diving letter:
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While 65% of financial reporting teams plan to increase their support for environmental, social and governance (ESG) programs in the future, less than one in ten companies surveyed have given finance departments primary responsibility for overseeing ESG program reporting and tracking theirs Firms, according to a survey of investor relations officers (IROs) from the National Investor Relations Institute and Donnelley Financial Solutions.
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The top corporate departments responsible for ESG reporting and tracking are Sustainability (27%), Investor Relations (24%) and Legal (23%), followed by Finance (9%). Almost half (44%) of them said ESG data is stored and shared through programs like Microsoft Teams, Google Drive and Dropbox, rather than on a secure platform, the survey found.
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Companies use “a bit like wire and gum,” said Frank Kelley, director of ESG & Compliance Services at Chicago-based Donnelley, in an interview. “In general, there are strong financial controls for accounting, financial metrics and disclosure, and the report found that those controls are really lacking in the ESG area.”
Dive insight:
The report’s findings on lax internal controls over ESG data come as the potential costs of incorrect ESG reporting rise amid increasing regulatory scrutiny.
The Securities and Exchange Commission plans to require companies to describe their governance and strategy related to climate risk on Form 10-K and has created a task force tasked with addressing misstatements in issuers’ ESG disclosures to identify. Meanwhile, the International Sustainability Standards Board (ISSB) gathers regulators from the US, Europe, Japan and other jurisdictions around common rules for disclosures on climate risk and other ESG topics.
These changes are helping to drive a paradigm shift in the way companies and their leaders approach ESG. In recent years, corporate boards have taken a central role in the programs, and increasing input from CFOs is needed as the costly programs become a capital allocation issue, Kelley said.
“It’s changing from a communication tool where you say, ‘We’re doing these great things,'” Kelley said. “As the SEC and broader stakeholders focus more on ESG, it’s become more of a disclosure document…you need proper controls over it.”
CFOs should start small when considering technology for their ESG initiatives, said Kelley, whose company provides software and systems that can be used for ESG initiatives. Executives can start by housing the data in a secure and inexpensive data room and build two years of baseline metrics before considering more complicated platforms, he said.
Businesses should “not get ahead of their skis,” Kelley said. “If they don’t have at least two years or reporting metrics, [the technology] is often wasteful and underutilized.”
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