Challenges facing the CFO role on the journey to sustainability

Authored by Susie Clements and Fran?ois-Xavier Ragot

Defining their role in meeting their organisation’s sustainability goals is taxing many of today’s finance leaders – and was the central topic of discussion at a recent Heidrick & Struggles CFO roundtable in Brussels. Co-presented by Ron Soonieus, Senior Advisor at BCG and Director in Residence at the INSEAD Corporate Governance Centre, and Sébastien de Brouwer, Chief Policy Officer at the European Banking Federation (EBF), the event saw a select group of Belgian CFOs share the challenges they face in helping their boards do the right thing for both stakeholders and the planet.

It’s been a decade or more since boards began discussing why they needed to implement ESG policies, including those around sustainability. For most, the motivators behind ‘why’ – including regulatory requirements, talent attraction and investor demands – are now clear. Many boards have moved on to the ‘what’ of ESG – what it costs, what they need to invest in, what targets should be set. And the frontrunners have defined the ‘what’ and started working on the ‘how’.

The CFO plays a significant role in establishing ‘how’ a company can and does meet its sustainability goals. This is vital, because at the convergence of value and values, corporate sustainability defines the long-term survival of the organisation – it is the ability of the company to grow and be profitable without damaging either its own future or that of the society in which it operates.

The role and challenges for the CFO in enabling sustainability

Responsibility for sustainability is now shared by the CFO in collaboration with the rest of the executive team. The urgency of addressing climate change and the growing expectation for businesses to act has incorporated new duties into the CFO’s remit. CFO has a part to play in managing escalating investor activism; compliance with incoming regulation; financial and non-financial reporting; and the integration of sustainability performance into investment decisions.

At its core, the CFO’s role is to guide the business in becoming sustainable while continuing to create value for all its stakeholders. But our roundtable attendees reported that they are being hampered by a number of basic hurdles, namely:

? Poor availability and quality of data

? Conflicts in aligning financial decisions with ESG goals

? Lack of maturity of the ESG topic within many businesses

? Complexity of ESG regulations.

These fundamental issues are leading to more complex challenges, including:

? Persistent lack of clarity over ESG

As one attending CFO explained: “If you ask six people how they define ESG, you get six different responses. We are also sometimes facing dogmatic reactions in the organisation.” Despite the evidence confronting them, some market stakeholders remain surprisingly sceptical about the cost-versus-reward balance of sustainability, seeing ESG as an expensive tick-the-box requirement, rather than an opportunity to change business models and create value in the long term.

? Increasing non-financial reporting burden

There is a substantial amount of non-financial reporting required on sustainability issues. A basic activity for the finance function, non-financial reporting nonetheless requires CFOs to devote a disproportionate amount of time and resources to understanding the requirements of incoming and existing regulations. For many CFOs, this reduces the time spent on strategic conversations on sustainability. “Regulations are so complex we don’t have time for an ESG strategy. We try to figure out the regulations and how to report; we don’t know the impact but the figures have to be right,” explained one attendee.

? Scope 3 further complicating compliance

Within the overall reporting burden, Scope 3 – carbon emissions that result from activities by assets not owned or controlled by the reporting organisation, but still created within its value chain – is particularly difficult to manage. Seeking alignment along the full supply value chain is highly complex in some industries, especially when suppliers are microbusinesses or based outside EU and therefore not tied by the regulations affecting their corporate clients. “We are listed, so we have to report on Scope 3, we have to look at embedded carbon in construction: but how do we identify that when we work with small construction suppliers that are not subject to the regulation?” asked one CFO.

Next steps for CFOs in overcoming sustainability challenges

When organisations are at the ‘how’ stage of sustainability, the challenge is setting the right targets, then accepting that implementing those goals will require alterations to existing business models. To achieve this, the CFO must test and quantify both these goals and subsequent performance to establish the financial implications for the company. But they can only do so once they have overcome the challenges outlined above.

When moving to a clear level of sustainability, the CFO needs to be confident that a lower return on investment (ROE) in the short term will be compensated by a higher ROE in the long term. During this period, the expectations of stakeholders need to be managed with clear communication about the sustainability journey. This will become easier as the clarity and stability of sustainability regulations increases. And with greater regulatory certainty, CFOs will also be in a position to spend less time on low added-value activities such as reporting, and focus more on the strategic dimension of sustainability.

The ideal long-term outcome is for the organisation to establish the right business conditions to achieve its sustainability targets, avoiding a heavy focus on short-term goals at the expense of long-term viability, and creating value-add without causing detriment to others. The CFO’s role in this will continue to evolve.