As companies ramp up ESG reporting, CFOs remain unconvinced

Accounting

Finance executives are wary of efforts to report on environmental, social and governance issues, although other executives are more open to tracking issues like diversity and inclusion, according to PricewaterhouseCoopers.

PwC’s latest CFO Pulse survey found that nearly 50 percent of the executives polled said their organization will increase diversity and inclusion reporting to internal and external stakeholders. However, when CFOs were asked about the finance function’s priorities, CFOs were less likely to point to the importance of ESG. The top priorities of CFOs include establishing the finance function as a strategic business partner (47 percent), increasing automation (41 percent) and cost management (39 percent).

Investors and other stakeholders are pressuring companies to provide more detailed reporting on issues like sustainability in response to mounting concerns about climate change and the growing appetite for ESG investment funds. Diversity and inclusion have also become top priorities at many companies in response to the Black Lives Matter protests sparked by the killings of George Floyd, Breonna Taylor and others last year, and the string of attacks on Asian Americans since the outbreak of the pandemic. ESG standard-setters like the Sustainability Accounting Standards Board, the International Integrated Reporting Council, the Global Reporting Initiative, the Climate Disclosure Standards Board and the Carbon Disclosure are working on harmonizing their standards and frameworks, in coordination with the International Financial Reporting Standards Foundation, which is laying the groundwork for an international sustainability standards board that it will oversee alongside the International Accounting Standards Board.

There does seem to be growing recognition of ESG issues among CFOs. “The finance function is partnering with the rest of the business and getting beyond the finance reports,” said Wes Bricker, vice chair and assurance leader at PwC. “We see this as part of the ESG trend. But as CFOs understand operational data, other non-financial data, which will have a financial effect over time, CFOs can be relevant in the core competencies of good controls, quality reviews and then creating information that’s decision useful and decision worthy. CFOs are prioritizing that, and this is coming through in the data — 69 percent of CFOs said that coordinating ESG data and information across the company is a priority. That was not a priority a few years ago, so we’re seeing a bigger trend with CFOs reaching deeper into the company, partnering with their business leaders and understanding data, oftentimes non-financial, that’s relevant to bringing the business forward and advancing it.”

PwC U.S. assurance leader Wes Bricker

CFOs can leverage ESG as an avenue to help the finance function stay close to business priorities, but only 21 percent of the CFOs polled by PwC see enhancing ESG reporting and disclosures as a priority in 2021. However, by not making ESG reporting more of a priority, CFOs may be at risk of falling behind on future expectations around disclosures.

The survey found that 68 percent of the CFOs are focused on metrics, material issues and frameworks. “CFOs see it as part of their mandate to understand how to measure relevant non-financial information,” said Bricker. “That’s the foundation for reporting up to the audit committee, up to a board and a risk committee, reporting performance measures to the compensation committee, so CFOs are playing a key role in that assurance question. How does a board know that the data is high quality and investment grade? That’s where assurance comes in. Boards are looking for assurance that the information is at the same level of quality that investors expect, and we’re responding to that call with assurance offerings.”

The Securities and Exchange Commission is putting more attention on ESG reporting and disclosures under its new acting chair, Allison Herren Lee. and Bricker, who was chief accountant at the SEC before returning to PwC, has noticed.

“I do see the SEC focused on the issues that companies have been addressing in their reporting on websites and responses to investor surveys,” he said. “The SEC is now asking the question of whether that information should be integrated into SEC filings. Climate change is a topic Acting Chair Lee has prioritized as part of the broader attention to ESG data. You look back, and [former SEC chair] Jay Clayton focused on human capital, which is the S in ESG. and [former SEC chair] Mary Jo White focused on governance, such as cybersecurity and breaches and how that information needed to come up through companies to the board to be properly overseen and resolved. So, the Commission over time has prioritized different elements. I think it’s important to see climate change in the context of a broader effort by the Commission on reinforcing high-quality disclosure, which is the bedrock of our capital markets. And that’s where PwC also comes in because it’s that focus on building trust in society through high-quality information.”

One risk looms large for CFOs: the talent and skills shortage. Like most executives surveyed, 93 percent of CFOs believe the availability of talent with technical skills is crucial. Over the next year, 62 percent of the CFOs surveyed by PwC predict their company plans to increase diversity and inclusion training, and 51 percent anticipate an increase in D&I reporting to internal stakeholders.

The survey also found CFOs anticipate significant growth opportunities in key areas related to the digital economy, with 46 percent of the respondents predicting high growth and 36 percent anticipating moderate growth. They also foresee high growth in consumer behavior shifts due to the pandemic (34 percent) and the work-from-home trend (21 percent). Those opportunities appear to outweigh concerns about risks related to increased regulation and trade and tax concerns with the Biden administration. CFOs’ top priority for the finance function is to establish finance as the business partner to the rest of the business. Other priorities include automating processes and reducing cost as a percentage of total revenue.

“Following a year of major disruption, we had major upheaval across business, CFOs are expressing a much brighter outlook for 2021,” said Bricker. “Almost half of CFOs, or 46 percent of them, view the digital economy as a high-growth opportunity.”

Approximately 81 percent of the CFOs surveyed expressed optimism about the U.S. economic recovery, exceeding the broader C-suite’s positive outlook of 76 percent. More than three-quarters (76 percent) of CFOs are optimistic about the U.S. pandemic response (which was also higher than that of all executives at 71 percent). Their revenue outlook is also positive, with 87 percent anticipating growth over the next 12 months, up from only 25 percent in September and 28 percent in October, according to PwC’s quarterly CFO Pulse surveys. Only 4 percent anticipate their company’s revenue will decline, which is a big improvement from the 51 percent who expected a drop in revenue six months ago.

CFOs see three big risks ahead: a more challenging regulatory environment, U.S.-China tensions and global trade and tax policy, with 41 percent indicating they’re pessimistic about the U.S. policy and regulatory environment.

Nonetheless, the survey bodes well for CFO perceptions of an economic recovery in the U.S. this year. “A third of CFOs see long-term pandemic-related shifts as a major growth opportunity,” said Bricker. “That’s taking something which has been so disruptive, so concerning, and has threatened many of us at personal levels and professional levels, but nonetheless augurs a future that works differently from the past, with a return to work, investments in our people, investments in the skill sets for tomorrow. All of those things form a brighter outlook for 2021. Most CEOs, or 81 percent of them, are optimistic about a U.S. economic recovery. Translating the oftentimes multinational view that CFOs have in their businesses, what does that mean for the U.S. as a country? Fueled by the focus on moving from vaccines to vaccinations at scale, the encouraging economic data that we have, gains in our labor market and continuing expansion in manufacturing, I feel really good about how CFOs see the U.S. economic recovery.”

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