If your leadership team has made a commitment to diversify its ranks as part of its environmental, social and governance (ESG) strategy, how do you measure how close you are to your goal?
It seems easy enough: If you have seven people on your leadership team, how many are women and underrepresented minorities? But what if you have separate leadership teams for separate functions, and some people on one leadership team are also on another. How many times do you count each of these people?
That’s the type of challenge CFOs face as they create rules for measuring and reporting their company’s ESG performance, says Wes Bricker, vice chair of PriceWaterhouseCoopers and the former top accountant of the Securities and Exchange Commission.
"What you wouldn't want is for someone to play a game with statistics and count a person three times rather than one time if it was advantageous to a metric," Bricker said.
Rise of ESG
CFOs are increasingly grappling with how to measure their company's ESG performance because of the importance investors and other stakeholders are placing on performance beyond profitability.
The trend comes against the backdrop of social and other movements, including Black Lives Matter, #MeToo and climate action, which are driving a rise in activist investors who demand corporate accountability.
"When you layer on the increase in presence of activists, it becomes a very difficult environment for CFOs," says Tricia Clifford, a consultant in the financial officers practice at management consulting firm Spencer Stuart.
As the executives who oversee their company's internal accounting processes and financial reporting, CFOs must set the rules for measuring a type of performance they've not had to measure before, in many cases.
Measuring your company's greenhouse gas footprint is a case in point.
If yours is a manufacturing company, measuring emissions might be relatively straightforward based on the amount of energy your factories, and those of your vendors, use. But if you're a software company, are there aspects of your operations responsible for releasing gasses, and if so, how do you measure that?
"Many companies have made a net zero commitment," Bricker said. "So, they have the strategy locked in. The next step is, how do you measure whether you're on course or off course?"
Measuring starts with using standards published by organizations such as the Sustainability Accounting Standards Board (SASB), the Task Force on Climate-related Financial Disclosures (TCFD), and the Big 4 accounting firms: KPMG, PwC, Ernst & Young and Deloitte.
Each of these organizations, and others, provides guidelines on how to measure and report these non-financial and other types of metrics in a way that allows for comparisons across companies. The goal is to have companies measuring and reporting their performance in a standard way.
For example, for greenhouse gasses, the Big 4 standards define which gasses to track — carbon dioxide, methane, nitrous oxide, F-gases, among others — and how to measure their release: in metric tons of carbon dioxide equivalent (tCO2e).
"Now we have a set of metrics that we can use for measurement," Bricker said.
Companies can also use tools to measure how well they're measuring, and reporting, against the standards.
Bricker has been meeting with CFOs in virtual roundtable discussions to get their feedback on a tool PwC released last month, called the ESG Pulse app, to help CFOs and others on the executive team gauge the quality of their measurements and also whether their reporting is sufficiently transparent to be informative to investors and others.
The app consolidates into a single database the ESG data the company generates by business unit and region and provides a set of metrics, categorized by industry, for measuring performance and benchmarking it against others in the same industry.
There are four possible outcomes for how well a company is measuring and reporting its performance:
- High quality measurements with high transparency reporting
- High quality measurements with low transparency reporting
- Low quality measurements with high transparency reporting
- Low quality measurements with low transparency reporting
"Having a high degree of confidence of the quality and of the transparency is the best position to be in," he said.
Each of the other outcomes presents its own challenges. If you have high quality measurements but low transparency in your reporting, you're failing to let investors and others know how well you're doing against your goals. Or, if your measurement quality is poor while your transparency is high, you're shining a spotlight on your performance weaknesses.
However well you're doing on measuring or reporting, having an early indication of where you are helps executive team members identify steps to do better.
"It helps companies take control of a very important conversation," he said.
With organizations like the Business Roundtable supporting the focus on ESG standards, CFOs can expect to feel increasing pressure on getting the measurement and reporting of their company's performance right. More than in years past, standards and tools can help.