Audit Committee Leadership Network, December 2021
Companies are facing an ever-growing demand from investors, regulators, and activist groups to incorporate environmental, social, and governance (ESG) matters in their business strategies and to provide transparency about past and planned actions. As a result, the quality, depth, and breadth of ESG reporting are under greater scrutiny, and the stakes for getting it right are high. Sustainability reports are increasingly being aligned with other corporate disclosures and subjected to more rigorous controls, and some form of ESG reporting is expected to become mandatory in SEC filings.
ESG reporting is increasingly a cross-functional effort, no longer isolated in social responsibility or sustainability departments. CFOs and finance organizations are now being asked to support or even lead on ESG reporting. Finance professionals can better translate greenhouse-gas emissions, social metrics, and other ESG data into monetary terms, and they are often skilled at regulatory compliance. A commentator observed that “the expertise of the CFO team is well suited to lead the design, operation, and maintenance of internal controls and governance over sustainability performance information.” With the SEC signaling the potential for tighter regulation of ESG disclosures, finance organizations are likely to increase their involvement in reporting.
On November 16, 2021, members of the Audit Committee Leadership Network (ACLN) met virtually to discuss ESG reporting practices and processes with Hugh Johnston, chief financial officer of PepsiCo; Nancy Buese, chief financial officer of Newmont Mining Corporation; and Prat Bhatt, chief accounting officer of Cisco Systems. The following themes emerged from the discussion:
Guests’ companies demonstrate mature ESG strategy and reporting practices. Members noted that Newmont, Cisco, and PepsiCo are significantly more mature in their ESG reporting than most members’ own organizations. A member said that the three companies have “demonstrated the path that we’re all eventually going to end up on,” as well as “the obstacles, barriers, problems, and opportunities” that other companies can expect to encounter on their ESG journeys.
CFO perspectives on ESG reporting practices. Finance teams are playing an increasing role in managing ESG data. The guests explained that their finance teams do not own ESG data but play a vital role in partnering with others in the organization to ensure that the right structure, processes, controls, and systems are in place to ensure reporting integrity. Mr. Bhatt said, “I don't think that finance necessarily needs to own the data …. What finance can most readily add is structure, process, control systems, data architecture, systems—skills that finance is readily able to provide.” But one guest and a few ACLN members observed that finance’s role may change as the SEC moves to demand ESG disclosures in corporate filings. One member noted that finance might become not only a supporter of ESG reporting but a customer of some of the nonfinancial data.
Compensation is being linked to ESG goals. At Newmont, ESG metrics are included in both short- and long-term compensation plans for both executives and nonexecutives. Ms. Buese said that ESG metrics were about 20% of the short-term incentive program in 2020, and she expects this percentage to increase in the future. The compensation of leadership at the organization is also tied to 2030 and 2050 climate goals, Ms. Buese explained, reflecting the company’s recognition that “a huge amount of the lift will take place in the next handful of years, and it’s the investments in the projects that we will build to support those goals that are just absolutely critical.” A member was impressed to hear about Newmont’s linking long-term compensation plans to ESG, an unusual practice in Fortune 500 companies.
Training is now critical both for finance teams and other ESG data owners. Mr. Bhatt emphasized the need to create awareness and to educate Cisco’s global finance team of approximately 3,000 finance professionals on ESG issues. He described a comprehensive training program that is being developed and will include ESG learning modules in 2022. But finance is not the only area where new skills are needed. Members and other guests highlighted the need to educate ESG data owners in all parts of the organization on reporting and controls. A member noted, “It’s important to not only train and engage people in finance but the broader organization, as each company has a different focal point in the organization for ESG.”