The Sustainable Finance Function

Since the beginning of this year, most financial institutions need to comply with CSRD. They have adopted ESG (Environment, Social & Governance) goals into their strategy over the past few years, connecting shareholder value with ESG goals. These organizations are developing and embedding measurable and smart KPIs (Key Performance Indicators) and monitoring these in their internal performance dialogue. They have taken commendable strides in producing initial 'actual' metrics, primarily through hands-on (unstructured) processes. Now, they're diligently working to fortify their capabilities, aiming to steer the organization in a controlled and structured manner towards its predominantly long-term strategic ESG goals.

The Sustainable Finance Function we allude to here is working towards monitoring, reporting and co-steering on the organization’s ESG goals. This requires evolving the existing core Finance Function capabilities in order to incorporate ESG and CSRD in a sustainable way. There are a number of complications that hinder the implementation of these capabilities:

Performance Management: existing strategic ESG goals are often not sufficiently translated to specific business, product or market segments. Even if they are, the additional complication is that long-term goals (e.g., ambition C02 neutral by 2040) require additional detailing to incorporate targets over the in-between periods, so that the transition can be monitored over time and the organization is able to track progress and avoid unforeseen surprises as the goal gets closer.

Accounting & Reporting: many financial institutions are still challenged in getting the initial actual data adequately sourced in a structured, controlled and repeatable way. The production relies mainly on ad hoc processes or work-arounds and consolidation is tricky due to a lack of standardization and alignment within the organization. This also means that the data is challenging to audit, complicated further by inadequate documentation and evidence.

Planning & Control: most financial institutions currently have limited capabilities within the Finance Function for adequately controlling the ESG data. The unstructured way in which the data is gathered, makes movements analysis and period-to-period comparisons virtually impossible. This makes it difficult for organizations to adequately explain progress and steer on deviations. Moreover, the previously mentioned lack of detailed targets makes comparing those with the actuals equally challenging. 

Finally, a complication which is irrespective of the specific function: finance is not very used to dealing with non-financials. These data are more expansive in scope, less detailed, sometimes unstructured and usually not expressed in euros which is the familiar currency of finance. Getting the people within finance familiar with these non-financial data requires a cultural change within the function.

Integrated view of value: many Finance Functions are continually expanding their scope to safeguard the value creation and value extraction from an integrated point of view. It is essential, from the outset, that 1) it is clearly defined what ESG means for the organization; and 2) that the Finance Function outlines a vision, structure and implementation plan for establishing (central) processes for data collection, reporting, performance management and communication to internal and external stakeholders. Some organizations attribute this expanded role to the ‘Chief Value Officer’, whereas other have elected to embed this explicitly within the CFO role itself. The CVO or CFO are therefore (cultural) changemakers, taking ESG capabilities to the next level from their central role, by communicating the comprehensive value story to internal and external stakeholders.

Mastering the data: in a similar fashion to any other major new reporting regulation, the starting point for the Finance Function is organizing a structured, standardized and controlled sourcing of data from its entities to the group. The IT architecture and the data models therein will require expansion and the corresponding data flows should be integrated as much as possible to allow for a smooth and aligned processing from source to report. The IT systems will require additional calculations for movements, deriving the KPIs and providing the additional down-drill and projection functionality. The data models will require expansion, primarily in the scope rather than in the detail of data. Alignment between the data will be driven more by efficiency purposes than by regulatory or accounting necessity.

Developing the finance talent: underscoring all the above is the need to equip finance talent with the skills to understand, analyze and interpret non-financial data and deliver insights on ESG progress to the business in an impactful way. First of all, the Finance Function will need to increase its speed of adoption of new techniques and methodologies. To adequately steer towards long-term goals, forecasting on ESG data will become more and more important. Given the scope (both in terms of data as well as in time), data analytics and AI (Artificial Intelligence) will be essential components of the new capability here. Secondly, the Finance Function’s ability to act as a true business partner will become more important than ever before. Finance business partners need to step ahead of the pack and lead the business dialogue. This way, finance not only co-steers the organization’s progress on its ESG goals, but in doing so also pro-actively embodies a truly Sustainable Finance Function.

1. Define Reporting Scope and Prioritization. Identify the size, materiality, and impact of what needs to be reported now and in the future. Define reporting ambitions, considering alignment with peers and emerging best practice. Finally, categorize, prioritize, and classify ESG metrics, in order to identify which metrics are ‘core’.
2. Achieve a robust and efficient operating model to deliver your reporting. Move away from a fragmented ESG operating model and achieve transparency of ownership over processes, controls, and metrics. Establish a robust control and assurance framework over your ESG reporting processes and metrics.
3. Develop a supporting data ecosystem and architecture. Understand data gaps and how they can be remediated. Develop an integrated data catalogue, mapping data sources, domains, and critical data elements for prioritized ESG metrics. Define financial and non-financial reporting target state architecture.