Environmental, social, and governance (ESG) reporting has emerged as a significant challenge for CFOs of large multinational companies, requiring them to navigate a complex, time-intensive, and constantly evolving regulatory environment. Alessio Lolli, Vice President of Corporate Performance at Wolters Kluwer, emphasizes that while ESG reporting is relatively new, it shares similarities with past transformative reporting requirements, such as the implementation of Sarbanes-Oxley (SOX) in the early 2000s.
CFOs are under immense pressure to get ESG reporting right. Globally, there are over 600 ESG standards, a number that continues to grow. Investors, analysts, customers, and employees increasingly demand reliable ESG data, making accurate reporting crucial. Despite the complexities, CFOs can draw valuable lessons from the SOX compliance era to manage the ESG reporting storm effectively.
The first lesson from SOX compliance is the importance of mentality. Like SOX, ESG reporting should not be viewed as a mere check-the-box exercise. SOX regulations aimed to increase transparency, ensure data accuracy, and prevent misinformation. Similarly, ESG standards seek to promote transparency and reliability in reporting. CFOs who approached SOX with a mindset focused on long-term benefits implemented new safeguards and governance practices that supported their organizations' health. Adopting a similar mindset for ESG reporting can optimize its positive business impact.
Second lesson, it's crucial to start somewhere. Early SOX compliance efforts revealed significant weaknesses and gaps in financial data, making the process seem daunting. However, finance leaders who viewed SOX as an opportunity to uncover new insights and improve processes ultimately benefitted. Today’s finance leaders should approach ESG reporting with the same perspective, seeing it as an opportunity to reduce risk and inform business strategy, rather than being overwhelmed by the challenges.
Maintaining a digital attitude is the third lesson. According to KPMG's 2024 ESG Organization Survey, 47% of businesses still handle their ESG data using spreadsheets, despite the significant risks associated with ESG reporting. The encouraging news is that, in the next three years, 37% of firms want to invest in data collecting and management tools, while 40% of enterprises want to invest in ESG-specific software. Modern finance professionals who invest in cutting-edge Corporate Performance Management (CPM) systems will be better positioned to promote effective and quick progress in ESG reporting, much as early SOX pioneers did by utilizing existing CPM technology to improve financial data collecting and reporting.
By incorporating ESG data into a CPM framework, companies may automate reporting, simplify data, lower risk, and adhere to constantly shifting regulations. It also aids in finding fresh angles for advancing environmental initiatives.
ESG reporting represents the latest "perfect storm" for CFOs, but it also offers significant opportunities. Through adopting a digital-first attitude and seeing ESG reporting as more than just a compliance exercise, CFOs can increase stakeholder trust, boost company valuation, and provide value to their enterprises.
