In 1970, the famous conservative economist Milton Friedman published an article in The New York Times Magazine that would later be widely regarded as one of the most important forces shaping corporate history over the next 50 years. Friedman advocated for "profit primacy," arguing that the best way for corporations to fulfill social responsibility was to focus on maximizing shareholder value and put profits first. This gave rise to the idea of a "trickle-down" social responsibility effect.

By 2020, however, Friedman's views were facing unprecedented challenges. Amid intensifying climate change and the aftermath of the George Floyd incident, a corporate reform movement known as "Environmental, Social, and Governance" (ESG) rapidly gained momentum, with many large U.S. companies at least expressing verbal support. ESG funds, as one of the fastest-growing sectors in the asset management industry, are seeking to hold corporate managers accountable for their actions.

"The CFO's role in advancing ESG implementation will be crucial," said Leeor Groen, an investment banker, global ESG advocate, and head of BV Ventures in Zurich. He noted that CFOs are the gatekeepers of reported data within corporate organizations, and as their reporting responsibilities extend far beyond financial data, their role will undergo a transformation.

Despite the widespread discussion of ESG, there is still no definitive set of measurement standards to verify whether companies are truly practicing ESG. This is because the ESG concept is relatively new and extremely complex, and a widely recognized and adopted set of indicator standards has not yet been established.

Core and Expanded Indicators

A turning point emerged in late September—in one of the most significant developments in the ESG field, the Big Four accounting firms announced that, under the auspices of the World Economic Forum (the organizer of the Davos global leaders' meeting), they had agreed on a set of standard indicators. The framework is based on four principles: Governance, Planet, People, and Prosperity. Its goal is to enable companies to report ESG performance in a unified manner, allowing for comparability within the industry and enabling all parties to set and understand performance targets.

Key details in the World Economic Forum white paper state: "Core indicators: a set of 21 more mature or critical metrics and disclosures. These are primarily quantitative, and many companies already report related information (though often in inconsistent formats) or can obtain it through reasonable effort. They mainly focus on activities within the organization's own boundaries." Under the "Planet" dimension, core indicators include emissions reporting; under the "Society" dimension, they involve diversity; and under the "Governance" dimension, they include anti-corruption measures.

The report also discusses so-called "expanded indicators," which leave room for a broader expression of commitment to the values of "stakeholder capitalism," a concept the report explicitly advocates. Expanded indicators aim to go further than core indicators, for example by calculating ESG performance in monetary terms.

The white paper states: "Expanded indicators: a set of 34 metrics and disclosures that are often less mature in existing practices and standards, have a broader value chain scope, or convey impact in more complex or specific ways (such as in monetary form). They represent a more advanced way of measuring and communicating sustainable value creation."

"Now is the time for companies to expand engagement with stakeholders," said Carmine Di Sibio, EY Global Chairman and CEO, in a statement on the Big Four ESG announcement. Bob Moritz, Global Chairman of PwC, also noted in his own statement that stakeholders—including investors, policymakers, consumers, and employees—need "more comprehensive, comparable, and robust information to make decisions. By getting that information flowing and aligning market incentives with performance on these metrics, a better tomorrow becomes possible."

CFOs Will Lead the Charge

Despite progress in standard-setting, the path to advancing ESG metrics and measurement could be time-consuming and complex for CFOs, said Bill Stone, founder of ESG fund creator Stance Capital. However, eventually "reporting platforms will emerge that make it easier for corporate CFOs to aggregate and report" ESG-related matters. As CFOs' reporting responsibilities expand due to ESG, their role will transform.

"Our goal is to establish a framework where every financial decision incorporates climate change considerations, just like interest rates, credit risk, or cash flow," said Mark Carney. Carney, former governor of the Bank of Canada and the Bank of England and now the UN Special Envoy for Climate Action and Finance, spoke at a Climate Week NYC event about the Big Four indicators announcement. "But climate change should also be seen as one of the fundamental drivers of risk and value for global companies and assets. This starts with reporting, extends to risk management, stress testing, and scenario analysis, not only for opportunity purposes but also for risk purposes. Ultimately, it will expand to expectations for capital providers and how they report."

Stone said that so far, the largest companies are taking the most ESG action, while the U.S. lags Europe by five to seven years in ESG adoption. "In the U.S., ESG requirements will trickle down from the largest companies to mid-sized companies and then to smaller companies." But amid California wildfires and racial justice protests, the challenges to ESG adoption remain formidable.

A top ESG observer who spoke on condition of anonymity said: "ESG is well known at the top of the U.S. corporate food chain, though not necessarily popular. When you go down to mid-sized and smaller companies, they have some concept of ESG, but adoption efforts are much less. And in some other places... you'll hear: 'ESG? What's that?'"