CFO Focus: Environment and Sustainability

As businesses move into the post-pandemic phase of their development, CFOs must focus on how sustainability and the environment now impact every aspect of their enterprise’s processes, and directly affect profitability.

In the past, the CFO has been somewhat distant from the environment and sustainability issues impacting their enterprises. As a result, their level of involvement has been minimal, but that is about to change radically.

As ESG (Environment, Social and Governance) now shape’s how businesses are perceived in their marketplaces and the power that consumers today have to drive enterprise change, CFOs are now a critical component of any company’s strategic planning to minimise risks associated with these business components, but critically, how CFOs can steer ESG to be a commercial advantage.

Speaking to CFOs, their core focus has not changed: the financial wellbeing of their companies. However, I am seeing a widening of their remit to consider other factors that could impact that profitability and investor confidence. Increasingly these factors are centred on the environment and the tangible deployment of ESG initiatives.

Why should CFOs take the lead in these development scenarios? First, there is a cost imperative to consider with any innovation or development, none more so than environmental and sustainability initiatives; but CFOs can offer more than simply financial guidance for these projects: Deloitte, I believe, encapsulated how the CFO must drive ESG across their organisations:

“At the intersection of sustainability and financial performance, CFOs are in the best position to communicate to stakeholders how a company’s ESG strategy management and performance contributes to overall value creation.”

There is a cost to all innovation that businesses understand. Factoring in ESG and tangible manifestation of these initiatives into budgets is only one aspect of the CFOs new role. Just oversight of the ESG initiatives across their enterprises is not enough. CFOs need to be active participants in the planning, deployment, and assessment of these projects.

?Post COP26

?Being more transparent with business practices, especially those that connect to the environmental impact, has become a watchword for modern businesses. Consumer pressure has forced enterprises to show their environmental and sustainability credentials in the wake of greenwashing. Here, data becomes vital not just to collect but also to validate, as the report from EY points out.

“Being transparent delivers benefits, but it is not without risk. Companies release information through a variety of channels — printed reports, websites, supplier sustainability indices, ratings agencies — so they must ensure that their data remains consistent across various reporting platforms.”

A more open approach is clearly the way forward for many businesses as they look to integrate ESG into their processes. Indeed, I see reliable sustainability information as an essential component of post-pandemic enterprises. Connecting the financial health of a business with innovation and development will see CFOs widen their remit. Embracing the non-financial aspects of their role will ensure they transform into effective drivers of their companies.

With a renewed interest in all aspects of a business's performance, CFOs will also take on the role of stakeholder liaison. Indeed, I also see some enterprises creating CSO (Chief Sustainability Officer) roles which I think speaks volumes about the importance these enterprises are placing on proper stewardship of ESG across their operations. Here, the CFO is a close and integrated partner bringing the financial skills and insights needed for CSO to do their jobs efficiently.

?Future focus

For decades ROI was the key driver for all CFO activity. Today, the drivers have become multi-faceted, with the CFO touching every aspect of their businesses. The CFO has had to evolve rapidly in an age where environmental credentials are directly related to financial performance.

Again, Deloitte succinctly describes the importance of CFOs in the sustainable development of their companies: "CFOs are not only key stakeholders in a company's successful transition to a sustainable enterprise, but they are also predestined to take the lead.”

The skills that CFOs bring to any ESG initiative can't be overstated. The analysis of financial performance, which can have many active components, are skills that every enterprise can use to develop its ESG credentials. The return on sustainability is not a misnomer in this context but an actual driver of innovation today.

I think Gregor Alexander, CFO, SSE said it best in the IMA (Institute of Management Accountants) report: “I would argue that the CFO is at the centre of a change that is happening within business. Corporate responsibility is no longer the philanthropic side-line that is a million miles away from the core business; it is now an essential part of the CFO’s toolkit.”

A sustainable CFO is, then, a critical asset that all enterprises need to drive their environmental and sustainability initiatives to meet regulations, but more critically, to evolve their businesses to become the companies their customers want to buy from.

The EY report concluded: “CFOs are not only key stakeholders in this area, they are predestined to take the lead thanks to their organisational network and in-depth overview of data, processes and reports. In addition, CFOs have the professional toolkit to align ESG issues with the company's profitability goals.”

For CFOs, the financial risks and pressure their enterprises are now under includes a trinity of influences, including consumer pressure, investor need and regulation. The CFOs that can place these drivers into the context of their businesses and create development and innovation strategies that consider these components will be their market leaders.