This year, Chief Financial Officers (CFOs) may be able to shift some of their focus from responding to the pandemic to the challenges and opportunities brought by changes in technology, regulation, and other trends.

Some changes are beyond the CFO's control, such as the economic outlook, or adjustments to regulatory and tax policies under the incoming Biden administration.

Other trends fall within the CFO's purview and are relatively easier to manage. Here are five trends worth watching.

1. Increasing pressure to adopt ESG metrics

Companies should consider preparing for increasingly rigorous scrutiny by investors, regulators, and the public of environmental, social, and governance (ESG) sustainability metrics.

"As ESG disclosure becomes mainstream, CFOs, especially those of large public companies, will have to deal with more questions from stakeholders about their organization's ESG performance," said Shailendra Gupta, CFO of Acuity Knowledge Partners, which provides research and analysis for financial services firms.

The use of ESG metrics is growing. According toa survey by KPMG, the proportion of companies reporting on the sustainability of their operations rose from 75% in 2019 to 80% in 2020.

According to a Willis Towers Watson survey of boards in North America, Europe, Asia, Africa, and the Middle Eastof directors, the pandemic, economic uncertainty, and social and racial injustice have prompted companies to accelerate adjustments to their ESG priorities.

Among respondents from 168 institutions, 78% plan to change their use of ESG in executive incentive plans within the next three years, and 41% plan to incorporate ESG metrics into long-term incentive plans over the same period.

Nearly three-quarters of North American respondents have already implemented at least one initiative to promote inclusion and diversity within their organizations, and another quarter plan or are considering doing so.

Gupta said in written responses to questions that, depending on the business, companies may need to consider providing performance metrics on topics ranging from climate change and human rights to data privacy and board capability.

Multiple groups are pushing for different ESG reporting standards, complicating efforts by companies to achieve uniformity and ensure stakeholder buy-in. These organizations include theSustainability Accounting Standards Board (SASB), the Global Reporting Initiative (GRI), and the Task Force on Climate-related Financial Disclosures (TCFD).

Two-thirds of the top 100 companies and three-quarters of other large companies use the GRI reporting framework, while 20% follow the system recommended by the TCFD.

Gupta said that while consensus on common standards is being reached, companies should focus on building robust ESG data collection systems similar to current mechanisms for collecting financial data.

2. The countdown to LIBOR's exit will grow louder

This year, many CFOs may need to pay more attention to the process of moving away from the London Interbank Offered Rate (LIBOR). LIBOR is the benchmark for trillions of dollars in commercial loans, derivatives, and other financial contracts globally.

Time is tight—regulators have set December 31 as the deadline for new contracts to use alternative reference rates, and June 30, 2023, as the deadline for existing contracts to transition away from LIBOR.

The stakes of LIBOR's exit are high. In many companies, LIBOR is embedded in a range of financial contracts and core operations, such as valuation, accounting, tax, and debt management. Some debt instruments are held by hundreds of investors, and any modification requires their consent.

The Federal Reserve and other U.S. regulators said in aNovember 30 statementthat "given consumer protection, litigation, and reputational risks, the agencies believe that entering into new contracts referencing U.S. dollar LIBOR after December 31, 2021, would create safety and soundness risks."

To avoid disruption, finance executives need to play a central role in identifying corporate vulnerabilities and transitioning to alternative rates.

The alternative rate favored by U.S. regulators—the Secured Overnight Financing Rate (SOFR)—has seen faster adoption in recent months, but due to some disadvantages, it is far from replacing LIBOR.

SOFR is based on overnight repurchase agreements collateralized by U.S. Treasuries and, unlike LIBOR, does not allow treasurers to make forward-looking rate calculations. LIBOR is based on estimates by London banks of the costs they would pay to borrow from other banks. LIBOR rates can predict levels three, six, and twelve months ahead.

Pieter van Vredenburch, head of Market Alpha Advisors, said finance executives should ensure their entire organization understands the risk and funding implications of adopting alternative reference rates.

"CFOs need to ensure their IT and risk management teams keep up with the transition timeline," van Vredenburch said. "If companies are unprepared, significant problems could arise."

3. Targeted, AI-assisted zero-based budgeting will outlast the pandemic

When COVID-19 caught CFOs off guard last year, many viewed zero-based budgeting (ZBB) as a time-tested tool for cutting costs.

In a Gartner survey of 300 global finance leaders in April, 26% expected to use ZBB to respond to the pandemic. CFOs achieved budget "quick wins" by scaling back planned time and entertainment, leadership activities and off-site meetings, capital expenditures, and hiring spending,Gartner said.

But today, ZBB is not the grandfatherly blank-sheet budgeting process of around 1977. Finance professionals are deploying AI and cloud platforms to conduct efficient, precise reviews of corporate spending.

By using digital tools, CFOs can parse large volumes of business unit data by cost category or cost center, identifying opportunities to streamline processes and achieve strategic, targeted savings. Analytics tools can show how budget changes would alter company performance under different economic or business scenarios. Workflow applications can speed up review and approval.

The result: finance professionals avoid the extensive time and effort ZBB previously required to collect, organize, and analyze data. They can more easily achieve ZBB's goal, which, according to Gartner, is to "resize budgets and redirect resources toward value-added activities aligned with reprioritized business outcomes."

Catherine Dahl, CEO of Beanworks, an accounts payable SaaS provider, said ZBB "is the best type of financial planning, as long as the annual impact doesn't compound—that is, if you don't spend the planned money, you don't lose future opportunities."

But if CFOs ignore its primary goals, ZBB can backfire and potentially lead to a downward performance spiral. Gartner said: "Many organizations apply ZBB to costs in ways that often fail to deliver business value. Without value, cuts must continue."

Dahl said budgets should adapt to new circumstances, especially in uncertain times like now. "At some point in 2021, the economy may pick up; in that case, a static budget will weigh down the organization."

4. CFOs will try to expand the use of real-time data

The pandemic highlighted the importance of credible real-time data for rapid decision-making. CFOs may spend part of 2021 upgrading their preparedness for the next sudden crisis.

Clearly, they still have much work to do.

A survey by Accenturefound that 99% of CFOs want to use real-time data when making decisions, but only 16% believe they are fully capable of doing so. Accenture found they allocate an average of 33% of departmental budgets to building real-time operations and processes.

According to Accenturedata, finance professionals this year are most concerned about rising interest rates, pandemic disruptions, economic recession, and the potential impact on talent recruitment and retention. Only 11% of respondents said they were confident in their preparedness for a recession.

Accenture said 68% of surveyed CFOs believe AI, machine learning algorithms, and a range of real-time data sets are critical to improving data accuracy and refining forecasting models. The survey covered 450 CFOs and other finance leaders at companies with annual revenue of at least $1 billion in the U.S. and Europe.

According to Accenture, gaining capabilities such as real-time scenario planning "enables finance leaders to optimize cash flow, forecast more accurately, and integrate planning across the business."

5. CFOs will seek the optimal balance between remote and office work after the pandemic

Finance professionals will be core decision-makers in a particularly complex, high-stakes challenge in 2021: determining the timing and pace of returning to the office.

CFOs will need to consult with C-suite colleagues and track a range of hard and soft metrics, not just the basic costs saved by closing facilities. When considering potential cost savings and expenditures, CFOs would do well to:

  • Compare productivity levels between remote and office work;
  • Reduce the higher IT support costs of remote work and minimize cybersecurity risks;
  • Determine the benefits of remote work policies when expanding the potential talent pool beyond the company's usual geographic area;
  • Measure employee anxiety and isolation, and strengthen programs to ensure well-being when necessary;
  • Assess the risks of returning to the office and the budget needed to safeguard employee health.

Based on interviews with multiple CFOs, faced with broad and complex issues, finance professionals cannot adopt a one-size-fits-all solution. They need to prepare for different public health scenarios and adjust plans throughout 2021.

"We are in new territory. We talk about continuous planning often, and I think this is one of those areas where we have to be agile in our approach," Shane Hansen, CFO of FP&A SaaS company Planful, told CFO Dive.

Hansen said CFOs need to work closely with the chief human resources officer and other members of the executive leadership team. "Getting everyone aligned when making decisions based on overall data, not just financial metrics, is very important."

Steven Springsteel, CFO of Betterworks, a human capital management SaaS company, said many finance executives may lean toward a hybrid model of remote and office work. This could mean shrinking office space, he said, with employees primarily working from home while occasionally "hot-desking" in the office for team or client meetings.

Springsteel said Betterworks has so far adopted a hybrid approach. Last year, it decided not to renew the lease on its headquarters in Redwood City, California, while keeping its New York City office, which is primarily focused on sales and customer service.

He said some CFOs may lean toward scaling down their fixed workspaces entirely.

"Going back to the office is not really a black-and-white issue," Springsteel said. CFOs need to ask: 'Do people feel comfortable, do they feel safe?'"