CFOs play an increasingly important role in overall business strategy, and having a perspective and taking a stand on sustainability as part of corporate agenda will make a huge difference to the company’s business value. The fact is that sustainability-related challenges increase risks and can threaten the bottom line. Focusing on sustainability offers CFOs the chance to connect their stewardship and strategy roles to future-proof their companies and enhance shareholder value.
So what exactly does sustainability mean and encompass? On a very broad level, it is about protecting and enhancing key natural and foundational resources. For businesses, it relates to having a vision and strategy that will sustain the company in the long term, and about the ethical responsibilities of doing business in ways that minimize social and environmental damage.
Why should CFOs care?
In view of concerns about climate change, resource scarcities, and rising global demands of food, water, and energy, here are a few potential issues that CFOs need to pay attention to:
- The accelerating pace of global sustainability-related regulations.
- Increasing activism among concerned shareholders.
- Growing financial reporting pressures and requirements to include sustainability criteria.
- Public expectations of corporations regarding sustainability.
- The relative importance that younger generations – both your customers and your employees – place on sustainability.
But in general, CFOs have been slow in tackling sustainability issues head-on. Reasons for their tardiness and unwillingness could include, for a start, the apparent lack of interest from investors. Secondly, they might also lack interest because of the failure by the sustainability community to engage CFOs on their own terms. Finally, CFOs may still be stuck in an old paradigm.
That could all soon change if you consider how and where strategic thinking and action around sustainability, led by the CFO, can really make an impact in the organization. Strategic CFOs are beginning to integrate sustainability into their value propositions and leadership initiatives. In general, CFOs can leverage sustainability concerns to enhance performance in three areas:
- Risk management
- Capital productivity
- Innovation and growth
Integrating sustainability into the CFO’s risk management perspective could achieve a few things:
- They can better manage the volatility around energy and commodity prices, which CFOs perceive to be the biggest risks to financial performance in the near term.
- They can have better control over unnecessary costs and avoid damage to corporate reputation by avoiding incidents such as spills, accidents, product recalls, or other performance issues.
- In terms of achieving capital productivity, thinking about sustainability strategically can bring about opportunities in reducing compliance and operating costs, boosting employee productivity, and improving business processes.
Having a sustainability-powered vision can also lead to growth and innovation in unexpected ways. For instance, in industries such as consumer goods, establishing sustainability initiatives can promote more meaningful conversations between brands and consumers, thus driving business growth.
It is possible for sustainability to be embedded throughout the firm’s operations. Mergers and acquisitions, divestitures, and capital expenditures can be analyzed from a sustainability standpoint. Tax planners can include sustainability when they identify tax liabilities, and procurement managers can anticipate sustainability constraints and opportunities in supply chains.
Integration into business models and reporting is key
To achieve these objectives, integration into business models and reporting is crucial. Two good examples are Philips and SAP. The integrated reporting movement, guided by the International Integrated Reporting Council (IIRC), helps companies understand and communicate the ways in which their business models create value. More than just a reporting mechanism, a company must showcase what is referred to as “integrated thinking” to report in an integrated manner.
For companies in Singapore, for example, EY’s “Materiality and Sustainability Disclosure: Key Insights From the SGX Top 50 Report,” which studied the sustainability disclosure of the top 50 SGX-listed companies by market capitalization, found that while 80% of the SGX-listed companies make some mention of sustainability in their annual reports or websites, only 60% actually report on their sustainability performance. This shows that there is room to grow in terms of integrating sustainability into reporting, and CFOs can lead the charge by driving these initiatives. Ultimately, when sustainability becomes an integral part of the company’s DNA, overall performance can be enhanced and risk can also be better managed.
Learn more about how finance executives can incorporate sustainability initiatives into their overall strategy.