 2021.
Integrating sustainability into business strategy
Since they’re relatively new to the C-suite, CSO responsibilities have been murky. As Harvard Business Review states, “The CSO has thus been charged with being all things to all people, and expectations about the role are both incoherent and grandiose.” Inconsistency across industries, a lack of decision making authority, and competing priorities have stood in the way of effective CSO performance.
But, as other executives have woken up to the importance of sustainability, they’re increasingly taking on a bigger role in strategic planning. HBR goes on to say “CSOs have moved away from a role centered on messaging and instead are spearheading the true integration of material ESG…issues into corporate strategy. This pivotal change requires close collaboration with other members of the senior leadership team and active engagement with investors.”
Key to this change has been investors’ recognition that ESG issues aren’t merely a box to be checked — they’re a critical factor in financial performance. That’s why, in addition to strategic planning, CSOs are moving into financial arenas as well.
Closer collaboration with finance teams
Between changing reporting requirements and investor sustainability expectations, CFOs and CSOs find their responsibilities overlapping. As EY puts it, “Increased collaboration between CFOs and CSOs can help finance teams ensure that external ESG reporting moves toward the same rigor and credibility as financial reporting. By strategically working together, they can have the data governance, processes and advanced analytics tools to offer management teams and boards the required insights.”
HBR unequivocally states that “the CSO should be involved in strategy and capital allocation.” With the right tools at their disposal, these leaders can benefit one another. CSOs can construct robust sustainability reports with better financial know-how, and CFOs can better answer ESG-related questions from investors by leaning on the CSO’s expertise.
ESG moves beyond just environmental concerns
Since ESG was first introduced in 2006, most of the attention has been placed on environmental concerns, including carbon emissions, pollution, and sustainability. The social and governance components, in comparison, have gotten short shrift.
Since 2021, companies have improved their performance in these metrics. While environmental concerns remain at the forefront, especially in the face of pressing climate challenges, stakeholders are now demanding a more holistic approach to sustainability.
Social concerns take center stage
In the wake of global movements advocating for racial justice, gender equality, and workers’ rights, the social aspect of ESG has seen a surge in attention. As EY notes, “the S is, probably in some ways, the least understood but the most important…There are deep people, talent implications, diversity and inclusion, social issues that impact a community in which businesses reside, and their ability to respond and action those issues are increasingly important.”
What about governance?
The entrance of CSOs and changing reporting requirements mean strong governance is more important than ever, especially around your data. Forbes sums it up nicely: “In the world of ESG initiatives, notifying your shareholders that you’ve eliminated the such-and-such amount of annual waste, or that you instituted an admirable initiative to reduce your carbon footprint is the easy part — the “ES.” It’s the “G” that likely needs more of your attention.”
Ultimately, rather than thinking of each ESG component separately, it’s becoming clear that the three pillars of ESG are interconnected. Environmental initiatives often have social implications, and robust governance structures are needed to oversee both. For instance, transitioning to green energy sources can lead to job losses in traditional energy sectors, raising social concerns. Companies are now expected to address such interconnected challenges holistically.
With more changes to come, companies need a single source of truth for their Capex data
Between reporting changes and investor demand for sustainability KPIs, companies have reams of new data to get their arms around. According to the Harvard Law School Forum on Corporate Governance, “New regulations expected to be adopted in 2023 will result in exponential growth in the amount of environmental, social and governance (ESG), i.e., sustainability, data generated by reporting companies and available to investors.” More data means a greater emphasis on organizing and making use of that data, and spreadsheets just won’t cut it.
Enter intelligent solutions like Finario. Here are some of the ways our purpose-built platform can set you up for success in the age of ESG:
- Unified Capex database: Finario consolidates all capital project data into a single, cloud-based repository, ensuring that ESG-related investments are tracked seamlessly alongside other capital projects. This unified view aids in comprehensive reporting and strategic decision-making.
- Scenario analysis: With the uncertainty surrounding ESG regulations and their impact, the ability to run multiple scenarios is crucial. Finario’s platform allows companies to model different investment outcomes, helping you balance sustainability objectives with risk-adjusted ROI analysis.
- Real-time reporting: Finario offers real-time reporting capabilities, ensuring that stakeholders always have the latest data at their fingertips as ESG reporting standards evolve.
- Approval workflows: The importance of having a structured approval process cannot be overstated. Finario’s platform ensures that ESG-related capital projects undergo rigorous review and approval workflows, ensuring alignment with both financial and sustainability goals. Moreover, it helps companies to ensure that even projects which aren’t specifically being considered for regulatory reasons are being evaluated for how they fit in strategically with their ESG priorities.
At the end of the day, whether an organization is responding to existing or anticipated regulations, shareholder demands, or its own mission and priorities, the proof is in the pudding – that is, in what is actually being done. Or put another way, nothing speaks louder about where a company stands than where it puts its money. It’s why how and where a company chooses its Capex investments is so important.