Getting to the Core of ESG: Unpacking the Role of a Finance Professional

Environmental, Social, and Governance (ESG) criteria are increasingly important for finance professionals. ESG is a set of standards used to measure investments' sustainability and ethical impact, and it has become an integral part of modern finance. In this blog post, we'll discuss the role of finance professionals in ESG investing and some strategies for understanding and implementing ESG criteria.

On this page

• Overview
• Why is ESG important for finance
• What is the role of a finance professional in ESG
• Current Standards and framework
• IFRS reporting requirements
• Job roles for finance professionals in ESG
• How to learn ESG for finance

Also Read

• Meaning and basic fundamentals of ESG
• ESG Interview questions
• Why storytelling is important to roll out an effective ESG plan
• ESG certification by AICPA

What is ESG?

ESG stands for Environmental, Social, and Governance, and it assesses a company's performance in three areas:

1. Environmental: This includes the company's impact on the natural environment, such as its greenhouse gas emissions, resource conservation efforts, and waste management practices.
2. Social: This evaluates the company's relationships with its employees, customers, and the broader community, including issues such as diversity, equity, and human rights.
3. Governance: This assesses the company's leadership, management, and general business practices, including transparency, accountability, and shareholder rights.

ESG considerations are becoming increasingly important to investors, asset managers, and other financial market participants to assess their investments' long-term sustainability and ethical impact. Some investors use ESG criteria to select investments that align with their values, while others use ESG data to identify and mitigate risk in their portfolios. Understanding and incorporating ESG considerations into investment analysis and decision-making can be essential for finance professionals.

Today the investment in ESG is around 3.7 trillion dollars and continues to grow at 20% yearly.

Why should finance professionals stay ahead of the ESG curve?

There are several reasons why finance professionals should worry about ESG (Environmental, Social, and Governance):

1. Long-term sustainability: ESG considerations help to identify and address potential risks and challenges that may impact a company's long-term sustainability. This can be important for investors looking to make long-term investments that will generate stable returns.
2. Risk management: ESG data can be used to identify and assess potential risks in a company or investment. This can be important for finance professionals looking to manage risk in their portfolios.
3. Regulatory requirements: In some cases, regulatory bodies or industry standards may require companies to report on their ESG performance. This can be important for finance professionals who must ensure that their organization complies with these requirements.
4. Client and stakeholder expectations: Many clients and stakeholders are increasingly interested in ESG and may expect financial professionals to consider ESG in their analysis and decision-making. This can be important for finance professionals who want to meet the expectations of their clients and stakeholders. We break this down below:

Expectations of investors, stakeholders, and shareholders on ESG

There are many different expectations that investors, stakeholders, and shareholders may have when it comes to a company's commitment to ESG. Some of these expectations may include the following:

1. Transparency: Investors and stakeholders may expect companies to be transparent about their ESG practices and performance, including addressing environmental, social, and governance issues. This may include providing information about their carbon emissions, supply chain practices, and governance structures.
2. Accountability: Investors and stakeholders may expect companies to be accountable for their ESG practices and to take responsibility for any negative impacts they may have. This may include setting targets for reducing greenhouse gas emissions, improving employee diversity and inclusion, or enhancing board diversity.
3. Responsiveness: Investors and stakeholders may expect companies to be responsive to their concerns and to engage in constructive dialogue about ESG issues. This may include opportunities for stakeholders to provide input on ESG matters and hold the company accountable for meeting its commitments.
4. Performance: Investors and stakeholders may expect companies to demonstrate strong ESG performance, including meeting or exceeding industry standards and benchmarks. This may include demonstrating progress towards meeting sustainability targets, improving employee engagement, or enhancing governance practices.
5. Integration of ESG into business strategy: Investors and stakeholders may expect companies to integrate ESG considerations into their business strategy and decision-making processes. This may include setting long-term sustainability goals and regularly reporting on progress towards meeting these goals.
6. Communication: Investors and stakeholders may expect companies to communicate regularly and openly about their ESG practices and performance. This may include providing information through annual reports, sustainability reports, and other public disclosures.
7. Engagement with stakeholders: Investors and stakeholders may expect companies to engage with a wide range of stakeholders, including employees, customers, suppliers, and local communities, to understand their ESG concerns and to address them in a meaningful way.
8. Responsiveness to changing ESG expectations: Investors and stakeholders may expect companies to be responsive to changing ESG expectations and to adapt their practices and strategies as needed to meet these expectations. This may include proactively addressing emerging ESG issues and staying up-to-date with industry best practices.
9. Overall, investors, stakeholders, and shareholders may expect companies to take a proactive approach to ESG, to be transparent about their practices and performance, and to demonstrate a commitment to sustainability and social responsibility.

Overall, the importance of ESG in finance is growing as more investors, asset managers, and other financial market participants recognize their investments' long-term sustainability and ethical impact. Understanding and incorporating ESG considerations into financial analysis and decision-making can be essential for finance professionals.

What is the role of a finance professional in ESG?

The role of a finance professional in ESG (Environmental, Social, and Governance) depends on their specific job function and the emphasis their organization places on ESG. Some possible roles for finance professionals in ESG include:

1. Incorporating ESG considerations into investment analysis and decision-making: Finance professionals may use ESG data and analysis to assess potential investments' sustainability and ethical impact and to make informed decisions about which investments to include in their portfolio.
2. Incorporating ESG considerations into financial planning and strategy: As the CFO, you may ensure that ESG considerations are integrated into the organization's financial planning and strategy. This may involve collecting and analyzing ESG data and using it to inform decision-making and strategy.
3. Assessing and managing risk: Finance professionals may use ESG data to identify and assess potential risks in their portfolios and develop mitigation strategies. This may involve working closely with other departments, such as risk management or sustainability, to ensure that ESG risks are identified and managed effectively.
4. Communicating with clients and stakeholders about ESG: Finance professionals may be responsible for explaining the importance of ESG to clients and stakeholders and for reporting on the organization's ESG performance.
5. Developing and implementing ESG policies: A financial controller may be involved in developing and implementing policies and procedures related to ESG within the organization. This may involve working closely with other departments, such as sustainability or legal, to ensure that ESG policies are consistent with the organization's overall strategy and goals.
6. Guiding ESG reporting and disclosure: You may be responsible for helping the organization comply with ESG reporting and disclosure requirements, such as those set by regulatory bodies or industry standards. This may involve working closely with other departments, such as finance or sustainability, to ensure that the organization's ESG performance is accurately and transparently reported.

Current Standards and frameworks that drive reporting on ESG 

Some several standards and frameworks drive financial reporting on ESG (Environmental, Social, and Governance):

1. The Global Reporting Initiative (GRI): The GRI is a non-profit organization that provides guidelines for companies to use when reporting on their ESG performance. The GRI guidelines cover various topics, including climate change, labour practices, human rights, and product responsibility.
2. The Sustainability Accounting Standards Board (SASB): The SASB is a non-profit organization that develops industry-specific standards for companies to disclose their ESG performance. The SASB standards cover various sectors, including financials, healthcare, and technology.
3. The Task Force on Climate-related Financial Disclosures (TCFD): The TCFD is a voluntary framework that provides guidance for companies to use when disclosing their financial risks and opportunities related to climate change. The TCFD framework covers governance, strategy, and risk management topics.
4. The International Integrated Reporting Council (IIRC): The IIRC is an international organization that promotes integrated reporting, which combines financial and non-financial information in a single report. Integrated reporting can help companies to provide a more comprehensive view of their performance, including their ESG performance.

Overall, these standards and frameworks provide guidance for companies to use when disclosing their ESG performance and can be essential tools for finance professionals responsible for financial reporting on ESG.

IFRS and ESG and disclosure examples

While the IFRS does not explicitly address ESG considerations, they require companies to disclose certain non-financial information that may be relevant to ESG. 

For example, the IFRS requires companies to disclose information about their environmental impacts, such as greenhouse gas emissions and the use of natural resources. They also require companies to disclose their social impacts, such as their relationships with employees and stakeholders.

These disclosures are usually done in the footnotes of the financial statements. Some examples are: 

Here is an example of how a company might disclose its ESG performance in the "notes" section of its balance sheet, per the requirements of the International Financial Reporting Standards (IFRS):

Note X: Environmental impacts

• During the year ended December 31, 20X1, the company's total greenhouse gas emissions were [X] metric tons of CO2e. This represents a [X]% decrease from the previous year.
• The company is subject to several environmental regulations, including the [X]. In 20X1, the company incurred costs of [X] related to complying with these regulations.

Note Y: Social impacts

• The company is committed to promoting diversity and inclusion in the workplace. As of December 31, 20X1, [X]% of our employees were from underrepresented groups, and [X]% of our board members were from underrepresented groups.
• During 20X1, the company faced [X] labour disputes. These disputes were resolved through [X] negotiations with our employees.

Note Z: Governance practices

• The company's board of directors consists of [X] members, [X] of whom are independent.
• In 20X1, the company implemented a new executive compensation policy, which [X].

Job roles for finance professionals with ESG Skills

A wide range of companies may hire finance professionals who are qualified in ESG (Environmental, Social, and Governance). These companies may include: 

Here are a few examples of industries that may hire finance professionals with ESG qualifications, along with specific examples of companies within those industries:

1. Financial services: Financial institutions such as banks, investment firms, and asset managers may hire finance professionals with ESG qualifications to help manage risk, identify opportunities, and meet the growing demand for ESG-related products and services. Examples of companies in this industry that may hire finance professionals with ESG qualifications include Goldman Sachs, BlackRock, and State Street Global Advisors.
2. Consulting: Consulting firms may hire finance professionals with ESG qualifications to advise and guide clients on ESG-related issues. Examples of consulting firms that may hire finance professionals with ESG qualifications include McKinsey & Company and Deloitte.
3. Energy and natural resources: Companies in industries such as energy, mining, and manufacturing may hire finance professionals with ESG qualifications to help manage risks and opportunities related to their ESG performance. Examples of companies in these industries that may hire finance professionals with ESG qualifications include ExxonMobil and Royal Dutch Shell.
4. Non-profit and government: Government agencies and non-profit organizations may also hire finance professionals with ESG qualifications to help manage their financial resources and address environmental and social challenges. Examples of organizations in these sectors that may hire finance professionals with ESG qualifications include the World Wildlife Fund and The Nature Conservancy.
5. Real estate companies may hire finance professionals with ESG qualifications to help manage risks and opportunities related to their properties' environmental and social impacts. Examples of companies in this industry that may hire finance professionals with ESG qualifications include CBRE and Jones Lang LaSalle.
6. Healthcare: Healthcare companies may hire finance professionals with ESG qualifications to help manage risks and opportunities related to their operations' environmental and social impacts. Examples of companies in this industry that may hire finance professionals with ESG qualifications include Johnson & Johnson and Pfizer.
7. Retail: Retail companies may hire finance professionals with ESG qualifications to help manage risks and opportunities related to the environmental and social impacts of their supply chains and operations. Examples of companies in this industry that may hire finance professionals with ESG qualifications include Walmart and Target.
8. Technology: Technology companies may hire finance professionals with ESG qualifications to help manage risks and opportunities related to the environmental and social impacts of their products and operations. Examples of companies in this industry that may hire finance professionals with ESG qualifications include Apple and Microsoft.

These are just a few examples of industries that may hire finance professionals with ESG qualifications. Many other industries may likely be interested in hiring finance professionals with these qualifications, as ESG is becoming increasingly important in the financial sector.

How can a finance professional learn ESG?

Here are some examples of ways that a finance professional can learn about ESG (Environmental, Social, and Governance) issues:

1. Take a course or program: A finance professional could consider taking a course or program focused on ESG issues, such as the AICPA ESG Fundamentals certification program or the ACCA certificate in Sustainability Programme. These programs can comprehensively understand ESG issues and how they relate to finance professionals.
2. Attend conferences or workshops: A finance professional could attend conferences or workshops focused on ESG issues, such as the Sustainability and Investing Summit or the European Conference on Sustainable Finance. These events provide an opportunity to learn about ESG issues and network with other professionals in the field.
3. Read industry publications: A finance professional could read industry publications, such as the Financial Times' Sustainability Briefing or the Global Sustainable Investment Alliance's (GSIA) Global Sustainable Investment Review, to learn about ESG issues and stay up-to-date on developments in the field.
4. A finance professional could consider joining a professional organization, such as the Global Association of Risk Professionals (GARP) or the Financial Times, which may offer resources and training on ESG issues.
5. On-the-job experience: A finance professional could seek job opportunities with companies that strongly focus on ESG, such as Goldman Sachs or BlackRock or the companies we listed above, which can provide valuable on-the-job experience and allow the individual to learn about ESG issues firsthand.

Summing up 

ESG investing is no longer a niche practice; it has become mainstream, and finance professionals must be prepared to understand and implement ESG criteria. 

Eduyush offers a comprehensive AICPA certification course on ESG fundamentals for finance professionals. This course is an essential first step for any finance professional who wants to stay ahead of the curve on this critical issue.