Finance professionals – the unexpected heroes of sustainability
How accountants could save the world
In the longer term, sustainability is key
Sustainability is becoming a key consideration for consumers. Deloitte’s study, Shifting Sands, 2020, shows that 43 per cent of consumers are already actively choosing brands on environmental grounds and 34 per cent of consumers on ethical ones.
However, consumers are not the only influences pushing companies to reassess their product and market strategies. Employees, investors, suppliers, the media and regulators are also doing so. The evolving choices of the broader range of stakeholders suggests companies will not remain successful without managing their business in a socially and environmentally responsible manner. Larry Fink, Chairman and CEO of BlackRock, explains in his 2020 letter to CEOs that climate risk is an investment risk. BlackRock is requesting from the companies in which it invests sustainability information on a wide range of issues, from labour practices to data privacy to business ethics, as well as climate-related risk.
From a public debate to financial statements
There are numerous environmental, social and governance (ESG) reporting frameworks but their application varies by country and, though the standards are mostly mandatory for large and listed or state-owned enterprises, the reporting requirements often do not cover the entire spectrum of corporate’s sustainability responsibility.
Recent initiatives that aim to harmonise standards and clearly link ESG impacts to corporate activities are promising. Transparent measurement, valuation and disclosure of sustainability-related information is on its way to becoming a common best practice, rather than an option.
Relevant recent developments
The key role of Finance in sustainability
It is the Finance function that can act as a hub for the broad range of external stakeholders as well as the entire business when it comes to providing transparency and supporting the implementation of sustainability targets.
Finance will ultimately need to fulfil the requirements on sustainability disclosures in financial reports. However, the Finance function’s responsibility and possibilities go far beyond external reporting.
Enterprise Performance Management – a holistic approach to implementing strategy by translating objectives into budgets – management reports, and forecasts are Finance processes that are integral to embedding ESG metrics in an organisation.
To begin with, the CFO’s role is to shape a corporate strategy in which the financial and sustainability-related objectives are mutually beneficial. Financial health is a prerequisite to achieve the desired ESG performance and ESG performance is key to staying financially healthy in the long run.
The next step is to translate strategic objectives into annual budgets, with allocations along the value chain and down the organisational levels. This step is key in order to plan and ultimately monitor achievements versus targets on a year-by-year basis. As with every financial objective, good practice follows a balanced scorecard approach, by which both the ESG performance goal as well as its underlying drivers are planned and monitored. The combination of goal and underlying driver makes a KPI actionable.
This means that if a company commits to reduce its CO2 emissions by 30 per cent over 10 years the CO2 emission reduction needs to be broken down over the years and allocated to all relevant functions, such as own production and procurement from third party suppliers.
Using Enterprise Performance Management processes, Finance is able to embed the necessary actions into the organisation and steer their implementation.
Where to start
- Achieve clarity on the broad range of stakeholders that will measure your company’s ESG performance
- Start the discussion on the interdependency between financial health as a prerequisite to act on ESG performance, and ESG performance as key to long-term financial health
- Assess to what extent your management reports reflect the strategic objectives and how well strategic KPIs are explained by its underlying action-oriented drivers
