The recent COP27 summit in Egypt has further reinforced the urgency of the climate threat. As countries, as organisations, and as individuals, we need to do far more to combat climate change, and act much faster than we’re acting today.
I believe that finance professionals can play a crucial role in the collective effort to halt climate change and help accelerate the transition to a more sustainable future. To fulfil this role, however, they will need to evolve and expand their core skillsets and many need to rethink their approach to planning, budgeting and forecasting.
Broader view of performance
Planning and performance management paradigm, new global research by ACCA and Chartered Accountants Australia and New Zealand (CA ANZ), in association with PwC, highlights the scale of the challenge. Planning and performance are integral activities for finance functions, with budgeting and planning cycles consuming considerable amounts of time and effort. Yet these cycles remain largely financially focused – despite sustainability being a global priority and many organisations having resource-related constraints.
The transition towards a more sustainable economy demands that finance teams take a broad view of performance and value. Nevertheless, just 16% of respondents surveyed for the research said environmental, social and governance (ESG) forecasting was ‘fully integrated’ into their financial planning and performance process. What’s more, little over half (56%) said they currently give ‘equal’ focus to financial and non-financial areas, such as sustainability and supply chain issues.
Fortunately, finance professionals themselves recognise the impetus for change. A large majority (82%) agreed that new forms of performance measures – as opposed to purely financial measures – are needed to meet the expectations of investors, analysts and the capital markets.
As well as taking a broader perspective, finance teams must shift their focus away from purely historic performance. While it is important to tell the story of the past, this should not come at the expense of understanding the drivers of future performance, the likely risks and opportunities their organisation may encounter, and the actions needed to ensure success.
The research shows that some cultural change is needed to bring about this shift. Today, the key focus area for financial planning and analysis (FP&A) activity in organisations is still understanding the performance of ‘actuals’ against budget, cited by 57% of respondents. In contrast, just 24% focused on robust ‘what if’ scenarios, even though scenario analysis would help their organisations to better understand the potential impact of climate-related risks and opportunities.
There is also a need to revisit processes. Looking into the future requires flexible and straightforward processes – which are sadly lacking in many organisations. For example, the research found that it takes most organisations (57%) between one and three months to complete an annual planning cycle. In other words, up to a quarter of one year is spent planning for the next.
If they are to become more agile at budgeting and forecasting, finance teams must have the right technologies and methodologies at their disposal. These include tools and processes that support constantly changing assumptions and macroeconomic factors, such as inflation and employment levels. Finance teams also need access to both internal and external sources of data.
Despite the plethora of purpose-built planning tools and enterprise planning modules that exist today, finance teams continue to rely heavily on spreadsheets, however. In fact, the research found that 82% of respondents relied mainly on spreadsheets to help manage planning and performance in their organisation.
In contrast, just 34% made use of next-generation tools, such as extended planning and analysis (xP&A) applications that feature inbuilt artificial intelligence and machine learning. These tools – which are both business and finance tools – should be an important component of organisations’ digital transformation strategies.
Fail to prepare, prepare to fail
Over the coming months and years, organisations will come under increasing pressure, from their investors as well as other stakeholders, to hit their net zero targets. If they are to achieve these targets, they will need a plan – an integrated plan that incorporates operational and financial considerations while drawing on the expertise of every internal team.
As an organisation, we are supporting the journey the accountancy profession needs to take through integrating the necessary knowledge in our qualification and providing CPD opportunities and research, such as this latest report, that will help drive the changes needed.
Already, finance teams are recognised as valuable business partners by their colleagues within their organisations. So, we must call on them to play an instrumental role in this planning process while taking an organisation-wide and value-based view of performance that embraces purpose and people, as well as profit. By transforming the way that organisations approach business planning, the finance function can help to save the world.
To learn more about the ACCA research, click here