Sustainability and the Finance function – are you ready?

Sustainability is nothing new. For many years, organisations have increasingly supported sustainable practices, with the North of England leading the way by reducing emissions 13% faster than the UK as whole¹. This support has largely been a voluntary strategy to align with customer priorities. Recently, however, such adherence has become a requirement for organisations, as a result of new regulations regarding sustainability-related reporting, and an increased awareness of climate-related risks to business. This has caused sustainability activities to move increasingly from areas of the organisation such as marketing or supply chain, into the finance function.

What’s changing?

1. Customer buying behaviours are shifting towards sustainable products that have social equity value
2. Executives are turning their focus towards the opportunities offered by green transformation and innovation: Gartner research recently found that 25% of global CEOs will consider sustainability a strategic priority by 2025²
3. Investors are increasingly incorporating sustainability factors into their decisions
4. Regulators are introducing a series of supervisory guidelines to aid financial institutions in their transitions to net zero. In the UK, as of the 2022/23 financial year, the disclosure of climate-related risk and opportunity is now mandatory for organisations with at least 500 employees. The disclosures required are based on the recommendations issued by the international Task Force on Climate-related Financial Disclosures (TCFD).

What does this mean for the finance function?

To adapt to the changing landscape and future-proof their organisation, the CFO and the finance function need to:

• Rethink the underlying performance model to integrate sustainability, emissions, and social equity data right from the beginning, to ensure it is built into processes and enabling technology
• Strategise to decide which sustainability initiatives to prioritise and where to invest
• Manage and report on sustainability-related data, ensuring the information provided to external stakeholders is relevant, compliant, and accurate
• Incorporate climate-related risks into their risk management
• Demonstrate how they can access cheaper capital by making investment decisions that enable their organisation to deliver to a low-carbon future
• Integrate the services they provide, such as financial planning and analysis, with sustainability requirements

What are the challenges?

Whilst the contribution of such an influential group as financial professionals to the fight against climate change is hugely exciting, we must also recognise the challenges organisations face as they embark on this journey. Particular areas of concern for CFOs are:

• Data: Sustainability data is sourced from multiple providers and largely based on estimation, making it difficult for the CFO to aggregate a consistent, accurate view of their organisation’s sustainability activities
• Skills gap: The finance function must acquire a deep understanding of sustainability, related regulations, and ESG criteria, which is challenging when these requirements are new and constantly evolving
• Greenwashing: Organisations must create a solution that is good for both the business and the planet, rather than just appearing to act more sustainably whilst in reality failing to make significant changes
• Tunnel vision on emissions: If an organisation focusses solely on emissions, it may neglect to consider the impact on society and industries

What assets can CFOs leverage?

Despite the challenges, there is much discussion around the skills and tools that companies can exploit to improve their sustainability actions:

• The finance function already possesses many of the core skills necessary to fulfil sustainability-related requirements: regulatory understanding; analytics management; tracking and management of corporate performance; data capture and reporting; planning and forecasting; risk management
• New tools are being developed to incorporate sustainability data into ERP systems
• New data providers and FinTechs are emerging within the sustainability space, aiding data sourcing and analytics

What are the next steps for finance professionals?

1. Educate themselves on ESG:
   • What are the requirements?
   • What might be expected from their department?
   • What initiatives does their organisation already have, and how do these relate to their strategy?
   • Which areas of their organisation (sustainability, supply chain, marketing, etc.) hold the data or information they need?
2. Think about what green skills their organisation will need for the future, and how they can develop those skills and gain that knowledge
3. Look for ways that technology can aid sustainability reporting within their organisation
4. Collaborate! We all need to make changes to reduce our impact on the environment, so connect with Deloitte and other relevant industry communities, and tap into forums and peer networks, to share knowledge and resources

__________________________________________________________

References

¹ NP11: Clean Growth

² Accounting for Change: The Cross Section of Sustainability and Finance with Clare Nkweto Simmonds, Director at Deloitte MCS Limited (libsyn.com)