Corporate ESG Requirements Are About to Ramp Up. Here’s How CFOs Can Prepare.

Chief financial officers are playing a bigger role in helping companies navigate ESG issues.
Chief financial officers are playing a bigger role in helping companies navigate ESG issues.


  • Finance chiefs should focus on three areas when building climate-reporting systems—collecting data, tracking regulation and coordinating with ESG raters

Companies are increasingly tasking finance chiefs with developing systems to address environmental, social and governance issues, in the face of coming federal climate-disclosure rules and pressure from shareholders and employees.

Chief financial officers need to create systems for collecting data to meet soon-to-be-unveiled new requirements from the Securities and Exchange Commission, while managing compliance costs.

“There’s been a major sentiment shift in what people expect organizations to do," said Matthew Bell, Ernst & Young’s climate change and sustainability leader. Nearly 80% of roughly 400 global institutional investors surveyed by EY last year said companies should make investments that address ESG issues even if doing so reduces profits in the short term.

As a result, he said, “We’ve seen an increasing role that the CFOs are playing," particularly over the past 18 months.

While it might sound tempting to centralize ESG responsibilities in the finance department, which already deals with data and reporting, consultants said that isn’t practical given the scope of requirements and breadth of corporate interests.

“What’s unique about ESG is that the stakeholders within the business are not just finance," said Robert Michlewicz, chief executive of Visual Lease, a New Jersey-based cloud-software maker that helps businesses manage and optimize their leased assets, including real estate.

Instead, he said, companies should create an internal task force that focuses on ESG requirements. Such a task force needs to reach out to leaders across the entire business who will then share data with a centralized team, said Michlewicz, whose company recently established a climate-reporting consulting service for clients.

To help finance chiefs navigate the evolving regulatory landscape, CFO Journal spoke to consultants and executives for tips on managing the coming tide of ESG-related regulations.

Create a data framework

Once a task force is established, having organizational support for data governance is key, said Tim Arndt, chief financial officer of San Francisco-based Prologis, a real-estate investment trust that owns and invests in logistics facilities. This includes creating a system to capture, store and interpret data, as well as working with the chief technology officer to automate the process, said Suzanne Fallender, vice president for global ESG at Prologis.

One of the biggest challenges for many CFOs is figuring out how to establish a data baseline, or decide which data to collect, Michlewicz said. ESG disclosures are qualitative and can be vague, leading many companies to make bold claims to be net zero by a certain date, he said. But making sure data is accurate and can be tracked is important for figuring out forward-looking calculations.

A common mistake is to focus on getting caught up on something the company had failed to track in the past, opting for a quick fix. However, investing in the right technology for long-term reporting needs should be a priority, Michlewicz said.

EY’s Bell suggested looking into real-time performance tracking. “The truth is, it’s really tough for organizations right now to be able to track a lot of these metrics in real time," he said, though he added that as more-comprehensive disclosure systems are put in place, organizations can make real-time decisions rather than seeing it as a compliance burden.

Understand evolving regulations

Staying on top of the ever-changing rules and regulations is a must, Michlewicz said. The SEC, the European Union’s Corporate Sustainability Reporting Directive, or CSRD, and the International Sustainability Standards Board, or ISSB, are the main sources to watch, he said.

The coming SEC climate-disclosure rules, originally proposed by the agency in March 2022, would require public companies to report climate-related risks and emission data—including the so-called Scope 3 emissions that come from a company’s supply chain.

The rules would require SEC-registered domestic or foreign companies to include a raft of climate data in reports such as 10-K and annual reports. Any climate-related costs that are 1% or more of each line item total—such as revenue, inventories or intangible assets—would have to be reported.

The EU leads the pack in green regulation, including the CSRD, which will require even non-EU companies doing business in the bloc to disclose everything from greenhouse-gas emissions to gender pay differences. In the U.S., ESG regulations vary by state, with a recent Supreme Court ruling allowing, at least for now, states to pursue cases against oil companies.

Given the nature of the changing regulations and uncertainties, “very specific progress over perfection" has become a priority in planning, said Clare Scherrer, CFO of Smiths Group, a London-based engineering company. “Especially when you’re planning for 2040 and 2050, no one has the ability to understand all the variables and how they’re going to come together.…We just need to start progressing down the journey, and then navigate whatever comes up in the way," she said.

Be proactive with ESG raters

There are hundreds of ESG ratings firms that strive to provide fair and impartial assessments of a company’s sustainability performance, using quantitative and qualitative data. This is often based on questionnaires and publicly available information, but the process has been a source of frustration for many, said Emily Kreps, head of ESG Americas at Deutsche Bank, who helps advise the bank’s clients on their ESG strategies.

ESG ratings systems, such as those provided by MSCI and Moody’s, have little correlation with credit-rating systems, causing a lot of confusion, she said. “Everyone’s got their own black-box methodology, whereas credit-rating is much more black and white and mathematical," Kreps said.

According to a 2023 Rate the Raters survey conducted by the SustainAbility Institute at global sustainability consulting firm ERM, many investment teams are now required by their companies to incorporate ESG ratings and data into their investment decisions, yet more than half of businesses and investors said they have only moderate trust that ESG ratings accurately reflect ESG performance. Meanwhile, more than half of the companies surveyed said they engage with at least six ESG ratings providers, such as CDP, formerly known as the Carbon Disclosure Project, Institutional Shareholder Services’ ESG rating arm, Morningstar’s Sustainalytics, MSCI ESG, S&P Global ESG and EcoVadis.

Unlike credit-ratings firms, which typically hold annual meetings with companies, ESG ratings firms don’t meet as often with the businesses they rate and the ratings system isn’t standardized. “It’s far less of an interactive process," Smith Group’s Scherrer said.

What has worked well, according to finance chiefs, is to take the time to work with ratings firms, explain how your business works and respond proactively rather than leaving the raters to rely on publicly available information that might be hard to find. This prevents wasted effort on issuing reports that aren’t relevant, a number of CFOs said.

“If you don’t own the narrative, somebody will create the narrative for you, and you might not like that narrative," said Curtis Ravenel, a member of the secretariat of the Task Force on Climate-Related Financial Disclosures, speaking in a recent webinar hosted by Reuters. The TCFD is a body backed by the G-7 that seeks to provide a standardized framework for climate-related financial reporting.

“At the end of the day," Scherrer said, “if an investor is going to put $50 million to work in your company, they want to understand directly what your priorities are, what you’re doing and how you are reporting."

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