While 65% of financial reporting teams plan to give more support to environmental, social and governance (ESG) programs in the future, less than one in 10 companies surveyed have given finance departments the primary responsibility of overseeing the reporting and tracking of ESG programs at their firms, according to a survey of investor relations officers (IROs) from the National Investor Relations Institute and Donnelley Financial Solutions.
The top corporate departments in charge of ESG reporting and tracking are sustainability (27%), investor relations (24%) and legal (23%) followed by finance (9%). Nearly half (44%) of respondents reported that the ESG data is housed and shared via programs such as Microsoft Teams, Google Drive and Dropbox rather than on a secure platform, the survey found.
Companies are using “a bit of a baling wire and bubble gum” approach, Frank Kelley, director of ESG & Compliance Services at Chicago-based Donnelley, said in an interview. “Generally speaking, there are rigid financial controls to accounting and financial metrics and disclosure and what the report found was that those controls are really lacking in the ESG space.”
The report’s findings of loose internal controls related to ESG data come as the potential cost of getting ESG reporting wrong is rising amid increased regulatory scrutiny.
The Securities and Exchange Commission is aiming to require companies to describe on Form 10-K their governance and strategy toward climate risk and has launched a task force mandated to identify misstatements in issuers’ ESG disclosures. Meanwhile, the International Sustainability Standards Board (ISSB) is rallying regulators from the U.S., Europe, Japan and other jurisdictions around common rules for disclosures about climate risk and other ESG issues.
Those changes are helping drive a paradigm shift in how companies and their executives are approaching ESG. In recent years corporate boards have been taking a central role in the programs and increasingly input from CFOs is needed as the costly programs become a capital allocation issue, Kelley said.
“It’s shifting from a communications tool where you’re saying ‘we’re doing this great stuff,’” Kelley said. “As the SEC and the broader stakeholder groups have become more laser focused on ESG it’s become more of a disclosure document...that you need proper controls for.”
CFOs should start small when considering technology for their ESG initiatives, said Kelley, whose firm provides software and systems that can be used for ESG initiatives. Executives can begin by housing the data in a secure and economical data room and establishing two years of baseline metrics before considering more complicated platforms, he said.
Companies should “not get ahead of their skis,” Kelley said. “If they don’t have at least two years or reporting metrics, [the technology] is often wasteful and underutilized.”