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Governance

Sustainability & ESG quickly becoming the responsibility of several C-level roles

Natalie Runyon  Director / ESG content & Advisory Services / Thomson Reuters Institute

Natalie Runyon  Director / ESG content & Advisory Services / Thomson Reuters Institute

Vital issues of corporate sustainability and adherence to ESG initiatives are increasingly becoming the responsibility of C-level executives

Environmental, social and governance (ESG) issues are quickly emerging as cross-disciplinary areas of responsibility of C-level leaders. In fact, chief sustainability officers, chief legal officers (CLOs), and chief financial officers (CFOs) see the most expansion within their corporate functions as the growth of ESG duties begins to impact these roles.

The creation of chief sustainability officer roles has increased in recent years, though corporate responsibility and ESG have evolved into mainstream issues over the last decade. The primary responsibilities for individuals in these sustainability roles have been communication and change management. With the multitude of ESG frameworks, the new responsibilities of sustainability officers will likely include more data delivery as well.

“Sustainability is a becoming a delivery role,” pointed out Olivia Whitman, Head of Sustainability at Siemens. “We’ve spent a decade trying to be changemakers, and now suddenly, we’re having to implement processes and think about strategy.”

Indeed, ESG data sits across multiple corporate functions, while the expertise of key parts of data analysis and the development of process and procedures for governance sits within the corporate finance and legal functions, respectively. In fact, accountants and financial analysts use their expertise in rigorous examination and preparation of financial information for public disclosure. Likewise, the corporate legal function usually is the final stop in approving such information for public disclosure.

CFOs see the most growth in ESG responsibility

The proposed rules for putting climate disclosures on financial documents by the Securities Exchange Commission (SEC) is one of the most recent key drivers in growth of ESG data and reporting responsibilities among corporate finance functions. This has left CFOs as the ones who are reaching out to inquire and hire outside support to conduct multidisciplinary ESG advisory services, according to Jennifer Cantero, the head of accounting firm Sensiba San Filippo’s multidisciplinary ESG advisory practice. “Accountants have been measuring financial data for a long time, and it only makes sense that we would be the ones measuring nonfinancial data in light of the upcoming new requirements to comply with climate disclosures,” says Cantero.

Another critical element positioning CFOs well to lead organizations’ ESG efforts is the necessary effort to clean up data related to ESG. The fact that ESG information sits within siloed information systems and would need to be analyzed and aggregated for reporting only adds to the critical role that accountants and financial analysts will play in this process.

Also, a lot of ESG data integrity requires CFOs to ensure rigor and consistency when it comes to setting up internal controls, and the auditing processes around the key performance indicators (KPIs) for reporting. The proposed SEC rules will most definitely increase the priority of ESG within internal audit teams, which are usually based within the corporate finance function.

CLOs increasingly playing a larger role in ESG

General counsels are extremely involved in developing ESG strategy as well. More specifically, about half of the lawyers (47%) said that “they personally lead a material portion of their organization’s ESG initiatives,” according to a recent research report, which also showed that 90% of legal departments are leading a ESG initiative.

In addition, in-house lawyers have always been key leads for governance because of their engagement in activities such as risk assessment, training, reporting, monitoring, and investigation.

In the last 24 months, CLOs have emerged as the de facto chief ESG officers for most companies, especially around key reputational risk issues due mainly to increased litigation risk. Indeed, private consumer and shareholder plaintiffs both are broadening their legal claims to include allegations of misstatements or omissions regarding companies’ sustainability information and even greenwashing, which is deceptive advertising or marketing spin used to persuade the public that an organization’s products and policies are more environmentally friendly than they actually are.

Another relatively new development that is expanding ESG responsibilities among CLOs is the fact that corporate directors are increasingly targets of litigation regarding their perceived breach or failure to comply with their of fiduciary duty, usually based on claims of lack of oversight based on underlying ESG claims. This makes it even more important that CLOs have corporate secretarial responsibilities to ensure quality documentation in the boards of directors oversight mechanisms.

Looking ahead

The primary motivators for increased prioritization for ESG across companies has been and still is a marketing and branding play. Indeed, the majority of lawyers pointed to image, competition, and investor concerns as factors that motivated their organization to adopt environmental goals beyond what was required to be in compliance with environmental laws.

While this concern may have started with the environment, it is quickly shifting in focus to social elements. Clearly, this underscores that the importance of ESG and the demand for transparency and accountability are here to stay.