CFOs must become sustainability savvy to meet the evolving regulatory landscape

CFOs must be ready to embrace the new sustainability reporting and compliance requirements. These requirements are driven by increasing stakeholder demand for transparent and responsible business practices. The necessity for this change stems from the rising importance of environmental, social, and governance (ESG) factors, which are now a critical element in corporate reporting and disclosures.

The finance function must deepen its understanding of the implications of ESG or sustainability factors and standardize the reporting structure and framework to meet stakeholders’ expectations. The rising importance of sustainability and responsible business practices is expected to make ESG an integral part of the financial and accounting (F&A) reporting frameworks (see Exhibit 1). The increasing necessity for transparent reporting to adhere to regulatory requirements and meet stakeholder expectations will require CFOs to prioritize the ESG agenda.

Exhibit 1: ESG is one of the top five priorities for finance executives as enterprises are not just considering top- and bottom-line targets but also the ESG targets

Sample: 207 F&A executives across Global 2000 enterprises
Source: HFS Research, 2024

Many enterprises consider the sustainability agenda critical; however, ownership of this function is still not established. Currently, CFOs are involved in the overall reporting of performance metrics, including sustainability. This increased focus on sustainability will require the finance function to adapt and learn non-financial metrics as part of the traditional financial metrics to provide a holistic view of organizational performance and value creation.

In this context, during our recent CFO study, the CFO of a leading pharmaceutical company said, “Sustainability reporting has become a pressing issue in our entire value chain. It forces us to develop systems and controls to measure our operations and their impact on society and the environment. This enables us to report non-financial metrics such as greenhouse gas emissions (GHG), resources consumed, and people impacted.”

ESG reporting hinges on educating stakeholders and building awareness

With the growing emphasis on sustainability, there is still some uncertainty around the objectives and consequences. However, finance leaders must familiarize themselves with the evolving reporting standards, frameworks, and sector-specific updates to better integrate ESG factors. By raising awareness of their impact on sustainability, companies can empower themselves to educate and communicate their sustainability goals with stakeholders, potentially leading to a more sustainable and responsible business environment.

During one of our recent conversations, a divisional CFO of a financial services company stated, “When it comes to sustainability, our actions matter a lot, whether they are small or significant actions taken by different teams. We could educate our teams about sustainability practices, identify opportunities for the business to contribute to societal and environmental aspects, or even adopt sustainable practices ourselves.”

Navigating new standards: The path forward for CFOs

Regulatory bodies are gradually making it mandatory for enterprises to demonstrate how they fulfill their responsibility toward society, people, and the environment. These include:

• The Corporate Sustainability Reporting Directive (CSRD) rules have been enforced by the European Union (EU) since January 2024, impacting more than 50,000 organizations primarily from the EU region.
• The International Sustainability Standards Board (ISSB), established by the IFRS Foundation, introduced sustainability disclosure IFRS S1 (financial) and IFRS S2 (climate) in June 2023 to measure progress against the committed goals.
• The U.S. Securities and Exchange Commission (SEC) mandates material climate-related risk disclosures for public companies regarding direct emissions and those from energy purchases, known as Scope 1 and Scope 2 emissions, respectively.
• Lastly, even though compliance with Global Reporting Initiative (GRI) sustainability reporting standards is voluntary, more than 10,000 organizations in over 100 countries have adopted them.

The evolution of stricter regulations is adding to the complexity of ESG reporting. Organizational leaders must formulate strategies and guidelines to eliminate ambiguity and develop a clear understanding of ESG objectives to drive clarity and enable the flow of correct and quality data. CFOs, along with their existing focus on financial integrity and alignment with business functions, will be required to shoulder the responsibility, along with other organizational leaders, to integrate the mandates into organizational functions. Building a clear understanding of sustainability standards is crucial as it will enable CFOs to quantify the goals for financial and non-financial metrics, leading to transparent, compliant reporting.

During our recent CFO study, Felix Langenbach, CFO at luxury goods company LVMH, Japan, said: “Sustainability is a priority in the next five years for the finance function in any company. It requires new skills and building an understanding of changing regulatory environments with global nuances. Much of it has to do with the right data, stewardship, and compliance, making it a natural fit with finance.”

The Bottom Line: CFOs will play a key role in reporting sustainability metrics and KPIs that accurately meet ESG regulatory compliance.

Sustainability reporting standards are becoming structured and robust. Getting involved in the early stages of sustainability discussions and driving proactive dialogue with other company leaders will help CFOs identify and manage risks to ensure their organization complies with regulations while also creating business value. The finance function also will need to work toward building a deep understanding of the implications of ESG factors to standardize the reporting structure with transparency and trustworthy data. Additionally, they should take support of ESG-focused technology-enabled tools and third-party services, such as managed services, to comply with regulatory and reporting requirements.

CFOs must take a flexible approach as they and their organizations adapt to the evolving ESG environment by leveraging their risk management and reporting expertise.