RESEARCH REPORT
ESG reporting: From compliance to competitive advantage
5-MINUTE READ
June 25, 2024
In brief
- As companies around the world strive to achieve their net-zero and other sustainability targets, they face a rapidly evolving regulatory landscape.
- Only 10% of CFOs report that their companies are prepared for detailed reporting mandates.
- Just 15% of companies use their ESG measurement and management capabilities to fast track their sustainability strategy and drive business value.
The shifting sustainability regulatory landscape
As companies across the globe look to meet their net-zero and other sustainability targets, they face a rapidly evolving regulatory landscape. Among these newly implemented laws and regulations, there is a wide range of new environmental, social and governance (ESG) reporting requirements. These include the European Union’s Corporate Sustainability Reporting Directive (CSRD), the US SEC’s Climate-Related Disclosures (CRDs) and requirements developed by the International Sustainability Standards Board (ISSB).
Policymakers are using three mechanisms to achieve a range of outcomes. CFOs need to understand these mechanisms and develop approaches in line with regulators’ objectives. These include measures aimed at:
- Increasing market transparency and the recognition of ESG risks and opportunities by mandating disclosures.
- Creating fairness and opportunity for domestically produced goods by setting prices on the carbon content of imports.
- Affecting business decisions by providing incentives and grants for specific sustainable activities.
Complying with these new rules can be challenging as they place new demands on both finance and sustainability teams. But these requirements also present an opportunity to leverage a rapidly evolving set of new technologies to help organizations gather better information, make smarter business decisions and create value from sustainability.
By combining technology capabilities and human ingenuity, organizations can transition from merely complying with ESG requirements to achieving greater value from their reinvention strategies. Our 2023 Reinvention research found that Reinventors, those companies that have built the capability for continuous reinvention, increased revenues by an additional 15 percentage points compared to other survey respondents from 2019 to 2022. We expect the gap in revenue growth to increase by 2.4 times to 37 percentage points by 2026. Reinventors are also more profitable and our modelling estimates that, for the average Reinventor, each year following the adoption of a reinvention strategy is linked to a 2.9 percentage point uplift in margin relative to those that are not pursuing reinvention. But Reinventors don’t just excel on financial measures. They outperform their peers on non-financial metrics as well.
Pressure grows, but organizations are unprepared
A large majority of CFOs (78%) are feeling pressure from at least three different stakeholders to take more action on sustainability issues (see figure below).
The urgency around sustainability is clear across stakeholder groups
Q. Does your organization feel pressure from the following stakeholders to act on relevant sustainability issues? (% CFOs)
Source: Accenture ESG Measurement and Management Study, 2023; N = 730
Many respondents say their companies aren’t fully prepared to meet these growing expectations and requirements. Upcoming regulations demand that companies report on risks and opportunities related to climate change and seek external assurance on their disclosures. Just 22% of CFOs say they are well prepared to do both.
Complying with new regulations should be just the beginning. Yet, insights from our survey and in-depth interviews show that organizations often struggle to align their long-term aspirations to their short-term objectives.
For example, over the long term, a successful sustainability program can reduce costs by making production cycles more efficient and cutting energy use and waste. It can also increase revenues by opening access to new customer segments or markets.
When regulations force you to look at something that you haven't paid attention to previously, you can gain new insights and inspiration.
Massimo Terrevazzi / Group CFO & Executive Director, Perfetti Van Melle Group
Nine capabilities to move beyond compliance
Our research and client experience identified nine technology- and talent-based capabilities organizations must develop to move beyond mere compliance and create competitive advantage as they accelerate their sustainability strategy.
ESG measurement
To comply with disclosure requirements, CFOs need to be able to accurately measure ESG performance. This involves having in place the right processes and technologies to collect all the relevant ESG data, help ensure its quality, and make it available across the organization. Technologies like generative AI can play a critical role in accelerating the automation of data and its dissemination throughout the business.
1. Data collection: Whether and to what extent an organization has automated ESG data collection.
2. Data quality: The existence and sophistication of frameworks and controls to ensure automated ESG data quality within an organization.
3. Data availability and integration: Access to ESG data across business units and functions through an integrated platform.
ESG management
It’s also important that CFOs manage the company’s ESG performance. This involves linking non-financial key performance indicators (KPIs) to financial metrics and analyzing and forecasting ESG data to identify risks and opportunities. To achieve this, regular non-financial monitoring is necessary to detect and address discrepancies between actuals and targets.
4. Transparency and integration of non-financial KPIs: The extent to which an organization's non-financial metrics are defined and linked to financial reporting.
5. Analytical and forecasting technology: The existence and sophistication of an organization’s technology (AI and generative AI) for analyzing and forecasting ESG data.
6. Leadership access to and consumption of ESG information: How leaders access and use ESG information for strategic decision-making through real-time insights and customizable data visualizations.
7. ESG considerations in business decisions: The extent to which ESG factors are integrated into an organization’s business strategies and decision-making processes.
Talent
Underlying both measurement and management is talent. While strong ESG skills are essential in the finance team, they are also critical for teams outside of finance so that they can effectively collaborate with their finance colleagues. To truly integrate sustainability into business performance, it’s crucial to have people across the organization with both financial and ESG skills.
8. ESG skills in the finance team: The level of ESG expertise within the finance function.
9. Finance skills in the sustainability team: The extent of financial expertise available within the sustainability or ESG team.
To truly incorporate sustainability into your business, it must be integrated throughout. We have an integrated strategy that includes both financial and concrete ESG KPIs...
Léon Wijnands / Head of Sustainability, ING Netherlands
Companies’ progress is uneven …
Most companies we surveyed have started to develop some of these capabilities, particularly around measurement.
- More than half (55%) of respondents are capturing relevant ESG data automatically;
- almost two-thirds (62%) have frameworks and controls in place to document ESG performance; and
- more than 60% also reported having necessary ESG data available for all business units.
… yet a small group is taking the lead
A few companies have reached a high level of maturity across the nine capabilities and have developed ways of measuring and managing their ESG performance to drive business results. Survey results reveal companies fall into three maturity categories.
Weak ESG measurement and management capabilities
About 12% of companies surveyed fall into this category. Their ESG data collection is partially automated. They perform data quality controls but do so manually. The ESG data they have is accessible to only certain pockets of their businesses. Their finance talent suffers from poor ESG skills and the sustainability teams suffer from poor finance skills.
Moderate-level ESG measurement and management capabilities
Most companies (73%) operate in this middle ground. They have better processes for collecting ESG data—with 54% having already automated ESG data capture—have more robust quality controls and make their ESG data more widely available across the organization. As for talent, finance teams could benefit from improved ESG skills while their sustainability peers would benefit from better finance skills.
Strong ESG measurement and management capabilities
About 15% of companies have strong ESG capabilities. These businesses gather detailed ESG information and monitor its quality automatically. They turn ESG data into knowledge to improve real-time strategic business decision-making. Furthermore, they use predictive analytics to identify potential ESG-related risks and opportunities and foster collaboration by cultivating complementary skills within their finance and sustainability teams. Their finance and sustainability teams also benefit from solid ESG and finance skills.
Companies with strong capabilities see sustainability as an opportunity
Our survey shows there is a direct correlation between a company’s ESG measurement, management and talent capabilities and its ability to see sustainability as an opportunity. This means companies with strong ESG capabilities can leapfrog their peers by identifying and acting on sustainability-related opportunities more quickly.
About 20% of respondents from companies with strong ESG capabilities already consider sustainability a significant value driver for their organizations today. This is accelerating their sustainability strategy. Less than half as many respondents from companies with weak ESG capabilities feel the same (9%).
More than six in ten (68%) of CFOs from companies with weak capabilities believe balancing sustainability and profitable growth is challenging for their organization, whereas only 20% of companies with strong capabilities believe this. From our experience, companies with weak capabilities tend to have poorer visibility into the growth opportunities hiding in their sustainability efforts.
In a similar vein, only 20% of companies with strong capabilities believe that focusing on sustainability negatively affects the interests of their shareholders. Three times as many (61%) of CFOs from companies with weak capabilities believe this. This sentiment was confirmed in our client discussions.
Six actions to develop your ESG measurement, management and talent capabilities
Every company faces unique challenges in developing its ESG measurement, management and talent capabilities and regardless of the starting point, the following actions are recommended:
Define your ambition: When it comes to ESG reporting, CFOs need to decide with their C-suite colleagues if their ambition is simply to be compliant or seize the opportunity and use the information to drive the business. Being clear about the goal helps define the people, skills and infrastructure needed across the organization.
Prepare for compliance: A key driver of the current regulatory effort is to provide ESG disclosures that are comparable to financial statements. Almost all proposed or enacted regulations will require that these ESG disclosures be audited. At a minimum, companies should be prepared to provide limited, reasonable assurance.
Integrate your ESG reporting: ESG data measurement and targeting can only be performed together with financial planning and performance management as they impact each other.
Turn data into insights: To gain insight from ESG data, companies need to automate their collection process by using advanced ESG reporting tools and establishing the appropriate IT architecture. This includes building a data and generative AI backbone into the company's digital core. Outsourcing or managed-services solutions can help organizations quickly access leading ESG measurement capabilities and accelerate their ability to move from data to insights.
Stay close to regulators and ecosystem allies: One way to do this is to communicate proactively and transparently. With regulators, this can help companies better understand their current and future thinking, intent and priorities when it comes to regulatory and voluntary ESG commitments and matters.
Engage with your people and stakeholders: Leaders who want to make the most of newly acquired ESG data need to win the hearts and minds of their internal stakeholders. One way to do this is to position the effort as a component of a key strategic enterprise initiative and not as an additional “global compliance effort.” Mobilizing internal stakeholders early and setting up change-management programs to gain their support is a critical step.
Companies that can transform ESG data into insights and embed them into business decisions are better able to identify sustainability-related opportunities, overcome barriers, and in the end, generate more value through better decision-making.
As our study findings show, CFOs who lead by example and approach this challenge by taking a strategic approach to building ESG measurement and management capabilities will likely create competitive advantage and accelerate their organization’s sustainability strategy.
ESG and the pivot to sustainability
72%
Study respondents say they are feeling pressure from regulators and governments to take more action on sustainability issues.
85%
Expect mandatory ESG disclosures to increase over the next three years.
54%
Report their organization aligns its ESG performance disclosure to established international reporting frameworks beyond requirements.
69%
Report sustainability is a high priority for their organization.
38%
Say their organization is investing in sustainability initiatives in order to improve financial performance.
24%
State business model transformation for sustainability will be a main area of focus for their organization over the next 18 months.