It’s 2022, the world is recovering from the unexpected COVID-19 pandemic. In the silence of lockdowns across the world, what was different? Businesses experienced slow economic moves, confusion at the strategic levels and so many questions for management darkened the horizons. Critical to management were questions like how does the business thrive, stay relevant to the community, and create shareholder value? In the wake of adaptation to survive the pandemic, quick solutions were found; changes like hybrid work models, virtual meetings, and flexible working hours took centre stage. The challenges of COVID-19 have accelerated innovation in technology and changed the way businesses are structured and operate. Similarly, there is increased focus on how businesses are governed and their impact on the environment and society.
The focus on elements of Environmental, Social, and Governance (ESG), has dynamically changed the expectations of stakeholders and requires businesses to include the ESG agenda as a core area in formulation of their business strategies. Various stakeholders need information to understand broader impacts companies have on people, the economy, and the planet, and their wider contribution towards the United Nations Sustainable Development Goals (SDGs). Businesses that increased transparency to their stakeholders are now more viable and valuable.
The ESG agenda aims to address the non-financial risks and opportunities inherent to a business’ day-to-day activities. The attainment of profit as a purpose continues to fade because the pursuit of profit alone is not enough to unlock long term value and meet stakeholder expectations for sustainable businesses.
What does this mean for the CFO?
It is not enough for CFOs to understand what the business needs now; they must also determine what will likely drive growth in coming years, a timeframe extended by challenges related to decarbonisation and ESG issues.
Now more than ever, CFOs must apply the forward looking lens together with the commercial mind to identify levers that will help drive strategy and improve prediction capabilities. They must deepen their understanding of the business and must work with other departments in their organisations to obtain an understanding of what matters to employees, customers, suppliers, and regulators.
Across varying sectors and industries, new policies and regulations are being drafted that will require companies to disclose information of their footprint in reporting and filing. With such formal reporting, the introduction of ESG data into financial reports will make a lasting impact on how business gets done because these requirements respond to what matters to the world today.
Therefore, CFOs are increasingly expected to play a pertinent role in driving the ESG agenda including harmonizing financial and sustainability reporting. Some of the areas where CFOs ought to focus include:
Dedicate resources to support sustainability-related activities. There is need for CFOs to deliberately allocate resources to implement activities aimed at building a sustainable business. As part of the strategic plan, a detailed action plan is a must-have to act as a step-by-step guide in identifying and acquiring the needed resources for successful implementation of sustainability-related activities and these should be aligned with the business goals and objectives. This also involves identifying cost effective solutions in addressing ESG-related problems and opportunities that confront the business.
Commit to providing material information about the entity’s exposure to sustainability-related risks and opportunities. These include risks related to climate, labour practices, human rights and community relations, water, and biodiversity. Material information could include but is not limited to information about the impact of the entity’s operations on society, the environment, and events that have a low likelihood but a high potential impact on the future cash flows of the business.
Ensure sustainability-related risks and opportunities are core to the business strategy. This involves assessing the impact of the ESG risks on the business model, strategy, and cash flows of the business in the short, medium, or long term and to check the resilience of the strategy to significant sustainability related risks.
Incorporate sustainability issues into the risk management processes of the business. CFOs today need to enable users to understand how an entity’s existing and emerging sustainability-related risks are identified, assessed, managed, and mitigated and whether those processes are integrated into existing risk management processes. This supports users of sustainability-related financial disclosures in evaluating the organisation’s overall risk profile and risk management activities.
Regularly monitor and report. CFOs need to define metrics and targets to support users of sustainability related financial disclosures in assessing the entity’s progress and performance concerning sustainability issues. Key performance indicators include cross industry metrics, industry-based metrics, and other entity-specific indicators.
The future of the ESG agenda is dynamic and more developments will continue to emerge. But the core remains that implementation of strategies geared towards better governance, transforming society, limiting impact on the environment, and disclosing purpose-led information that goes beyond the financial statements will ultimately enhance the level of transparency and accountability to society and the broader stakeholder groups. Therefore, the question is no longer whether CFOs have a role to play in driving the ESG agenda, but how well they are going to respond to this role. Therefore, CFOs should step up and take the lead.
By Esther Gensi and Joseph Ssekabira, Risk Advisory, Deloitte (Uganda) Limited (jssekabira@deloitte.co.ug)
