ESG » The sustainability revolution: Why some companies will not survive

The risk of falling behind in the “sustainability revolution” is growing rapidly as the industry continues to develop at a swift pace, placing greater pressure on CFOs and business leaders to “step up”, according to Ambrose Shannon, managing director of sustainability services at Accenture.

“Finance needs to step up even more. CFOs need to be able to provide the visibility to all parts of the business around how [they’re] funding and financing the transition and how the transition feeds back into profits and bottom-line strength.”

However, this isn’t about becoming green for green’s sake, he says. CFO’s need to focus on transforming the business into a sustainable one, maintaining its profitability within the transition.

A recent report by Accenture found that 47 percent of companies don’t have the proper resources to track and implement ESG commitments. Similarly, only 31 percent of companies had fully embedded ESG data in their core operational and management information systems.

“Nobody is better placed than finance to really understand how we monetise and what the commercial implications of the transition are for our organisation.

“The trick and difficulty will be, how and when do [you] allocate capital from current business to future green business. That’s where CFOs are going to have to rely on data.”

Automation offers solution to ESG data challenges

The level of granularity in unstructured ESG data that companies need to provide, as well as be able to compare the different metrics used, such as in carbon emissions and water usage, can often create a roadblock, says Shannon.

“When you’re a finance person, you know the difference between a financial number and another financial number. Not necessarily the same is said with ESG data,” he says. “Our inability to size or gage what these different constructs are is going to take a little bit of time to get used to.”

One of the solutions around ESG data lies in automation, says Shannon. “It’s a combination of data, technology and people.”

However, 70 percent of companies are still using manual or semi-automated process for their ESG reporting, according to Accenture’s report.

Previously, organisations have modelled datasets on spreadsheets to provide responses for the investment community around disclosures that required low levels of granularity.

“That’s untenable given the volume of data that’s coming,” says Shannon. “Organisations think what the banks have asked from them thus far was involved, wait till we see where the banks are going.”

Companies are under increasing pressure to understand what their Scope 3 emissions are, with the reporting category viewed as the most challenging for businesses as it applies to emissions they are indirectly responsible for along their value chain. Currently, it’s optional for companies to report on Scope 3 compared to both Scope 1 and 2 which are mandatory.

For the banks to understand their own Scope 3 position, they need organisations to also figure out what their Scope 3 emissions are too, says Shannon.

“The only way [companies] are going to be able to collect all that data, model it, understand it and embed it into [their] own performance is by housing that on a sophisticated data solution – it must have that level of rigor.”

Additionally, the datasets need to be auditable, and spreadsheets are a “nightmare” for auditors and CFOs, points out Shannon.

Investor tolerance is decreasing

With the anticipated harmonisation of frameworks and developments around the International Sustainability Standards Board (ISSB), investors are becoming less tolerant of companies using the ‘too many frameworks’ excuse, according to Shannon.

“Many organisations are now disclosing, so the rationale why your organisation isn’t is becoming less tolerable,” he says.

However, 44 percent of companies said an inability to define and prioritise material ESG issues for disclosure is one of the top challenges in measuring and reporting ESG performance.

With earnings season approaching, investors will be looking for the external disclosures in company statements, how embedded they are in internal strategies and whether the reports are consistent with what they see, says Shannon.

Businesses at risk of being left behind

As banks prioritise their investment to companies meeting ESG requirements, those that were “off to the races earlier” could start to pull away from the rest.

“Organisations that are able to clearly demonstrate and articulate how they’re pivoting and undertaking the transition will get a disproportionate amount of financing,” says Shannon.

This could trigger a “two-speed flow” among organisations; those who are progressing faster with ESG will have greater access to funding, compared to those “slow off the block” who could get left behind.

Accenture’s report revealed that organisations that can translate ESG metrics to show progress on their sustainability goals are able to generate around 2.6x higher on total return to shareholders compared to those that haven’t.