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ESG needs business – not just environmental – focus

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Richard Spencer, ICAEW’s director of sustainability, talks to Neil Cutting about the need for finance leaders to view sustainability through a business lens.

24th Jan 2024
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A lot of finance directors and CFOs are currently looking at their environmental, social and corporate governance (ESG) reporting within their business as they work towards their transition to net zero. 

But as finance leaders explore how they’re going to reduce their scope one, two and three emissions, Richard Spencer warned businesses to not lose sight of the role it and accountants play with the broader macroeconomics of sustainability.

  • Scope 1: direct emissions from owned or controlled sources
  • Scope 2: indirect emissions from purchased electricity
  • Scope 3: all other indirect emissions from activities such as supply chains and employee commuting.

Source: ICAEW 

“A lot of people approach scope one, two and three with the mindset that business is separate from society, from people and from nature. What I mean by this is that businesses see these in a disconnected way only as sources of risk to be controlled, rather than thinking about the impacts they have on nature and people. The danger is in doing so, finance leaders may just end up tinkering at the edges and not really substantially changing anything,” said Spencer. “In other words, you don’'t get the transformation.”

The CFO and the finance function have a big role to play in embedding sustainability into management decision-making (such as risk, capital expenditure or strategy) and into reporting. This is because they own the management information and reporting processes.

The current state

According to Spencer, the risk of “tinkering at the edges” was demonstrated at COP28, the United Nations’ Climate Change Conference, in Dubai where world leaders competed in a tug of war for the right approach to tackle climate change and transition away from fossil fuels. 

Spencer explained that currently businesses focusing on the need to decarbonise may decide to focus just on their scope 1 and 2 emissions and outsource their fleet of cars or some of their production, for example, to achieve their targets. But in doing so, they haven’t really contributed to an economy-wide decarbonisation, because all they’ve done is “move the problem to somebody else”.  

“You can make your business carbon-zero, but what we also want to know is, what impact are you having on the economy as a whole? And actually, are you also damaging nature? And have you left anyone behind?” said Spencer. 

Define the desired state

It’s not true in every case, but some CFOs and senior accountants see ESG reporting as an added burden to the huge amounts of work they have to do just to get audited accounts out the door. 

But as our recent conversation with Anders Liu-Lindberg highlighted, the shift to Industry 5.0 will embolden CFOs to see the value in ESG as opposed to just seeing the burden.

Spencer, too, expects to see the viewpoint of CFOs to positively change over time. “We would like to get to the point where every chartered accountant, every member, every decision they make is informed by sustainability in the same way as ethics informs every decision,” he said. 

Defining the desired state, Spencer wants to make sure that even the wider supply chain is considered by businesses. “You could characterise this as a move from thinking about risk but also thinking about your impact,” he said. “It becomes a story of value creation and not just of financial and produced capital but social, human and natural capital too. Maintaining all the capitals will underpin continued long-term economic prosperity.”

So in the future, the CFO would know that all of their stakeholders, shareholders, society and employees expect this. It’s just something so ingrained in the business that they have to do it and they see the value of it. It’s just as valuable as earnings before interest, taxes, depreciation, and amortisation (EBITDA) and the cashflow numbers. It just makes good business sense. 

Then there is the war for talent. Recruiters are saying that they are increasingly having to provide information on sustainability to their candidates, in the same way they would inform them of their package and benefits information. So, if companies aren’t able to compete, they’re not going to win the war for talent.

In helping finance leaders achieve this future, Spencer noted that the Institute of Chartered Accountants in England and Wales (ICAEW) has done work to equip members in practice and business to have skills and competences to go from “competent” to a “leader” in sustainability, which will enable the business community to achieve the ultimate aim of ESG. 

“This is about ensuring that we have the competency to understand and report robust, trusted numbers in the sustainability space,” said Spencer. “Because as chartered accountants, that’s what we’re really good at doing and influencing business decisions on that.”

First steps

So what should a CFO or FD do within the next three months? The first step CFOs or FDs should take to reach this desired state in the future is to understand the skills required for robust data reporting.

Spencer emphasised that accountants have to move away from the old risk-based world that is “straightforward to grasp” and understand that “the world is complex”, adding that we’re “riding a wave of uncertainty that means things aren’t neat and tidy”. 

“Accountants have huge experience of being personally effective with challenging business situations. They have business acumen to drive the right business decisions – it’s in their  DNA. 

“But we have to learn a few more technical skills – just like we learn the latest international accounting standards –to understand the difference between scope one, two and three, for example,” noted Spencer.  

“We’ve got the core experiences, but the challenge for CFOs and FDs is to tailor it to the needs of the sustainability world.”

How to measure and manage the transformation

Spencer suggested that the first action a CFO should take to integrate sustainability reporting into their organisation is to build their knowledge base. There are many courses on offer. Spencer highlighted ICAEW’s specialist qualification in sustainability, however other professional bodies like the Association of Chartered Certified Accountants have similar certifications.  

Spencer pointed out that there are different maturity levels, as such ICAEW has developed a sustainability competence framework; “developer” is a beginner, next level is “competent” and the highest rank is “leader”.

He added that neither of these are considered an “expert” – they’re competent in a sense of being on the ground doing this work. “As a professional body, we are not in the business of qualifying sustainability experts. We are in the business of qualifying accountancy experts who are competent in sustainability.”

This distinction is important in managing the organisation’s transformation because as the code of ethics sets out, accountants have to be aware of when they need to call in an expert. “Part of being competent is knowing what the limits of your knowledge are,” he said. 

So from there, the CFO could work out a skills action plan for their team to take them from developer to competent and then leader

Next, he also encouraged CFOs to find their organisation’s head of sustainability, find out what they do and even question why they don’t report to you. As already mentioned, ESG reporting is going to be as important to the business as EBITDA and the cashflow numbers. 

Finally, CFOs need to understand what gets reported on this at the board. Start big, then figure out who does it internally and assess your confidence in the robustness of that reporting of information and data. 

Evaluate and improve 

In order for CFOs to keep driving continuous improvement on ESG reporting within the organisation, Spencer brought the conversation back to the importance of understanding the impact of looking at sustainability through a business lens. 

Spencer illustrated how the domino effect of climate change globally impacts all businesses, even a finance director of a fictional speciality metals business in the East Midlands. 

“The massive heat wave across Eastern Europe and Central Asia in 2010 and 2011 caused a failure of wheat crops in Ukraine, Russia and Kazakhstan. This sent the commodities market spiralling as governments started to put embargoes on wheat exports, sending the price of wheat through the ceiling. This led to the Arab Spring and a whole set of new geo-political arrangements.

“That heatwave also was a determining factor in the Syrian Civil War. Together these caused a wave of immigration and became one of the deciding influences in the Brexit vote, which has had a huge impact on our speciality metals producer in the East Midlands. 

“CFOs and FDs need to understand that these big events are now becoming ever more common, and while that initial event may not directly affect your business, the second, third or fourth risk that cascades down from it will.”  

This ultimately demands that by understanding and managing ESG in their wider business models, CFOs can help drive resilience in their business, and thus weather the storms.

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By FactChecker
24th Jan 2024 18:11

"The first step CFOs or FDs should take to reach this desired state in the future is to understand the skills required for robust data reporting" ... well that's won the hearts and minds, so what's next?

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By John Downes
25th Jan 2024 12:30

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