CFOs and sustainability—a growing relationship
There are powerful reasons why corporate finance teams should be key participants in their business’s sustainability journeys.
First, sustainability-related risks are today viewed as business risks. The World Economic Forum Global Risks Report 2017 lists extreme weather events, water crises, and failure of climate change mitigation and adaptation among the top five global risks in terms of impact.
“The risk factors that global companies are encountering are starting to change,” said Terry F. Yosie, Ph.D., president and CEO of the World Environment Center, a not-for-profit organization in Washington that advocates for sustainable business practices. “In years past it had to do with market conditions, investment assessments, and political stability of different countries. But these factors are now expanding into factors related to … climate change and resource availability. These are landing at the CFO’s table, because they are a part of the risk to the business.”
Secondly, sustainable practices have been shown to save organizations money and create long-term business value. Microsoft reported in 2015 that it saved more than $10 million a year through its internal carbon fee model, where business groups within the organization pay an incremental fee for activities that lead to carbon emission such as energy use and air travel. The organization also used the funds collected to sponsor sustainable community projects across the globe.
Consumer giant Unilever recently found that its sustainable-living brands have grown 50% faster than the rest of the business. According to a 2015 Nielsen study, 66% of consumers are willing to pay more for sustainable brands—up from 55% in 2014 and 50% in 2013. Given the current environment, business-to-business customers look at sustainability as well when they choose partners and suppliers.
There is also evidence that organizations with sustainable practices perform better financially. A 2014 CDP report found that climate change leaders among S&P 500 companies report 18% higher return on equity than those in lower quartiles and 67% higher return on equity than nonresponders.
Lastly, companies are seeing increasing investor interest in sustainability. Clearly, there is a compelling case for sustainability as a core business practice. If an organization wants to stay competitive and continue to engage stakeholders, all business functions need to participate in its sustainability efforts, and finance is no exception.
CFOs and their teams now need to look at combining the best of old and new methods to measure and monitor the progress of sustainability within their organizations.
“Finance has the unique ability to drive systems, processes, and structure to enable accurate and complete measurement and reporting to drive performance toward sustainability goals,” observed Mark Mellen, CPA, CGMA, who helps clients manage environmental, social, and governance risk in his role as Deloitte Risk and Financial Advisory manager at Deloitte & Touche LLP.
Deepak Chandran, CFO at Wipro Consumer Care (International), which manufactures and markets household and personal care products across developing markets, said he and his team encourage other business functions to find environmentally sustainable alternatives for day-to-day processes. “We evaluate large, new capex projects or large-scale ingredient replacement programs not just from an ROI angle but also from the filter of furthering the sustainability objectives of the organization,” Chandran said.
Like all strategic objectives, sustainability can become a part of organizational thinking only if all business teams work together. A recent Deloitte report recommends that CFOs cooperate closely with chief sustainability officers and operations heads to help the business better manage material sustainable issues and environmental risks.
Many organizations also begin their shift toward sustainability by turning their attention to day-to-day processes. But since the end goal is to replace current practices with sustainable alternatives, finance needs to demonstrate cost savings and long-term returns. Rather than trying to capture ad-hoc activities, organizing these initiatives under a “broad and intentional sustainability program that includes ongoing evaluation of stakeholder needs and materiality considerations that focus efforts on generating the greatest value” would prove more effective in realizing this aim, recommended Mellen.
Organizations such as Puma and Unilever are well-known examples of businesses that have clearly defined their sustainability objectives and linked them to business goals. According to the Deloitte report, this approach will also aid CFOs and their teams in replying to growing interest from external stakeholders.
While there are a number of international frameworks, such as GRI, A4S, SASB, and TCFD, now available, sharp focus within an organization on its own sustainability priorities will help avoid fatigue and confusion in choosing and responding to these various platforms for disclosure.
Putting sustainability center stage in the business world has never been more critical than it is today. As organizations search for hands-on and innovative approaches to transition from their long-standing processes to sustainable models, CFOs and their teams are well-equipped to help them do so. According to the Deloitte report, CFOs can consider a three-step plan to embed sustainability within their organizations:
“One of the biggest hurdles to rolling out new initiatives, especially something as traditionally qualitative as sustainability, is the lack of prioritization,” said Sean Stein Smith, CPA, CGMA, DBA, an assistant professor of professional practice at Rutgers University. “Starting the conversation around new projects, emphasizing the financial benefits of these objectives, and supporting these positions with quantitative data fall under the area of responsibility of CFOs. Sustainability is an issue that will only continue to grow in importance, and CFOs should approach these types of projects in the same businesslike manner that other objectives are analyzed.”
Shilpa Pai Mizar is a freelance writer based in Asia. To comment on this article, contact Chris Baysden, senior manager of newsletters at the AICPA.
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