Although sustainability and environmental, social and governance (ESG) programs are nothing new, 2023 was a turning point in global regulatory bodies’ commitments to requiring companies to report on these efforts.
To gain an understanding of this trend, Digital Journal spoke with Joe Fitzgerald, SVP of Market Strategy at Visual Lease. This focused on a recent study digging into organizations’ preparedness to comply with impending environmental impact reporting requirements, actionable steps teams should be taking now, and what else will be top-of-mind for business leaders in 2024.
Digital Journal: Visual Lease recently published a new study focused on environmental impact reporting – could you tell me a bit about the report and why it felt important to dig into this topic?
Joe Fitzgerald: In 2023, we saw increasing interest in Environmental, Social, and Governance (ESG) across the globe. While ESG programs and reporting are not new concepts, consumers, investors and employees alike have become more vocal about their preference to interact with companies that are not only setting ESG goals but also, reporting on their progress against these commitments.
Further amplifying the focus on ESG, 2023 was also the year that various regulatory bodies issued reporting guidance in an effort to introduce standardization. Now, due to measures introduced by entities like The International Sustainability Board (ISSB) and the California government, as well as anticipated guidance from the Securities Exchange Commission (SEC), companies of all industries and sizes will eventually be required to report on their environmental impact.
For many organizations that are impacted by these evolving requirements, the ability to comply with these guidelines will require tremendous effort – and that’s because, similar to when the new lease accounting standards (ASC 842, IFRS 16 & GASB 87) were introduced, accurate ESG reporting hinges on access to complex, previously dispersed and dynamic data sets. And as we saw with the introduction of the lease accounting standards, the time and resources required to gather, centralize and analyze this type of data is significant.
For our newest analysis under The Visual Lease Data Institute (VLDI), “The 2024 Office of Finance Outlook: Environmental Impact Reporting,” we surveyed senior accounting and finance executives from companies with more than 1,000 employees to learn more about where organizations are in their ESG reporting journeys, and to share important trends and insights with the many companies that are looking to get ahead of common reporting challenges.
DJ: What are some actionable steps organizations should be doing now to get ready for this kind of complex reporting?
Fitzgerald: Our survey uncovered a notable gap in ESG reporting readiness, with nearly 70% of organizations reporting that they do not yet have a fully established ESG reporting framework in place and 10% are lacking a framework altogether.
Several factors contribute to this lag. Some companies are in the early stages of establishing a data collection and maintenance strategy, while others possess data but lack confidence in its accuracy due to weak processes and controls. Additionally, some believe their datasets are complete but struggle with initiating a proper analysis.
Given how critical accurate and complete data is to ESG reporting and goal setting, we recommend that businesses first establish roles and responsibilities across the various teams – finance, sustainability, real estate, procurement, operations etc. – that will contribute to the ongoing data management and reporting processes. This foundational step ensures the cross-functional accountability and collaboration required to make meaningful progress against your organization’s sustainability goals.
Once roles and responsibilities are established, the team should focus on gathering the data that is needed to report their environmental impact – the focus area of emerging regulatory requirements including IFRS S1 and IFRS S2, as well as the SB 253 and SB 261. And given that nearly 40% of global carbon dioxide emissions originate from real estate-related assets, companies should prioritize gathering leased and owned asset records to identify consumption data of greenhouse gas emissions such as CO2, PFCs, CH4, SF6, N2O and HFCs.
DJ: Was there another takeaway from the report that especially stood out to you?
Fitzgerald: One of the data points I found most interesting was that 88% of surveyed senior finance and accounting executives report that environmental and sustainability factors are a high priority when entering into new lease agreements, illustrating that businesses are keenly attuned to the pervasive demand for companies to establish and fulfill new ESG goals.
It’s important to note, however, that without visibility into the current environmental impact of an organization’s owned and leased assets, businesses cannot reasonably set accurate and achievable sustainability goals. This is precisely where effective lease management becomes paramount.
Considering the pivotal role that leased assets play in understanding an organization’s environmental footprint, coupled with the fact that leases often represent a company’s second-largest expense, it would be irresponsible for businesses to overlook their lease asset portfolio. And, when properly prioritized, managed and reported on in a centralized system of record, your portfolio can be leveraged to help your business achieve strategic financial and operational outcomes.
From a competitive standpoint, organizations not prioritizing these efforts risk falling behind, especially when our findings indicate that a substantial 84 percent of enterprise organizations are actively prioritizing lease management. This heightened emphasis is attributed to both the implementation of lease accounting standards (ASC 842, IFRS 16 and GASB 87) and the emerging regulatory requirements surrounding environmental impact reporting. Proactively addressing these aspects becomes not just a regulatory necessity but a strategic imperative for organizations aiming to stay ahead in an increasingly competitive landscape.
DJ: Sustainability and ESG reporting are clearly going to be major priorities in 2024. What else is going to be top-of-mind for business leaders as we head into the new year?
Fitzgerald: Because of the current spotlight on ESG, I anticipate that business leaders will increasingly recognize the strategic advantages of investing in technology that provides access to unique data and insights.
For example, Compass – a large real estate technology company – takes its lease portfolio data from the Visual Lease platform and marries it with its business data in a proprietary data visualization tool, allowing them to make holistic business decisions and keep its organization up to date on portfolio changes. And similarly, Toshiba America Business Solutions utilizes their data within the Visual Lease platform to evaluate facilities, plan space, conduct market research and make business decisions.
By implementing a centralized system of record that supports collaboration across all of the teams that interact with leases throughout their lifecycle, business leaders will gain access to data that they can trust and use to make well-informed decisions – providing the agility needed to stay ahead in today’s economic climate.
DJ: You mentioned earlier that the Office of Finance has played a larger role in driving initiatives that impact a company’s core objectives. What do you think this will look like in 2024?
Fitzgerald: Corporate finance departments have historically played a large role in driving business initiatives and ensuring strategic decisions positively impact a company’s core objectives, such as ensuring compliance with The General Data Protection Regulation (GDPR) and The Sarbanes-Oxley Act, as well as driving Diversity Equity and Inclusion (DEI) at their organizations.
ESG reporting is the next step in this evolution of the Office of Finance because it has implications on both financial and operational initiatives. And many finance leaders are already engaged – our survey found that 97 percent of surveyed senior finance and accounting executives and 100 percent of surveyed CAOs and CFOs at enterprise organizations are involved with the current state of ESG reporting. Further, ESG reporting is the #1 area where finance teams want to upskill this year, moving up significantly from last year’s #11 ranking and indicating that ESG reporting will remain an ongoing need for audit preparation, as well as the ability to show progress against sustainability goals.
