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The requirements for ESG reporting are knocking on the door. And even though we know that they become a reality to an even greater extent before long, many people are still unsure of what it will really imply for them and their internal working procedures, focus and reporting. In Basico, we are like most finance people: we like to be well-prepared. And so, we have asked Bente Overgaard, one of Denmark’s leading experts in the ESG area, how Danish companies can prepare for the ESG reporting in the best possible way.
If you have ever commuted with public transport during rush hour, you have probably experienced that: it is a great advantage to get on the train early – where you can find a nice seat, check the timetable and move around if your seat turns out to be less attractive than first assumed.
The same actually applies to ESG reporting. “Right now, there is a moment of opportunity,” says Bente Overgaard and continues:
”If you get moving early and start ESG reporting now, you give yourself the opportunity to practise the discipline and find out what works well and what needs to be adjusted in your process. And it is an advantage to be well-prepared rather than waiting until the reporting requirements have become a reality – and you will not be able to hit the target on the first try.”
The board and management must take the lead and send a clear signal to the employees that we mean this – and this is the way we are going. Because we are basically talking about a cultural change.
Bente Overgaard is one of Denmark’s leading experts in the ESG area and author of the book ”Virksomhedens grønne omstilling” (the company’s green transition) from 2022. She is programme manager of CBS board leadership educations and responsible for and teaching the financial board educations as well as the board education within sustainable finance and ESG. She is chairman of the board of AES Erhvervssikring, Holberg Fenger Holding and Ennogie Solar Group. Moreover, she is deputy chairman of Den Danske Naturfond and board member of Jyske Bank A/S, SP Group A/S and Johannes Fogs Fond etc. Finally, she has fresh board experience from the state-owned companies Energinet and Finansiel Stabilitet. … and she has run many miles in the financial sector – more specifically, 26 years’ experience, most recently from Nykredit A/S where she has been group managing director for eight years. In parallel, she has held board positions in Finanssektorens Arbejdsgiverforening, BEC and JN Data.
The troublesome E
When asked how she would suggest getting started on ESG reporting, Bente Overgaard answers promptly:
”I would probably start by finding out which parts of ESG are relevant to report for your company. And focus your efforts there,” she says and continues:
”In my opinion, E – environmental – is the most difficult area. This is where the problems lie, and this is where the companies fumble a bit. Therefore, it is a good idea to find out whether there are any frameworks you can rely on,” she says and explains that she would look towards NASDAQ’s IFRS reporting if she was a company about to embark on ESG reporting. Because it contains some target numbers and definitions that you can work from – and which give a sense of the task you are looking into when you have to report on ESG.
”That being said, there is no doubt that there are data challenges. Many people find it difficult and new to work with this type of data – and it is. Again, I would like to refer to IFRS and NASDAQ and their definitions because there is probably something you can use in them. Furthermore, several banks, interest groups and consultancies offer help in this area.”
Bente Overgaard adds that the E area is also the area in which major changes and investments are necessary to live up to the target numbers in the ESG requirements.
”It may also be important to change a skewed gender balance, but it is often easier to change it than to make decisions on large investments to reduce one’s CO2 footprint,” she says and adds: ”And besides, CO2 is not the only thing you must deal with in the E area; water, biodiversity, circular business models etc. are also important areas of interest in relation to the environmental target numbers. And the regulation of these areas is here to stay. Therefore, it is important that the board and management team discuss the company’s strategic choices in these areas now.”
When something colours the big companies … it rubs off on the small
Initially, the requirements for ESG reporting cover large companies. And so, some small and medium-sized companies may think that, for now, they are exempt from ESG requirements and do not find it relevant to deal with them.
”But I think you should think this through again. Because even though you are not covered by the legislation in phase 1, market requirements are changing. And as soon as the large and medium-sized companies have been covered by the legal requirements, the small companies are next.”
”And the biggest challenge in the E part for the large companies is the scope 3 requirements – i.e. emission in the value chain. But to others, it is almost a scope 1 requirement because they must deliver upstream in the value chain. So, even if you, as a small company, are not yet directly covered by legal requirements, as a supplier you may be covered by large companies’ scope 3 requirements – so it may be important to have this under control if you want to continue to deliver to the big customers,” Bente explains.
ESG is important – but it is not the only thing in the world
The challenge with ESG reporting is obviously bigger if you are a production company, as the CO2 footprint of service companies is often limited. Bente Overgaard points out that especially small and medium-sized production companies face some expectations and requirements that will take time and a number of efforts to prepare for.
”This does not mean that you should throw everything else overboard. Because many small and medium-sized production companies are facing huge challenges right now due to rising energy prices, rising commodity prices and disruptions in the value chain, and many of them are struggling to make ends meet. ESG is not the only consideration, but the sooner you can start to form an overview of how much you use and emit, the better you position yourself in the future, other things being equal,” says Bente Overgaard and adds: ”You can use countless resources on this, and, therefore, prioritise what is ‘material’.
You get what you measure
Bente Overgaard explains that it may be an advantage to establish a ’centre of excellence’ with ESG competences. With one or more employees who focus on ESG.
”You may just need a part-time resource, where one of your employees dedicates part of his/her time to the area. But by anchoring a clear ESG responsibility, you ensure that it is handled.”
”Moreover, it is important to set sub-goals. And to define some must-win battles that can help to achieve the sub-goals – and it is important to ensure that you follow up on them and work towards them – just as with any other transformation,” says Bente Overgaard.
She adds that some clear target numbers and KPIs must be set up for ESG. Because there is a high degree of truth in 'you get what you measure'. But the KPIs cannot stand alone. They must be supported by the employees’ – and not least the management’s – daily actions.
”The board and management must take the lead and send a clear signal to the employees that we mean this – and this is the way we are going. Because we are basically talking about a cultural change.”
The CFO may become the company’s ESG focal point
Bente Overgaard is not in doubt when we ask her where she sees ESG going:
”As a starting point, ESG will belong to the CFO area in the future – ’period’. Because this is where we have the skills to ensure validity of the data.”
Therefore, Bente Overgaard also believes that it is crucial that the CFO has the right perspective and mindset in relation to working with ESG. ”The CFO must think that ESG key figures are just as important as the financial ones and must be treated in the same way,” she says.
”Of course, communication and the good story are also important, but you only have a good story to tell if you have validity in your numbers. That is why ESG belongs to the CFO area from now on rather than to marketing and communication. The communication department, in which many companies have formerly had their CSR efforts anchored, will also have tasks to do, but ESG becomes increasingly methodical, numbers and data-driven, and numbers must be valid,” Bente says and smiles before rounding off:
”Transparency is important going forward, but the company’s communication must be based on numbers and data to be credible.”
Do you need help anchoring your ESG reporting with supporting processes?
In Basico, we are experts in supporting the preparation of both internal and external reporting.
Do you need help formalising your ESG reporting – and establishing the supporting organisation, processes, systems and skills in relation to the increasing requirements from collaborators, customers, suppliers, sources of funding, employees and interest groups?
Then, do not hesitate to contact Basico! We can help prepare a plan for and establish an underlying model for the reporting on ESG.
