ESG: A New Value Creation Lever for IROs and CFOs
Environmental, social and governance (“ESG”) has long been associated with doing good. From its origins in corporate social responsibility to the current sustainability reporting regime, one could easily mistake ESG as yet another mechanism to encourage companies to take more responsibility for the environment and society at large. At the extreme, this altruistic view of ESG has been challenged and weaponized in the current political environment. While this politicization of ESG makes for good theater, it overshadows the value creation potential that can be driven by a well-run sustainability program. Bear in mind, ESG is just a tool, a corporate Swiss Army knife of sorts. It can be used in a multitude of capacities with varying levels of impact both within and outside of the company wielding it. However, many companies are not yet fully harnessing their ESG programs to create tangible financial value.
It’s therefore understandable that many investor relations officers (“IROs”) and CFOs have kept themselves at arm’s length when it comes to their companies’ ESG programs. This attitude must change as we enter the new sustainability reporting regime. As disclosures become more standardized, driven by a shift to mandatory reporting, the market will also shift in how it evaluates ESG programs. Investors will no longer credit companies for simply providing a comprehensive set of sustainability disclosures, but will instead focus on the actual performance of such disclosures relative to peers and the broader market. The train is leaving the proverbial station and IROs and CFOs must decide if they’re getting on board.
The New Reporting Regime
New sustainability regulations are largely aligned with more established yet voluntary frameworks, such as the Task Force on Climate-Related Financial Disclosures (“TCFD”) and the World Resources Institute’s Greenhouse Gas Protocol. But they vary in many respects, including assurance mandates, implementation deadlines and explicit non-compliance penalties. In turn, compliance will require unprecedented internal collaboration, including among the investor relations function and the office of the CFO.
Compliance with these new regulations will become table stakes over the next few years, similar to financial reporting today. However, the responsibility for understanding and disclosing drivers of performance, as well as related engagement with shareholders, will undoubtedly fall on IROs and CFOs. As ESG and financial reporting increasingly merge, these corporate leaders will need to improve their game to manage and understand such complex matters.
To help IROs and CFOs focus on what matters most, we’ve outlined four levers worth considering to augment investor relations programs and ensure value creation in this evolving, regulation-centered environment.
Related Expertise
The views expressed in this article are those of the author(s) and not necessarily the views of FTI Consulting, its management, its subsidiaries, its affiliates, or its other professionals.
©2024 FTI Consulting, Inc. All rights reserved. www.fticonsulting.com
