Accelerating the pace of change in corporate reporting
Closing the investor disconnect through more financially relevant ESG reporting.
There are four key areas identified in the research:
1. Accelerating the delivery of enhanced reporting
The COVID-19 pandemic has acted as a major accelerant for corporate reporting. A multi-stakeholder capitalism model that can benefit all stakeholders – investors, workers, consumers, suppliers, and communities – is seen as important to building a more prosperous and sustainable world and addressing global challenges, from climate change to inequality.
Corporate reporting is increasingly expected to include enhanced and material ESG disclosures alongside other information to show how an organization is driving value for all stakeholders. There is increased pressure on corporates to improve their ESG reporting – from equity investors, insurers, lenders, bondholders and asset managers as well as customers who all want more detail on ESG factors to assess the full impact of their decisions. Organizations and their finance leaders should move quickly to meet stakeholders’ expectations and articulate a unique narrative on how they create long-term value.
Accelerating into the era of enhanced reporting74%
of finance leaders surveyed said the transition from traditional financial reporting to an enhanced reporting model that encompasses financial and ESG reporting has accelerated.
2. Closing the ESG reporting gap
There is a gap between how useful companies believe their ESG reporting to be and the views of investors who use it in their decision-making. Investors are more likely than CFOs and finance leaders to be concerned about the usefulness and effectiveness of organizations’ ESG disclosures, including their materiality and a lack of insight into long-term value strategy.
The corporate investor disconnect on ESG reporting
Question: thinking generally about the ESG reporting your organization discloses, which of these aspects challenges its usefulness and effectiveness?
Issues that compromise usefulness and effectiveness of corporates’ ESG disclosures
Finance leaders surveyed
The disconnect between ESG reporting and mainstream financial information
The lack of focus on the material issues that really matter
The lack of information on how the company creates long-term value
The lack of real-time information
The lack of forward-looking disclosures
3. ESG reporting standards can be crucial to assessing long-term value
Finance leaders and investors agree on the importance of increasing the rigor of ESG reporting by introducing – and even mandating – standards that are common to financial reporting and assurance. However, it is investors as the users of reporting that are more bullish about the requirement for consistent and mandated standards than finance leaders are as preparers. While 74% of finance leaders surveyed said it would be helpful to mandate reporting of ESG performance measures against a set of globally consistent standards, this rises to 89% for investors.
At the 2021 United Nations Climate Change Conference (COP26), the International Financial Reporting Standards (IFRS) Foundation announced it will create a new board – the International Sustainability Standards Boards (ISSB) – which will be tasked with creating a single set of standards “to meet investors’ information needs.”1 As the article outlines, this could be a significant development in the transition toward a green economy, but there could be a number of issues for the ongoing policy agenda.
4. Defining the role of finance in ESG reporting
To address the reporting gap, CFOs and finance leaders should define what role they and their team should play in ESG reporting. In the 2020 EY Corporate Reporting survey, 63% of finance leaders surveyed said that ESG reporting was a “significant” or “very significant” part of their role and responsibilities. Today, this has increased to 70% of respondents.
There has also been a significant increase in the number of finance leaders surveyed (33%) who said that it was a “very significant” part of their role – an increase from 24% of respondents in 2020. As well as finance leaders themselves, finance teams are also playing an increasingly central role in ESG reporting, with 95% of finance leaders surveyed stating that finance teams played some sort of role.
Building an enhanced reporting future
Rethinking finance’s approach to talent, C-suite collaboration and advanced data analytics.
Drawing on the research, there are two priorities that can help build a finance function that can deliver enhanced reporting.
Priority one: the future of work, collaborative leadership, and talent
- Design the future of finance work: The COVID-19 pandemic’s acceleration of virtual working has led to major change in approaches and attitudes to work, as leaders look to build an agile, people-focused operating model. In the research, more than half (56%) of finance leaders surveyed see a future based on hybrid working models.
- Collaborate and build relationships to drive a cohesive ESG approach: A significant amount of ESG data is owned and controlled by different areas of the business rather than being under finance’s control, which can involve cooperation and collaboration between finance and other leaders and functions. This connector role – with CFOs and finance leaders bringing together different information from across the enterprise into a coherent reporting framework – will likely require CFOs and finance leaders to work closely with the owners of important pieces of ESG information.
Working with key internal ESG stakeholders48%
of finance leaders surveyed said that they have had significant interactions with their chief sustainability officer (CSO) over the past 12 months, on performance against material environmental metrics.
- Future-proof talent and skills: The research identified technology and data skills as important to the future of the finance team. When the research asked finance leaders to look ahead over the next three years and nominate the skills that would be important for their finance people to succeed in their roles, “understanding of advanced technologies” and “data analytics” emerged as the top two areas.
Priority two: advanced data analytics and forecasting
- Extract ESG insights from data through advanced analytics: The research shows that advanced analytics capability is one of the main priorities for finance leaders in terms of their technology investments over the next three years. This capability is likely to be important to enhanced reporting, because advanced analytics can help organizations to structure, synthesize, interpret and derive insights from large volumes of data, and create credible and useful ESG reporting.
- Reboot FP&A: The research identified “adapting to fast-changing business drivers, such as changing customer behaviors and modeling the implications” as the top response to “the main advantages of a more agile approach to forecasting” by finance leaders surveyed. Greater agility could be achieved by moving from traditional backward-looking analytics of data and information to more advanced approaches, including predictive and prescriptive analytics. However, the research noted that finance functions also have fundamental data issues that should be overcome, such as lack of timely data and inefficient data integration.
The way forward
Important actions to provide the trusted and enhanced reporting insights
There are three areas for CFOs and finance leaders that will likely be important as the finance function continues to evolve and provide the trusted and enhanced reporting insights their business requires:
1. Resolve the ESG reporting gap with investors
CFOs and finance leaders can play an instrumental role in helping to meet ESG requirements from investors. As a starting point, they should assess their organization’s current approach to ESG performance measurement and reporting, to better understand what is material, and how they could move the focus toward what is truly important to drive long-term value.
2. Take the lead in advancing the ESG agenda among C-suite peers
As well as making sure there is a strong connection between financial and nonfinancial reporting, and that ESG reporting is material, CFOs and finance leaders should be proactive and work with CEOs, COOs, CSOs and risk officers, and their boards to advance ESG and sustainability performance as an important strategic objective. This includes the link between ESG and long-term value, and encompasses both strategic growth and risk management.
3. Catalyze change and drive innovation across finance operating models, advanced data analytics and talent
While the COVID-19 pandemic has been a major societal challenge, it has also been a time when organizational functions – such as finance – have responded with great creativity and innovation as they found new ways to operate in a COVID-19 pandemic world. Today, there is an opportunity to build on that trend. This involves building more agile and fluid operating models; setting out a bold technology roadmap for transforming financial analytics and providing enhanced and trusted reporting, including advanced tools such as artificial intelligence (AI); and developing a future talent strategy for finance that is based on continuous and dynamic learning and which attracts and motivates the next generation of CFOs and finance leaders.
The world faces significant challenges, from building post-COVID-19 pandemic prosperity to addressing major environmental threats. Enhanced corporate reporting could play a central role in helping organizations to navigate turbulence and build a sustainable future. CFOs and finance leaders should play an important strategic role in accelerating the transformation of corporate reporting – building transparency into ESG performance and earning the trust of investors and other stakeholders.