The Sustainability Crusader: Unleashing the Financial Power of the CFO
The world faces an unprecedented environmental and social crisis. CFOs, acting as Sustainability Crusader, can leverage financial expertise to drive positive change within their organization. Understanding the financial implications of sustainability enables them to align actions with the planet and society’s well-being, driving long-term financial growth and success for their company.
The role of the Chief Financial Officer (CFO, finance managers) has evolved over the years, and they are now increasingly seen as business partners rather than just financial accountants. From cost reduction to risk management, CFOs play a crucial role in steering companies towards a sustainable future. As a contributor towards corporate sustainability they can ensure that the company’s financial operations align with its sustainability goals and objectives. This includes assessing the financial risks and opportunities, and developing financial strategies associated with sustainability initiatives to support their implementation.
In this write up, I have discussed how CFOs can play an impactful role and provide cross functional partnership for achieving sustainable goals and implementing ESG practices. Many studies have shown that sustainability and profitability no longer have to be mutually exclusive. Companies that prioritize sustainability in their operations and business strategies can actually achieve long-term financial gains.
One of the key ways CFOs can contribute is by providing financial expertise and analysis to inform strategic decision making. Incorporating sustainable investing strategies into investment decision making can not only benefit the environment and society but also lead to long-term financial gains. Finance teams under the supervision of CFOs can help by developing financial models to assess the financial impact of different sustainability initiatives, such as investments in renewable energy or changes in supply chain practices.
Developing financial models involves projecting financial forecasts by analysing market trends, internal and external business environment and competitive factors. Assessment of the financial implications of decisions is done by adopting discounted cash flow techniques and considering ROI. As CFOs understand the importance of ROI and how to calculate that, they can intuitively integrate even non-financial impact KPIs into their financial models by considering financial proxies for the same. Thus, simple ROI models can be converted into Sustainable ROI models by collaborating with finance managers. For example CFOs can talk about EBIT and ROI of reductions in wastewater or carbon emissions, or ROI of measures taken for building employee morale. Their financial expertise can help the company make informed decisions by considering both financial and non-financial outcomes which can drive impact and profitability together.
When CFOs partner with sustainability departments they can help to understand their needs and priorities. CFO and CSO (Corporate Sustainability Officer), can work together to identify areas where costs can be reduced, such as through process improvements, automation, or outsourcing. They can both work together to conduct supplier due diligence and negotiate better deals with more sustainable suppliers. Implementing energy-efficient systems and technologies can help companies to reduce their energy costs, which can be a significant expense for many businesses. Finance teams can help in implementing these measures to reduce energy and other operational costs by providing past financial data. They can provide analytical report and estimate implications of reducing, reusing, recycling of materials and sustainable packaging. In this way, finance managers can help companies to lower their costs associated with purchasing and disposing of raw materials.
Another important role of CFOs is to help the company identify and prioritise the ESG issues that are most material to the company’s financial performance. Issues associated with sustainability may range from regulatory changes, environmental law enforcements, market fluctuations, and other potential reputational risks. Identification and assessment of these issues contributes to determination of stakeholder materiality which is a very important step in implementing sustainable initiatives.
Finance managers can help rethink their company’s sustainability team using new accounting frameworks, such as the Triple Bottom Line, and new measures for performance for 4 Ps- planet, profit, people and product sustainability. CFOs can work with the sustainability team to establish performance tracking systems to measure and evaluate the company’s progress on sustainability KPIs over time.
CFOs play a key role in raising green finance by identifying and assessing green finance strategy, building relationships with green investors, calculating green cost of capital by considering non-financial risks in assumptions, ensuring compliance, and finally communicating performance to the capital providers. They should make sure that performance is not green-washed.
CFOs can also support stakeholder engagement by ensuring that the company’s financial reports are prepared and disclosed in transparent and accurate manner. This can include ensuring that the company’s financial reports include information on its sustainability performance, such as its environmental and social impact, and that this information is provided in a clear and accessible format.
Lately, regulations have introduced accounting for carbon pricing, such as through a carbon tax or a cap-and-trade system, which can have a significant impact on a company’s balance sheet. The specific impact will depend on the company’s operations and emissions, as well as the design of the carbon pricing system. It’s the role of CFO to project the impact of carbon pricing on the profitability , values of assets and cash flows. CFOs should determine how much they should invest in innovation for the transition or buying carbon credits.
Another key area where they can contribute is ESG audits. Chief Financial Officers (CFOs) typically have experience in working with external auditors, and they understand the auditing process and the expectations of auditors. During an ESG audit, the CFO can work closely with the external auditors and internal teams to provide the necessary financial data and information, and to ensure that the audit is conducted in compliance with the relevant standards and guidelines. They can also help to ensure that the company’s ESG performance is aligned with its overall financial performance, and that the company is transparent and accountable to its stakeholders. CFOs also have the ability to interpret and communicate the results of the audit to other stakeholders. They can explain the audit results in terms of financial implications and highlight key areas of improvement and progress.
Thus, CFOs play a significant role in planning, adoption, implementation, monitoring, auditing and communication of ESG practices in an organisation. Cross functional collaboration is the key to a sustainable business.
The world is facing an unprecedented environmental and social crisis, and businesses have a crucial role to play in addressing these challenges. CFOs have the unique ability to leverage their financial expertise and influence to drive positive change within their organization. By understanding the financial implications of sustainability, they can not only do what is right for the planet and society, but also drive long-term financial growth and success for their company.