For the greater good? The good, bad, and ugly of ESG for CFOs

The 21st century has delivered everything a consumer could want: instant delivery, infinite choice, and trillion-dollar companies.

But behind the glow of convenience and profit, a harder question lingers for every boardroom: at what cost?

That’s why the EU, UK, and others have rolled out new frameworks mandating reporting on their impact on the planet, and societies. And with no one else to own it, the call for transparency has (by default) landed squarely on the desks of finance leaders. For CFOs, the task is to build systems of accountability that stand up to scrutiny and go beyond the comfort of glossy reports. But that is no easy task:

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Read time: 10 minutes 2 seconds
⧗ Written by Katishi Maake and Secret CFO

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Environmental, social, and governance (ESG) refers to the standards used to measure a company’s impact on the planet, its people, and how it’s run. What started as a niche idea in ‘sustainable finance’ has become a mainstream effort to align business incentives with the broader responsibilities - to the planet, its employees, and society at large.

You can debate whether that’s good or bad. What’s not up for debate is that ESG is fast becoming a permanent fixture in the CFO agenda.

The EU has taken on a wide-scope, compliance-heavy reporting model for ESG disclosure, the Corporate Sustainability Reporting Directive (CSRD). 

In November 2022, The European Council passed the CSRD requiring all companies above a certain size (any two of: 250+ employees, €50m+ revenue or €25m+ assets) to adopt European Sustainability Reporting Standards (ESRS), phasing in from 2024.

Think of ESRS as GAAP but for non-financial currencies; tonnes of carbon, the wellbeing of your workforce, and the integrity of your supply chain (to name just a few). A standardized framework designed to ensure consistency, comparability, and reliability of disclosures across three pillars:

The UK has taken its own path, adopting the Task Force on Climate-related Financial Disclosures (TCFD), which is similar to CSRD but different. Large companies in the UK have been wrestling this for the past couple of years, and are already mandated to make certain disclosures including: 

This includes being specific about the time horizons considered - short, medium, and long term - how climate risks are quantified over those periods, the assumptions behind them, and the actions being taken to mitigate or adapt.

Other countries, including Brazil, Canada, Australia, and Japan are on a similar path at the same kind of pace.

In the United States, while the pace has been slower, the direction had been broadly similar - political sentiment and potential legal challenges under the new administration notwithstanding. The SEC’s Climate Disclosure Rule, finalized in March 2024, is also built on the TCFD framework. The SEC voted earlier this year to end the disclosure rules, a move currently being challenged in court. Watch this space.

The world’s largest capital providers have had ESG firmly on their agenda for a while, driven by their own funders - pension funds, sovereign wealth funds, and insurers - who want assurance that their capital is being deployed sustainably.

As BlackRock Chair Larry Fink wrote in his 2020 letter to CEOs:

“We believe that all investors, along with regulators, insurers, and the public, need a clearer picture of how companies are managing sustainability‑related questions. This data should extend beyond climate to questions around how each company serves its full set of stakeholders.”

For years, many of the world’s largest investors have operated separate green funds, offering green bonds to companies that meet defined ESG criteria. While these instruments are often priced similarly to conventional debt, they’re easier to access - thanks to the abundance of capital chasing a limited pool of qualifying issuers. But to qualify, businesses must meet the green standards and commit to ongoing ESG reporting.

Adopting a new currency of reporting is a massive undertaking, even for the willing. Data is fragmented, historical baselines are thin, and in some jurisdictions ESG disclosures are now subject to assurance, leaving little room for error or guesswork.

As reporting quality improves, investors will inevitably push to translate ESG data into financial impact. Questions like:

And that’s before the internal politics begin: who actually owns this inside the business? Finance teams have the rigor and compliance experience, but often lack the bandwidth, domain expertise and systems. Dedicated ESG teams have the passion and expertise, but not always the structure or control discipline to report at an auditiable standard.

And this is serious stuff. Poor ESG governance has severe consequences:

Lucky Saint is a UK-based alcohol-free beer brand that’s decided to be a leader on ESG transparency, despite not yet being mandated by law.

The company achieved B Corp. certification in 2022, which is awarded to companies that meet certain standards of social and environmental performance, transparency, and accountability. 

Elevating ESG reporting to the same standards as financial reporting takes real effort.

Lucky Saint’s CFO Adrian Johns told us that poor ESG governance can become a major drain on focus and resources, especially if it’s unclear who's responsible for what. 

At Lucky Saint, sustainability sits as part of the broader supply chain and operations team, overseen by a director with ESG experience. That function falls under Johns’ remit, alongside his finance responsibilities, to ensure clear accountability to the board.

Data management is arguably the biggest challenge in ESG reporting. It can show up in lots of different ways:

Johns described Lucky Saint’s data collection process as a piecemeal approach that requires collecting logistics miles for emissions from all their 3PL haulers, flushing out inaccuracies, and creating a central model. And that's just for one component of the carbon footprint…  

The company also has a supplier sustainability questionnaire that it uses to assess the ESG credentials of its supply chain. 

“The finance skillset lends itself well to the methodical nature of data gathering, sense checking, and consolidation,” Johns said. “The sort of day-to-day responsibility can sit with supply chain or sustainability or customer teams, [but] I think there's definitely a central role for folk with a finance skill set to play in bringing all that together.” 

Given the external disclosures will carry Johns’ signature, he has a high standard for making sure their reporting is as accurate as possible. 

He said Lucky Saint works with a sustainability consultant who has a large bank of data to benchmark against their outputs for a “sense check” on accuracy. 

“When you've not got years of your own data to refer back to, you need to use another comparable data source,” Johns said. “That’s another benefit of consultants.” 

Johns doesn’t see it that ESG reporting will necessarily sit in finance at every company. He believes bigger companies with more resources may design their internal structure to create functions responsible for ESG outside of the finance team.  

And there is no question that ESG reporting has had some financial benefit. Lucky Saint works with an insurance broker that offers favorable premiums to B Corp. businesses. With the insurance market seeing the governance and diligence processes required to become B Corp certified demonstrating an elevated approach to risk management.

Johns said demonstrating ESG credibility is now crucial for businesses to get a seat at the table. 

“It's now becoming table stakes when you think about capital markets and investment,” he said. “It's no longer something that is nice to have on the side.”  

For some companies, the exact date from which they’ll need to be compliant is still not clear. Just last week, the European Parliament moved to limit CSRD reporting requirements to companies with more than 1,000 employees or €450 million in revenue.

This gave Copenhagen, Denmark-based review platform Trustpilot a bit of respite in their preparations. 

But while not yet subject to the reporting requirements of CSRD, the company is moving like it is, to avoid scrambling later. We spoke to their Finance Director Zak Pandor.

ESG reporting landed on his table because Trustpilot treats it like statutory reporting. That means everything is expected to be audit-ready alongside annual reporting.

As a software company, Trustpilot’s direct climate impact is low, but it’s still been a lot of work. The company still has engaged a number of consultants and advisors to figure out how to measure their carbon effects, and then get assurance over their reporting.

When it comes to the “E” component of ESG,” Trustpilot wants to be compliant with the regulations but not necessarily a leader that sets ambitious net-zero targets, Pandor said. 

They’ll leave that to American Airlines and Rolls Royces of the world; both of which have set ambitious net-zero goals. With the former already validated by the Science Based Targets initiative.

But Trustpilot believes it can lead by example in social and corporate governance. Meaning, they can lead in other ESG measures; such as employee satisfaction, data privacy and ethical use of new technology.

“Ultimately, it's understanding what's your North Star. How are you a differentiator? And in which areas do you want to be a differentiator?” he said. 

Trustpilot has split ESG into different areas of the business. Ultimately, finance holds it all together but coordinates with relevant departments —HR, IT, etc.—to ensure the data can withstand rigorous assurance, Pandor said. 

Managing accurate data is incredibly difficult. For example, carbon emissions are grouped into three “scopes”:

It’s tough enough to measure what you control. It gets a lot harder once you venture beyond your own systems and suppliers.

For example, tracking Scope 2 energy usage for a coworking space is much trickier than tracking for an owned office building. That’s why Pandor said it’s extremely important to make sure the tools available to track such data are accurate. 

“That is only as good as the information and data you put in,” he said. “If you put shit in, you’re going to get shit out.” 

It’s clear that ESG is a major undertaking that requires a lot of precision and attention to detail. Over the past five years, an entire industry has exploded to provide companies, their finance teams, and CFOs the resources needed to reach a compliant benchmark (or beyond.)

The Big 4 accounting firms have all developed sustainability practices alongside the emergence of boutique specialist consultancies to help businesses elevate their reporting. That could range from light touch advisory to full outsourcing and anything in between.

And naturally, there is a whole ecosystem of software products helping businesses chase a solution to a tricky reporting problem, too. Like Greentally, whose software leverages AI to help clean up and centralize emissions data.

Founder and CEO Ning Na told us calculating carbon emissions internally can be extremely tedious, and particularly difficult for smaller companies who don’t have the internal capacity to absorb the work. 

For example, in calculating Scope 3 emissions, a lot of the data needs to be “cleaned” before loading into any software. How the raw data is collected at source varies in consistency and quality.

But often it’s the CFO or finance team that’s “best” equipped to understand these processes and why the attention to detail matters, as Na explained. “With the financial background, it's easier to talk to the CFO. You’re dealing with people who care about money.” 

Na said regardless of jurisdiction, industry, or company size, the CFO needs to be involved in the ESG reporting agenda.

“Most CFOs don’t understand ESG as much, at least in North America, because the laws aren’t as strong as Europe.” 

The questions your board will ask - beat them to it: