How can CFOs be confident in value creation without confidence in reporting?

Integrating sustainability as a driver of long-term value

Overall, fewer than half of finance leaders surveyed (47%) think it’s "extremely likely” that their organization will deliver against their major sustainability priorities and meet stated targets, such as achieving net zero on time.

There could be a number of reasons why finance leaders have their doubts. They may feel, for example, that the commitments were too ambitious in the first place.

“As CFOs become more involved in sustainability reporting, their awareness of the immaturity of the reporting mechanisms used in the nonfinancial area has grown,” suggests Dr. Matthew Bell, EY Global Climate Change and Sustainability Services Leader. “While it’s relatively easy for an organization to put in place an ambitious sustainability target, once finance leaders start drilling into the data – and they see how much needs to be done to bridge to a target — their conservative tendency perhaps starts to kick in, with a healthy skepticism about the organization’s ability to hit those commitments.”

This finding also raises the question of whether companies are prioritizing short-term earnings performance over longer-term commitments. More than one-quarter of Group CFOs surveyed (29%) said that capital investment into sustainability has decreased over the past 12 months. The EY Global DNA of the CFO Survey showed that sustainability programs are rated the most important long-term investment priority for CFOs, but are also the most likely initiative to be cut or paused to hit short-term earnings targets.

This tendency could undermine longer-term confidence in a company’s ability to execute and deliver on its guidance and commitments. Investors already echo that uncertainty: Only 53% of respondents think it’s very likely that companies in their primary markets will achieve their targets.

Commenting on this imbalance between short- and long-term objectives, 80% of investors surveyed agreed that “executive teams are too quick to take steps designed to drive short-term profit or meet quarterly earnings guidance.”

Investors expect CFOs to act as a counterpoint to this tendency, using their credibility, influence and existing relationships to encourage the CEO and executive team to take the long-term view. However, the EY Global DNA of the CFO Survey found that not all finance leaders are willing to voice their opinions all of the time. Fewer than one-third of respondents (32%) “always” speak up when their opinion differs from the consensus, and only 30% of respondents always strongly challenge members of the executive team when they disagree on an important issue.

If the CFO is to influence the senior team, they should produce a strong, evidence-based analysis of the trade-offs from different capital allocation decisions. However, when we looked at those survey respondents who were in a CFO role (group, divisional and regional CFOs), that segment was particularly concerned that they “lack data and metrics that allow the CFO to fulfill their important role in capital allocation to sustainability priorities.”

This reflects the challenges of measuring and assessing the value of sustainability initiatives. For example, a climate investment might provide financial value but also planetary and customer value. Timeframes for value creation also vary: A climate investment may only provide a financial return over the medium to long term. Delivering financial value may require technology to advance sufficiently to make scaling viable.

The key is creating a balanced portfolio. Initiatives that generate financial value can subsidize those that have a positive planetary impact but uncertain financial return. The 2022 EY Sustainable Value Study found that, on average, more than one-third of climate initiatives (37%) will have a positive financial return over their lifetime, creating a basis for supporting those that provide planetary, customer or other forms of value.

Recommendations

Finance leaders should make their capital allocation process as transparent as possible, both internally and externally. Internally, they should help business unit leaders understand which investment areas contribute to the long-term strategy and are most likely to receive capital. Externally, CFOs should communicate to investors the framework for long-term capital decisions. A united approach from leadership and the board reinforces the importance of long-term focus. This collaborative dynamic can be crucial, as explored in: How can boards bridge the gap between sustainability ambition and action?, which highlights the collective role in embedding sustainable practices into corporate strategy.

Investors should expect that they can rely on the sustainability information in corporate reporting. However, the research found that even preparers themselves have doubts. More than half of finance leaders surveyed (55%) feel sustainability reporting in their industry risks being perceived as including elements of greenwashing.

These doubts may reflect the relative immaturity of sustainability reporting compared with the sophisticated methods used in financial reporting. Companies have drawn on multiple voluntary sustainability reporting frameworks and metrics are still evolving. While companies may set targets and report progress in good faith, finance leaders clearly have doubts that disclosures are backed up by the necessary due diligence, data and processes.

“My experience is that finance leaders are primarily concerned about the lack of rigorous, data-enabled reporting,’’ says Dr. Velislava Ivanova, EY Global Strategy and Markets Leader, Climate Change and Sustainability Services. “In the past, sustainability professionals were producing reports with a wide range of stakeholders in mind, from employees to customers, which were often narrative based. But finance comes at it from a different angle: Their background is generally in financial and regulatory reporting, where you report against mandatory standards and defined metrics. Finance leaders are highlighting the difficulty of producing credible reporting disclosures due to the highly complex nature of sustainability topics and the overwhelming amount of reliable data required for the new mandatory sustainability reporting.”

Building confidence in sustainability reporting is likely to require an integrated response, including governance, behaviors, regulations and assurance. Advances in AI could also play a role.

Successfully navigating nonfinancial reporting regulations, standards and assurance

Nonfinancial reporting regulations and standards are an opportunity to build confidence in sustainability disclosures. However, there is a risk if companies are focused first and foremost on the cost and complexity of responding to new reporting regulations and standards: 55% of finance leaders surveyed said costs would be significant, and 44% said it would be a highly complex exercise. If finance leaders are primarily concerned about rising costs and the challenges of the task, they could turn to a “low-bar” approach to try to reduce their exposure.

A low-bar approach focuses on compliance. While this covers the essential requirement of achieving compliance with a mandatory rule, it will likely fail to establish a strong link between sustainability and value creation. Focusing on the cost implications of sustainability reporting regulations is a tacit admission that the company does not consider sustainability to be important to its long-term prosperity and, therefore, it is unlikely to integrate it into corporate strategy and the enterprise risk management system

Building stakeholder confidence in nonfinancial information

Almost three-quarters of investors surveyed (74%) say external assurance by an independent third-party would boost their confidence in the credibility and accuracy of a company's nonfinancial reporting.

However, there are question marks over whether companies’ nonfinancial data is ready to undergo the scrutiny of independent third-party assessment. Nearly all finance leaders surveyed (96%) note some problems with the nonfinancial data they receive for reporting.

Moves to mandatory sustainability reporting regimes — as well as the growing importance of nonfinancial assessment — are fueling interest in an ESG controller role dedicated to sustainability. More than one-third of finance leaders surveyed (36%) already have someone in place, and 58% of respondents are planning to establish and fill this role (that 58% is made up of 26% who plan to establish the role within the next 12 months and 32% who are looking more long term).

Recommendations

• To drive a transformative approach to nonfinancial reporting, finance leaders should shift mindsets. They can start by aligning reporting strategies with the company’s sustainability goals and other transformation initiatives. Engaging with the CEO and leaders such as the chief strategy officer can help elevate the discussion on sustainability reporting, moving beyond compliance and integrating it into broader strategic goals. Close collaboration with sustainability officers is key.
• For companies in the early stages of nonfinancial assurance, an assurance readiness exercise can uncover gaps in data, controls and processes by putting select sustainability disclosures through a limited assurance process. This prepares companies for future mandatory assurance regimes.
• CFOs should seek ESG controllers with a broad skill set. Beyond finance skills, the ESG controller should have strong data and technology expertise and be adept at collaboration. Interpersonal skills are crucial for working across departments, including sustainability, legal and supply chain. Appointing someone with proven business partnering skills and a strong network can provide a head start.

There are two imperatives for finance leaders and their supporting finance functions. First, they should understand the requirements of investors and create a compelling and achievable value creation narrative. Second, they should instill confidence in investors around their sustainability reporting.

As CFOs integrate those two imperatives into their finance transformation plans, AI could play an important role. It can transform the efficiency of core finance processes, strengthen the effectiveness of data analytics and generate insights that enable value creation. The EY Global DNA of the Financial Controller research highlighted that controllers are already enthusiastic users of AI tools, with 65% using generative AI (GenAI) frequently.

While “traditional AI” can analyze numeric, tabular and structured information, for example, and make predictions that are integrated into a business intelligence report, GenAI can go beyond this. It can work with unstructured data such as charts, video and code. It has the advantage of using natural language and applying context based on prompts to offer predictions. In the future, companies could increasingly use these tools in tandem.

GenAI can also drive significant productivity improvements in the finance team. It can summarize and compare large amounts of text and information for inconsistencies and assess a company’s relative position in its industry.

There are several success factors for finance leaders to consider as they explore the potential of AI:

1. Build on strong data and technology foundations

Any AI innovation in finance should be built on solid technology and data foundations. However, there are weaknesses in both areas:

• Data: Improving the quality of the data used to train complex AI systems can accelerate their advancement. However, as previously mentioned, 96% of finance leaders report some kind of problem with the integrity of the nonfinancial data they receive. A failure to establish that integrity could compromise the ability of AI to process large amounts of data and generate strategic insight. Finance leaders should examine how GenAI can be used to fix data problems so that data issues are not used as an unnecessary delaying tactic by teams. There are GenAI tools that can examine data sets and help identify the problem area. This can significantly accelerate the speed at which problems can be identified and fixed.
• Technology: Developers should build AI around agile, high-grade technology. However, only 32% of finance leaders surveyed say they have this in place, and 39% of finance leaders surveyed are contending with limited IT resources. 
  

2. Take a responsible, principles-based and collaborative approach to build trust in AI

While the true impact of GenAI on the finance function is still emerging, the technology offers exciting potential to transform data analytics capability, from generating financial forecasts to real-time business intelligence.

Putting in place a framework for the responsible use of AI will likely be essential. Guided by the US National Institute of Standards and Technology Risk Management framework and professional experience, the EY organization has developed basic principles to help build confidence and trust in AI.

These principles cover a range of areas, from accountancy to fairness. When it comes to “fairness,” for example, the framework suggests that an AI system should be designed with the requirements of all relevant stakeholders in mind, so that outcomes aren’t skewed against any part of the population it’s intended to serve. The broader impact of this technology should fully align with the organizational mission and ethics.¹

3. Navigate emerging AI regulations while managing cost and compliance factors

Finance leaders are particularly concerned about keeping costs down, with more than one-third of finance leaders surveyed (39%) seeing this area as “very challenging” when it comes to developing AI-enabled solutions for finance analytics and reporting.

Part of the cost concern could be related to another area: More than one-third of finance leaders surveyed (36%) feel it’s very challenging to make sure that any finance AI tools are compliant with relevant regulations. Finance leaders are perhaps concerned that the work involved in managing risks (such as the security of sensitive finance data) and building in compliance could increase costs significantly for AI’s use in the finance domain.

While jurisdictions are taking different approaches to AI, there are common principles, such as focusing on perceived risks to core values, security and transparency. By acquiring an understanding of the overall principles, finance leaders can anticipate emerging compliance requirements.

4. Take a human-centered approach to empower finance teams for an AI-driven future

Taking a human-centered approach to finance transformation and culture change could be key to realizing the potential of AI. However, only 26% of finance leaders surveyed feel that leaders routinely seek input from younger members of the team when driving transformation.

Interestingly, the research found that those who are already using AI in finance analytics, and are enthusiastic about its use in reporting, are further ahead in building a human-centric, innovative culture:

• We looked at the 26% of overall respondents who seek younger team members’ insights and examined how responses varied depending on their views on AI.
• That analysis found that those who are using AI in analytics and are enthusiastic about its application in reporting are more likely to involve younger generations: 41% of those AI “champions” routinely seek input from younger members of the team.
• However, this drops to 20% for those who have low AI analytics maturity and are hesitant about its use in reporting.

This suggests that companies that encourage innovation, openness to change, intellectual curiosity and a willingness to confront assumptions could be better placed to keep pace with the fast-changing AI agenda. For CFOs, thinking about the link between AI deployment and culture change can be important.

Recommendations

• To build the technology and data foundations required to support AI innovation, finance leaders should focus on the supply and governance of financial and nonfinancial data, and the types of technology they require to harvest, integrate and consume nonfinancial data, from cloud to specific data analytics tools. Once a suitable structure is in place, companies can build a vision of how AI can transform insight generation.
• A principles-based approach to AI could build trust. While AI regulations differ by jurisdiction, core principles such as security and transparency remain universal. By staying ahead of these principles, finance leaders can prepare for future compliance requirements, helping their companies avoid unnecessary costs by embedding protections early in AI development.

Investors require a clearer understanding of how companies are driving long-term value in today’s rapidly changing world. CFOs can address this requirement by taking action in three areas to bridge the reporting confidence gap and leverage emerging technologies. This can help to transform the finance analytics that underpin effective decision-making and reporting.

1. Avoid a narrow focus when addressing greenwashing risk and finance’s role in improving nonfinancial data

Finance can bring significant experience and implement controls and policies to improve the quality of sustainability disclosures. But finance’s role should not be confined to instilling discipline. Finance leaders should define what constitutes greenwashing in their industry, based on the regulatory environment and industry leading practice and adapt that definition as the regulatory agenda evolves.

Overall, finance’s wider role is to create sustainability reporting that clearly articulates the organization’s strategy and consistently reports the progress it is making. In this way, organizations avoid falling into the common traps of greenwashing. By integrating robust sustainability data into decision-making, finance leaders can drive better outcomes and capital allocation decisions.

2. Build a responsive picture of the risks and ethical challenges of AI

CFOs should help to provide a comprehensive understanding of the opportunity (value) and risk of specific AI use cases in finance. As these tools evolve, new ethical implications are likely to emerge. Encouraging debate in the finance team about the opportunity and potential ethical impacts of AI can foster a flexible, contributive approach. This positions AI ethics as an ongoing journey, rather than a destination.

This active role in AI risk management reflects the CFO’s overall importance to technology innovation. Forward-thinking finance leaders are not only integrating AI into their finance transformation plans and the future of reporting but also exploring new opportunities to transform decision-making and insight generation at the enterprise level.

3. Embrace the challenges of finance culture change with a tailored approach.

There is an argument that finance functions could find culture change difficult. There is often significant legacy experience in finance; teams refine processes over many years, and there is an understandable aversion to risk. Finance leaders should focus on interactive communication, so that their teams feel part of the culture change process and secure in voicing their misgivings. 

Summary

The 2024 EY Global Corporate Reporting Survey found that investors are not being given the clarity they seek on companies’ plans for long-term value creation. CFOs share their doubts about the credibility of nonfinancial reporting and commitments to sustainability targets.

CFOs should build deeper engagement with investors, embed sustainability risks and opportunities into financial strategy, and utilize advances in reporting regulations and assurance to take an enhanced approach to nonfinancial reporting. This could give investors confidence in a company’s prospects for creating long-term value and cement the finance leader’s position as a champion of future value creation.