At Ameresco, CFO Doran Hole recently released the public company’s inaugural Environmental, Social and Corporate Governance report, reflecting the renewable energy company’s ESG practices pertaining to its business and operations, employee engagement, health and safety and corporate responsibility. Like many CFOs, Hole was called to take “a leading role in all of this,” he said.
By “all of this,” the veteran sustainable energy sector CFO is referring to the exploding need for companies to communicate their ESG risks and opportunities to investors, which have elevated ESG to a level of importance not seen in a disclosure context since the early days of Sarbanes-Oxley (SOX) compliance. On the horizon: the growing possibility that ESG metrics will need to be reported in the financial statement much like other written records of a company’s financial condition.
“The reason CFOs need to lead when it comes to ESG disclosure and reporting is those two words,” said Hole. “Who thinks more about these subjects all the time other than a CFO? The skill sets and capabilities to orchestrate proper analysis, disclosure and reporting of ESG metrics sits in the CFO office, just as it does with respect to [complying with] accounting standards.”
Hole is far from alone among CFOs girding for what is expected to become another critical task performed by the finance and accounting function, in alignment with cross-functional peers in investor relations, legal, compliance, HR, sustainability and so on. Failure to heed the demands for ESG accountability by investors—not to mention customers, partners and the public at large—can blow up into a reputational disaster sending these stakeholders fleeing.
“The demands from investors for clear and accurate ESG messaging is soaring, which explains why this has moved into the CFO office,” said Marija Kramer, managing director and head of ISS Corporate Solutions, which helps companies align their ESG programs with corporate strategy.
As president, Donald Trump deemphasized the economic impact of climate change and issued an executive order making ESG investing more difficult for 401(k) plans. President Joe Biden has taken the opposite tack. He’s directed the Labor Department to rescind the Trump order on ESG investing and in May put forth an executive order to help “tackle the climate emergency,” he said, calling it a top priority. Later that month, U.S. Securities and Exchange Commission Chair Gary Gensler said the agency plans to unveil climate-related and human capital rules as part of the SEC’s ESG disclosure rules.
Gensler didn’t provide a hard deadline for those rules, but many longtime ESG observers expect that U.S. public companies will eventually be required to provide a written record of their ESG activities and performance in their financial statements, beginning with the E of the three ESG factors.
“The first to cross over will be climate change,” said Tim Mohin, former CEO of the Global Reporting Initiative (GRI), an ESG international independent standards organization. “After 20 years, sustainability has finally crossed the Rubicon into the mainstream crop of financial disclosures. Before long, CFOs are going to be focused full-stop on financially material ESG reporting.”
A Long Time Coming
Bear in mind that ESG reporting has yet to become law and a swing to the right in Congress and the White House could derail these plans, observers contend. But as climate change continues to wreak havoc and issues like diversity and inclusion increasingly affect a company’s relationships with employees, suppliers, customers and communities, ESG reporting is inching ever closer to a fait accompli.
Certainly, the demand for publicly available information on a company’s ESG risks among institutional investors like State Street, Vanguard and BlackRock is not softening. “If you put Larry Fink’s words into the mouth of an old hippie 20 years ago, people would have laughed at him,” said Mohin, referencing the Chairman and CEO of BlackRock’s annual letter to fellow chief executives. “Today, everyone is listening.”
And they’re taking action, with disclosure of ESG data fast becoming the norm. An estimated 90 percent of companies in the S&P 500 publish corporate sustainability reports—separate from their financial filings, for the time being.
“ESG historically was a bunch of different activities that companies undertook and assembled together into some sort of ad hoc disclosure, but we’re now seeing a rapid shift in the understanding that ESG risks are business risks no different than other enterprise risks,” said Kristen Sullivan, partner and leader of Deloitte and Touche’s sustainability and KPI services practice. “This understanding is compelling a maturation in the governance structure and control environment to manage and disclose these risks.”
The challenge (there are several) is the lack of a single agreed-upon set of uniform rules for reporting ESG data in a standard format on a global basis. A related challenge is the wide range of ESG data in a portfolio context, given disparate risks like carbon dioxide emissions, human rights practices, executive compensation and employment discrimination. A June report by investor intelligence firm Georgeson tallied at least 600 products to manage ESG data provided by more than 150 firms; the largest institutional investors tend to focus on roughly 40 of these providers.
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Yet another challenge is the more than a dozen different ESG frameworks and standards for reporting ESG data. The Georgeson report stated that large investors favor five of these frameworks and standards—GRI, CDP (Carbon Disclosure Project), SASB (Sustainability Accounting Standards Board), IIRC (International Integrated Reporting Council) and TCFD (Task Force on Climate-related Financial Disclosures).
“Obviously, there’s a lot of frustration within companies on all the different ESG data providers, standards and frameworks out there; companies aren’t sure where to start,” said Hannah Orowitz, a senior managing Director on Georgeson’s corporate governance advisory team.
Clarity is the cure to confusion, which in turn requires consensus. Sullivan said momentum is building for a converged global ESG reporting standard that would help calm the chaos. She pointed to a proposal by the International Financial Reporting Standards (IFRS) Foundation to create an International Sustainability Standards Board. The influence of the IFRS, which like U.S. GAAP (Generally Accepted Accounting Principles) consists of a set of accounting rules governing what must be reported in a financial statement, is estimable.
“As we start to see a new regulatory landscape take shape, there will be more clarity on what needs to be reported, helping companies get more precise and intentional about the governance structure, systems, processes and controls to collect, analyze and report on ESG data,” Sullivan said.
As this occurs, ESG data will be treated no differently than other financial data that is reported in a company’s financial statement, said Mohin, who previously held sustainability leadership roles at Intel and Apple, worked on environmental policy at the U.S. Senate and the EPA, and is currently Chief Sustainability Officer at Persefoni, a provider of carbon footprint management software.
“We’re moving quickly toward having ESG data audited and assured,” he noted. “Each of the big four audit firms and major management consulting firms have developed robust offerings providing professional-grade audits and/or assurance of climate change disclosures. But companies internally still need to rely on someone that knows GAAP and how to put together the financial statement.”
That “someone” is the CFO, he said.
Steering Toward the Future
Hole at Ameresco fits the job description. His first task in leading Ameresco’s ESG initiative was to form an ESG steering committee, which is subdivided into three teams—one each for the E, S and G. Called the ESG Ambassadors, the committee is composed of more than two-dozen employees culled from every operating function across the U.S., Canada and the United Kingdom.
In his capacity as the executive leader of the ambassadors, the CFO provides oversight of their ESG undertakings and communicates these activities to Ameresco’s CEO George Sakellaris and the board of directors. The committee’s biggest project to date was the development of the inaugural ESG report to shareholders, which was months in the making. “As a company already very focused on the E, we needed to dive more deeply into the S and the G,” said Hole.
Hole’s strategic leadership of the ESG initiative and his formation of ESG Ambassadors corresponds with Sullivan’s ESG disclosure recommendations. “From a strategic standpoint, CFOs are best equipped to take a systematic approach in understanding ESG risks, which are really no different than other enterprise risks,” she said. “Once companies put together a cross-functional group to identify, prioritize, measure and manage ESG performance, the CFO can then allocate appropriate resources to drive credible disclosures.”
Nevertheless, it wasn’t a foregone conclusion that Hole would lead Ameresco’s ESG initiative, he said. “We knew it needed executive sponsorship, but the question was who,” he said. “We looked at what would be required from an ESG disclosure and reporting standpoint, and then thought about who is usually on other end of the line when a customer calls to ask about our ESG metrics. That pointed to me.”
The reason is the traditional purview of a CFO, whose responsibilities include ensuring the financial report is accurate, complete and verifiable, he said. “The same practices apply in the context of ESG reporting. The accounting standards and disclosures work the same way ESG standards and disclosures would work.”
Following the formation of ESG Ambassadors, the committee members evaluated the services of both ESG data providers and ESG standards providers to determine the ones most aligned with Ameresco’s business and operations. Hole subsequently reached out to these organizations to help develop the ESG disclosures in the inaugural report.
Not that any of this was easy. “The fact that a reporting and disclosure framework has yet to take shape with a consistent set of accounting standards made it difficult to describe our ESG risks and quality in the form of accurate and complete metrics,” he acknowledged. “This wasn’t U.S. GAAP versus IFRS; it was `versus’ a dozen other things.”
Hole is not alone in finding the experience challenging. “Concrete `asks’ [from investors] are coming into the finance organization to ensure the company is looking through the lens of ESG across the business,” said ISS Corporate Solutions’ Kramer.
A wide lens is needed. “From a supply chain standpoint, the CFO needs to know the environmental sustainability and labor practices of the company’s suppliers,” Kramer said. “ESG assessments of vendors and (business) customers also need to be done. Real money is at stake here, with lenders now joining investors and others in scrutinizing ESG ratings, and ESG assurance now making its way onto the audit committee agenda at board meetings. It’s tough work, but time is of the essence.”
For companies like Gryphon, the prospect of ESG reporting obligations compelled the Bitcoin mining company to get its environmental house in order before beginning operations later this year, said Rob Chang, Gryphon’s CEO and the former CFO at another Bitcoin mining company, Riot Blockchain. He estimates the company’s annual revenues will be in the $138 million range.
Chang doesn’t want Gryphon to be tarred with the same brush mucking up the brands of other Bitcoin operations. Mining virtual cryptocurrencies consumes vast amounts of energy to solve complex mathematical problems, resulting in an aggregate carbon footprint on par with countries like Argentina and Ukraine, according to a recent report. Bitcoin mining alone produces 36.95 megatons of CO2 annually, the equivalent of adding nearly 9 million cars to the road.
“Our goal is to become the first vertically integrated crypto miner with a wholly owned 100 percent renewable energy supply,” Chang said. “The way the world is working is toward a carbon-free environment; it only made sense to position Gryphon as having net-zero emissions right from the start in our ESG data.”
The company has ordered 7,200 specialized computers to begin mining, but the power consumed by the machines will be delivered entirely by a hydroelectric facility in upstate New York that previously powered an aluminum smelting operation. When the business uprooted to another region, that left an abundant source of renewable energy capacity for Gryphon to consume.
Chang declined to provide the exact location of the facility for competitive reasons. “China has kicked out a lot of crypto miners and they’re all looking for new sources of power,” he explained. “We’ll be net zero at launch—and then some. We just bought 250 carbon credits to remove 250 tons of carbon waste from the atmosphere, making us carbon negative.”
If energy sucking industries like crypto mining can green up in preparation for ESG reporting mandates, other sectors can follow suit. And not just because investors are demanding it. “We titled our first ESG report, `Doing Well by Doing Good,’” said Hole. “Aside from my personal responsibility as CFO to ensure we are forward-thinking with respect to ESG, I am personally interested in combatting climate change. It’s part of my DNA. It’s why I am here.”
Down the line, he projects that ESG reporting will become the third major function of a public company CFO, the other two being traditional financial reporting and Sarbanes-Oxley internal controls. “It will become part and parcel of our overall public reporting responsibilities and require oversight by the audit committee and the board,” he said. “It’s a big role for CFOs, but we’re used to carrying a heavy load.”