It is typical in organisations for the CFO to be ultimately responsible for: investor relations, facilities, purchasing, human resources and IT. Moreover, CFOs have a unique vantage of operations, by seeing it from a purely financial paradigm. And, therefore, many of the business risks and opportunities exposed through a coherent sustainability strategy involve teams who lie under the ultimate control of the CFO. Yet, research shows CFOs who do not feel the pressure for a sustainability strategy from the CEO are left feeling under whelmed by the sustainability agenda – which exposes a paradox.
Meanwhile, investor pressure towards sustainability is ever increasing. In a 2009 Carbon Disclosure Project (CDP) report of investors – 77 per cent of respondents factor climate change information into investment decisions citing ‘carbon risk’ and ‘potential regulation’ as motivation.
These results are very much in line with the Tru Cost report Carbon Risks in UK Equity Funds which stated: ‘assessment of future corporate value is directly proportional to carbon and sustainability reporting and management.’ Sustainability has become a major protector for companies against: rising costs, damage to brand and reputation, existing and future environmental legal mandates as well as shifting customer and market expectations.
And, while there are deep concerns if there is poor or non-existent integrated reporting; sustainability reports are signals to stakeholders that the issues of sustainability are being taken seriously and provide the means for stakeholders to track progress, adding value to the business.
In the long view, environmental social governance (ESG) is driving improvements towards the triple bottom line – economic, social and environmental. From the point of view of risk mitigation and secure financial growth; socially and environmentally astute companies are grasping the opportunities.
‘Climate risk can have a real impact on portfolio holdings. There is a growing case for trustees to attain some level of knowledge around these issues, and take steps to mitigate any negative consequences for not taking action,’ notes a recent report issued as a guide for British Pension Fund.
Disturbingly, SMEs are four times more likely to do nothing. This is typically because CFOs see sustainability as a cost, and cite resource constraints. This misconception, which leads to inadequate future strategies, is mainly due to a lack of understanding of the risk mitigation, value opportunities and business benefits associated with sustainability. This view is supported by the PwC, CDP, DEFRA Review of the Contribution to GHG Emissions Reductions and Associated Costs and Benefits report.
However, as customers shift to reducing the risk of environmental and social exposure of their supply chains; CFOs and other executives are going to have to fundamentally review the way they look at their business and value chain. Thus, as CFOs become used to the balancing act of profit and the credo of sustainability being connected, treating environmental considerations with the same level of transparency as the financial metrics, it makes the process of tracking true costs and benefits across the organisation, its assets and operational activities easier. Sustainability will then fall in the natural realm for accountants – confirming accuracy and credibility.
This leads to integrated environmental and strategic planning that provides an accurate, long-term view in terms of accountability life cycle and delivering clear key performance indicators and budgets. Additionally, it protects the company from poorly measured random environmental projects and creates a sustained process of intended actions, clear outcomes and business benefits. In addition, improvements in operational efficiencies and the achievement of cost savings will free up capital for reinvestment into new technologies.
Note that, while investment in low-carbon technologies will help reduce energy consumption and greenhouse gas emissions, to optimise such investments the procurement of such technologies must be linked to a company-wide sustainability strategy. Managers must holistically link organisational processes to these new technologies. Such strategies will – and do – reward companies that deliver more efficient products and services that reduce the environmental exposure of their customers.
Moreover, there has been a great deal of research which shows sustainability improves motivation, lowers staff turnover and is a driver for attracting and retaining the best people. The resulting improved team cohesion delivers further financial benefits, as the team will always surpass the contribution of the individual. A quality team will enhance the customer experience and drive important innovations of new products and services.
“Leading companies recognise that successful sustainability performance translates to successful bottom-line business performance, and investors are attracted to companies that act in a sustainable manner with a focus on long-term profitability and competitive advantage,” writes Jessica Fries, director of The Prince’s Accounting for Sustainability Project (A4S).
Essentially, CFOs must connect with energy management and sustainability teams, moving from isolated teams to pervasive aspects of all critical business functions; thus, maintaining robustness in verification and substantiation of developed key performance indicators. This in turn will create visibility and inclusion of sustainability into core business practices and accountability processes, enabling capital requests to include energy and resource consumption, evoking the ability to apply whole life cost analysis of asset ownership; and initiate post project measurement and verification, critical to deliver confidence in current and future energy and resource project savings claims.
In conclusion, given the CFO’s integral role in all areas relating to resource management and sustainability, there should be an emphasis on margin improvements through cost savings and increased competitiveness. Additionally, sustainability offers mitigation against the failure to disclose environmental risk, and thus, protection against reputation damage and gaining poor peer rankings in investor research.
Ultimately, sustainability throws a spotlight on the opportunities for cutting costs, creating innovation, improving differentiation and the ability to compete; while helping to mitigate risks from: supply chain, costs, tax, legal and resource. It is the responsibility of the CFO and their accounting teams to provide the best systems and information to enable long-term planning. The point surely: serving the best interests of the environment and communities can also be seen to be the right financial approach.
Christopher Gleadle is managing partner for The CMG Consultancy, which improves the sustainability performance of clients’ worldwide – optimizing business environments and managing sustainability risks and challenges.