While it is widely understood that responsibility for developing and implementing an aligned sustainability strategy lies primarily with the Chief Sustainability Officer (CSO), the potential for the Chief Financial Officer (CFO) to create value via environmental, social and governance actions (ESG) is massive, and quite untapped.
The evolving role of the CFO
Over the past few decades, the role of the CFO has evolved significantly, where once they were solely focused on numerical markers and quantitative value; the CFO’s of today are visionaries who are concerned with creating future value via strategic decision-making aligned with ESG.
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. Today’s CFO’s work closely alongside Chief Executive Officers (CEO’s), 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 ESG factors to financial performance; other CFO’s are gladly accepting this extension in responsibility in the hopes of creating long-term value. Furthermore, the forthcoming EU regulations will increase the financial penalties for organisations which do not meet policy requirements; therefore, CFO’s who undertake leadership on sustainability issues and ESG objectives will ultimately future-proof their business through reducing financial risk whilst creating long-term value.
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 CFO's 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.
- 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.
- 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.
- 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 CSO's 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 sustainability delegates 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 they must work in collaboration to meet the long-term financial and sustainability goals of a company.
Moving forward, CFO's will have to be more dynamic, patient and flexible than ever
As the demands of sustainability evolve, CFO’s 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 in building transparency, trust and momentum within a business.
Through utilising sustainability as a tool to create value in an increasingly dynamic marketplace, CFO’s will mitigate financial risk and thus accelerate the achievement of their company’s long-term financial goals. A study by Verizon found that over a 15-year period, ESG programs have on average increased shareholder value by €1.18 billion. Meanwhile, carbon taxes increased from €9.7 in 2018, to over €87.5 per metric ton in February 2022. As such, it is now more than ever crucial for CFO’s to harness sustainability as a tool in order to avoid risk, bolster their bottom-line, and future-proof their business.
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 and the subsequent transition to a low-carbon economy.
- 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).
- Being a collaborator; through liaising with internal and external stakeholders to ensure a commitment to sustainability is embedded across a company's wider network.
- 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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