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Guide to ESG and sustainable finance for CFOs
Blog //04-11-2022

Guide to ESG and sustainable finance for CFOs

by Daniel Docherty, Director of Strategy

While financial KPIs represent the focus of CFOs' planning, guiding, and reporting, a company's value and risks are not exclusively defined by financial statements.

We are witnessing more stakeholder pressure to consider ESG principles and ideals. These non-financial risks might lead to tangible and quantifiable financial effects if left neglected. Nonetheless, when properly recognised, assessed, and disclosed, ESG risks may drive corporate success and safeguard a company's brand and image.

Businesses that handle ESG challenges directly under the direction and participation of the CFO are better equipped to produce enterprise value while fulfilling ESG legislation reporting requirements and wider stakeholder expectations for responsible risk management.

Now more than ever, the CFO ESG dichotomy should be united, and for any CFO, sustainability should become a key criterion for corporate success.

What is ESG?

ESG is the collective term for responsible and sustainable financial factors. It is a paradigm that investigates Environmental, Social, and Governance considerations in addition to financial reasons when making investment decisions.

What does ESG stand for?

  • Environmental - Evaluates a business's environmental stewardship. It evaluates how its operations affect the environment and manages environmental hazards. It encompasses direct operations as well as the whole supplier chain.
  • Social - Assesses the company's management of relationships with its workers, suppliers, consumers, and operating communities.
  • Governance - Relates to a company's leadership, executive remuneration, internal controls, audits, and shareholder rights. More importantly, investors want to know whether they can trust the firm and what kinds of judgments are made behind closed doors. Included are executive compensation, gender equality / equal pay, bribery and corruption, and board diversity.

Is ESG the same as sustainable finance?

While ESG and sustainable finance are similar concepts that overlap in some respects, they are quite different. Sustainability is a wide concept that may apply to everything firms undertake to enhance their corporate social responsibility performance. Conversely, the ESG framework is more comprehensive and, focusing on three areas: Environmental, Social, and Governance.

Hence, sustainable finance is an umbrella term, while ESG is more particular. Furthermore, sustainable attempts are distinct from ESG efforts to be more socially and ecologically responsible since it relates more to a company's capacity to survive than to its social and environmental responsibility.

Both sustainable finance and ESG require an acknowledgement that nowadays, it is not enough to deliver excellent financial results as a firm, but it is also important to demonstrate corporate responsibility and a commitment towards a better world.

Why are ESG and sustainability important?

CFOs and Finance Managers

The responsibilities of CFOs have evolved dramatically over the last two years. In conjunction with the finance function's competence in measuring and reporting, CFOs and finance managers are in a solid position to push ESG initiatives throughout the enterprise.

Finance functions

Finance departments that comprehend ESG effectiveness may reconsider their capital allocation to participate in possibilities that provide financial rewards, environmental advantages, and more responsibility. Implementing a reporting methodology and comparing ESG may reveal opportunities to enhance profits and the enterprise’s attractiveness for investors while also cutting capital costs through green finance methods.

CEOs and business owners

Overall, the increased demand of key stakeholders and the proliferation of sustainability compliance enacted worldwide by regulators have determined CEOs to include ESG issues on the corporate board's agenda. Integrating ESG with the business strategy may stimulate long-term competitiveness via innovation, brand differentiation, customer loyalty, cost-effectiveness, and talent retention.

Best practices for ESG

Finance teams already possess the requisite skill sets to lead ESG initiatives, and CFOs have a distinct edge over their C-suite peers when it comes to driving good ESG change internally and publicly.

ESG reporting must be converted into financial terminology and measures. As the organisation's fiduciary units, finance teams have the expertise necessary to compile and disclose KPIs to stakeholders and shareholders.

Enterprises should implement ESG guidelines by following the subsequent principles:

  • Develop sustainable principles to guide investment decisions and provide value.
  • Prioritise strategic efforts by integrating ESG factors into business cases and calculating sustainability effects.
  • Implement ownership, responsibility, and organisational effects enterprise-wide.
  • Demonstrate ESG initiatives to stakeholders.

Environmental standards in finance

Overall, the environmental pillar of ESG concentrates on how a company performs in relation to the physical environment, considering factors such as energy consumption, pollution, natural resource use, conservation record, animal treatment, etc.

Given the extent of the many problems confronting the globe and the growing severity of environmental risks for businesses, the E component of ESG has gained increasing relevance.

Finance functions should grasp both the financial risks and non-financial hazards of environmental concerns and the possibilities that arise from identifying and managing these risks.

Select benchmarks relevant to your industry

Businesses should not strive to accommodate all dimensions when creating ESG policies. Instead, choose three to five quantifiable ESG criteria that matter to your company and audiences and match them with your corporate strategy. For instance, fracking oil and gas companies should assess water and waste management and its effects on precious natural resources.

Calculate your carbon footprint

Companies can now assess their carbon impact using computerised technologies built for this purpose. These tools provide spaces for inputting all possible company activities, and they may determine their carbon footprint for each given action, as well as the total environmental impact.

Implement double materiality

This concept entails that corporations should address both the ESG concerns that affect their business as well as their impact on society and the environment.

Create an exclusion list

The financial department might create a list of initiatives it will not support due to environmental issues or other concerns of the business or its shareholders. Excluded activities may be governed by national ESG regulation or international agreements, restrictions, and best practices.

Contextualise the information

ESG data does not exist in an informational vacuum and requires suitable contextualisation for clarity. This context may partly derive from the firm's relative performance (having as benchmarks firms in the sector or historical performance).

Collect the relevant data

Accuracy requires ensuring that the data behind the disclosures are accurate and reveal how the statistics were calculated.

Social standards in finance

Central to the Social dimension of ESG is the subject of how a business handles its main connections with its personnel, the society in which it works, and the political environment.

Several social issues, ranging from short-term to long-term challenges, might impact the financial department of a corporation.

Hence, while some of these best practices might not be under the direct responsibility of financial departments, they need to acknowledge the social standards. By doing so, they can understand how to further investigate if their actions will impact the enterprise's financial performance.

Ensure safe work environments

All enterprises should adopt ethical labour standards and seek to provide safe working conditions for both their staff and clients. Clear benchmarks should be established by financial teams that support proper working conditions.

Participate in community philanthropy

Donations, community philanthropy activities, and investments in local infrastructure projects are all ways for businesses to show their commitment to assisting local communities. Financial departments should consider the proper allocation of financial resources to these initiatives. 

Work with local suppliers

Sourcing local items is also a quantifiable effort to strengthen a business's community ties. In this context, financial departments should balance the profitability of these new partnerships and assess their feasibility.

Governance standards in finance

Although environmental reporting and social impact may be uncharted areas for compliance teams, governance challenges are tightly entwined with traditional compliance operations like legal affairs, internal audits, and human resources.

High standards of business ethics and corporate governance preserve openness, transparency, and the rule of law, enhancing investor interests' protection and maintaining investor trust.

Align the activities of the departments

Are the objectives and ESG KPIs articulated in concrete, executable terms for doing business, and are they conveyed openly across the organisation? There is no use in reporting what is not really occurring in the daily business conduct.

Ensure transparency in decision-making

Consider any national or international policies about the budget, debt, and financial management. Next, financial teams should assess if they are practical, adhere to, and encourage responsible financial management practices.

Solid financial reporting procedures

It is important to ensure that you conduct accurate and dependable financial reporting supported by reliable financial statement preparation systems. Some of the issues that can be considered are: How is the budget tracked throughout the fiscal year? When is the information created, and is it utilised for financial management?

Clearly communicate ESG objectives

Forward-looking objectives and KPIs enhance the enterprise's credibility. Investors are interested in not just a company's historical success but also its future ESG strategy and implementation.

Integrate ESG assessments with financial impact

Adopting ESG as part of your yearly financial review is a recommended practice reporting. Ideally, the CFO and Board of Directors would evaluate the ESG performance of a firm alongside its financial success.

6 steps to help you embrace ESG and sustainable finance

1. Match ESG strategy with corporate strategy

Successful ESG activities must align with business strategy. Integrating ESG into your corporate process entails establishing sustainability guiding principles to guide investment decisions to create value; prioritising strategic initiatives by integrating ESG drivers into business applications and quantifying sustainability aspects; and driving ownership, accountability, and organisational influence across the business. Clarify the wide spectrum of stakeholders that will evaluate the ESG performance of your organisation.

2. Assess knowledge gaps

The examination of any new ESG standards or processes should include an assessment of the finance team's existing knowledge and the potential need for additional expertise. Finance executives may identify skill shortages within their teams but may also discover that existing knowledge may be applied to ESG issues.

3. Choose the proper ESG framework

Whether conducting an internal audit or engaging a third-party auditor to analyse your ESG risks, you must pick one or more ESG frameworks that are compatible with your organisation's objectives. The Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-Related Financial Disclosures (TCFD) are two of the most widely used frameworks, with the Global Reporting Initiative (GRI) coming in a close third. SASB gives wider sector-specific guidance on a variety of ESG risks, while TCFD focuses more narrowly on climate challenges.

4. Discuss the ESG dimensions

Start a conversation about the connection between ESG performance and financial health. The second is a precondition for the first, and ESG performance is essential to long-term financial health. Ensure that your management reports represent the organisation's strategic goals and that action-oriented drivers explain the appropriate KPIs.

5. Strengthen ESG reporting

ESG commitments require iterative reporting to stakeholders. Finance teams may give ESG development the same weight as financial outcomes. Some of the most prevalent ESG measures that might be considered are energy consumption, air quality, waste generation and water management.

6. Prepare for audit

Before the advent of a broader range of mandated advice, organisations were allowed to report ESG data using a variety of frameworks or recommendations. This has made it difficult for stakeholders to compare other organisations' efforts and outcomes or to feel confident that they are receiving a complete or objective view of an organisation's success.

Unlock the power of ESG within the finance function 

As enterprises with strong ESG credentials draw modern investors, it is paramount for CFOs leading the finance function to understand the potential of ESG and learn how to put it into practice.

Moving forward, CFOs must broaden their ESG responsibilities to encompass sustainability challenges if they want to fulfil internal and external expectations and secure long-term success.

Numerous major corporations are successfully using the Cloud to assist their ESG strategies, as they automate processes and standardise data, increasing transparency inside the business and assisting executives in gaining a deeper understanding of various social and environmental hazards.

Advanced’s financial management and accounting software enables you to benefit from these advantages, boosting your bottom line and benefiting the environment. Get in touch with our Cloud financial management experts to find out more.

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Daniel Docherty

Daniel Docherty


Director of Strategy

Daniel joined OneAdvanced in May 2019 to lead our Software as a Service portfolio, moving on to lead the overall Finance Management, Spend Management and People Management strategy. He brings over 18 years of experience in core business and finance solutions, working with customers from a wide background of industries and scale.

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