September 22, 2023
At a Glance
- Identifying Stakeholders
- Comprehensive View of Carbon Impact
- Effective Carbon Accounting Systems
With environmental, social, and governance (ESG) regulation taking on greater importance in the business world, and the mandatory reporting that comes with it, chief financial officers now find themselves tasked with navigating the complex terrain of reporting requirements.
In Optera’s recent ESG Trends report, three-quarters of finance leaders reported “compliance with regulations and verification” as one of the most pressing problems to solve this year.
To start, CFOs must first identify stakeholder priorities through a materiality assessment, a process helping organizations identify and prioritize ESG issues most relevant to their business operations and stakeholders. Then, they must invest in the right value enablers by aligning with the strategic ambition for sustainability and ESG reporting.
Ty Colman, chief revenue officer and co-founder of Optera, says data is the key to a comprehensive and agile sustainability strategy. “CFOs cannot establish credible goals -- or track progress year after year -- without understanding how their current emissions map to specific business facilities, programs, suppliers or products,” he says.
When these numbers are sufficiently granular and built from primary data (versus estimates), organizational leaders can identify the biggest reduction opportunities and best practices to comply with regulations.
Colman explains granularity and primary data are key to emissions reduction, but this need not lead to analysis paralysis. “Understanding where the biggest impacts are can inform the prioritization of your data collection,” he says.
Ultimately, maintaining a comprehensive view of carbon impact empowers companies to continuously monitor progress and adjust practices as new regulations emerge.
Involvement From Finance Department
“We’re seeing increasing involvement from the finance department,” Colman says. “I’d say at least a third of our customers have the finance team directly involved in emissions accounting, internal audit, or signoff.”
He adds the process for emissions data assurance is like auditing financials, making it a logical move -- especially because the SEC will be one entity collecting reports.
“CFOs already work closely with the legal team but may not be as accustomed to collaborating with the sustainability team,” he says.
From Colman's perspective, it will be critical for CFOs to understand the sustainability reporting frameworks and work closely with purchasers to negotiate with emissions-heavy suppliers, much as they would deal with vendors with cost overruns. “Companies are moving quickly to build cross-functional accountability for various climate metrics and data management processes,” he says.
He says while most finance leaders currently use spreadsheets to calculate their emissions, manual processes will be insufficient as reporting requirements and scrutiny increase. “CFOs will need high confidence in their numbers, necessitating carbon accounting tools for comprehensive, standardized data and streamlined analysis,” Colman says.
Relate Initiatives to Value Drivers
Janel Everly, Gartner senior director analyst, says CFOs must link their sustainability disclosures to their materiality assessment and organizational strategy by quantifying their ESG impacts and relating their initiatives to value drivers that can be mapped to strategic time horizons. “Leading CFOs then analyze their long-term realized return to the enterprise by quantifying as many nonfinancial returns as possible,” she says.
She explains CFOs need to partner with executives across the organization to build an enterprise value equation that balances decision trade-offs across different value dimensions and stakeholders. “They must ensure information disclosed is complementary based on the same facts and circumstances by developing processes and controls to provide sustainability-related information of the same reporting entity, quality and time as their financial statements,” Everly notes.
She points out leading companies “build in” sustainability reporting to find a better balance. “These organizations are 3.7 times less likely to deprioritize sustainability than companies that ‘bolt on’ sustainability at the margins,” she says.
From Everly's perspective, an effective carbon accounting system improves reporting efficiency, accuracy and transparency, saves time and resources, and provides organizations with agility to respond to new regulations as they continue to evolve.
Organizing a Complex Task
Colman notes managing the data from Scope 1 (direct emissions originating from sources owned or controlled by the organization) and Scope 2 (indirect emissions resulting from the consumption of purchased electricity, heating/cooling) alone can be overwhelming for large businesses.
They may have thousands of facilities around the globe, each with different consumption patterns for electricity, natural gas and other emissions-intensive activities.
“But that only scratches the surface for most businesses as they begin to measure scope 3 emissions across their value chain,” he says.
Supply chains, for example, involve hundreds or even thousands of entities, meaning organizations need huge amounts of data to quantify their emissions for reporting.
“Manual tools and spreadsheets are time-consuming, error-prone and provide limited insights,” Colman adds. “Imagine if a Fortune 500 company told its board that it managed procurement or the general ledger on spreadsheets -- the lack of sophistication would be unthinkable.”
He says the level of sophistication organizations have come to rely on for financial accounting will be the expectation for carbon accounting within the next five years.
Colman points out technology streamlines data sharing, allowing organizations to collect data easily and efficiently from all supply chain tiers, and automated analysis standardizes data and makes the necessary calculations, saving organizations extensive time on reporting.
“Regardless of current or future regulations, CFOs and executives recognize there is a market imperative to quantify and reduce emissions, one that’s increasingly driven by customers, employees and investors,” he says.
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