The Hackett Group Principal John O’Mahony and Director Stephen Ferguson discuss the role finance is likely to play as companies increase their focus on environmental, social, and governance (ESG) issues, driven in part by impending European and U.S. regulatory reporting requirements around corporate environmental impact.
Welcome to The Hackett Group’s “Business Excelleration Podcast,” where week after week we hear from experts on how to avoid obstacles, manage detours and celebrate milestones on the journey to world-class performance. This episode – hosted by Gary Baker, Group Global Communications director at The Hackett Group – focuses on finance’s role in the new ESG agenda. ESG – or environmental, social and corporate governance – is a hot topic right now that is broadly about setting more socially conscious standards for corporate behavior. As legislation catches up to the cultural tide of ESG progress, companies need to be prepared to walk the talk in relation to their ESG aims and commitments. To consider how finance leaders will be impacted by this shifting climate, Gary welcomes John O’Mahony and Stephen Ferguson, both directors at The Hackett Group, as his guests for the episode.
Given everything going on in the world, Gary’s first question to Stephen is whether or not ESG is still (and should be) a priority for companies. Circumstances have changed a great deal in the past year, with the onset of a war in the Ukraine and the development of economic headwinds and instability. The turmoil of this environment has strengthened concern for ESG aims though. International standards are still in development, the agendas for the SEC and Europe are still moving forward, and pressure on companies will continue.
A lot of the efforts of the day focus on the climate aspect of ESG, but ESG deals with a much broader array of issues than the climate problems that hold the most popular attention at the moment. Less visible environmental issues like those of biodiversity, water, pollution and waste fall under the auspices of ESG work, as do social justice issues like the DEA and fair trade initiatives. It would be wise for companies to think of ESG in a broad sense rather than simply in terms of the central issues of the day because different aspects of ESG will continue to gain prominence and drive action steps. There is, in fact, the potential for a comprehensive impact from ESG efforts over the next five to 10 years.
In light of the persistent momentum of the ESG agenda, Gary asks John what advice he offers to organizations as he explains what they must do. First, he says, don’t underestimate the work that will need to go into the process of adopting ESG aims. Companies need to put in the effort to do the work well and shouldn’t see the push for ESG progress as an administrative burden. Rather, they should see it as a genuine opportunity to create a unique competitive advantage with clients, investors and stakeholders. As companies market themselves as responsible employers with an environmental tag, this can lead to good things and offer a sustainable competitive advantage.
While many companies only think about ESG efforts in terms of an initial commitment step, John further advises leaders to determine a strategy on how to deliver against this commitment. For one thing, companies must determine how they will facilitate reporting. What data sources will they use? They will need a large data model in place, and the model will have to be auditable. How will they hold their organizations to account? Doing so will necessitate a shift in how the company plans and assigns responsibility. Ultimately, delivering against aims calls for a genuinely big commitment and requires transformation for the organization overall.
The finance function has a significant role to play in this company change, and Stephen explains what this looks like beyond the tasks of counting and reporting. On its face, the change for finance is about disclosure. However, the sort of new disclosure needed is different from other disclosure issues. There is more that now needs to be taken into account, and this fact will likely have a comprehensive and invasive impact on the finance function. The control and risk management areas of finance will have to consider new strategic risks, as well as different reporting and new taxes. The financial planning and analysis areas will have to consider new scenarios, and performance management will need to get processes upgraded and must weigh new key performance indicators and incentives. The transaction areas of finance will face decisions about travel policy, carbon offset accounting and environmental taxes.
The finance function will play a major role in proving through action that the company is serious about its public commitment to ESG aims. As the company takes steps forward, it will have to determine how to take on new responsibilities within its organization and establish the role of an accountability officer to oversee ESG progress. In terms of technology, most companies already have in place the sort of comprehensive financial disclosure system that can serve as a baseline for ESG reporting. But since there are multiple data sources associated with ESG reporting and they are often reliant on non-ESG data, companies will have to explore whether they can augment or modify their existing tech to fill new needs, or whether they might need to add a complementary technology to properly manage all relevant data for ESG accountability.
- 0:53 – Welcome to this episode hosted by Gary Baker.
- 2:16 – Given everything going on in the world, is ESG still a priority, and should it be?
- 5:04 – How is the way companies are responding to nonclimate-related ESG issues changing?
- 7:15 – Advice to organizations as they pursue an ESG agenda.
- 8:33 – Companies need both an initial commitment and follow-through.
- 10:47 – Specific impacts on the finance function.
- 13:43 – Do companies need new systems or organizations to address these issues?
- 17:21 – Thanks to today’s guests.