Sustainability. Corporate responsibility. “Going green.”

The words may differ, but whatever you call it, companies and their shareholders are paying more attention to the nonfinancial dimensions of business these days. A lot more. Social and environmental performance is especially hot.

These issues have always been out there. But in the past, they typically fell somewhere under the umbrella of corporate philanthropy or under a hazy cloud of “doing the right thing.” And, in many cases, talk about sustainability was just that: words for the sake of public relations.

But that’s all changing. Nonfinancial issues like labor standards, product safety and environmental protection are rapidly becoming real business issues. And C-level executives can’t afford to ignore them anymore.

Why now?
For starters, what used to be voluntary is starting to become mandatory. Regulators are demanding more disclosure of nonfinancial information. Companies in the United Kingdom, for example, are now required to comply with a broad set of laws related to disclosure of sustainability and environment.

Disclosure in the United States remains voluntary, but probably won’t be for much longer. The American Institute of Certified Public Accountants has draft guidelines for audit verification of CO₂ emissions, and the Securities and Exchange Commission and the Financial Accounting Standards Board also have task forces looking at nonfinancial information.

Not surprisingly, the U.S. Environmental Protection Agency is also involved, with a mandate to manage carbon as a pollutant. And the U.S. Federal Trade Commission is taking a close looking at the standards for “green labeling.” If you’re selling so-called sustainable products, be prepared to back up your marketing claims with hard numbers on the percentage of recycled materials used and/or other metrics.

This movement is not just in the West. China now requires companies to undergo an environmental review before launching an initial public offering. Brazil’s large public companies now compete to be included in Bovespa’s Corporate Sustainability Index, which has outperformed the broader stock market and requires detailed disclosure of environmental, social and governance practices.

Shareholders are paying attention too. A record number of shareholder resolutions on global warming were filed this year, nearly double the number filed just two years ago.¹ And while the investment case for sustainability is not airtight, research has indicated that sustainability factors can indeed have a significant impact on stock market valuations.

The challenge for finance
But for many organizations, the timing couldn’t be worse. Finance departments already struggling to keep pace with existing initiatives now risk being caught flat-footed as the calls for greater reporting on sustainability grow louder. The challenge for the chief financial officer (CFO) is to put hard numbers on these soft concepts. At the same time, CFOs need to balance the risk of public disclosure and all of the work needed to make information credible – and verifiable.

In a recent survey called In the Dark, Deloitte found that 87 percent of chief executive officers and senior executives described their ability to track financial measures as “excellent to good.” But when asked about their capacity to handle nonfinancial information, just 29 percent were able to express a similar level of confidence.

Part of the problem is a lack of standards. The Global Reporting Initiative is the de facto global standard for greenhouse gas reporting. But competing standards also exist, raising uncertainty.

Worse yet, companies trying to report CO₂ information for the first time often find that they don’t have the systems and processes in place to be comfortable putting together a detailed report. Or if they do, the systems aren’t automated and reconciliation is a tedious manual exercise.

Finally, creating a voluntary report is one thing, but putting controls and compliance in place to sign off on their accuracy – a la Sarbanes-Oxley - is a whole different ball game.

Getting up to speed on sustainability isn’t easy, but there may be some unforeseen advantages in doing so. Like customers, investors and other stakeholders who are paying close attention. When they ask what you’re doing about climate change, a blank stare or a glossy brochure about your green initiatives likely won’t cut it.

Getting started
These are big changes, and they can’t all be done overnight. But you can start thinking about them. Start by asking yourself a few questions:

• Are we prepared to deliver a credible and accurate report on our environmental and social performance?
• Are our systems mature enough, in terms of tracking carbon, solid waste and energy usage, to stand up to an independent audit?
• Can we develop a business case for these issues – and map them to specific levers to create value?

If the answer to any of these is no, think about seizing the initiative (before someone else does). The first steps that you might consider include:

• Formally assessing how ready the finance organization is to drive or support new metrics in social and environmental areas.
• Doing some worst-case scenario planning for issues that may emerge from customers, shareholders or regulators.
• Challenging the internal audit function to demonstrate the strength and transparency of processes and controls used to measure and report environmental and social performance.
• Considering the impact of a move from voluntary to mandatory reporting on processes, systems and people.

Finance and the CFO have an important role to play in reporting on social and environmental performance. It’s time to step back, evaluate your organization’s readiness to take on the task and get ready to take the first steps.

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¹ Ceres and ICCR press release, March 6, 2008

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