Growth in ESG sees CFOs take on sustainability role

Sus­tain­abil­i­ty has gone main­stream. It’s now an issue that affects how all com­pa­nies do busi­ness, and is a strate­gic pri­or­i­ty for the C‑suite. As a result, CFOs are increas­ing­ly deal­ing with sus­tain­abil­i­ty met­rics that were once the pre­serve of the mar­ket­ing and investor rela­tions depart­ments.

It is not nec­es­sar­i­ly an easy tran­si­tion. “It would make sense for sus­tain­abil­i­ty met­rics to be aligned with cor­po­rate health met­rics and dis­cussed using sim­i­lar finan­cial lan­guage,” says Dafy­dd Llewellyn, EMEA gen­er­al man­ag­er at insight­soft­ware, a provider of finan­cial plan­ning and report­ing sys­tems for CFOs. “But this remains chal­leng­ing giv­en the lack of glob­al­ly recog­nised [sus­tain­abil­i­ty] report­ing stan­dards, which con­trasts with cor­po­rate health mea­sures.”

Unlike finan­cial report­ing stan­dards, honed over decades by glob­al­ly recog­nised forums such as the Inter­na­tion­al Finan­cial Report­ing Stan­dards (IFRS) Foun­da­tion, sus­tain­abil­i­ty met­rics are often con­fus­ing or poor­ly under­stood by investors. Dif­fer­ent com­pa­nies may pri­ori­tise dif­fer­ent envi­ron­men­tal, social and gov­er­nance (ESG) goals, or pick and choose between dif­fer­ent mea­sures – shout­ing about reduc­tions in elec­tric­i­ty usage but stay­ing silent on sup­ply chain man­age­ment, for exam­ple. 

But with investors demand­ing answers to awk­ward ques­tions about sus­tain­abil­i­ty, CFOs are start­ing to apply their skills to ESG met­rics. Last Novem­ber the IFRS Foun­da­tion launched the Inter­na­tion­al Sus­tain­abil­i­ty Stan­dards Board to devel­op a glob­al base­line of dis­clo­sure stan­dards that meet investor needs. The Finan­cial Sta­bil­i­ty Board has estab­lished the Task Force on Cli­mate-Relat­ed Finan­cial Dis­clo­sures, which aims to improve and increase the report­ing of cli­mate-relat­ed finan­cial infor­ma­tion. And the Unit­ed Nations has brought togeth­er a CFO task­force for its Sus­tain­able Devel­op­ment Goals, argu­ing that “as stew­ards of tril­lions of dol­lars in cor­po­rate invest­ments, CFOs are unique­ly posi­tioned to reshape the future of cor­po­rate finance and invest­ment as a cat­a­lyst for growth, val­ue cre­ation and social impact”.

This means sus­tain­abil­i­ty is now a key con­sid­er­a­tion for the finance func­tion. Deb­bie Clif­ford, CFO at design soft­ware com­pa­ny Autodesk, says: “Sus­tain­abil­i­ty work requires align­ment with finan­cial pri­or­i­ties such as ESG report­ing, investor rela­tions, cap­i­tal man­age­ment, car­bon account­ing, impact mea­sure­ment, cor­po­rate devel­op­ment and even prod­uct devel­op­ment.

“Sus­tain­abil­i­ty is evolv­ing from a cost cen­tre into a val­ue dri­ver – not yet top-line growth, but as the reg­u­la­to­ry pres­sures and costs of car­bon emis­sions increase, we think it soon will.”

It’s cer­tain­ly a fac­tor to be reck­oned with for com­pa­nies look­ing to raise finance. Thai Union is one of the world’s largest seafood com­pa­nies, with brands includ­ing John West, King Oscar and Par­men­tier. Last year, it raised more than £600m through sus­tain­abil­i­ty-linked bonds and loans, and is aim­ing to tie 75% of its long-term financ­ing to its over­all sus­tain­abil­i­ty per­for­mance, as well as spe­cif­ic met­rics such as emis­sions and sup­ply chain trace­abil­i­ty.

“Risk has always been fun­da­men­tal to the role of CFO,” says Ludovic Gar­nier, Thai Union’s group CFO. “And there is a wide­spread recog­ni­tion among the busi­ness com­mu­ni­ty and our investors, that the great­est risk is our chang­ing plan­et. If we fail to halt and then reverse nature loss, we’re going to see a lot of the resources and ser­vices we rely on for busi­ness con­ti­nu­ity becom­ing increas­ing­ly scarce and unsta­ble.”

That means that ESG is increas­ing­ly part of cor­po­rate cul­ture. Stephen White, CFO of renew­ables infra­struc­ture start­up Field, says: “The way in which [Field] acts on a day-to-day basis is nat­u­ral­ly aligned to the ESG agen­da – it’s kind of tak­en for grant­ed in the deci­sions we make every day. But frankly I think [ESG report­ing] is a lot hard­er than report­ing, say, prof­it and loss.” 

For exam­ple, Field has com­mis­sioned a life-cycle assess­ment of lithi­um-ion bat­ter­ies, to under­stand where the resources come from and the car­bon foot­print of this key tech­nol­o­gy. “It’s the most preva­lent bat­tery tech­nol­o­gy avail­able and yet, unbe­liev­able as this sounds, nobody has done that assess­ment,” White says. 

This high­lights how hard it can be for com­pa­nies to report effec­tive­ly on sus­tain­abil­i­ty. But one rad­i­cal solu­tion could involve embed­ding sus­tain­abil­i­ty met­rics with­in the finance depart­ment. Span­ish renew­ables com­pa­ny Acciona last year moved sus­tain­abil­i­ty from mar­ket­ing to the finance depart­ment, cre­at­ing an inte­grat­ed chief finan­cial and sus­tain­abil­i­ty offi­cer role.

José Ángel Tejero, Acciona’s CFSO, says: “Sus­tain­abil­i­ty was our hall­mark but it was start­ing to be per­ceived as a ‘com­mod­i­ty’ by stake­hold­ers.” 

He says mov­ing it to the finance depart­ment gave equal weight and dis­ci­pline to sus­tain­abil­i­ty and finan­cial man­age­ment and report­ing. “This means report­ing on ESG per­for­mance with the same dis­ci­pline and thor­ough­ness that is the norm for economic–financial indi­ca­tors.

“The key per­for­mance indi­ca­tors in our ESG score­card include the ESG impact on EBITDA, invest­ment, CO2 emis­sions, water and ener­gy use, and our align­ment with the EU Tax­on­o­my for sus­tain­able activ­i­ties,” Tejero explains. “The inte­gra­tion of finance and sus­tain­abil­i­ty lends coher­ence and dis­ci­pline to our busi­ness pur­pose.”

The more sus­tain­abil­i­ty met­rics impact finance KPIs, the more crit­i­cal it is that CFOs devel­op an under­stand­ing of how to mea­sure and report on ESG. Sus­tain­abil­i­ty met­rics can pro­vide busi­ness oppor­tu­ni­ties, attract and reas­sure long-term investors, and offer com­pet­i­tive advan­tage.

Thai Union’s Gar­nier says: “The inter­est we have seen in our shift to sus­tain­abil­i­ty-linked financ­ing shows investors under­stand that cli­mate, nature, and social issues have a sig­nif­i­cant impact on busi­ness per­for­mance. If we hit our sus­tain­abil­i­ty tar­gets we gain a more favourable inter­est rate, and if we miss them we are finan­cial­ly account­able via the oppo­site process. 

“Our ‘blue finance’ deals so far have been more than two times over­sub­scribed. Investors would not be show­ing that kind of inter­est unless they under­stood that get­ting our sus­tain­abil­i­ty strat­e­gy right direct­ly impacts our finan­cial per­for­mance and the secu­ri­ty of their long-term returns.” 

Sus­tain­abil­i­ty is tran­scend­ing tra­di­tion­al busi­ness sec­tors and becom­ing as much a part of the cor­po­rate cul­ture as it is a part of the glob­al soci­ety in which we all live. With an issue as big and com­plex as sus­tain­abil­i­ty, the finance func­tion can­not be sole­ly respon­si­ble; but it is clear that ESG met­rics will be a more sig­nif­i­cant part of the CFO’s remit in the future.