A recent survey suggests that Irish CFOs are placing less importance on ESG considerations than they did a year ago, despite growing stakeholder interest, explains Derarca Dennis

Ireland’s financial leaders are optimistic about the future despite current challenges, identifying investment in talent as one of their top priorities, the EY Ireland CFO Survey 2023 has found.

Interest in environmental, social and governance (ESG) issues has, however, faded over the past year and this is a cause for concern.

Just six percent of the 151 finance leaders surveyed by EY Ireland cited increasing the sophistication of non-financial reporting as one of their top strategic priorities for the five years ahead, down from 15 percent in the 2022 survey.

Only 10 percent saw opportunities in sustainability and decarbonisation as a priority for driving growth in the year ahead.

It is essential to view these findings in the context of the timing of both surveys, however.

The 2022 survey took place before the Russian invasion of Ukraine at a time when the world was emerging from COVID-19. There was a decidedly optimistic view of economic prospects and a growing focus on the need to tackle the climate emergency.

Conditions in early 2023 could hardly be more different.

Spiralling energy costs, inflation at levels not seen for decades, rising interest rates and continuing geopolitical volatility have combined to focus business minds on more immediate survival and growth concerns.

ESG viewed as compliance

Forty-three percent of our respondents pointed to sustainability regulatory compliance as a key focus for the next two years, while just two percent identified non-financial and ESG reporting as a priority for the same period.

What is concerning is that organisations not covered by regulations (current or imminent) could face difficulties winning new business or maintaining relationships with existing customers.

Organisations that are covered by the regulations, and that have set decarbonisation targets, increasingly require their supply chains to meet the same standards, with potentially severe consequences for failing to prepare adequately, so collaboration across the supply chain is essential.

Financial and training implications

Organisations raising finance already have to answer questions about sustainability performance and social impact from banks, private equity houses and other potential investors. It is, therefore, imperative to make ESG/non-financial reporting an integral part of their core strategy.

There was also a degree of discordance in the findings.

When talking about the evolving role of the CFO, 54 percent of respondents claimed their role now includes a greater focus on ESG and non-financial reporting, and 60 percent described their non-financial/ESG performance monitoring and reporting capability as basic or not mature.

Despite this, attaining non-financial/ESG reporting skills was identified as a priority for the next five years by just 15 percent of the financial leaders surveyed.

Lack of leadership buy-in

A lack of endorsement from senior leadership and a paucity of expertise and experience within the finance team were cited as key barriers to more effective ESG reporting at an organisational level.

Some 30 percent of the finance leaders surveyed said it was not considered a priority among leadership, which may lead to unaddressed ESG risks in the future.

While the current macroeconomic environment and business climate can justify some diversion of attention away from the ESG agenda, the fact remains that it cannot be divorced from the broader needs of the business.

Indeed, ignoring ESG will present significant risks in an environment where a business’s ESG credentials and sustainability performance will increasingly become key competitive differentiators.

Future-focused CFOs need to be aware of the importance of the ESG ecosystem and mindful of the environment in which they operate, which not only includes Ireland but also the European Union.

They must ramp up resource allocation to enable their finance teams to meet rapidly growing ESG and non-financial reporting requirements.

Failure to take these steps could see businesses falling behind those competitors that are addressing the ESG agenda today.

You can read the full report at EY.ie.

Derarca Dennis is Assurance Partner at EY Ireland