Small and medium-sized companies are lagging behind in terms of how quickly they are addressing climate risk, said Shari Littan, director of corporate reporting research & policy at the Institute of Management Accountants.
“We're observing a disconnect and almost two different conversations happening out there where smaller and medium sized companies are not moving at a fast pace towards addressing climate and other [environmental, social and governance] related risks,” Littan said in an interview with CFO Dive.
As stakeholders and investors are increasingly looking for businesses to respond to climate change, organizations have been forced to take a hard look at both their external reporting to meet the demands of regulators and policymakers and their internal management to “to support management decision making on sustainable business issues,” according to a December report from the IMA.
Private companies are not subject to the same regulations that public companies will be subject to once the Securities and Exchange Commission sets climate risk rules — which it is expected to do by May. The IMA report was critical of the focus on the push toward disclosures of carbon emissions through regulation from the SEC and other organizations alone.
It “may be “exacerbating disparities between the decision-usefulness of standards for public companies and a lack of attention by private companies,” the report said.
A disconnect
Some of the IMA’s findings indicated a lax attitude toward the issue. About half of respondents in the December IMA survey, which polled 14,000 public and private business leaders internationally, stated that sustainability information is not used by management for any purpose. Respondents from private companies have neither identified climate as a relevant matter nor acted on it, according to the report.
When it comes to how regulators can work with SMEs and private companies in order to close the gap between that of public companies, “the main thing is education and communication,” said Littan.
For example, Littan noted, it’s important to know that executing these audits can uncover cost saving opportunities. One agricultural company started looking at their carbon footprint a few years ago and discovered how much water they were wasting, Littan recalled. “They ended up saving a bundle because this helped with their water management,” she said.
“There needs to be a focus, perhaps, on how we reach the entire economy up and down the value chain. So that we actually are moving towards a sustainable economy and building sustainable businesses,” said Littan.
The CFO’s role
In terms of how companies — private and public — can realize opportunities with these regulations, the leadership style of the CFO is crucial, according to Littan.
“There is so much focus right now on what needs to be reported. And companies of every size are thinking about the ‘how to’: how to get started, how to build along the process, and we find that the expertise and leadership style of those who are CFOs or in the corporate finance and accounting function, bring enormous insight to the table,” Littan said.
The most important skill that finance leaders bring to the table, is their ability to think along the lines of investor relations — which can be a key pillar to success no matter how large the organization.
“CFOs have a training in the rigor of delivering quality information, how it gets processed, how it gets gathered, and summarized and delivered in a way that responds to the company's purpose,” said Littan.
