In 2021, chief financial officers (CFOs) may be able to divert some energy from pandemic response to focus on challenges and opportunities posed by technology, regulation, and other trends.

Some changes are beyond CFOs' control, such as the economic outlook or regulatory and tax policy adjustments under the incoming Biden administration.

Other trends fall within the CFO's purview and are more manageable. Here are five trends worth watching.

1. Pressure to adopt ESG metrics increases

Companies should consider preparing for stricter scrutiny from investors, regulators, and the public regarding environmental, social, and governance (ESG) sustainability metrics.

"As ESG disclosure becomes mainstream, CFOs, especially those at large public companies, will have to respond to increasing questions from stakeholders about their organizations' ESG performance," said Shailendra Gupta, CFO of Acuity Knowledge Partners, a financial services research and analysis provider.

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

According to a survey of boardsby Willis Towers Watsonacross North America, Europe, Asia, Africa, and the Middle East, the pandemic, economic uncertainty, and social and racial injustice have prompted companies to accelerate adjustments to their ESG priorities.

Of the 168 institutions surveyed, 78% plan to adjust the use of ESG in executive incentive plans within the next three years, and 41% plan to introduce ESG metrics into long-term incentive plans within 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, with another quarter planning or considering it.

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 competence.

Multiple groups are pushing for different ESG reporting standards, complicating companies' efforts to achieve uniformity and ensure stakeholder recognition. 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% of companies follow the system recommended by the TCFD.

Gupta said that until consensus is reached on common standards, companies should focus on building robust ESG data collection systems similar to existing financial data collection mechanisms.

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

This year, many CFOs may need to pay more attention to the exit of the London Interbank Offered Rate (LIBOR), which serves as the benchmark for trillions of dollars in commercial loans, derivatives, and other financial contracts globally.

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

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 modifications require their consent.

The Federal Reserve and other U.S. regulators said in aNovember 30 statementthat "in light of 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 company exposures 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 certain disadvantages, it is far from replacing LIBOR.

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

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

"CFOs need to ensure their IT and risk management departments keep up with the transition timeline. If companies are unprepared, it could trigger major problems," van Vredenburch said.

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

When the pandemic caught CFOs off guard last year, many viewed zero-based budgeting (ZBB) as a time-tested cost-cutting tool.

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 cutting planned spending on time and entertainment, leadership activities and off-site meetings, capital expenditures, and hiring,Gartner said.。

But today, ZBB is no longer the grandfatherly blank-spreadsheet budgeting process of 1977. Finance professionals are deploying AI and cloud platforms to conduct efficient, precise reviews of company 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 alter company performance under different economic or business scenarios. Workflow applications accelerate review and approval.

The result: finance professionals avoid the extensive data collection, organization, and analysis time and effort that ZBB previously required. They can more easily achieve ZBB's goal, which, according to Gartner, is to "resize budgets and shift resources toward high-value activities aligned with reordered business outcomes."

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

But if CFOs lose sight of its primary goal, ZBB can backfire, leading to a downward performance spiral. Gartner said: "Many organizations apply ZBB in ways that often fail to deliver business value. Without value, cuts must be sustained."

Dahl said budgets should adapt to new circumstances, especially in uncertain times like now. "At some point in 2021, the economy may rebound; a static budget will crush an organization under those conditions."

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

The pandemic highlighted the importance of reliable 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.

An Accenture surveyfound that 99% of CFOs want to use real-time data in decision-making, but only 16% believe they are fully capable of doing so. They spend an average of 33% of their department budgets on building real-time operations and processes, Accenture found.

According toAccenture, finance professionals this year are most concerned about the potential impact of rising interest rates, pandemic-related disruptions, economic recession, and talent recruitment and retention. Only 11% of respondents expressed confidence in their preparedness for an economic downturn.

Accenture said 68% of surveyed CFOs believe AI, machine learning algorithms, and a range of real-time data sets are crucial for 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 United States 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 best balance between remote and office work post-pandemic

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

CFOs 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 should:

  • Compare productivity levels between remote and office work;
  • Reduce the higher costs of IT support for 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 areas;
  • 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, finance professionals cannot adopt a one-size-fits-all solution to the broad and complex issues. They need to prepare for different public health scenarios and adjust plans throughout 2021.

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

Hansen said CFOs need to work closely with chief human resources officers and other members of the executive leadership team. "It's important to get everyone on the same page when making decisions based on holistic data, not just financial metrics."

Steven Springsteel, CFO of Betterworks, a human capital management SaaS company, said many finance executives may prefer a hybrid model of remote and office work. He said this could mean reducing office space, having employees primarily work from home, and occasionally "hot-desking" in the office for team or client meetings.

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

He said some CFOs may prefer to scale down permanent workspaces entirely.

"Returning 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?"