Data is the carbon of the financial reporting ecosystem – that is, it is the building block upon which all information is composed. Accordingly, ESG data are the rudimentary elements that will be collected, aggregated, and analyzed to comply with various ESG reporting requirements, namely the SEC’s climate disclosure proposal.
With the SEC’s proposal, an important alignment has occurred among ESG, digital transformation, and the finance function. Finance professionals are poised to combine their expertise with processes and controls with tools and technologies to create the infrastructure that will power organizational ESG reporting efforts.
To highlight this critical confluence and help bridge the knowledge gap, the Financial Education & Research Foundation (FERF) of Financial Executives International (FEI) partnered with Persefoni to study how finance functions are evolving in response to the SEC’s climate disclosure proposal.
Q&A With Joe Cavanaugh, VP of Strategic Finance at Persefoni
Q. How should finance professionals think about auditability as they make and implement changes to the systems that capture, store, and analyze climate data?
A. Auditability must be a core tenet of any company’s GHG data management process and strategy – no different than in financial accounting. First, the audit and assurance requirements included in the initial SEC proposal provide a strong indication of where we are headed from a regulatory perspective. Second, as the market evolves from the question of “what is your GHG emissions baseline?” to “what are you doing to reduce it?”, companies need to ensure comparability across systems and calculations for various time periods in support of monitoring and demonstrating progress to stated goals and targets.
As climate data informs contextualization of risks and investment decisions at the executive and board levels, potential restatement due to adjustments in calculation methodology or systems used will be problematic. Those companies that are thinking about these processes and requirements today are setting themselves up for success given the potential lead time for the development and implementation of a sound reporting process from the perspectives of data management, auditability, and controls.
Q. When onboarding new companies, what are their biggest pain points related to maintaining a rigorous structure to extract, capture, and analyze their climate data?
A. Data management in the context of producing disclosure grade climate management and accounting data is a challenge. Compared to financial accounting, enterprise carbon accounting – driven by the Greenhouse Gas Protocol (i.e., GHGP) - is a newer discipline with diffuse data sources and types, and generally with less-developed internal systems and resources behind it.
For companies in the midst of implementing a carbon accounting solution – whether doing it for the first time or upgrading to a higher level of sophistication and management – it is critical that they keep in mind their end goals (e.g. public disclosure, auditability, and compliance with prevailing standards) and ensure that all of their data sources and approaches to data management are aligned in support of those goals. Data sources may need to be replaced or upgraded, or processes to be refined, in pursuit of developing enterprise-grade answers that will inform a company’s management strategy.
Q. How has the conversation around climate data changed over the past few years? How do you think the conversation around climate data will change as finance professionals continue to enter into the conversation in a more significant way?
A. The conversation around “climate data” has evolved rapidly – where previously sustainability offices led the charge with a focus on discretionary reporting and reductions, the center of climate discourse is quickly moving toward the CFO’s office.
With the SEC’s proposal and investors’ desire to see standardization of reported data, we are moving closer and closer to the obvious analog – financial accounting – to see how corporations will need to align their internal systems and controls to support data management and reporting that will be truly disclosure grade. The core expertise that the finance function holds in these areas will be critical to implementation and management in the face of the evolving regulatory and shareholder landscape, so it is a very natural evolution to see this discussion push into the realm of the CFO’s office and the Audit Committee. However, we believe that the conversation will remain multi-disciplinary involving not just finance but also legal, strategy, sustainability, operations, supply chain, and human resources.
In a FERF research interview conducted prior to the SEC’s climate proposal being announced, one financial professional at a large public company commented on how they were approaching controls and processes: “We’ll get working on controls when we know what we are reporting on and the accompanying reporting requirements.” His sentiment reflected one shared by many others at that time. Whereas finance professionals were in a wait-and-see mode, finance leaders at large public companies have already increased and are continuing to grow the time and attention they are investing in preparing to comply with reporting requirements.
*FERF collaborated with Persefoni on a survey of 50 finance professionals at firms with average revenue of more than $5 billion per year to examine how roles are evolving to prepare for major climate disclosure rules such as the SEC’s climate disclosure proposal. To learn more, read our report How Corporate Finance is Preparing for Climate Disclosures & Best Practices.