Sustainability, the CFO’s Job: Three Key Issues

[caption id="attachment_82037" align="alignright" width="300" caption="Wall Street, Photo by Leon Kaye"][/caption] Making the business case for sustainability, at least on Americans’ side of the pond, has fallen on deaf ears in the C-suite for years.  Like strategy, “sustainability” is treated and handled differently by various companies.  Sometimes there is a dedicated director or VP; occasionally an executive team runs the show; larger companies have dedicated crews.  But too often, to the sustainability or corporate social responsibility (CSR)  head’s frustration, an increased emphasis on environmental, social, and governance (ESG) matters never reached the higher echelons in a company’s org chart.  Arguments for sustainability often do not resonate in a business culture where numbers, hard data-driven and financial numbers are what matters. But this is changing.  Companies like Walmart, GE, and Campbell Soup Company realize that sustainability efforts can pay off.  In a country where publicly held companies must maximize shareholder value by law (that is not an opinion, that is a fact that many within the green scene cannot wrap their heads around), saving energy, reducing water consumption, and offering more transparency can create that “triple bottom line.”  To that end, Ernst & Young released a report earlier this week that explains how sustainability can and will change the role of the Chief Financial Officer (CFO). Ernst & Young’s report explains how sustainability trends are shift the role of the CFO in three key areas:

• Investor relations:  Shareholders are speaking much louder and much more stridently than they did just a few years ago.  During the 2011 proxy season, 40 percent of shareholder resolutions were related to ESG issues.  And over a quarter of ESG-related resolutions gained a 30 percent “Yes” vote, which Ernst & Young describes as a critical threshold (other observers say anywhere from a 10 to 20 percent vote can motivate companies to rethink their policies).  Mutual fund companies are paying more attention to sustainability related issues, and the rating companies (which have received, ahem, a fair bit of scrutiny lately) are directing more focus towards ESG matters as well.  All this leads to a shift in the duties of companies’ investors relations staffs; and CFOs, according to Ernst & Young, will lend more than a few hands with the demands placed on IR departments.
• External reporting:  More than 3000 multinationals issue sustainability (or CSR or ESG) reports, and many of these companies now provide more than static or trite glossy PDFs.  Companies including UPS, Timberland, and Microsoft are raising the bar in offering frankness while encouraging increased stakeholder engagement.  To that end, more companies are having their sustainability reporting audited by third parties (such as the Carbon Disclosure Project for carbon emissions performance).  And that experience with third party performance falls into the CFO’s lap because they know how to balance the challenges and opportunities that arise from third-party verification.
• Operational controllership and financial risk management:  Early last year, the Securities and Exchange Commission issued guidelines to companies on how to disclose risks possibly related to climate change.  Carbon data, and more frequently, water data, is becoming financial data because of these resources increasing price.  What was once tangential to the costs of running businesses has and will be central to the financial risks that come when running a company.  Whether evaluating the costs of large capital projects or ascertaining the reliability of sustainability data, CFOs and the departments they head will be careful when ensuring that all this data is accurate.

So as more companies realize that improved supply chain management, resource stewardship, compliance, and corporate governance will enhance that bottom line, watch for those traditional financial tools to evolve in order to meet companies’ sustainability efforts.  And as CFOs grasp the benefits of accurately reporting a company’s sustainability, CSR, or ESG agendas, look for them to reach out across the C-suite, from the general counsel to human resources.  All of this will help embed sustainability even more into companies’ embrace of the triple bottom line, so no matter what the motives are, this is a trend that soon will become a standard business practice.  And as sustainability moves out of its silo and into the CEO’s office, the results, hopefully, will benefit us all.