Here is a possible evolution of corporate finance by 2030 in three stages.
2021-2023 – Reacting
Spurred by social and environmental trends, evolving investor preferences, and new disclosure regulations, executive teams assess the benefits of systematically engaging with stakeholders while accounting for the future cost of externalities under various scenarios.
The corporate responsibility or sustainability function is strengthened. But, centralized, it is often isolated. Due to sustainability's multiple facets, firms struggle to implement an organizational structure that effectively integrates ESG. ESG reports are poorly structured and undifferentiated. Material ESG drivers are hesitantly identified, too numerous, and inadequately aligned with KPIs, while ESG targets are half-baked. ESG rating agency logos are pasted on bland IR slides, accompanied by contextless KPIs.
The link between ESG and long-term value creation is lacking, allowing for rampant skepticism and political interference. Executives are deeply frustrated with investors, and vice versa.
Greenwashing is a permanent risk. The markets lose efficiency. Amid this fog, firms displaying a modicum of ESG maturity capture an outsized share of ESG funds flow.
2024-2027 – Acting
Mandatory disclosure obligations (CSRD/ESRS in 2024, ISSB) provide financial market participants with new information in the form of non-financial (non-pecuniary) data in integrated reports.
Investors, firms, and, more generally, corporate financiers gradually learn how to translate this new data into cash flow impacts, by which point they are renamed ‘pre-financial’ KPIs. Where the connection with hardcore dollars is difficult to establish, KPIs translate into a ‘quality premium’ driven by increasingly sophisticated investor preferences and cost of capital considerations.
The sustainability function typically reports to the CFO, while the IR and PR functions work more closely together than ever, reflecting the growing alignment between investors and stakeholders.
Considering their purpose and strictly focused on material ESG KPIs, companies incorporate sustainability into their strategy, operating (or business) system, and capital structure. Leading firms use educational IR to support their equity story. Group portfolios are reviewed through financial and pre-financial prisms, leading to M&A transactions, IPOs, and spin-offs.
Firms not subject to mandatory ESG reporting opt for voluntary disclosure to stay competitive vis-à-vis their stakeholders and tap into the growing pool of ESG investor demand in Europe and beyond.
Investors become more discerning. The financial markets regain some efficiency.
2027-2030 – Earning
The EU disclosure obligations (CSRD) achieve extraterritoriality. There is no place to hide in the global world of finance. ESG emerges as an integral part of corporate business systems.
Half a decade of data allows for correlations between ESG and stock price performance to emerge, powered by artificial intelligence. Securities enjoy deeper segmentation alongside shades of ESG. The financial markets reach a peak level of capital allocation efficiency.
Seamlessly integrated into all corporate finance transactions, ESG (and anti-ESG) vanishes.