Integrating ESG & Sustainability Into Your Finance Function

Investor demands and financial implications continue to mount for organizations to adopt Environmental, Social, Governance (ESG), and Sustainability initiatives and they will only become more pronounced in the future. Increasingly, reporting responsibilities are being shared across functions, with accountability often being placed on the Finance function.

Recently introduced SEC reporting requirements now require organizations to include detailed quantitative disclosures on greenhouse gas emissions, industry-specific metrics on climate change risk, as well as human capital management disclosures. Reinforcing the importance of these requirements is the new “SEC climate and ESG task force” aimed at proactively identifying ESG-related misconduct.¹ Despite increasing pressure, the majority of organizations surveyed identify as being in the preliminary phase of their ESG & Sustainability journey. Our research shows, underdeveloped strategies, lack of standardization, inconsistent messaging, and the cost of compliance are all hindering impact.

To better understand the current state of organizations, and their respective finance function’s role as it pertains to ESG & Sustainability priorities, Russell Reynolds Associates surveyed 113 public and private company finance executives.²

Based on this research, we explore solutions for an ever-evolving landscape, including best practices on aligning ESG & Sustainability across the organization, identifying which metrics and functions drive impact, and developing your finance function for current and future related implications.

Lack of clarity surrounding ESG & Sustainability poses challenges for finance

As organizations develop and evolve their ESG & Sustainability strategies, whilst navigating the roll out of mandated reporting requirements, organizations and finance functions often grapple with the associated challenges. Our survey respondents consistently reported the following three challenges:

1. Underdeveloped strategy and role delineation: The key to delivering upon an ESG & Sustainability strategy is embedding the associated metrics into key strategic initiatives, assigning clear ownership, and integrating implementation in people’s day-to-day lives. Over 50% of organizations stated ESG & Sustainability issues are already appreciably impact their organization, yet many cited slow adoption internally.
2. Lack of standardization: While many have metrics or established functions, there seems to be a lack of understanding as to how it translates to meaningful reporting—e.g., what is mandatory vs. what is optional—as well as inconsistency in the standards. Additionally, best-in-class ESG & Sustainability initiatives are expensive to execute.
3. Misalignment of incentives: New regulations place significant accountability on the finance function and often don’t have a direct financial impact. Further, the lack of incentives associated with the achievement of these metrics, can result in suboptimal choices that are often self-serving for the organization.

Underdeveloped strategy: few organizations are considered best-in-class when it comes to ESG & sustainability

The majority of organizations claim to be at the beginning of their ESG journey, with 56% of organizations still in the preliminary phase of their ESG & Sustainability implementation, despite the majority of organizations already executing on some ESG & Sustainability initiatives (Figure 1).

On a sector basis, the industrial and natural resources sector leads the way, with 33% of respondents reporting they follow best-in-class ESG & Sustainability practices. In comparison, 25% of financial services and professional and business services organizations, 16% of consumer organizations, 12% of technology organizations and no healthcare organizations reported that they follow best-in-class ESG & Sustainability practices.

Figure 1. Which of the following best describes your organization?

^{Source: RRA survey ‘The Evolving Role of Finance: ESG & Sustainability’, n = 113, 2022}

Lack of standardization: inconsistently defined structures in ESG reporting leads to unclear ownership, or no ownership at all

Ideally, ESG & Sustainability efforts should have shared ownership across functions. However, only 33% of organizations distribute this responsibility evenly. Most often the legal, regulatory, and compliance function or the finance function own the ESG & Sustainability strategy (Figure 2.)

Figure 2. Who owns ESG & Sustainability in your organization? (Select all that apply)

^{Source: RRA survey ‘The Evolving Role of Finance: ESG & Sustainability’, n = 113, 2022}

Of those organizations who reported themselves as best-in-class when it comes to ESG & Sustainability, the majority have an ESG & Sustainability finance leader who owns reporting. However, over a quarter of organizations have not yet established owners of reporting (Figure 3.); indicating how nascent some organization’s efforts are.

Figure 3. Who owns ESG & Sustainability Reporting (e.g., greenhouse gas emissions reporting, human capital reporting, sustainability FP&A) in your organization?

^{Source: RRA survey ‘The Evolving Role of Finance: ESG & Sustainability’, n = 113, 2022}

As previously mentioned, lack of standardization and unclear accountabilities have 67% of organizations relying on multiple sources of information to guide metrics selection. While there is no single source of information on ESG & Sustainability finance requirements, those who rated themselves as best-in-class are 17% more likely to rely on expert external advisors to help them gain insight into financial requirements. In fact, enticed by the potential revenue streams, Big Four Accounting firms are making significant investments in building out their climate-related offerings.³ While the use of external advisers differentiates best-in-class organizations from others, it also signals a barrier to entry for many smaller organizations, and a significant cost for compliance.

What incentives? The most impactful ESG & Sustainability reporting metrics and functions are the least reported on

Our research showed that some of most impactful ESG & Sustainability levers are the least reported on (Figure 4.) Over 90% of organizations report on more than one metric or function, but not always the ones that are perceived to have the greatest impact or potential, especially those owned by finance (highlighted in purple) as exhibited by the following.

• Corporate philanthropy is the most reported on, yet this reporting has the least impact as it pertains to driving decision making.
• Conversely, sustainable corporate development and M&A is the most likely to drive decision making yet has the lowest level of measurement.

In other words, there is a clear lack of alignment between what is being reported on and what drives decision making, likely related to the aforementioned challenge of a lack of incentives.

Figure 4. Which ESG & Sustainability reporting metrics or functions does your finance function have and do they drive decision making?

^{Source: RRA survey ‘The Evolving Role of Finance: ESG & Sustainability’, n = 113, 2022}

ESG & Sustainability reporting is here to stay and finance has a role to play

As of now, only a quarter of respondents see ESG & Sustainability considerations as impacting their ability to create value (either financial, social or environmental). The focus on ESG & Sustainability are only expected to increase over time, and finance can be the differentiator between staying abreast while driving impact or reporting for compliance purposes only.

To improve the impact finance can have on ESG & Sustainability, consider the following recommendations.

Clear delineation of ESG & Sustainability strategy and roles – RRA’s recent survey⁴ found that organizational structure is the primary differentiator in an organization’s likelihood to meet their ESG targets. By aligning ownership, defining strategic initiatives and aligning incentives with metrics that drive decision making, your organization can maintain alignment with the evolving ESG & Sustainability agenda, while becoming best-in-class.

Collaboration across functions – While finance or legal may own many of the reporting requirements, ESG & Sustainability requires ownership broadly across the enterprise. Our survey suggests the greatest partners to finance will be operations/supply chain, legal and HR (Figure 5.) This will change depending on sector; for example, healthcare and technology sectors are more likely to partner with legal, while consumer and industrial/natural resources sectors are more likely to partner with operations/supply chain.

Figure 5. Which function(s) should Finance look to team with in order to drive impact? (Select all that apply)

^{Source: RRA survey ‘The Evolving Role of Finance: ESG & Sustainability’, n = 113, 2022}

Whether looking externally or developing your finance team internally, ensure ESG & Sustainability is a key competency – The cost of compliance has become a significant challenge and the most impactful functions and metrics fall under finance’s domain. If developing your finance team internally, consider:

• Are these skills being factored into your finance leadership talent decisions?
• Is sustainability a key competency when selecting, promoting, and rewarding leaders?
• Does your existing team’s talent have any skills gaps that need to be addressed?

References

^{1. U.S. Securities and Exchange Commission ‘SEC Announces Enforcement Task Force Focused on Climate and ESG Issues’, 2021}

^{2. RRA survey ‘The Evolving Role of Finance: ESG & Sustainability’, n = 113, 2022}

^{3. Financial Times ‘Big Four accounting firms rush to join the ESG bandwagon’, 2021}

^{4. RRA ‘Chief Sustainability Officers Have More Impact When They’re Aligned To The CEO’, 2022}

Authors

Rose Mistri-Somers is a member of Russell Reynolds Associates' Financial Officers Practice. She is based in New York.

Nick Roberts is a member of Russell Reynolds Associates' Financial Officers Practice. He is based in San Francisco.

Adam Rundh is a member of Russell Reynolds Associates' Financial Officers Practice. He is based in Chicago.

Kurt Harrison is the co-head of Russell Reynolds Associates’ Global Sustainability Practice. He is based in New York.

Catherine Schroeder is a member of Russell Reynolds Associates' Financial Officers Practice Knowledge team. She is based in Toronto.