Growth in ESG sees CFOs take on sustainability role
Sustainability and finance are becoming increasingly intertwined as investors demand ESG metrics alongside financial data. How are chief financial officers dealing with this expanded remit?
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.