What are the biggest challenges for finance leaders embracing ESG and sustainability?

Today’s CFO has responsibilities far beyond the traditional remit of finance and accounting. Increasingly finance leaders are expected to act as strategic leaders and advisors to their organisations on non-financial business areas and emerging priorities, such as ESG and sustainability. 

CFOs are expected to oversee and understand the implications of ESG, but this demands a shift in approach, a move away from traditional accounting to a position of accountability. It's a confusing landscape to navigate, with many unsure of what to tackle first. While there is widespread recognition of the importance of prioritising ESG, to do this CFOs need to understand the impact. Who, then, is driving the ESG and sustainability strategy?

We invited CFOs, FDs and CEOs from a cross section of businesses and sectors to a roundtable with the ACCA to share their thoughts on the biggest challenges to embracing ESG and sustainability. 

What are the key issues and concerns? 

► Implementing sustainability
Lack of clarity around what sustainability really entails, and a pressing need for more education on the practicalities and complexities, such as the differences between Scope 1, 2 and 3 – as an example. 

► Inconsistent ESG standards and varying legislation
Various standards open to interpretation make steering through the regulatory maze a daunting task. With every country adopting a different approach to ESG, where can finance leaders turn to for guidance?

This issue has been resolved since the roundtable dinner. On 2 May the IFRS Foundation and EFRAG published  interoperability guidance to illustrate the high level of alignment achieved between the International Sustainability Standard Board’s (ISSB) standards and the European Sustainability Reporting Standards (ESRS).
 
► Difficulty in managing data and setting SBTi targets
A real fear of backlash in the market and frustration among businesses as doing nothing or getting it wrong can lead to negative press and public outcry. Flexibility is vital as businesses strive to do the right thing.

► Understanding Net Zero
What does it really mean and how do businesses get there? How do you measure and manage climate-related risks? Is partial progress better than none at all and how will the market perceive this? 

► Challenges of Green financing
While many CFOs realise the long-term economic benefits and gains, the immediate challenges can be overwhelming. Understanding green financing is critical for funding to deliver SBTi targets and the transition to Net Zero. 

► Strategic prioritisation and governance
How to get the necessary Board support and elevate ESG to the top of the agenda. Boards often lack the necessary knowledge, and Non-Executive Directors (NEDs) may not have access to the right information. Is this a risk that's not yet integrated into your risk register? 

► Delivering value on ESG and Sustainability
Balancing the commercial aspects with ESG imperatives to deliver value. Quantifying the cost, benefit, and revenue to build a compelling case for the future is a complex task that requires scenario development and strategic planning to ensure value for stakeholders and the organisation as a whole.

Employees and new hires are increasingly driving the ESG agenda and setting the expectation for businesses to demonstrate tangible progress. Many organisations exhibit an 'ignorant passion'—a sense that action is necessary but without a clear understanding of what to prioritise. Clients are also asking for ESG credentials and alignment with specific reporting frameworks. Yet, most businesses struggle with the 'social' aspect of ESG, as this is often least understood. 

Where are businesses on their ESG journey?

The ESG journey varies significantly depending on the size of the company. Larger businesses often have the advantage, having embedded ESG principles and sustainable practices from the outset with strong backing from their boards. However, for smaller businesses that are part of a larger supply chain this can be disproportionately challenging. Smaller businesses need time to develop their ESG strategy while managing the day-to-day pressures of keeping their operations running. 

The incentive to accelerate ESG compliance is also less evident amongst smaller businesses as financial penalties for non-compliance are non-existent. This lack of immediate consequence can slow the urgency to adopt ESG measures. Although many will be alert to the social impact of customers choosing competitors that can clearly evidence their ESG credentials.

There is a clear disparity in approaches among different-sized organisations and the need for more education as well as collaboration to share best practice. Larger corporations have a role to play in supporting small and medium-sized businesses with less resources and understanding of ESG requirements. 

What are finance leaders calling for?

► Robust infrastructure and clarity over best practice 
It is essential to have a structure that enables businesses to recover quickly if they don’t get it right the first time and to focus on a narrower range of objectives with greater accuracy. A clear definition of what 'good' ESG practice looks like, with objectives seamlessly integrated into business operations would aid understanding and provide clarity. Decisive resolution is pivotal to driving this change, ensuring that ESG becomes an integral part of the business landscape.

► Clearer requirements in data collection and reporting
The current landscape is muddled, making it challenging to align and maintain consistency across the board. With data quality often questionable, moving forward becomes a significant hurdle. It is also difficult to understand what is being reported, reinforcing the necessity for more transparent and uniform reporting standards.

► More regulation and a single standard
Finance leaders are asking for more regulation with clear guidance and requirements mapped out, and incentives and penalties to ensure compliance. There is ongoing work with the ISSB in setting and measuring standards to provide the clarity and consistency businesses need. Adoption of these standards is the responsibility of each country’s standards setting body. 

However, it is also vital to recognise that industry sectors are different and have unique challenges, so this will need to be taken into consideration. For example, what will work for retail may not work for real estate or manufacturing. There is sectoral guidance on both Transition Planning (TPT) and from the Global Reporting Initiative (GRI). Both of these feed into the ISSB’s work. The key is knowing where to look and raising awareness of this guidance. 

► Greater knowledge sharing and education
There is a significant gap in knowledge sharing across industries and different-sized businesses. While manufacturing may have a wealth of information available, other sectors lag behind. Sharing challenges and solutions is key to collective progress. By fostering an environment where knowledge is freely exchanged, finance leaders can learn from one another, adapting best practice and driving their ESG strategy with confidence.

► Continuous education
Aligned to the need for greater knowledge sharing is the responsibility to stay on top of this fast-moving agenda. Finance leaders would benefit from a programme of continuous education to keep up-to-date on the different issues as they evolve and make sure they are aware of what information is out there. It’s not a topic CFOs can ignore any more.

BDO is uniquely qualified to support finance leaders navigate greenwashing, embed ESG and Sustainability to future proof their businesses and build resilience into their growth plans.