Part of the “Purpose-Driven CFO” series
In April, Handelsblatt, the German business daily, published a guest comment in which Luka Mucic explains why sustainability is becoming more important for CFOs. This is an extended version of the article, which appeared June 25, 2018, in the SAP Global News Employee Network.
“To prosper over time, every company must not only deliver financial performance but also show how it makes a positive contribution to society.”
These powerful words come from Larry Fink, chief executive of the leading investment firm BlackRock. Fink called on chief executives of companies around the world to prove how sustainable their actions are. “Without a sense of purpose,” he continued, “no company, either public or private, can achieve its full potential. It will ultimately lose the license to operate from key stakeholders.”
The response he got was substantial. Many analysts were surprised to hear this message come from a top investor. But was Fink really the first person to make such an appeal?
Certainly not. He just vehemently summarized what has been happening in business in recent years. At SAP, for example, our executive board started paying more attention to sustainability in 2009, and four years later, we published an integrated report for the first time. This report gives equal importance to financial, social, and environmental value creation, and it shows clearly how they interrelate.
Our vision is to help the world run better and improve people’s lives, and since publishing our first integrated report, we have been providing concrete information on how we, as a company, are turning this vision into reality. Such transparency opens the door to dialogue with customers, employees, partners, and stakeholders in wider society. It strengthens our credibility as a pioneer in sustainability and enables us to leverage our greatest strength: providing customers with solutions and technologies that help them achieve positive economic and social change while minimizing their impact on the environment.
An integrated report helps make companies more successful on every level, including ultimately even in the financial markets. After all, according to the latest report by the Global Sustainable Investment Alliance, 53% of total professionally managed assets in Europe now use responsible investment strategies, and responsible investment now accounts for 26% of all professionally managed assets globally.
Sustainability is rising to the top of CFOs’ agendas
CFOs have been reporting more than just financial performance for a while now. They have had to broaden their focus because the relationship between a company’s financial performance and how it treats people and the environment, both within the business itself and across the entire value chain, matters at least as much.
Though it is about wanting to do the right thing and living up to our company’s purpose and responsibilities in the first place, non-financial KPIs provide an important basis for steering the business more holistically. We measure our business success through four strategic indicators: revenue and operating margin reflect past performance; employee and customer engagement help us understand what we can achieve in the future.
The relevance of seemingly “soft” factors like these increases even more if we express them in terms of monetary value. The significant impact non-financial KPIs can have on operating profit can be clearly seen in our Business Health Culture Index: Each percentage point increase or decrease in the index changes our annual operating profit by between €85 million and €95 million.
The impact of non-financial KPIs
Another good example is the effect of employee retention on financial performance. This is highly significant for SAP as a leading provider of business software. Nothing has a greater impact on SAP’s long-term success than the creativity, talent, and loyalty of our people. Our integrated report provides the numbers to support this. Every percentage point move in employee retention levels changes our annual operating profit by between €55m and €65m.
Similarly, we look at how employee commitment influences our financial results. The Employee Engagement Index measures employee commitment and loyalty, how proud our people are to work for our company, and how well they identify with it. For every percentage point change in this index, we see a change of between €50m and €60m in our annual operating profit.
We calculate this index, which is currently at 85%, by surveying our employees annually. We also ask them if they think it is important for SAP to pursue sustainability. Today, 93% of our workforce believe it is important, up from 77% eight years ago.
These scores tell us that we are right to continue pursuing the course we set in 2009—for instance, by further reducing our carbon emissions. In this area, we reached another important milestone in May 2017, when we committed to becoming carbon neutral by 2025. An ambitious goal. But with our cloud strategy and the fact that our data centers are 100% powered by renewable energy, it is an attainable one.
Purpose-driven companies outperform the markets
The connections between our cloud strategy and our climate goals show how a company’s sense of purpose can be combined with its financial objectives. That is how purpose-driven companies, which align their core business with the social and ecological challenges of our time, are born.
This 360-degree approach not only leads to social and ecological change; it also pays off in the markets. Many studies have shown that purpose-driven companies perform significantly better. The effects are seen in the real economy, in factors such as innovation power and sales, and in the financial markets—for example, in stock prices and market capitalization. That is why sustainability has long been a top priority for CFOs. It also creates new opportunities for us because, now more than ever, companies need reporting and analytics solutions that deliver the knowledge to drive the financial, social, and ecological performance of the company as a whole.
The original article was published on April 16, 2018, in the German business daily Handelsblatt.
For more on this topic, please read the “Purpose-Driven CFO” series.