ESG (Environmental, Social, and Governance) factors are top of mind for global stakeholders today. Investors now consider the ESG goals of an organization, their ongoing ESG strategies, and related reporting of ESG metrics – a major shift from just a decade ago.
By the end of 2022, global ESG Assets under Management (AUM) are expected to surpass $41 trillion and are on track to exceed $50 trillion by 2025 (more than a third of global AUM), sizable increases from $30.6 trillion in 2018.
These realities converge with emerging compliance requirements from top legal bodies around the world, prompting organizations to make ESG a financial, cultural, and regulatory imperative.
As Regulatory Momentum Builds, so Do Leadership Frameworks
Over the last few years, the SEC (Securities and Exchange Commission) has shown greater interest in ESG Reporting , particularly regarding climate-related disclosures. In March of 2022, the SEC proposed rules around climate-related disclosures that, when effective, will impact public companies trading on U.S. stock exchanges.
While the proposed rules are not yet in effect, public companies must take a proactive approach to determine the organizational structure and leadership needed to align with the new SEC requirements. Leadership on ESG-related issues will look different depending on key factors of the organization, such as size, industry, and ESG goals. As such, taking a proactive approach to address ESG disclosure might look distinct for different companies.
Some organizations may feel that ESG reporting can be handled by the current finance team. Others will look externally for new hires or transfer internal resources given the level of rigor and controls required.
This new position of “ESG controller” will drive ESG reporting, strategy, and compliance in a cohesive, future-ready way, providing the organizational governance and skillset needed to advance ESG initiatives.
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What Is the ESG Controller?
Given the growing scrutiny around ESG data, a controllership can help bridge the gap between current- and future-state ESG reporting requirements. An ESG controller’s responsibilities entail ESG reporting from both a financial and operational perspective.
The controller must determine if existing KPIs meet expected reporting requirements and, if these do not, they will be responsible for working with the business to create the appropriate KPIs that better align across all regulatory requirements. Additionally, the ESG controller understands and has oversight of the various types of risks, as well as internal controls related to the ESG data-gathering processes, and will work with cross-functional teams (i.e., legal, finance, internal audit, etc.) to ensure ESG reporting risks are properly mitigated.
It’s important to highlight that a key difference between an ESG controller and ESG experts (i.e., ESG analysts, sustainability officers, etc.) is that an ESG controller has both a financial reporting perspective and an operational perspective of the organization, whereas an ESG expert is typically focused on the overall ESG and climate strategy.
With clear differences in responsibilities and oversight, organizations can thus benefit from having an ESG controller in addition to ESG experts.
Why You May Need an ESG Controller
For many organizations, gathering the right data and metrics for robust ESG reporting requires collaboration with different functional areas and potentially multiple third parties. As part of this process, it can be challenging to synthesize all the information in a consistent and comparable reportable format.
Given that the ESG controller understands both the operational and reporting sides of ESG, they are well-equipped to ensure a streamlined flow of data and synthesis of this information. When reported data is sourced from external parties, the ESG controller is trained to identify third-party risks that need to be accounted for before the data is relied upon by the organization.
While ESG reporting is typically complex, the upcoming SEC requirements will further increase the rigor of the reporting environment.
The group of experts within an organization that is focused on financial reporting may not have the bandwidth to take on ESG reporting, so it will be the ESG controller’s role to focus on this effort, in addition to ensuring that the content of these disclosures is not in conflict with financial reporting, investor reporting, and any marketing materials. Should there be discrepancies, companies may lose credibility in the market, particularly if key stakeholders identify that the information between current or future financial reports of the organization is inconsistent with the narrative disclosed in its ESG reports.
Additionally, the ESG controller can help create reporting policies and operational processes that will guide the ESG reporting function at the company. When implementing an ESG strategy across an entire organization, it’s important to align all functions to the ESG goals and the related metrics to ensure they’re internalized in day-to-day operations.
As an example, if a financial organization has decided to introduce a new policy as part of its ESG strategy that states they will not grant loans to businesses with poor environmental practices or lack of human rights policies (as defined by the firm), the ESG controller would need to oversee that the reporting processes are in place to assess whether business’s lending practices align with the new ESG mandate.
Further, the ESG controller’s role includes building out the ESG internal control environment. This will include assisting in control design and implementation, including controls over the data used in the reporting process.
Part of the SEC’s proposal includes a requirement for issuers to obtain external attestation or assurance over certain climate-related disclosures. This is a prime example of the importance of the ESG controller, who can help lead the efforts around external assurance to ensure the organization is ready for attestation, as well as to be the point of contact for the external auditors. This piece will be useful given that obtaining external assurance is usually a tedious process for most organizations, so an ESG controller would be there to ensure there is minimal disruption when it’s time to go through the audit process.
Relevant Skillset for the ESG Controller Role
The ESG controller must understand the financial and operational aspects of the business. This role may be internally sourced if the organization identifies an employee who has the knowledge and experience in both operations and finance. The key is identifying a candidate who is seasoned and:
- Has a proven track record for financial reporting and operations and understands the interdependencies of both to drive ESG goals.
- Brings the same rigor and diligence seen in financial reporting to the ESG reporting process. This is in line with the SEC expectations, as it requires climate disclosures to be subject to the company’s disclosure and financial controls.
- Has expert problem-solving skills, as ESG operationalization and reporting are nuanced and ever-changing. This goes hand in hand with project management skills, as this role will demand a high degree of coordination with different functional areas of the business.
- Understands internal controls and has experience in designing and executing controls.
For companies lacking an ESG team, hiring an ESG controller as one of the original team members can help set up the entity for success.
Companies waiting for the SEC proposal to be finalized before lining up leadership could translate into a costly mistake.
To remain ahead of the ESG curve or to get more information on the role of an ESG controller in your organization, contact Biovell today.