In the wake of the SEC’s proposed new climate requirements for publicly traded companies, environmental, social and governance issues are getting new attention in the C-Suite. Companies everywhere are looking to understand their business operations’ impact not only on employees and customers, but on the communities and countries they call home.
To better understand how companies approach reporting on ESG initiatives, Chicago-based compliance firm Donnelley Financial Solutions (DFIN) partnered with Morning Consult on its first-ever ESG Pulse Report. The report surveyed 200 decision-makers across the U.S. and UK, exploring their understanding of their company’s ESG initiatives and the steps they’re taking to keep their employees, customers and investors apprised of their efforts.
DFIN’s director of business development John Truzzolino spoke with StrategicCFO360 about the survey’s top findings—and why CFOs should care.
What’s the next big focus for ESG?
For much of the last two years, businesses have focused on social matters, re-evaluating their hiring and diversity practices as the Black Lives Matter movement took the national discussion on racism to center stage. Social issues will likely continue to play an important role in business operations over the next three years, but they’ll share the spotlight with ethics and compliance issues. Survey respondents ranked these areas equally, with 77 percent saying they expect social and governance issues will very much grow in importance.
As we start to consider what the world looks like post-Covid-19, there are signs businesses are also putting more emphasis on environmental initiatives—they want to understand the impact their operations have on preserving what we’ve seen to be a delicate ecosystem. Seventy-six percent of respondents said they expect environmental issues will grow in importance, with improving energy efficiency and reducing carbon emissions as the top priorities.
Why are companies struggling to report their ESG efforts?
With ESG issues growing in importance across industries, businesses must understand how to track their efforts and use their findings to both keep their stakeholders informed and course-correct when necessary. Unfortunately, many businesses still find that process challenging, with 89 percent of respondents agreeing that ESG reporting is burdensome for their organizations.
Perhaps the greatest issue companies struggle with when reporting ESG efforts is that they don’t entirely control their own destiny. Consider a brick-and-mortar retailer introducing an initiative to reduce their carbon footprint. They can take steps such as installing energy-efficient lighting, but their footprint is also measured by the carbon emissions of the manufacturers that develop the goods on the shelf, and the logistics companies moving those goods to the store. Businesses are struggling to track these suppliers, with 44 percent of respondents noting that the quality and reliability of third-party reporting is an area of concern.
To a lesser extent, companies are also struggling with internal processes that slow down reporting. Thirty percent said internal reporting is a significant issue, while 27 percent cited board oversight and 23 percent mentioned change management as barriers to reporting.
How can companies overcome these challenges?
Most companies understand that ESG success requires internal cooperation, with 92 percent of respondents saying they agree collaboration is important to success. Human resources is leading the charge, with 59 percent of HR respondents saying they have significant collaboration with other departments on ESG-related work.
However, companies also understand their ESG efforts don’t exist in a vacuum, and if they truly want to understand how their efforts—and the efforts of their partners and suppliers—are making a difference, outside perspectives are important. Eighty-four percent of ESG decision-makers partner with third-party firms in the ESG domain, and 100 percent find those partnerships helpful in driving organizational priorities. Sixty-seven percent are leveraging these partners to create reports and data visualizations, and 66 percent are using partners to consult on strategies and initiative prioritization.
Why should the CFO care?
Many respondents say their company still views ESG reporting as an HR (26 percent) or marketing (24 percent) responsibility. While these areas can contribute to the reporting process, leaving everything to HR and marketing is an outdated approach. ESG is continually growing in importance and is being scrutinized by both investors and the government—in fact, 79 percent of respondents said they are potentially unprepared for reporting requirements to change from entities like the SEC.
The reality is that a company’s ESG initiatives are already having significant financial ramifications on its bottom line, and a lack of data surrounding ESG efforts and outcomes prevents a business from offering its customers and investors a comprehensive picture of the company’s financial health. CFOs should take the lead in the ESG reporting process and determine the best strategies for leveraging both internal collaboration and external partners to get the full picture of ESG impact.