Financial executives should become more involved in their company’s sustainability reporting efforts, according to a new report.
The report, from Grant Thornton and the Financial Executives Research Foundation, found that financial executives are not as involved in corporate social responsibility matters and reporting as they should be, even though the finance function’s involvement in sustainability reporting adds credibility and confidence in the measurement, data collection and analysis processes.
“Financial executives should insert themselves for the very reason that the sustainability information is being more widely reported, and is being used by investors and others,” said Dorsey Baskin, managing partner of Grant Thornton LLP’s Assurance Services Development, who wrote the report. “It’s becoming more important, and therefore the financial executives should get involved to better ensure the quality of that information.”
Baskin cited several reasons why financial executives have not been involved in sustainability reporting all that much.
“Sustainability reporting doesn’t originate for the most part out of the financial reporting group,” he said. “It’s coming from some other part of the organization. The sustainability report might include some financial information, and whoever is responsible for preparing it might ask for some information about financial reporting to be included, but the sustainability reporting is owned by a different part of the organization. From a historical standpoint that is probably the most significant issue. The second would be that the CFO, the chief accounting officer and the finance function are probably aware that this is going on, but for the most part they don’t feel the need to insert themselves.”
A third reason, according to Baskin, may be that whoever is responsible for sustainability reporting, and knows where the information is coming from, may not feel that it has matured to the point that they’re ready to invite the scrutiny of financial executives, who would probably demand the kind of consistency, controls, documented processes and audit trails they expect in financial reporting.
Sustainability reporting may not have matured to the same point as financial reporting, but that’s a good reason for financial executives to get involved in the process.
“If you look at many of the sustainability annual reports that are issued today, they generally address each topic separately,” said Baskin. “There’s a section that talks about involvement in the community in which they operate and live, and then there’s a section that talks about their impact on the environment and a section that talks about their workforce and labor practices.”
Baskin expects to see sustainability reports evolving from a compilation of silos of information into the kind of integrated reporting promoted by the International Integrated Reporting Council, in which a company’s results are discussed from a financial, social, community and environmental standpoint.
“What you need to do is show how you are creating value through the operation of your company and value in what they call capitals, like intellectual capital, financial capital, environmental capital and so forth,” he said. “Many companies have now begun to do a separate sustainability annual report, and we think the evolution will be to an integrated report.”
Baskin also sees companies adopting sustainability as part of their corporate strategy, not just as a marketing or public relations exercise. “It’s becoming something that is strategic to the company,” he added. “When that happens, senior management is going to get more involved and lead the effort, and the financial executives are going to be involved. If you move beyond greenwashing into something that’s strategic, then it makes sense that the financial executives would be more involved.”
However, he acknowledged that in the United States there is still a great deal of skepticism about the strategic importance of sustainability reporting among financial executives, even though more than half of S&P 500 companies are doing annual sustainability reporting.
“It could be that the CFO is not getting involved because they question the value,” he said. “It’s a burden, and I don’t think the CFOs are going to run around looking for more work.”
Another concern is timing, particularly for integrated reporting. “It’s much easier from a resource standpoint to say, ‘I’m going to get my 10K done, and two, three or four months later I’m going to get out a sustainability annual report.’ If the end point is a sustainability report, that means you’re looking at a much more compressed timeframe to get everything done, and I think that is also a concern for the CFO group.”
He cited the example of South Africa, where integrated reporting for public companies is practically a legal requirement now. “I think that just multiplies the burden on the financial executives and their staff because you’re trying to get it all in one report to meet the deadline of your regulator,” said Baskin.
The Securities and Exchange Commission is planning to require reporting on any use of so-called “conflict minerals” by companies as an outgrowth of the Dodd-Frank Act, but Baskin pointed out that will be a separate report, not due until May 31 each calendar year. “Yes, it’s a new burden, but it’s not integrated into the 10K, which would have made it a much more difficult burden,” he said.
Baskin is unsure whether the SEC would ever begin requiring integrated reporting. However, he pointed out that the relatively nascent Sustainability Accounting Standards Board, which hopes to set standards for sustainability reporting, wants sustainability information to be included in the 10K. “They believe that these things they identify as being material to investors need to be included in the 10K or the 20F, or whatever filing you do with the SEC, so they are really pushing that angle,” he said.
As sustainability and corporate social responsibility issues become more important and strategic to companies, it becomes more important for the financial executives to take a leading role, he added. “It’s important for the financial executives to be involved and make sure that it’s high-quality information,” said Baskin. “As an auditor that’s why I think it should also be audited, by an independent auditor.”
He expressed skepticism about working with third-party services that claim to provide a seal of approval on a company’s labor or environmental practices. “I don’t know that we would work with them,” said Baskin. “We’re a better alternative. It’s been shown and reported in The Wall Street Journal and elsewhere that some of those verification services have little substance to them. Having assurance provided by CPAs is going to give higher-quality assurance.”
However, he acknowledged that CPAs who provide such services might also face liability risks. “Any service that you provide will expose you to risk of liability, but that’s part of the business,” said Baskin.