5 tips to help CFOs navigate through the intricate web of sustainability.
It is commonly perceived that chief sustainability officers (CSO), senior executives and in some cases corporate secretaries are the ones responsible for a company’s sustainability initiatives. But as sustainability issues and financial performance have begun to intertwine, chief financial officers are now rolling up their sleeves and getting personally involved in the measurement and reporting of a company’s CSR activities, says a report from Ernst & Young.
Sustainability is having a major impact on a company’s corporate governance practices; shareholders are now paying more attention to resolutions that relate social and environmental performance to issues such as compensation and the qualifications of board members.
According to the advisory firm’s report, one recent resolution advocated using sustainability metrics as inputs in determining executive pay, while another sought to ensure that board members had sufficient expertise to deal with sustainability and related environmental issues.
But despite having a full plate, the pressure mounts on financial chiefs to start staying on top of sustainability initiatives, since it has become part of companies' risk management and overall business strategies.
‘[CFOs] need to prepare for hard questions from stakeholders, and to demonstrate a heightened commitment to ESG (environmental, social and governance) performance,’ the report says.
And some CFOs have been getting ahead of the game. John Liu, NYC’s comptroller/CFO, earlier this year, called on Peter Loscher, CEO, Siemens AG, Europe’s largest engineering company, to retract its membership from the US Chamber of Commerce. The business federation, which represents the interests of more than three million businesses, previously opposed environmental reforms. ‘It’s not right for our shareholders’ money to support efforts that perpetuate environmental harm,’ Liu said. ‘Siemens is known for green innovation, but it’s supporting a group that bends over backwards to stand in the way of environmental protection.’
Liu took an active stance in alerting executives at Siemens of the chamber’s lack of support for environmental reforms. Also, he sought to engage with shareholders and have them cut all relations with the chamber, which is supposed to set an example for other businesses.
The Ernst & Young study proposes five actions that CFOs can take now to enhance corporate value through sustainability:
(i) Actively pursue a sustainability and reporting program. Increasingly, companies have seen that implementing the procedures needed to measure, monitor and report on environmental and sustainability issues helps them create value, reduce uncertainty about future cash flows and profitability, and improve their reputation.
(ii) Ensure that those responsible for sustainability matters do not operate in isolation from the rest of the enterprise — especially the finance function. The financial organization, through its accounting system, must provide the sustainability function with the information needed to do its job. That information should be timely, accurate and complete — the very same attributes that financial accounting information should possess. No matter how the company structures these responsibilities, the CFO is responsible for providing the sustainability function with the necessary information.
(iii) Enhance dialogue with shareholders and improve disclosure in key areas, particularly those related to social and environmental issues. Robust sustainability reporting can help with this.
(iv) Ensure that directors’ skills are relevant to the chief areas of stakeholder concern, including risk management tied to social and environmental matters. In particular, companies must communicate with shareholders. They could, for example, take advantage of the SEC disclosure rules around director qualifications to explain how the qualifications, backgrounds and skill sets of their directors — both individually and as a group — contribute to overall corporate strategy, including risk mitigation.
(v) Consider using non-traditional performance metrics, including those related to environmental/sustainability issues. Doing so could help align compensation with risk. In addition to financial metrics, performance goals should align with overall environmental strategy, including clearly defined metrics relating to energy efficiency, water usage and the reduction of carbon emissions.
Taking up the added responsibility of driving a company’s sustainability strategies can be difficult when juggling other tasks, but the key point is ensuring that the CFO is able to accurately respond to a shareholder’s concern.
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