Insight & Analysis

Time to act: treasury’s role in integrating financially material ESG data

Published: May 2021

Sustainable reporting has grown over the last decade. Now investors see it as increasingly financially material, and the pressure is on companies to integrate it into their corporate accounting models. It involves the expertise of sustainability teams with the processes and rigour of treasury and finance.

Stacks of coins in front of green bushes

As the pace economies decarbonise picks up in the years ahead, corporate success will increasingly depend on companies’ ability to articulate to all stakeholders how they are adapting to the new business model coming down the track. It means finance and treasury teams will need to publish corporate accounting models and balance sheets that put financial numbers on their sustainability data and information.

Of course, sustainable corporate reporting has been growing steadily over the last ten years, with some 80% of global companies now reporting on sustainability, according to KPMG. Of this cohort leaders have emerged, already integrating their financial performance with their sustainability performance in a single, annual report. However, it is the pace of this convergence that is about to pick up, as standard setters increasingly eye ESG reporting as financially material, and financial statements no longer give the full picture. “There are developments towards a more integrated form of reporting,” says Arjan de Draaijer, Global Co-Lead, Impact, ESG and Sustainability at KPMG in the Netherlands. “Financial reporting standard setters and sustainability reporting standard setters like GRI (Global Reporting Initiative) and SASB (Sustainability Accounting Standards Board) are increasingly looking at the similarities and connections between financial and sustainable reporting. It all points towards a more integrated perspective on reporting that caters to all stakeholders.”

One important shift in reporting is also under way. Companies have traditionally approached disclosure and reporting from an inside-out perspective. This typically involves measuring and reporting a firm’s impact on the outside world - like its carbon emissions. Increasingly, companies are using new disclosure requirements (namely the Task Force on Climate-related Financial Disclosures, TCFD) which focus on disclosure through a different, outside in-lens that reports on how climate change will impact the company’s financial performance.

This could entail disclosure on how rising temperatures could impact suppliers in developing nations, or how changing consumer behaviour will impact demand for a core product. “The indicators that are related to this type of reporting are of a different nature,” says de Draaijer. “A carbon footprint is still useful information in terms of detailing the carbon intensity of a product and its vulnerability to a low carbon economy, but this new type of information and data is increasingly appearing,” he says.

Regulation coming down the track will force the process. By 2025, climate risk assessments will be mandatory across the UK, including for listed companies, large private companies, pension schemes, insurance companies and banks. Elsewhere, the EU’s giant taxonomy will land through the course of next year, introducing a classification system of what constitutes sustainable economic activity. Cue the associated EU regulatory drives in support of the taxonomy like growing pressure for mandatory sustainability reporting requirements under the Non-Financial Reporting Directive (NFRD). Under the EU Taxonomy companies will have to articulate what proportion of their revenue is green and regulation is going to drive clarity around what kind of information is required, says de Draaijer.

Of course, gathering data and disclosure won’t only sit with treasury, but much of the responsibility could head treasury’s way. Although many firms have set up reporting systems out of their sustainability departments, as ESG reporting becomes more financially material it is increasingly the focus of CFOs, finance and control departments. “It involves a combination of the subject matter knowledge of the sustainability team with the processes, rigour and risk of treasury and finance,” concludes de Draaijer, who observes that many of the initial ESG corporate laggards without sustainability departments have fast tracked their sustainable reporting and accounting processes by placing the issue directly with finance teams.

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