Even though the SEC has effectively dropped the climate disclosure rule for public corporations, it doesn’t mean that sustainability reporting requirements are gone entirely. Many organizations must still comply with climate disclosure laws in California and the EU.
Under those laws, companies continue to be tasked with reporting emissions and environmental impacts, and many organizations are shifting ESG reporting to the finance team, which is already well-versed in tracking, compliance, and audits.
Centering ESG in the finance department moves sustainability issues from reputational and mission concerns into a core business function, according to experts who spoke with CFO Brew.
“Finance controls the heartbeat processes of companies,” Brigham McNaughton, partner in PwC’s sustainability practice, told CFO Brew. “Being able to just have sustainability at the table, the considerations embedded on all those is going to be incredibly powerful. And that’s the work we’re starting to see happen more.”
Favored status. According to Kate Gordon, CEO of California Forward, a sustainability advocacy group, and a former senior advisor to the US energy secretary, integrating sustainability into finance means it will now be discussed in more concrete terms businesspeople care about—money and risk.
“Fundamentally, if you want business to take something seriously and be a bottom line business issue and not a side project, it has to be done in the language of business,” Gordon said.
There are other benefits, too. Moving some sustainability responsibilities under the CFO makes them less susceptible to political shifts and could even help protect staff from layoffs, according to Gordon.
“Unless something is embedded in a way that reduces risk to your bottom line and potentially maximizes return, it always risks being thrown out,” she said. “That’s just the reality of the business world.”
Put up or shut up. The regulations are also causing companies to put their money where their mouth is, she said. McNaughton agreed that regulations require companies to outline how they’re going to actually deliver a climate goal, not just set aspirational ones.
“That created a moment where people either had to choose to say, we have a big goal and we don’t know how we’re going to meet it, or we have a big goal and here’s how we’re going to meet it,” he said.
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He hasn’t seen many companies that are willing to admit to regulators and to the public that they actually don’t know how they’re going to reach their goals. And because SEC disclosure rules didn’t require companies to cut emissions, many, like Google, Microsoft, Shell, and Gucci, have rolled back public commitments or abandoned them to avoid officially acknowledging the gap between ambition and execution.
“They got worried about their commitment,” Gordon said. “And maybe that’s a good thing, because maybe we need to be making commitments that people can actually achieve.”
Learning curve. Gordon hopes that by making climate risk part of the CFO’s mandate climate risk assessments will be front-loaded instead of being an addendum. She also expects that integrating sustainability as a core business function will help shift pricing, making sustainable investments more affordable and available.
As sustainability teams have learned the language of finance to make the business case for their investment, CFOs are now having to learn the nuances of sustainability. The second of California’s climate laws, SB-261, the Climate-Related Financial Risk Act, compels companies to address climate transition risk, which, according to Gordon, “is newer to the CFO world and harder to calculate.”
She pointed out that CFOs need to start factoring in technology risk for new energy systems as well as litigation risks, like the lawsuits against oil and gas companies, into their calculations. Right now, she said, businesses “don’t price the real risk of ignoring climate change” accurately or at all, but “the more you price that in, the more you see business behavior change.”
And as the CFO becomes more aligned with ESG, that could be a game-changer for sustainability efforts.
“I think finance can help to translate,” McNaughton said, “how we articulate how [sustainability] is going to drive growth…Then your CFO comes and says, ‘How can I give you more? Because you’re that part of the business I want to fund.’”