CFO Involvement in Getting CSRD Right

24 Jan 2024

Intertek’s Chief Financial Officer for EMEA explores the role of the CFO relating to a company’s sustainability agenda.

With increasing sustainability legislation - from the EU Green Deal to the Global Plastics Treaty, the CFO needs to help manage and measure that balance between short-term decision-making versus long-term sustainability benefits.

ESG Legislation priorities

With game-changing regulations like the EU CSRD, 2024 is the year companies need to get serious about ESG.  Beyond carbon emissions, businesses are increasingly looking at ESG through a broader lens. Considering the social perspective and the role of nature and biodiversity and movement on the EU restoration law, we will see acceleration on action taken by companies throughout the year in line with:

• The EU Nature restoration law is dedicated to preserving nature and biodiversity and will soon require companies to verify that products marketed in the EU do not incorporate commodities originating from recently deforested areas.
• Global Plastics Treaty – this is the world's first agreement to end plastic pollution. Described as the most important Green Deal since the 2015 international climate agreement, the Treaty has an unusually ambitious time scale for a globally binding agreement with the final agreement planned for late 2024.
• Sustainable Finance Disclosure Regulation SFDR - The European Parliament has been building out a sustainable finance framework to channel private funding towards investments that meet the objectives of the European Green Deal. The SFDR will require financial institutions to report on new ESG disclosure requirements, including their financial emissions by June 2024. The purpose of the mandatory disclosure is to make the sustainability profile of funds more comparable and better understood by end investors and to encourage the flow of capital into sustainability-focused firms.

Corporate Sustainability Reporting Directive (CSRD)

CFOs are responsible for overseeing the financial health of the organization. They ensure that financial resources are allocated efficiently and effectively, taking into consideration the long-term sustainability of the business.  So, under the European Sustainability Reporting Standards (ESRS) 1 section, when we look at a company structure, its control and oversights, this is where the role and control that the CFO has needs to be clear and prove how that function helps to govern the controls.

Integrating sustainability strategy into the financial strategy

CFOs play a role in integrating ESG initiatives into the overall financial strategy of the company. This involves considering the financial implications of these activities and aligning them with the company's financial goals which involves eight key areas:

1. Identifying and managing financial and reputational risks associated with ESG initiatives. Finance needs to assess the impact of these activities on the company's financial standing and help develop strategies to mitigate potential risks. When we look at the double materiality assessment in CSRD, we will need to see how the business and financial risks align.
2. Identifying gaps in the company's information or weaknesses in the underlying systems and controls that could inhibit the decision-making and reporting and set out plans to make improvements or upgrades.
3. Work with the CIO on implementing systems and controls to collect and report sustainability-related data that can be independently assured.
4. CSRD also looks at the budgeting process, including allocating funds for ESG initiatives. Finance needs to work with other executives to determine the financial resources available for these activities, whilst ensuring that these activities align with the company’s overall financial strategy. For example, looking at green taxes and incentives or creating a social value budget that each unit must contribute to.
5. From there, CFOs are responsible for implementing systems to measure the impact of ESG initiatives and reporting these outcomes to stakeholders. This involves developing financial metrics and key performance indicators to assess the success of the programs.
6. Linked to the above is their role in ensuring that the company complies with relevant financial regulations and reporting requirements related to ESG. We're seeing many of the CSRD KPIs that ask for data showing this measurement.
7. Finance should create synergies between CSRD readiness work and other transformation efforts taking place across the finance function, such as system transformation or legal entity restructuring or rationalization.
8. Finally, CFOs are responsible for financial reporting, including disclosing information about the company's financial performance and its adherence to CSRD practices. They work with the finance and accounting teams to assure that the ESG-related financial information is accurately represented in financial and non-statements.
9. We also see CFOs involved in communicating with various stakeholders, including investors, analysts, and the public.

Conclusion

CFOs play a vital role in integrating sustainability into the financial strategy of the organization, ensuring accurate financial reporting, managing the associated risks, and communicating the financial impact of sustainability activities to all stakeholders. This integration helps in aligning financial goals with social and environmental responsibility and contributes to a more sustainable and responsible business model.