Adapting governance to spearhead sustainability more effectively

Thu 18 Jan 2024

There are increasing regulatory expectations globally for financial institutions to disclose and demonstrate how sustainability-related responsibilities are allocated within the organisation. In this respect, the increasing global trend towards mandatory sustainability disclosure frameworks continues to underscore the significant role that the finance function is anticipated to assume in sustainability. 

It’s a trend reflected in Mazars’ latest survey, Sustainability practices stocktake: How banks and insurers have progressed, in which most respondents identified Chief Financial Officers (CFOs) as most likely to be responsible for sustainability-related matters. Depending on the financial institution’s structure, size and location, the Chief Executive Officer (CEO) and Chief Sustainability Officer (CSO) were also identified as responsible.

Of course, identifying the most suitable senior-level executives who will bear responsibility for spearheading and advocating for sustainability initiatives is only one part of the process. Equally important is that accountability procedures should be in place to monitor that these responsibilities are being carried out effectively and that clear oversight is in place. 

The need to review and refresh management procedures

There are increasing expectations for financial institutions to incorporate sustainability in terms of reference, responsibilities, meeting agendas and management information (MI). To this effect, MI should be reviewed across governance structures and updated to ensure effective oversight of sustainability matters.

Alignment between the Board’s and the Executive Committee’s responsibilities to ensure oversight is in place is essential. Financial institutions can reduce the risk of potential misalignment between Board and Executive-level oversight by taking a more holistic approach to sustainability initiatives involving different departments. Increasing the regularity of meetings to discuss sustainability and MI can also ensure that responsibilities are being fulfilled convincingly.

Identifying knowledge gaps and required skills

As financial institutions work on integrating sustainability considerations into decision-making and strategic planning, they need to ensure that staff across all levels have sufficient skills and expertise. 

Internal knowledge gaps should be sought out and clear plans put in place to support upskilling and increase awareness around sustainability across the organisation. Equally, financial institutions must ensure that Board members have the necessary understanding and skills to fulfil their sustainability-related responsibilities. 

Currently, the identification and assessment of social-related factors present a significant knowledge gap for financial institutions. In addition, improving technical knowledge and internal capabilities for effectively integrating climate and environmental (C&E) factors into portfolio concentration analysis and assessing their impact on credit quality requires attention.

Upskilling the finance function

If we assume that the financial function is set to play a significant role in sustainability matters, then particular attention should be paid to ensure responsibilities can be fulfilled. In particular:

• Ensure the integration of sustainability initiatives into broader financial planning and the optimal allocation of resources toward these initiatives. 
• Expand their role as “storytellers” of business performance reported in financial statements to encompass sustainability practices, progress and outcomes. 
• Oversee the integration of sustainability’s financial impact on business performance into the financial reporting process. 
• Leverage the rigour and internal controls governing financial information to compute and report on sustainability-related performance metrics. 
• Collaborate closely with other functions, such as risk and sustainability, to highlight the influence of sustainability-related risks and opportunities on business strategy. 

CFOs should prioritise upskilling staff, updating existing processes, and deploying appropriate technologies to effectively address the growing demands and expectations associated with sustainability matters.

As the global trend towards mandatory sustainability disclosure frameworks continues, ensuring the proper governance and accountability procedures are in place will help provide the foundations for effective and clear oversight of sustainability matters.