Over the past 10 years, discussions around the Chief Financial Officer’s role in sustainability have been largely symbolic. As partners in the world’s largest accounting and auditing firms, we’ve facilitated conversations with compelling viewpoints such as: “the Chief Financial Officer should become the Chief Value Officer” and “in the end, sustainability has financial consequences”.
But, honestly, we have not seen the major shifts needed to bring sustainability (including planetary boundaries and social considerations) into the heart of financial decision-making – until now.
Over the past year, it has become clear that companies are now in a pivotal moment of truth. And CFOs themselves are under pressure to demonstrate their continued competitiveness as sustainability goes mainstream.
Initiatives around mandatory sustainability disclosure are moving at breakneck speeds, triggered by increasing urgency of the climate crisis, nature loss, and mounting inequality. Focus is increasing on these issues both in terms of impact and financial risk, and by the heightened ambitions of regulators around the world.
These developments, among others, have piqued the attention of CFOs around the world.
Sustainability is changing the essence of CFOs’ work across nearly all facets – including in investor relations, controls, valuation and the scope of issues under management.
WBCSD’s CFO Network sees three critical areas where the CFO needs to pay attention and act, fast.
Financial systems architecture
Global standards related to environmental, social and governance (ESG) and sustainability reporting are changing rapidly, with the recent establishment of the International Sustainability Standards Board (ISSB) under the International Financial Reporting Standards Foundation, the exposure draft on climate released by the U.S. Securities and Exchange Commission and the draft EU Sustainability Reporting Standards.
As the chief preparers of required information, CFOs should be prepared to provide direct input into these processes to ensure that the standards take account of the feedback and concerns of business. Without input and direction from the preparer community, businesses run the risk of disclosing information that does not provide a true and transparent picture of corporate performance on sustainability.
It is the CFO whose unique voice and perspective is especially valuable to financial system architects, as they work to rejig the nuts and bolts of the financial system to produce more sustainable outcomes.
CFOs should use their collective voice to engage in direct interactions with standard setters and submit formal responses to market consultations of these developments.
By the same token, preparations for incoming standards should already be taking place. It can easily take over a year to obtain and supply robust, consistent and reliable data to meet incoming disclosure requirements.
Companies and their CFOs should undertake the work to prepare their roadmaps for implementation based on the latest developments in the standard setting space – while paying attention to critical considerations such as internal controls, governance, audit and assurance.
Redesigning capital markets
Beyond the financial system architecture and the role of disclosure, companies and investors alike are calling for improved communications between corporates and other capital market players.
There’s an increasing need to bring ESG into the heart of corporate-investor communication in order to optimize enterprise value and lower the cost of capital by being able to tell a compelling story about the link between sustainability and finance.
CFOs should also be able to articulate the link between sustainability and the purpose and strategy of the company. We call this “Sustainable Investor Relations (IR).”
The role of the CFO in this space is to define key value drivers and install and implement systems to manage, monitor and integrate sustainability into smart approaches to enhance the future value of the company. Discounted cash flow analysis, which requires too many assumptions on future cash flows without ESG considerations, may well be an outdated method in a couple of years’ time (if not already).
CFOs need to bring ESG to the heart of corporate-investor decision-making and communication. But how?
CFOs can get started by finding ways to bridge corporate practices with investor needs, and by working to understand how ESG and sustainability performance will affect valuation models. In doing so, companies will be able to conduct their capital market engagement efforts more effectively.
The ‘S’ in ESG
The dependencies between business and society have been known for a long time. Yet, it has historically been difficult for CFOs to pinpoint what the ‘S’ of ESG actually means for the finance function and its role could and should be in measuring and managing social impacts.
At the same time, companies face challenges around how to monitor, manage and communicate impacts on society – and are looking for the best ways to have positive impact beyond the company itself.
Given that global frameworks on mandatory disclosure are likely to evolve in the near-to-medium term, CFOs should ensure they’re ready to engage in difficult conversations around ‘S’ performance – and share with standard shapers and developers their thoughts and viewpoints.
An inconvenient truth?
Looking ahead, we are convinced that the role of the CFO requires incorporation of non-financial considerations, as sustainability meets finance in many aspects. The collaboration with other disciplines will be enriching and exciting as the Chief Sustainability Officer is increasingly considered a crucial partner amongst the other C-Suite.
Successful companies will make full use of specialist knowledge built by sustainability departments to create links between the traditional sustainability agenda and the finance function. This is particularly important in getting up to speed and telling your corporate sustainability story effectively to financial markets.
Inaction poses significant risks – which could range from non-compliance , to loss of financial value due to ineffective management of those E, S and G factors that matter to a company’s value.
WBCSD’s CFO Network brings together leading Chief Financial Officers to work directly with critical external stakeholders to develop the CFO agenda of the future for sustainability matters.
Together, they are implementing models and approaches to activate systems and processes that clearly link the financial and sustainability agenda in order to define best practices in communicating with investors and to comply with pending regulation.
This group will be a significant lever in translating an inconvenient truth about the E, S and G to one that brings business and finance to the heart of the sustainability agenda.
Wim Bartels and Arjan de Draaijer, Interim Leads CFO network
This article first appeared on the website of WBCSD