When it comes to managing ESG, CFOs must adopt a readiness mindset.
Christian Lindholm, VP of financial management, adaptive planning and analytics at Workday EMEA says now more than ever, companies need to be able to adapt quickly to new ESG updates and regulations.
Recently, the European Financial Reporting Advisory Group (EFRAG) and the SEC in the US proposed new international standards on how ESG should be measured and monitored. It is hoped that the new rules will eliminate “green-washing” by encouraging companies to take more concrete steps toward sustainability, making it easier for investors and customers to identify those companies that are serious about their environmental, social and governance responsibilities.
Workday recently expanded its ESG offering to help its clients meet these upcoming changes in ESG regulations. Christian says, “It’s a brave new world of unprecedented change for CFOs because they will have to deal with data that is not in their control. Moreover, these new regulations are coming and we don’t know what they're going to look like.”
Companies are likely to struggle to adapt to the upcoming ESG rules
Currently, there are 600 different ways to measure and report ESG data; this makes it both obscure and hard to follow. Collecting this data is also not straightforward. For instance, if a company has a very complex supply chain and partners in many countries, collecting information from every step of the supply chain and using it to make informed decisions can be difficult. Additionally, after collecting data and reporting the findings, a company must come up with mitigation strategies for any potential risks.
“One thing is certain, to handle the regulations for ESG you need a very strong and solid data foundation for collecting, reporting and ultimately mitigating risk,” says Christian.
Winners and laggards
Companies that are most likely to struggle are going to be the ones who don’t have the foundations of their reporting in order.
Christian says the CFOs who have developed the ability to be agile, and have shifted resources away from data collection and basic processing to actually enabling value adding capabilities by using things like machine learning, will seize the opportunity and come out stronger.
Workday offers two significant solutions, namely social reporting for ESG and supplier risk, as well as sustainability reporting, which are helping to enhance the portfolio of solutions currently available for promoting diversity, sustainable sourcing and compliance training.
Streamlined Workforce Reporting is a feature that will help users track progress against goals and identify areas for improvement. Customers will benefit from a consolidated dashboard that makes it easy to use.
In today’s fast changing world, the ability to adapt quickly is important, so when CFOs are embarking on digital information journeys, they must make sure they deploy solutions that can endure shifting requirements. “It’s not enough to just upgrade an old system: companies need to undergo a true transformation that can integrate with new features and tools. Companies that can combine this with an agile data hub will be better placed to deal with changing requirements and are best suited for this evolving need.”
Christian says, “It’s important for CFOs to adopt a flexible approach, because my expectation is that every year, for a number of years, there are going to be changes in the ESG regulations because we’re getting smarter on this topic and understating more complexities.”
Approaching ESG more broadly
He explains further that companies that are excelling at addressing ESG don’t think of it as standalone; they integrate ESG into their business case, in investment decision-making, and overall corporate strategy. Regulations exist to protect investors, and they also protect companies that invest responsibly.
A company’s ESG profile is a significant factor in determining which investors will provide funding, so there is a massive opportunity for companies to be more profitable by investing in ESG practices.
Also, increasingly job seekers will not consider employment with companies that don’t have an ESG strategy.
New responsibilities for CFOs
“For years we have spoken about the new role of the CFO as being strategic. I think reporting on ESG is going to be the ultimate test for CFOs: they really have to start thinking outside the box and be that value-adding force within their companies,” says Christian.
In addition to meeting external requirements, finance leaders will need to lead the way in educating the rest of the business on how to run a greener, more socially responsible company.
He concludes by saying, “My recommendation to CFOs is to get your corporate processes in order so you’re ready for the future. Technology skills and processes are definitely going to be essential, but it’s very important to think about ESG sooner rather than later because you do not want to be unprepared when the standards start affecting you.”