Sustainability and the importance of the Chief Financial Officer (CFO)
1 July 2011 | Luca Del Buono |
Meanwhile, investor pressure towards sustainability is ever increasing. In a 2009 CDP report of investors – 77% of respondents factor Climate Change information into investment decisions citing ‘carbon risk’ and ‘potential regulation’ as motivation. These results being 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 expectation.
And, while there are deep concerns if there is poor or non-existent integrated reporting; the ability to report, is a signal to stakeholders that the issues of sustainability are being taken seriously and provides accountability 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 – economical, social and environmental. From a 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.’
Recent report issued as a guide for British Pension Fund Trustees
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 is due in the main, to a lack of understanding of the risk mitigation, value opportunities and business benefits associated with sustainability; therefore, not making it part of future strategy. This view being supported by sector associations in the PwC, CDP,DEFRA Review of the Contribution to GHG Emissions Reductions and Associated Costs and Benefits report.
However, as customer’s shift to reducing risk of environmental and social exposure of their supply chain; CFOs and other executives are going to have to fundamentally review the way they look at their business and value chain to remain vital. Thus, as CFOs become used to the balancing act of profit and the credo of sustainability being connected, and make environmental considerations accountable, treating them 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. The natural home for accountants – to confirm accuracy and credibility.
This leads to environmental planning and strategic planning working together in understanding what the year ahead and long-term view looks like 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. Yet, 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; holistically linking organisational processes to these new technologies. Such strategies will – and are – rewarding companies that deliver more efficient products and services supporting the efficiency, and reducing the environmental exposure of their customers.
Moreover, there has been a great deal of research completed which shows sustainability improves motivation, lowers staff turnover and is a driver for attracting and retaining the best people delivering further financial benefits, through improved team cohesion, as the team will always surpass the contribution of the individual. Everyone pulling together foster’s a wholly more stable and rewarding culture. The higher emphasis on nurturing and developing team cohesion will improve and go beyond customer expectation and enhance the customer experience – whilst driving important innovation of new products and services enhancing market share.
“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.” Jessica Fries, Director, The Prince’s Accounting for Sustainability Project (A4S).
In conclusion: given the sight of all areas of responsibility of the CFO in relation to resource management and sustainability, there is an emphasis on margin improvements through cost savings and increased competitiveness. Additionally, sustainability offers risk mitigation against the failure to disclose environmental risk, thus, protection against reputation damage, and gaining poor peer rankings in investor research.
Secondly, CFOs will gain greater insight of energy and resource expenditure. By setting KPIs, illustrate savings through energy and resource accountability, giving greater visibility and management of operational processes across functional units. Capital requests would now include energy and resource consumption, enabling 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.
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 KPIs and associated metrics. This in turn will create visibility and inclusion of sustainability into core business practices and accountability processes.
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, so acting with the long-term in mind. The point surely: serving the best interests of the environment and communities can also be seen to be the right financial approach.
Copyright 2011 Christopher Gleadle, The CMG Consultancy
Christopher Gleadle is author of Sustainable Growth Through Sustainable Business and senior partner at the sustainability performance agency The CMG Consultancy.