Ernst & Young has released a report exploring the role of the chief financial officer (CFO) in sustainability matters, underscoring the growing awareness that paying attention to matters such as energy-efficiency, electricity sourcing and water management can be beneficial to the bottom line. Typically, it appears, the CFO has not paid all that much attention to such things.
The report (“How sustainability has expanded the CFO’s role”) focuses on specific ways that CFOs can participate in corporate sustainability strategy and amplify the potential impact on financial performance. The analysis is, in essence, a follow-on to some of the reporting that Ernst & Young has done about the growing number of shareholder proxies that are focused on matters of sustainability.
Steve Starbuck, the Americas leader of Climate Change and Sustainability Services for Ernst & Young, said:
“Companies that conduct financial and sustainability practices in silos could miss out on business opportunities and proactive risk management. Increasingly, a company’s sustainability story is being heard and read by the same stakeholders who read its annual report. Furthermore, the line between accounting records and sustainability records has begun to blur.”
There are five different ways that a CFO can participate more closely in shaping and reporting on sustainability strategy, according to the report:
- Stay in the loop on anything that could touch financial matters. If you think about it, for example, carbon emissions, could be considered just part of a company’s overall business inventory. It could have value or it could have liability.
- Address the way results are reported so that sustainability issues are part of the overall picture, not off on the side somewhere. The report notes: “As sustainability issues intertwine with business strategy, institutional investors are starting to view financial and non-financial performance as two sides of the same coin. Good [investor relations] can be a key factor in the price of a company’s shares and the interest rate it pays on its debt. For that reason, CFOs must stay up to date on their companies’ sustainability policies and initiatives, and on ESG issues more broadly.” The report also notes that ratings agencies are paying much closer attention to sustainability metrics.
- Work on ways of making sustainability reports and related financial implications simpler for shareholders to understand. For one thing, results of projects need to be reported consistently across the company. Right now, that is not always the case.
- Focus on understanding the intrinsic link between risk management and environmental management. The report notes: “Imagine, for example, that a multinational operates in a country whose chief lawmaking body passes a cap-and-trade law or institutes a carbon tax. Suddenly, the company’s carbon footprint would pose a financial risk.” Yep, so even though some U.S. lawmakers seem to be inclined to retreat when it comes to environmental regulations, American companies could still get whacked with them in other countries. So, their righteous indignation may be for naught. On the bright side, maybe tougher environmental regulations outside the United States will become one antidote to offshoring.
- Look at ways to help the company reward sustainability measures, with appropriate adjustments to employee compensation that encourage performance that aligns with sustainability goals. After all, we all know money drives the way that people behave. If your company really wants to drive sustainability, people need to be paid to act that way. Or NOT paid if they don’t act that way. I prefer carrots to sticks, but not everyone thinks that way.