Ten years ago, asking the chief financial officer (CFO) to accept responsibility for climate change would have been like suggesting the chief executive take personal charge of diversity and inclusion. They may have liked the idea and seen value in it, but it wasn’t a priority.
Today though, investors are likely to question why the CFO doesn’t have a mandate for sustainability. The evolution in attitudes over the decade has intensified in the past two years, converting lofty corporate ambitions on social and environmental issues into actionable targets.
Accounting for Sustainability, which has been encouraging the integration of natural capital into business operations since 2004, surveyed CFOs about incorporating natural capital into business in 2012. Their views? That environmental and social factors were “nebulous”, “notional costs to society” and the case for their relevance to a board had “not yet been answered”.
Nowadays, CFOs are championing the sustainability agenda. They are the obvious candidates at executive level to lead the charge and highlight the opportunities of sustainable business. Finance chiefs have the requisite skills of forecasting, risk management, governance, measurement and reporting to integrate the United Nations’ 17 Sustainable Development Goals (SDGs) into a company strategy and map out a plan to measure and monitor progress.
“Increasingly we see CFOs understanding and recognising the value of the broad range of factors like social capital and just how important the interaction any organisation has with society, whether it’s local communities or indeed increasingly the global supply chain,” says Jessica Fries, executive chair of A4S.
Over the past year or so, more and more CFOs and their boards are reviewing strategy to account for social and climate issues. Rob Hudson, chief financial and operating officer at St. Modwen, a FTSE 250 property company, began incorporating environmental and social targets into the business strategy a year ago. This year’s focus is to embed management metrics, key performance indicators and year-on-year targets to be able to measure whether the company is meeting its targets. St. Modwen has set itself six environmental and social goals, incorporating the UN SDGs into its own relevant targets.
“We’re adopting a test-and-learn approach,” says Hudson. “It’s a big journey ahead of us. And we’re at a relatively early stage, but we’re keen to do everything we can to drive delivery against the commitments we have.”
Jacobs, US infrastructure and engineering company, and one of the founding members of the UN CFO Taskforce, put in place a sustainability strategy in 2018 and is currently mapping out the next stage. It’s also using approved science-based metrics to measure its emissions targets.
Kevin Berryman, Jacobs CFO, says the company distilled the UN SDGs into six “relevant” goals for its business. “Even if the goals that we establish may be longer term, in terms of what’s called science-based progress, there are objectives and a commitment to start,” he says.
Due to the nature of its business, FTSE 100 energy giant SSE has been focused on measuring and reporting on climate matters for around a decade and pushing the green agenda in financial terms. Gregor Alexander, finance director at SSE, has overseen the issuance of three green bonds worth a total of around £1 billion for the company. In 2017 SSE issued the UK’s biggest-ever green bond at the time.
Even if the goals that we establish may be longer term, there are objectives and a commitment to start
“It’s all about the direction of travel,” says Alexander. “Some companies will be a bit behind, some companies will be ahead. But we all know that ultimately our shareholders are getting more and more focused on ESG, and not just environmental but social and governance as well. Getting that message across is really important for us.”
As people endorse the theme of saving the planet though, it can be hard to separate the greenwash from measurable targets. To date, thousands of businesses around the world have publicly pledged to be net-zero carbon by 2050, at the latest. There are 12,000 signatories in more than 160 countries to the UN Global Compact, a non-binding pact to encourage businesses to adopt and report on sustainable and socially responsible policies.
Yet, of the growing list, how many of those businesses have quantifiable targets? And how much can we count on the reporting of those goals with no globally agreed set of standards on sustainability?
Investors are becoming savvier in cutting through the detail in sustainability reports to get to the hard facts, but there’s more work to be done especially in terms of comparability. Sustainability reporting remains voluntary in most jurisdictions, but pressure from investors, employees, customers and stakeholders will ensure it is increasingly best practice with greater clarity and more scrutiny of targets.
Admittedly, the goal is huge and there is no globally agreed harmonised approach to incorporating financial and non-financial data. While some boards prefer standalone sustainability reports, there is a push towards a multi-capital value accounting framework, where non-financial data, such as water resources and staff turnover, runs alongside financial data to create a single profit-and-loss account. Practices are evolving.
“These are really big turnarounds that you would not have imagined two years ago,” says Dr Delphine Gibassier, professor of accounting for sustainable development at Audencia Business School in France.
As well as retraining whole finance teams to incorporate sustainability data and financial data into systems and processes, entire IT systems will also need to be redesigned and automated.
“It’ll be at least two years before we see some of the larger public companies not just experimenting, but deploying a multi-capital accounting system. But I’m astonished at the speed with which finance teams are moving,” says Gibassier.
There are many hurdles to overcome, but it finally feels like corporate ambition is translating into action by aligning finance with social and environmental goals to the benefit of the planet and people. CFOs are at the forefront of this change proving that protecting people and places also equates to creating commercial opportunities and business longevity.
