In some respects, CFOs need to see how they are transitioning and creating sustainable value as a story they can project through their annual reports and mainstream regulatory filings. This story is essential because it leads directly to how investors are directing their capital.

Frameworks such as the Corporate Sustainability Reporting Directive (CSRD), launched 1st January 2024 initially for EU listed organisations, requires limited assurance in the first reporting year and will potentially require reasonable assurance by the end of the decade. This will become applicable for large EU subsidiaries in 2025 and for non-EU companies from 2028.

Strong governance sets the tone for an organisation's commitment to ESG, aligning it with its overall strategy, embedding sustainability into its DNA and holding leadership accountable for accuracy.

As stakeholders increasingly scrutinise non-financial performance, the CFO must set the tone from the top and drive the standardisation of processes and controls that they operate over financial data into non-financial data. A more comprehensive internal controls over sustainability reporting (ICSR) framework will help identify risks, ensure confidence in the data, and provide clarity on assurance.

CFOs should consider their internal assurance processes around sustainability. For example, collaborating with internal audit teams to conduct periodic assessments of CSRD data processes can identify weaknesses and propose enhancements. Internal assurance, reporting and continuous improvement are essential feedback loops to good governance.

Key considerations for CFOs and their teams:

• Under which reporting frameworks and regulations am I required to report? And by when?
• How do I manage/mitigate the reporting burden that comes with those frameworks?
• How do I build Internal controls over sustainability reporting?
• What is my roadmap to ESG assurance?

Contacts:

• Tim Archer, Partner
• Dan Cane, Partner
• James Self, Managing Director

Coupling business and sustainability strategy is not in the CFO's remit alone, but they have a key role to play in demonstrating behaviours to achieve strategic and financial objectives by partnering with the business to drive better investment decisions and performance improvement.

As the steward of an organisation’s financial resources, the CFO needs to integrate ESG considerations into investment decisions balancing longer term sustainability goals with short-term financial targets. By supporting the organisation to evaluate the financial performance and impact on shareholder value of an ESG strategy and considerations of where to deploy capital, the CFO can ensure resources are allocated to enhance the triple bottom line.

Each leader across the C-suite will have their own role to play in harnessing sustainability to drive value creation. The heads of Finance and Strategy are jointly well positioned to drive an enterprise-wide shift from the “push” to the “pull” - from “defensive” to “offensive” by pursuing strategies that bring in closer alignment sustainability and typical business strategic priorities such as cost reduction, new sources of revenue, capital access, tax optimisation, as well as winning with customers and consumers, and attracting talent.

Key considerations for CFOs and their teams:

• How do I know where to best invest to achieve my sustainability goals?
• What is the return on investment on sustainability related initiatives?
• How will my business model change?
• How can my ESG disclosures and assurance impact on how the market values my business?

Contacts:

• David Anderson, Partner
• Liz Percy, Partner

There will be an increasing need to align capital with sustainable aspirations as well as commitments regarding large transactions or when financing events.

In some cases, sustainability will be the rationale for a transaction, such as infrastructure investments in electric vehicle charging networks, therefore capital will already be aligned with the mandate of sustainable investors. However, unlike infrastructure, many sectors do not have a clear sustainability requirement, which means a transaction must demonstrate significant value to investors outside of sustainability gains.

New external investors scrutinise sustainability risks and opportunities and assess how they align with their internal mandate and sustainability commitments. A misalignment may mean investors will be unwilling to commit. At the same time, a strong alignment could lead to preferential investment terms, such as green bonds or sustainability-linked loans, which may provide lower finance cost benefits.

This scrutiny, coupled with the rapid proliferation of sustainability reporting regulations, has put it squarely into the CFO domain.

Understanding which environmental and social drivers are most material is a critical first step, as it helps CFOs ensure they are responding to the main concerns facing external investors and helps them articulate their sustainability approach clearly and credibly, which will play a vital role in the success or failure of transactions.

Key considerations for CFOs and their teams:

• How would our sustainability strategy drive or be impacted by our M&A activity?
• What are the requirements of ESG due diligence?

Contacts:

James Hilburn, Partner

CFOs, in defining their own vision and strategy in the context of sustainability and focusing both on tactical and long-term solutions, need to understand how their operating model needs to change in order to address sustainability challenges and regulatory requirements.

There is certainly a trend towards anchoring sustainability within the CFO arena: sustainability progress must be seen as equally important to driving the financials and cross value chain data agenda (one source of truth) – in order to drive a fact-based change and control external communications.

There are various ways to organise Finance around the topic, and we’ve seen a maturity scale that begins with minimal support to external disclosures, progressing to ownership of process and data on ESG reporting, to managing performance cycles around sustainability objectives, and eventually business partnering at all levels (from Operational to the C-suite). This progression is also reflected in how Finance data structures and systems are adapted to integrate sustainability more seamlessly into traditional performance management.

An increasingly common indicator of Finance operating model maturity is the role of the Finance Sustainability Director or Non-Financial Reporting Controller, who often takes on responsibilities such as translating the sustainability strategy into impacts to the Finance organisation, engaging with Corporate Affairs teams for key disclosure efforts, providing people leadership to finance professionals in this topic, championing finance business partnering for sustainability, and facilitating trade-off discussions and leading all aspects of progress against key results.

Key considerations for CFOs and their teams:

• What are the expectations of our Finance teams?
• What capabilities will have to change across skills, data, tech, policies, procedures etc.?
• Where are the quick wins in leveraging existing capabilities?
• Do we need a Sustainability Finance Director, and what should they be responsible for?
• How is finance connecting with legal, HR, compliance, etc to build the right composite team to meet ESG governance and reporting?

Contacts:

Mateus Begossi, Director

It’s squarely in the CFO's mandate to support their business in maintaining a competitive position while moving towards a more compliant, sustainable business model.

Improving sustainability performance and metrics can be aligned to business financial performance improvements. Whether top-line growth from delivering more sustainable products to a customer base, where that customer base factors sustainability into purchase decisions, or cost reduction from lower waste, energy costs, packaging, or improved resource efficiencies. CFOs can bring a critical lens to sustainability initiatives and seek to quantify the returns delivered to the business and its stakeholders.

Throughout this journey, sustainability data will inevitably be treated like traditional financial performance, as most regulatory frameworks are trying to achieve a level playing field for capital allocation across the triple bottom line. By gradually investing in data, technology and reporting, and by upskilling their organisation, business leaders can demonstrate that better sustainability performance is a value differentiator.

However, the current value equation for sustainability investments isn't apparent because policies around sustainability metrics still need to be rolled out. And despite some early signs, there's little clarity on how markets will respond to this triple bottom line, which will keep any investment to the compliant minimum.

But it's not an all-or-nothing dilemma. Some policies, like those for carbon emissions, are relatively more mature and are easier to overlay on traditional business performance views, while topics like biodiversity, and the associated metrics, are more challenging.

So, one of the main principles in funding this journey is prioritisation. Many organisations may find it easier to justify the cascading of group annual targets to business unit KPIs for topics with clear policies and measurable data, such as carbon footprint, diversity and water consumption.

With stable policies and reliable data, it is not such a giant leap to embed them into regular business performance cycles alongside traditional indicators such as volumes, revenue, gross margin and operating expenses.

Key considerations for CFOs and their teams:

• Do we have enough visibility of sustainability spend and outcomes across the value chain?
• How do I know I'm making a decision that is simultaneously driving profit and sustainability?
• How can I support the business to optimise the triple bottom line?
• Are my business counterparts accountable and enabled to make new types of decisions?

Contacts:

Mateus Begossi, Director

Support with financing innovation to meet sustainability and climate targets is available through tax incentives and grants; governments globally have allocated billions in funding towards ESG-focused programs. This includes measures such as the EU’s Green Deal, the Inflation Reduction Act in the US and UK grant funding for energy transition activities (e.g. the Industrial Energy Transformation Fund). With all these developments and frequent changes – that in the case of grants require ‘up front’ application – CFOs must be able to understand and navigate the opportunities in different geographies.

Governments are also introducing new ESG-related taxes and similar measures to encourage behavioural change. These include plastic packaging tax (e.g. in the UK and Spain), changes to extended producer responsibility schemes (e.g. Hungary and the UK) and carbon emissions taxes (e.g. Singapore and the Netherlands). The EU Carbon Border Adjustment Mechanism (CBAM) is essentially a tariff on certain carbon intensive products imported into the EU, with costs phased in from 2026. The UK is expected to implement a similar measure from 2027. CBAM therefore encourages CFOs (and COOs) to look more critically at their supply chain’s emissions, end to end.

In addition, tax transparency reporting obligations are placing more onus on businesses to disclose how they go about managing their tax affairs. With a mix of mandatory and voluntary standards that vary between countries, CFOs will need to keep track and have the data to support, public reporting. Taxes fund basic societal needs (such as health and education), incentivise investment (including on sustainability and climate), and manage externalities (e.g. from fossil fuel extraction, plastic pollution, etc). Taxes are therefore seen as a sustainability issue by bodies such as the UN Principles for Responsible Investment, the OECD, the World Economic Forum and the Global Reporting Initiative.

Taxes interact with the EU Corporate Sustainability Related Disclosures (CSRD) through consideration of double materiality, and the EU Taxonomy Regulation includes minimum safeguards covering both tax and employment rights. CFOs therefore need to understand the interaction of sustainability reporting and tax transparency reporting.

Finally, there are various people and tax touchpoints with the ESG agenda, including fair remuneration (for example complying with minimum wage requirements or subscribing to voluntary ‘fair’ wage standards), and wider design considerations around employee reward. Increasingly common considerations include accessing government tax reliefs or grants available through employee Electric Vehicle schemes or continuing to critically assess the ESG performance indicators included in executive remuneration arrangements to ensure they continue to incentivise meaningful change and mitigate claims of greenwashing associated with any performance indicators that could be perceived by stakeholders as insufficient.

So, for CFOs it's more than just complying with regulations today; it will be understanding what opportunities and risks lie on the horizon and how to take a strategic approach to navigating these future changes.

Key considerations for CFOs and their teams:

• What incentives are available and how are they accessed?
• What additional scrutiny will be expected?
• Are there specific fiscal considerations for our regions and business models?

Contacts:

• James Wright, Partner
• Mark Kennedy, Partner
• Zoe Hawes, Director