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CFOs Take Steps to Prepare for SEC Disclosure Rules on ESG

S.J. Steinhardt
Published Date:
Jun 5, 2023


Chief financial officers are preparing for forthcoming Securities and Exchange Commission (SEC) rules on environmental, social and governance (ESG) factors by putting systems and controls in place, The Wall Street Journal reported.

Nearly 80 percent of roughly 400 global institutional investors surveyed by Ernst & Young last year said companies should make investments that address ESG issues even if doing so reduces profits in the short term.

While it would seem natural for CFOs to consolidate ESG responsibilities in their departments, consultants interviewed by the Journal said that is not practical, given the scope of requirements and breadth of corporate interests.

“What’s unique about ESG is that the stakeholders within the business are not just finance,” said Robert Michlewicz, chief executive of Visual Lease, a New Jersey-based cloud-software company that helps businesses manage and optimize their leased assets, including real estate. He recommended that companies create an internal task force that focuses on ESG requirements and reach out to leaders across the entire business who will then share data with a centralized team.

Once a task force is established, a data framework must be created, consultants and executives interviewed by the Journal said. That framework must have organizational support, said Tim Arndt, CFO of San Francisco-based Prologis, a real-estate investment trust that owns and invests in logistics facilities. That support includes working with the chief technology officer to automate the process of creating a system to capture, store and interpret data, said Suzanne Fallender, vice president for global ESG at Prologis.

CFOs must also figure out how to establish a data baseline, or decide which data to collect, Michlewicz said. Matthew Bell, Ernst & Young’s climate change and sustainability leader, also suggested looking into real-time performance tracking.

CFOs need to understand the evolving rules and regulations, Michlewicz said. Those edicts come from the SEC, the European Union’s Corporate Sustainability Reporting Directive (CSRD) and the International Sustainability Standards Board (ISSB).

In this uncertain environment, “very specific progress over perfection” has become a priority in planning, Clare Scherrer, CFO of Smiths Group, a London-based engineering company, told the Journal. “Especially when you’re planning for 2040 and 2050, no one has the ability to understand all the variables and how they’re going to come together. … We just need to start progressing down the journey, and then navigate whatever comes up in the way,” she said.

There are hundreds of ESG ratings firms that seek to provide impartial assessments of a company’s sustainability performance, using quantitative and qualitative data, according to the Journal. Therefore, the experts recommended being proactive with the raters.

ESG ratings firms don’t meet as often with the businesses they rate as credit-ratings firms do, and the ratings system isn’t standardized, so "[i]t’s far less of an interactive process,” Scherrer said.

Some CFOS interviewed by the Journal said that in order to work well with the ratings firms, companies should explain how the business works and respond proactively, as opposed to having the raters rely on publicly available information that might be hard to find. This avoids wasting work on issuing reports that aren’t relevant, a number of CFOs told the Journal.

“If you don’t own the narrative, somebody will create the narrative for you, and you might not like that narrative,” said Curtis Ravenel, a member of the secretariat of the Task Force on Climate-Related Financial Disclosures (TCFD), at a webinar hosted by Reuters. The TCFD is a body backed by the G-7 that aims to provide a standardized framework for climate-related financial reporting, according to the Journal.

“At the end of the day, if an investor is going to put $50 million to work in your company, they want to understand directly what your priorities are, what you’re doing and how you are reporting,” Scherrer said.

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