Sustainable success: How finance can lead from the front on ESG

Editorial note: This article is a derivative of the Raconteur data-driven finance insights

Together with the EU taxonomy for sustainability activities, the corporate sustainability reporting directive (CSRD) aims to stamp out greenwashing and ensure that investment is channeled into enterprises that will help the bloc to become climate-neutral by 2050. It’s set to affect about 50,000 companies across the European Economic Area – a significant increase on the 11,000 covered by the current non-financial reporting directive.

To comply with the CSRD, finance teams must report on a much broader range of ESG-related investments and activities from the financial year 2024 onwards. They will also have to disclose a range of key performance indicators covering anticipated financial impacts stemming from risks and opportunities relating to climate change and other issues affecting ecosystems and their biodiversity.

The directive should bring standardization and clarify how firms should report their ESG metrics and align these with financial data. This should help investors and other stakeholders accurately assess the financial risks arising from sustainability issues. The European Commission claims that this will ultimately create a culture of openness around the environmental impact of commercial activities.

Business-wide collaboration

In effect, the finance team of any company covered by the CSRD will need to know about ESG-related decisions and activities spanning the whole organization.

Annu Nieminen is the founder and CEO of the Upright Project, an open-access platform for impact data. She says sustainability is “no longer just something" just reported on. It's also increasingly steering decision-making across companies – for instance, in investment planning, product development, marketing and business development."

This means that "it won't be enough for the finance team to coordinate well with the sustainability specialists alone," Nieminen says. "Collaboration with all the business and even the board is required."

Therefore, financial processes and systems must be reviewed and, if necessary, adapted to ensure that every potential financial impact of a firm's ESG activities – including where risks and opportunities are most likely to emerge and have the strongest effect – is identified and gauged.

"Financial models should be able to translate ESG data into monetary values at risk, potential profits, provisions, and reliable forecasts," notes Erin Lyon, head of ESG consulting at Lloyd's Register Quality Assurance.

ESG data disclosed by firms under the CSRD and the EU taxonomy for sustainability activities will undergo auditing. According to George Roffey, chief sustainability and people officer at Centrus, a financial services provider, that's likely to be challenging for many finance teams.

"There has been a lack of historical data and no consistent taxonomy for how it's collected and measured, making this the biggest challenge to accuracy," he explains. "Every reporting requirement will add more work for the people, processes, and systems that underpin appropriately governed, risk-managed, and compliant financial controls."

Where the finance function can add value

Despite such challenges, the finance team's established role as the gatekeeper of costs and resources makes it well-placed to align sustainability requirements with core commercial strategies. That's the view of Alexandra Smith, co-founder and partner at sustainability management and reporting platform FuturePlus, part of The Sustainability Group.

"The function's expertise in financial analysis, risk management, and resource allocation positions it to drive ESG decision-making and reporting, ensuring that this aligns with financial performance, profitability, and stakeholder expectations," she says.

But, as many ESG initiatives involve different and perhaps novel business models, finance teams "need to be knowledgeable about ESG-related activities to ensure that they can support the business," says Trevor Hutchings, partner at BIP Consulting.

Such knowledge – and the inevitable increase in emphasis on ESG matters under the forthcoming directive – should empower finance teams. So says Jordan Hairabedian, a research consultant in European environmental policies and decarbonization at EcoAct, an environmental consultancy.

"They will play a more integral role in shaping the sustainability strategies of companies, focusing on reducing impacts and risks, ultimately enhancing business attractiveness," he predicts.

Hairabedian adds that, since the CSRD is the world's most ambitious piece of ESG legislation to date, companies may be able to use it as a guide to help them achieve greater resilience.

"This may entail some internal reorganization, with the finance team likely to be at the centre of the changes," he says.

Nieminen believes that making the CFO mainly responsible for their firm's compliance with the directive will also convey that definitions of impact and sustainability need to be unified.

"If this goes well, there can be some real benefits," she says. One of these is that "the whole organization will gain a common view and a strategy for what we need to aim for and why".

A note from us

Make sure your finance team is ready for ESG reporting and can stay CSRD compliant with our CO2 tracking features as part of Payhawk Green. Discover how to unravel your carbon footprint, (including Scope 3), carbon accounting, and more.