ESG is an interdisciplinary field, but what is the role of the CFO?

With the implementation of EU’s Corporate Sustainability Reporting Directive (CSRD), an increasing number of companies must address ESG. And CSRD also comes with a range of tasks and responsibilities. In this article, we focus on the role of the CFO and identify the responsibilities and tasks we believe are associated with it. At the same time, we take a broader view and outline how the ESG task broadly frames the entire company. 

ESG is a topic with a broad scope – from strategic work in the boardroom to integration in the business (e.g. sales, production and procurement) and support functions (legal, finance, IT etc.). This creates tasks that span across the company in terms of compliance, improvement initiatives, data collection, validation and the establishment of new processes and workflows.

In the ’strategy and execution’ part lies the responsibility for creating the framework and objectives for ESG across the company, as well as an operationalization that ensures the business develops in the strategic direction you have chosen. Broadly speaking, the responsibilities are often distributed as follows:

• The board and management have the overall responsibility for integrating ESG considerations into the company’s strategy and decision-making processes. This includes ensuring the development of ESG objectives, guidelines and policies, as well as requirements for ongoing reporting and monitoring of progress.  
• The sustainability manager leads the organisation towards social responsibility and environmental awareness, promotes initiatives with a positive impact and creates a culture that reflects sustainable values, ensuring operational development over time in accordance with objectives. This often also includes the responsibility for preparing the double materiality analysis.
• ESG PMO develops standardised project methods and tools for prioritising and managing ESG initiatives ensuring that execution aligns with objectives and resource allocation.
• The initiative owner, who is usually found in the affected business unit, has the operational responsibility for the ongoing execution and mobilization of changes and activities according to project plans, milestones as well as resource and time frames.

As a CFO, your role in the strategy and execution work is often to participate in the double materiality analysis as a representative for banks, investors and analysts. Additionally, there is a task of providing an infrastructure that enables the work of embedding and quantitatively monitoring initiatives and resource consumption, such as ongoing overview of energy procurement. .  

When it comes to reporting and auditor’s statements, your task as CFO is largely to create a quantitative overview of the actual and historical ESG development. This is necessary to support discussions about resources, risks and opportunities, as well as to comply with external requirements from, for example, banks, customers and auditors.

The task is not new, as establishing accurate and documented data bases in accordance with internal and external requirements is a process and a direct core competency in finance. The process, in its simplest form, consists of a series of components that together create an output of the desired quality across the organisation and involved stakeholders.

ESG reporting differs on several parameters, where the respective steps in the data collection process have a number of dependencies and complexities that the CFO or ESG responsible in finance should be aware of. Especially Scope 1, 2 and 3, which in practice constitute the majority of the task, differ significantly as the information can be both extensive and challenging to obtain and calculate and therefore also difficult to ensure sufficient quality of. Additionally, there is information about employees, which may not exist or may conflict with GDPR.

Below is a list of challenges you need to address when the process for data collection, controls, calculation, documentation and reporting are to be added to the existing process, data, system and control landscape:

1. Data quality and consistency:
   Ensuring accurate and consistent data over time can be challenging. Different departments or suppliers may have different methods and standards for data collection. Additionally, staff turnover requires documented workflows, history, controls as well as roles and responsibilities.
2. Availability of data:
   For Scope 3, it is often difficult to access the necessary data from suppliers and other third parties, as they may not have the required measurement systems or levels of detail in place. It may be necessary to revisit the contractual frameworks set for subcontractors to ensure the necessary data.
3. Standardisation and methodology:
   There are many different standards and frameworks for ESG reporting. This can lead to confusion and inconsistency in how data is collected and reported. Therefore, an appropriate methodology must be chosen and adapted – including an ESG accounting manual that fits the specific situation and the chosen framework. 
4. Technological challenges:
   Integrating different data sources and systems can be technically challenging. There may be a need for investment in specific ESG IT solutions and tools to efficiently collect, analyse and report ESG data. 
5. Resource requirements:
   Collecting and analysing ESG data requires significant resources in terms of time, skills and personnel. This can be a challenge for small companies or organisations with limited resources. Often, it may be advantageous to consider interim ESG profiles on a part-time basis to cover specific and periodic needs.
6. Changes in business activities
   Changes in the company's activities, such as acquisitions, mergers or changes in production processes, can affect data collection and make it difficult to maintain consistency over time. This requires clear processes and ownership. 

As a CFO, it is crucial that you establish a clear framework with defined processes, system choices, controls and owners, so that the task can be handled effectively and with a robustness that ensures both internal and external requirements and expectations for data and documentation can be met.

CSRD has changed the fundamental form and dynamics of, among other things, the annual report, where it regulates the level of quality and assurance requirements for sustainability information. This means that your responsibility is expanded, and you should ensure that your team handles sustainability reporting in a correct and relevant manner.

Based on our experiences with ESG specific role, responsibility and task distribution, we recommend that you introduce these five initiatives in your company: 

Preparation of an overview of the process and annual wheel: 
Create clarity about who inside and outside of finance needs to be involved and to what extent, so they can be instructed and prepared for the task. It is important to have an overview of when certain data is available, as there can often be lead time due to processing time with subcontractors. 

Establishment of controls:
Since data points will be new for a period and involve different issues than is typically the case for financial data, it must be clarified to what extent and how the data should be controlled, including the tolerance level for materiality and documentation requirements in accordance with the subsequent preparation of the auditor's statement. 

Implementation of specialised ESG systems:
Conduct a thorough analysis of the need for system support across both DMA and reporting. Explore the possibilities as well as the advantages and disadvantages of using existing systems versus specialized ESG software such as Klappir for automating data collection and analysis, improving accuracy and reducing workload. The CFO is the natural initiator and system owner here.  

Training and education:
Clarify the need for specific ESG skills and experiences and draft a plan for internal training of employees, recruitment of, for example, an ESG controller or support from an external partner in the short or long term. 

Standardisation:
Implementing standardised processes and frameworks for data collection can help ensure consistency and compliance with regulatory requirement.

As CFO, you have a central role in the implementation of CSRD and the integration of ESG in the company. By creating a quantitative overview of ESG development, you can support strategic decisions, ensure compliance with external requirements and promote a sustainable business model.

To succeed in the task, it is crucial to establish clear processes, controls and ownership across the organisation so that ongoing adjustments can be seamlessly integrated.