The business implications of environmental, social and governance (ESG) emerging mandates have been top of mind for financial executives in the wake of the new reporting and disclosure requirements proposed in May by the Securities and Exchange Commission (SEC).
“ESG requirements are changing the landscape of corporate America,” said Lisa Edwards, president and chief operating officer of Diligent, a governance, risk and compliance (GRC) SaaS company, in an interview. “For CFOs, financial risks and mitigating those risks are not political issues,” she said. Edwards spoke on the topic of ESG this week at Diligent’s Modern Governance Summit in Austin, Tex.
Many of the requirements that the SEC is proposing already exist in other parts of the world, said Edwards, and it is the “lack of a standard that has created challenges for CFOs in the ESG space.” In terms of how ESG reporting requirements will change the role of the CFO, Edwards said that she agrees with Larry Fink, CEO of asset manager Blackrock, who has said that climate risk is financial risk and asserted that CFOs need to be on the right side of potential financial risks.
CFOs should treat ESG reporting the same way that they do other types of financial reporting, she said. “Really ESG should be a topic of conversation that is very, very top of mind for every CFO,” she said. Setting a standard for ESG reporting has been a hot topic for months now, with the International Sustainability Standards Board rallying regulators from the U.S., Europe, Japan, and other jurisdictions around common-accepted rules for ESG issues.
Basic ESG fluency
“Regulatory pressure has turned out to be a good thing,” said Edwards, noting that the lack of a standard was actually causing more challenges for CFOs regarding ESG reporting.
In terms of finding success amidst new reporting requirements, Edwards stressed the importance of CFOs being well versed about these issues. “They need to get smart,” she said.
“Almost every [CFO at a publicly traded company] will have reviewed the prepared SEC ruling that came out in the spring,” said Edwards. “So thinking through ESG reporting, specifically climate reporting in the same way that they think through financial reporting and signing off on those documents as effectively audited statements is really where we're going with it.”
In order to prepare for this, Edwards said, CFOs need to make sure that they have a basic understanding of the new regulatory environment. CFOs should look to gain a “basic level of fluency in the different frameworks and the different sort of measurements and things like that, so that they can be conversant in it in the same way that they can speak to the financials,” she said.