The ESG Data Flywheel—CFOs Need More Than A Plan
It’s happening to CFOs more often: An investor asks about the firm’s exposure to climate risk on an earnings call. Or a board member worries after reading the news and wants to know more about the company’s diversity and inclusion status.
Customers, employees, investors, and regulators are interested in your environmental, social, and governance (ESG) performance metrics—and your cost of capital, employee retention, and customer loyalty are hanging in the balance. What’s more, the Securities and Exchange Commission (SEC) has repeatedly expressed a new heightened focus on disclosures about climate change, signaling a likely shift toward more standardized disclosures for public companies.
Managing the underlying data has typically been the job of the chief sustainability officer (CSO) or the general counsel. Now, there’s no mistaking it: the task is migrating to the CFO. And given the growing interest from stakeholders and shareholders, robust and accurate ESG reporting can both differentiate your company and broaden the role of the CFO.
When you start this initiative, it might feel like you are pulling on a tangled string that’s so unwieldy there’s no telling how long it will take to sort. That’s because today, much of the relevant information around ESG in companies is captured—if it’s captured at all—via manual processes, often in far-flung unstructured documents and spreadsheets. And most times, not in any kind of auditable environment—something that should give any publicly traded company pause.
But as investors in particular demand more insight on ESG matters, and with potential regulatory reporting on the horizon, data has to be “investor grade.” Not only that, it should be automated and actionable in a way that doesn’t subsume the accounting team, and others across the company, to the detriment of additional efforts.
For most companies, building a flywheel-like system is the answer. The mechanical concept of a flywheel is simple: the energy expended to create forward rotation in a wheel can create its own momentum that can be used to power something else later. It’s a store of energy that once set in motion can build on itself. In Jim Collins’ classic business book Good to Great, he calls ‘the flywheel effect’ in business the glorious moment where all of the hard work to create efficiency and forward motion results in momentum that powers the whole enterprise forward.
The up-front work to create your ESG ecosystem can have a similar feel to it. Yes, it will be work to get it rolling but soon you can gain momentum with strategy, implementation, and reporting, fueled by automation technology. And then those efforts can have a payoff, as the reporting and feedback drive investment and business improvement.
But where to start?
Here are three steps to take:
1) Establish standards and metrics
Begin with an ESG materiality assessment. Most companies should start with the standards laid out by the Sustainability Accounting Standards Board (SASB) for your industry, as well as guidance from the Task Force on Climate-related Financial Disclosures (TCFD). Then, tailor these guidelines for your firm. What constitutes a material disclosure that informs decision-making is subject to significant management judgment. Beyond what’s significant financially, what do your stakeholders—investors, employees, and the board, among others—think are the material issues relevant to your organization?
Once you’ve determined this, work to map out the process for gathering the information required, noting where it all resides, so you can begin to imagine how to migrate it to a new system.
As you have these conversations, “begin with the end in mind,” as they say. Someday in the future, as this data becomes public and investor-facing, you will be bringing their feedback to these same stakeholders. You might find yourself coming back to the head of HR to talk about an issue an investor raised about your diversity efforts, for example, or bringing details of your strong climate performance to your head of communications and your CEO. PwC is seeing executives use these opportunities to lay the groundwork for a solid partnership.
2) Create the right policies, processes, and controls
Once you decide what to report, a robust control structure will make all the difference. Software from providers may already be in use at your company, say, as your SOX compliance platform. Expanding to incorporate ESG with the same provider may give you a strong control component to capture your data in a system that is auditable and lives with your other financials.
One such solution: SASB and PwC have collaborated on a data framework that encompasses SASB’s 77 industry standards, creating a taxonomy to enable unstructured data and disclosures to be tagged, captured, and managed centrally. Terms related to ESG can be made machine-readable, stored, analyzed, and reported.
This taxonomy has been tested on the Workiva platform. Workiva is recognized as the market leader in SEC reporting and has powerful workflow capabilities for SOX compliance as well. The PwC alliance with Workiva provides a technology-enabled approach to ESG processes, controls, and disclosures, including integration of Workiva’s framework enablement, data, and reporting capabilities that allows a company to use multiple frameworks—or build their own—and match the data and outputs needed to tell their story.
This upfront work to create the foundation for automation is crucial; the time it takes to manually gather, analyze, and prevent error will likely be a hindrance. The goal is to tag your ESG component inputs in a way that allows you to adjust your analysis and reporting later, since standards will certainly evolve over time.
Work side by side with stakeholders as you build this system. You want to collaborate to ensure you have quality data as you set up policies and controls.
3) Establish the reporting regimen
Cloud-based reporting platforms, such as Workiva’s, can consume information from the underlying data systems and, when enabled with the end in mind, can reduce the time to generate the variety of reports required. But you’ll want to consider where that reporting appears. In a corporate sustainability report, or CSR? Posted on the company website? Included in your financial filings? Submitted to ratings agencies? Setting up a strong ESG reporting structure can differentiate your organization to all of your stakeholders.
This is where a centralized, standardized way of ESG reporting can empower the finance function. The CFO can begin to advise the broader business on how its ESG behavior is landing with investors. The Workiva platform, for example, helps bring accurate and data-driven disclosures to the market. That aids in the ever-critical analysis of ESG performance that leads investors to invest or divest. Strong ESG performance can win over and retain customers and employees by helping with recruiting and reputation in the market. Getting it right and showing continual improvement can set you apart in the press and in brand recognition.
If the idea of building out a system for each element of ESG is daunting, it’s feasible to build the strategy, implementation, and reporting mechanism for one aspect of the ESG framework. Perhaps start with something that feels more urgent—say, climate risk. Follow the process of setting a standard for metrics and reporting, creating appropriate processes and controls, and establishing reporting. Then, you can go back and do the same for material issues in other ESG areas.
Once the flywheel effect takes hold, you will be in a strong position to analyze, advise, and inform all stakeholders for the greater good—and the bottom line.