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No matter how you feel about rules in general, climate-related regulations around the world will place new duties on financial reporting teams.
The U.S. Securities and Exchange Commission has proposed several changes in what it wants public companies to disclose about climate-related risks. Even private companies and those headquartered outside Europe may have to report on material climate-related impacts under the European Commission’s Corporate Sustainability Reporting Directive (CSRD). The SEC and European Commission both want these disclosures audited. Meanwhile, California has adopted reporting requirements around climate-related financial risks that would affect both public and private companies of a certain size.
The push for material data related to climate and other environmental, social, and governance (ESG) data to be not only disclosed but also assured has prompted some companies to create a role for an ESG controller. This person would have oversight over the collection, reporting, and credibility of ESG data.
Let’s talk about why companies are adding this job title, why people with accounting, finance, or audit backgrounds might be in a prime position to go for the role, and suggestions to help an ESG controller start off strong.
The need for the role
As regulators and other stakeholders demand assured ESG disclosure, companies will need to build processes to ensure that publicly reported ESG information is as reliable as the financial data they report.
One difference between financial data and ESG data is that ESG data can come from multiple disconnected source systems, manual processes, and even from outside the organization. Certain data points like emissions data may rely on significant management estimates. Much of this data may have never been audited.
Wes Bricker of PwC has said an ESG controller is the position you didn’t know you needed.
Who is ready to step up?
You don’t need an ESG background to be an ESG controller. In fact this role is often filled by people with finance, accounting, legal, risk, or audit backgrounds, since they have deep knowledge of how to build a process for reporting with controls, said Kim Knickle, Research Director, ESG & Sustainability, for Verdantix, in a recent webinar.
Financial planning and analysis teams know how to examine the data for insights that influence corporate strategy. Internal audit and risk teams know how to review the data to identify emerging risks. Auditors and legal teams are skilled in preparing data and disclosures for external scrutiny. The ESG controllership opens up new career paths and opportunities for professionals with these skill sets.
This role could report to a chief financial officer, or some companies have opted to have this person report to a chief sustainability officer or another functional executive. Just note that if financial reporting teams are incorporating ESG data into annual financial reports, they’ll be the ones ensuring that ESG data can stand up to an audit. They’ll also be bringing financial reporting standards to ESG data.
Suggestions for building assured integrated reporting processes
As you build your ESG reporting process, your company can build its controls process for that data in parallel, said Charles Calovich, a Governance, Risk, and Compliance (GRC) Industry Principal at the software company Workiva.
He suggests doing a trial run of preparing an annual financial report that incorporates ESG data that undergoes scrutiny by internal auditors, so you can identify any gaps in controls. “It’s much easier to fix problems in-house before an external auditor identifies them within your annual report,” he said.
Try to view reporting requirements as not just a compliance exercise but as a conduit for strategic insights. “Compliance is not the goalpost,” Calovich said. Instead, leaders can use ESG reports to influence and drive business strategy, detect emerging risks, and identify new opportunities.
To be sure, financial reporting, ESG, and internal audit teams will have to work together to produce integrated reports of financial and non-financial data that are ready for third-party assurance. If accounting and finance teams and ESG teams all need to use the same data for multiple reports, there’s not really an efficient way to make that happen without technology, Calovich said.
The intense focus on and demand for integrated reporting have given corporate reporting teams an opportunity to win funding for people and technology that enable smooth collaboration among financial reporting, ESG, and internal controls teams. Don’t let it go to waste.
Learn about the technology more leading companies are using to bring financial reporting, ESG, and GRC teams together.