The Climate of Business #78: How CFOs are creating value through sustainability?

Climate Change Reality

• Paris Olympics promises to slash emissions in half - but environmental experts aren’t convinced (Euronews )
• 'Weather whiplash’: Flooding and droughts to happen more often and last longer as climate warms (Euronews )
• Pumping Heat a Mile Underground Is Helping One City Cut Carbon (Bloomberg )

• A Very Wet Winter Has Eased California’s Drought, but Water Woes Remain (NY Times )
• What Do Clothes Look Like in a Climate-Changed Future? (NY Times )
• Global fresh water demand will outstrip supply by 40% by 2030, say experts (The Guardian )
• What is the IPCC AR6 synthesis report and why does it matter? (The Guardian )

• February 2023 was Earth’s 4th-warmest February on record (The Guardian )
• Low dissolved oxygen levels behind mass fish death in Australian river (Reuters )
• Why East Antarctica is a 'sleeping giant' of sea level rise (BBC )
• Microbes on the farm: a solution for climate change? (Financial Times )
• Floating solar panels could completely power thousands of cities (The Verge )

Business Climate Reality

• EU’s Green Plan Will Force Oil Majors to Store CO2 Underground (Bloomberg )
• EU Wants to Attract Clean Tech: Here’s What You Need to Know (Bloomberg )

• Bid in for $500 mln U.S. climate grant for direct air carbon capture (Reuters )
• Brazil looks to start-ups in battle to reforest the Amazon (Financial Times )
• What's in the water? Businesses miss a huge opportunity to act locally (Green Biz )
• The enormous opportunity of e-waste recycling (Green Biz )

• Why sustainability must play a major role in your boardroom today — and tomorrow (Green Biz )
• Episode 355: ESG culture wars, lessons about investing for impact
• Nearly 60% of Companies not Disclosing any Supply Chain Emissions as Reporting Regulations Approach: CDP (ESG Today )
• Building a green industry within planetary boundaries (Climate Action Network )
• What the Silicon Valley Bank collapse means for the future of climate finance (CBNC )
• Net Zero Industry Act: European Commission unveils vision for green industrial revolution (Business Green )
• What is ‘green hushing’? The new negative sustainability trend, explained (Fast Company )

Reality Check

While it is widely understood that responsibility for developing and implementing an aligned sustainability strategy lies solely with the Chief Sustainability Officer (CSO), the potential for the Chief Financial Officer (CFO) to create value via sustainability and environmental, social and governance actions (ESG) is commonly misunderstood.?

The evolving role of the Chief Financial Officer (CFO)

The job description of the Chief Financial Officer (CFO) is being rewritten.?

Over the past few decades, the role of the Chief Financial Officer (CFO) has evolved significantly. Whilst the responsibilities of a CFO were once solely focussed upon finance and preserving value; the CFO’s of today are visionaries who are concerned with creating future value via strategic decision-making.

The imminent growth of sustainability and subsequent increase in value placed on sustainability across the private sector has meant that CFO’s must take a sustainability-oriented approach to decision making. In doing so, CFO’s will need to incorporate scientifically backed sustainability information to guide their choices that enable strong financial performance, thus enabling them to create value and meet the desires of internal and external stakeholders. Today’s CFO’s work closely alongside Chief Executive Officers (CEO’s), Chief Sustainability Officers (CSO’s), and board members, to develop a sustainable business model; utilising financial and non-financial information to achieve a company’s strategic goals, its resource and capital allocation, and measure its long and short-term performance.?

Whilst the position of a CFO has historically been defined by a focus upon the measurement, management and reporting elements of financial value, CFO’s are increasingly taking on wider responsibilities directly related to the business’ sustainability and ESG related goals. Whilst there is hesitancy from CFO’s who are yet to understand the direct relevance of environmental, social and governance (ESG) factors to financial performance; other CFO’s are gladly accepting this extension in responsibility in the hopes of creating long-term value through implementing a sustainability and ESG strategy. CFO’s who do not undertake leadership on sustainability issues and ESG objectives will ultimately forgo the long-term value creation associated with the implementation of an effective sustainability and ESG strategy.?

Not only will compliance and reporting requirements increase within the coming years, but the preferences and values from investors will shift to become sustainability-oriented. As such, CFO’s must utilise the vast abilities of the finance function to build trust among both internal and external stakeholders. Through utilising an array of financial tools, whether it be forecasting, budgeting or allocating funds, CFO’s are able to place a fundamental focus upon sustainability factors to ensure they are a primary focus within all business decisions relating to value creation. CFO’s are increasingly asking sustainability-oriented questions such as:

• How can a business or organisation provide a value-oriented perspective on climate-related physical and transition risk?
• How can a business or organisation understand the impact and opportunities of carbon pricing and incentives?
• How can? a business or organisation deliver accurate ESG reporting to meet the needs of reporting requirements and external stakeholders, such as investors?

Simply put, the role of the CFO within the sustainability strategy of a company will inevitably become indispensable. If a company is able to find a balance between meeting short-term performance requirements and long-term sustainability goals, the extent to which CFO’s play a paramount role within long-term value creation will inevitably be recognised within their long-term performance.

How do CFOs transition in order to meet the demands of sustainability??

For many CFO’s, the idea of transitioning towards focussing upon sustainability within their financial strategy may be seen as daunting. However, it is recommended that organisations and companies undertake the following steps to ensure a smooth transition.?

1. Firstly, not only the CFO - but every person within a company or organisation - should be adequately trained and given the knowledge required to meet the evolving demands of sustainability.?
2. Next, sustainability should be embedded into every aspect of the organisation. An effective sustainability strategy requires alignment throughout the whole organisation through actions such a;? measuring sustainability performance within departmental reporting, and embedding sustainability targets within the remuneration of executives.
3. Lastly, technology should be leveraged to ensure the process of transitioning towards a sustainability focussed strategy is as smooth and efficient as possible. Utilising existing technology, such as Plan A’s comprehensive ESG platform , to integrate automated data controls related to ESG is central to ensuring compliance.?

Isn’t this the CSOs responsibility?

Many CFOs are bewildered by the thought of sustainability measurement, management and reporting becoming a financial responsibility as they believe this is the role of the Chief Sustainability Officer (CSO).?

This may be true in many cases, as CSO’s increasingly take on? responsibility across the areas of compliance, strategy, and even finance. However, many companies do not have a formal CSO in place, whilst many have CSO’s who are well below the C-suite - meaning they do not have a direct line of contact with the board of directors. The CFO plays a vital role in such cases to ensure a business is meeting its climate goals due to their direct influence upon key business decisions and their direct involvement with key stakeholders who have ever-evolving demands.?

Regardless of the organisational framework, the roles and responsibilities of CFO’s and CSO’s are interconnected; thus meaning they must work in collaboration to meet the long-term financial and sustainability goals of a company.?

Moving forward, CFOs will have to be more dynamic, patient and flexible than ever

As the demands of sustainability evolve, CFOs will be increasingly required to adapt to the growing requirements and forms? associated with value creation. CFO’s who are able to accept the ambiguous, and sometimes uncertain, nature of change will be able to explore new forms of creating value in a sustainable manner. Through embedding sustainability across all financial decision-making processes and procedures, and sharing both financial and non-financial data to internal and external stakeholders; companies and organisations will realise the paramount leadership role that the CFO plays within building transparency, trust and momentum within a business - whilst simultaneously meeting long-term sustainability and financial goals.?

In summary, CFO’s who undertake leadership on sustainability initiatives are required to play three fundamental interconnected roles which are inevitably being transformed by the growing demands of sustainability.

1. Being a strategic visionary; through the development and implementation of a sustainable?long-term financial strategy which balances resources and financial risk to contribute to? a business’ triple bottom line (people, the planet and profit).
2. Being a collaborator; through liaising with internal and external stakeholders to ensure a commitment to sustainability is embedded across a company's wider network.?
3. Ensuring effective communication; through a CFO who can translate the value of a company’s sustainability strategy to stakeholders - such as investors.

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