Why the Office of the CFO is Making Climate and ESG Ambition a Reality

Despite the headwinds generated by a growing anti-ESG movement, activists, stakeholders, NGOs, and other influencers are escalating their pressure on businesses and financiers to address critical social and environmental problems. Long-term value creation and protection prospects also drive businesses to pursue climate transitions and ESG transformations at scale. The office of the CFO—including controllership, finance, accounting, treasury, tax, FP&A, reporting, internal audit, and financial technology (fintech) groups—is playing an influential role in climate and ESG transformations.

Any discussion of how businesses can successfully implement climate and environmental, social, and governance (ESG) strategies must include the influential role of the office of the CFO. This article first discusses the forces defining the climate and ESG business landscape. This context is followed by perspectives on why the leadership, influence, and expertise of the office of the CFO—including controllership, finance, accounting, treasury, tax, FP&A, performance reporting, internal audit, and financial technology (fintech) groups—are playing an influential role in climate and ESG organizational transformations.

A Look at Context: Forces Defining the Climate and ESG Business Landscape

Climate transition and ESG organizational transformation initiatives are complex, controversial, and confusing; the landscape is rapidly changing, and the future is uncertain. Several complex forces and variables define and inform the climate and ESG business landscape.

Social pressure.

For example, despite the growing and formidable anti-ESG movement, environmental agencies and NGOs continue to remind world leaders that annual global clean energy investments of more than $4 trillion will be required by 2030 to avert a catastrophic climate disaster (World Economic Forum, “Financing the Transition to a Net Zero Future,” https://tinyurl.com/2au5h9fw). Exhibit 1 presents examples of calls to action.

EXHIBIT 1

Calls for Climate and ESG Action

Compliance and Trustworthiness: Seeking Standardization

Businesses are also facing questions about the trustworthiness of their climate/ESG reporting, disclosure, compliance, and assurance. Stakeholder and regulator concerns persist over the integrity of climate and ESG regulatory compliance, reporting, and communications. This is partly due to complexity, greenwashing, and the proliferation of changing regulations, standards, and voluntary frameworks (see Exhibit 3 for examples). This resulting lack of standardization and comparability from period-to-period and peer-to-peer creates confusion among preparers, regulators, and users/decision-makers. Progress continues, however, on harmonizing standards and guidance. Recent examples include the following.

Why the Office of the CFO is Making Climate and ESG Initiatives a Reality

Some organizations have formed centralized teams under the direction of an ESG leader (e.g., Chief Sustainability Officer). Whether or not such a centralized team exists, the office of the CFO—including controllership, finance, accounting, treasury, tax, FP&A, performance reporting, internal audit, and fintech groups—is increasingly playing an influential role in a company’s climate/ESG transition journey. Why is that?

Several factors contribute to the CFO’s role in a company’s climate/ESG transition, such as playing an influential role at the C-suite leadership table, co-leading and influencing various organizational transformations, cross-organizational and external stakeholder insights, access and credibility, and possessing a diverse range of relevant and unique expertise (see Exhibit 4 for examples).

While such competencies position the office of the CFO as a trusted influencer and collaborator in deploying and scaling climate and ESG transition initiatives, the office of the CFO will need to supplement existing skills with mastery of specific fields of practical knowledge in the climate and ESG domains in order to perform these responsibilities effectively (e.g., through continuing education, hiring, and strategic sourcing from third-party vendors). This includes the practical application of current and emerging regulations, standards, and frameworks (e.g., Greenhouse Gas Protocol Corporate Accounting and Reporting Standard, sustainable financing, and carbon instruments such as green bonds, sustainability-linked loans, and carbon credits).

To illustrate how the office of the CFO is increasingly playing an influential role in a company’s climate/ESG transition journey, the authors compiled the following top 10 list (in no particular order) of ways in which the CFO is well positioned to collaborate with the C-suite on climate and ESG initiatives. This is not an exhaustive list, and the nature and extent of such engagement by the CFO in these items will vary based on the size, sector, and strategy of a particular business.

1. Climate and ESG Strategy: Operationalizing Ambition and Purpose

The CFO is well positioned to help the C-suite embed climate, ESG ambitions, and purpose into strategy. Purpose statements initiate ambitions to embed climate/ESG strategies into the organization. “ESG can’t be seen as something separate from the business strategy,” says Conger. “So much of what we are focused on is ensuring that we don’t have stranded assets in the future and that we are as competitive as possible in the marketplace for our funds, people, and customers.” For example, the office of the CFO can help allocate resources based on stakeholder materiality and ROI, access company-wide data, manage sources and uses of financing, budgeting, and risk management.

2. Stakeholder Engagement/Double Materiality

Materiality informs climate/ESG strategy, stakeholder engagement, and social license to operate. Applying materiality is a complex process involving quantitative and qualitative performance measures. In the ESG space, it entails applying double materiality, which consists of 1) the material financial impacts of climate/ESG on the company and 2) the adverse impacts of the company on society and the environment. Such materiality assessments are designed to continuously engage stakeholders to infuse material expectations into climate/ESG strategies and inform resource allocations. The office of the CFO can help engage selected internal and external stakeholders to better understand what is considered material. They can also contribute to establishing climate and ESG performance targets, monitoring progress, and reporting, through actions such as designing and implementing processes to collect data, monitoring the results, addressing gaps, and governing risks.

3. Financing Climate Transition and ESG Transformation

The core finance expertise of the office of the CFO is an important component of an entity’s successful climate transition and ESG transformation. One example is that the CFO can lead efforts to access capital markets to help secure enabling financing. “We are finding that preferential financing is not as big a driver today as we’d like,” says Conger. “Most lenders and investors like to see ESG but aren’t willing to pay more yet. However, we do see that it can bring in philanthropic dollars that can be beneficial. In the long term, we anticipate the market will demand ESG, so part of the financial strategy is essentially defensive.” The CFO is well positioned to negotiate financing strategies to obtain a lower cost of capital by meeting specific climate/ESG requirements, such as sustainability disclosures and financing covenants.

4. Internal Capital Allocations and Budgeting

The office of the CFO typically leads the company’s financial planning and budgeting process and works with functional and divisional leadership to approve capital allocations. Accordingly, they can help ensure that business cases are developed to allocate budgets toward sustainability initiatives where appropriate. Tapping into these core competencies, the finance function can conduct cost-benefit analyses using discount rates that consider physical risks (e.g., flooding) and climate transition risks (e.g., regulatory compliance). Exhibit 5 presents additional considerations in sustainable financing.

5. Rating Agency Scores

The CFO is well positioned to navigate the impact of climate and ESG factors on rating agency scores. While rating agencies employ different methodologies, the process typically involves integrating publicly available data with the company’s voluntary disclosures and reporting. The CFO can help ensure that the company provides comprehensive responses to rating agency requirements, including questionnaires, interpreting publicly available data, negotiating covenants, and governing compliance.

6. Climate/ESG Transition Planning and Roadmaps

Increasingly, stakeholders and regulators expect organizations to have a comprehensive climate transition plan, including goals, targets, strategies, resources, decarbonization plans, and accountability—for example, to deliver real-economy emissions reductions with a pathway to net-zero GHG emissions. The office of the CFO can contribute to the creation, execution, and monitoring of climate and ESG transition plans and roadmaps. Creating transition plans and roadmaps raises several questions:

7. CFO Influence—Internal and External Stakeholder Engagement and Collaboration

The success of climate/ESG initiatives hinges on trusted buy-in, collaboration, and accountability from stake-holders. By its very nature, the office of the CFO routinely collaborates closely with several cohorts of internal and external stakeholders on a range of initiatives and issues. This trusted subject expert, collaborator, and influencer role is instrumental during climate/ESG transformations. Why is that?

One reason is that the office of the CFO has the necessary skills to analyze non-financial, unstructured climate and ESG-related data from operations, human resources, marketing, sales, and vendors to determine budgets, allocate funding, measure progress, and report on results. Another reason is that they are already positioned as leaders in designing governance, risk, and compliance (GRC) policies; risk analysis; and controls over regulations and vendor contract terms (e.g., cloud service providers), including shared accountability for governance. Such GRC competencies are essential to the success of climate and ESG transitions, given the rapidly changing regulations and growing concerns over the veracity of reporting and disclosures (i.e., greenwashing).

8. Collaborative Innovation

Operationalizing climate/ESG purpose in an organization requires integrating climate and ESG strategy into day-to-day operations. Collaborative innovation—that is, bringing together multi-disciplined perspectives and stake-holders to create innovative, mutually beneficial solutions—is crucial to this process. The office of the CFO can contribute to fostering collaborative innovation engagement with internal and external stakeholders to develop solutions.

9. Trusted Transparency: Climate and ESG Regulations, Communications, and Reporting

Climate/ESG stakeholders expect communication and reporting clarity—in other words, trusted transparency. A business must show that it is “walking the talk” of its climate/ESG purpose and performance. CFOs play a crucial role in this process through the following areas:

10. ESG Maturity Models

Nearly half of executives in climate, ESG, and finance roles for midsized and larger companies have worked on ESG for less than three years (NASDAQ, “2023 ESG & Climate Survey,” https://tinyurl.com/yxtf82f2). Knowing where the company stands is a crucial early step in climate/ESG transitions. An ESG maturity model can help define the current state of an organization’s journey.

ESG maturity models include pre-defined stages of aspiration and progress. The current state can then be compared with longer-term aspirations to identify gaps and create a timetable to fill these gaps. Numerous ESG maturity models are available today. For example, CohnReznick sorts companies into the following three tiers of ESG maturity:

Long-term Leadership

Activists, stakeholders, NGOs, and other influencers are exerting pressure on businesses and financiers to solve the world’s critical social and environmental problems. Long-term value creation and protection prospects also drive businesses to pursue climate transitions and ESG transformations at scale.

The office of the CFO has a growing agenda of priorities (e.g., digitalizing finance, talent management, data quality, balancing short-term and long-term value focus, and integrating the GRC ecosystem). Despite this jam-packed agenda, the office of the CFO—including controllership, finance, accounting, treasury, tax, FP&A, reporting, internal audit, and fintech groups—is playing an influential role in climate and ESG transformations.