Can finance save humanity?

Does the world really need another manifesto calling for companies to link their business to the sustainable development goals? One problem with the green business argument is that sustainable business strategies are still too often seen as a effort in corporate social responsibility or a perception game. If linking sustainability and profitability continues to be seen as a woolly argument by many investors today, this is largely because green values are often a “programme” when they need to be embedded in the business strategy.

Green targets need to be established, understood, measured and part of quarterly reporting. But by what criteria? And who sets the standards? If companies have trouble figuring out how sustainable thinking can be part of their business model, it may be because the wrong people are in charge of this strategy.

This article makes the business case that sustainability is a core value for companies and that finance is the driver of this new agenda for organisations. Why? If you can’t define the value of a business strategy and measure it, it will never be credible. Enter the CFO.

The Paris Agreement and the most recent COP in Glasgow mark a historic moment for humanity. They inspire interest for broader environment, social and governance actions. The buzzword in the business community is ‘sustainability’, and it seems that all business leaders know what it means for their organisations – and how it is critical to their value proposition.

Many may still not be convinced. But we see a number of key players who are leading by example today. Unilever, Ikea, Microsoft, Solvay (chemicals), Warehouse De Pauw (logistics real estate) have elevated sustainability to a corporate priority for shareholder value.

If we put a value on environmental responsibility, it becomes a business priority. Financial professionals are the vehicle to make this a reality. The community of CFOs, venture capital, investors, private equity and bankers guide companies to integrate environment, social and governance actions in the company’s fabric.

We argue for a broader view of finance. Today’s leaders in finance should be responsible for optimising prosperity for all stakeholders.

Sustainability = Purpose + Prosperity + Innovation

All organisations today face four disruptions to business as usual:

  • Consumers are opting for sustainable products
  • Employees demand that their professional activities and lives have purpose, not just profit
  • Investors are choosing sustainable investments
  • Government regulators require compliance with sustainable principles

So what does Finance bring to the party?

Finance helps a company’s board and executive team put a value on sustainability and understand how it fits into the strategy. It monetises non-financial sustainability data, showing managers how sustainability fits their business goals and gives a framework for evaluating progress toward targets. To progress this thinking forward, finance should take the lead in defining a new earning model, with innovation at its core.

New earning models

The elements of a new earning model are:

  • non-financial reporting that demonstrates value creation of “sustainable factors”, and integrates them with financial reporting; and
  • circular economy factors that consider the full life cycle of a product from creation to decommission and waste.

To be credible in embracing sustainability as a business goal, finance directors need tools to track and report on sustainability metrics, to clearly show investors and management how sustainability is a core value for the company. For example, they can help rethink the company’s business model by mobilising innovative accounting frameworks triple performance measurement – economic, social and environmental goals. Sustainability-based data analytics help make the case, with processes to aggregate and interpret sustainability-related data. This will empower managers to deliver on reporting integrated business and sustainability information that drive decisions.

Sustainability criteria and performance management

You can only manage what you can measure. This is why sustainability criteria need to be integrated into performance management.

Scenario-based or cross-divisional planning of sustainability-related factors such as CO2 penalties or climate risks to operations also need to be included. By tracking the extent to which sustainability is integrated into a business, finance can use this progress to optimise financing capacity and the funding mix or venture capital, private equity and other funding sources.

New aspects of sustainable finance are disrupting financial markets and how companies manage investor relations. Green Bonds, ESG funds, and other sustainable development instruments are increasingly popular. Companies that demonstrate a focus on sustainability can improve their financing terms by negotiating higher financing capacity and lower interest.

They can also apply for subsidies linked to sustainability transformation. The EU and also individual countries offer ‘green subsidy’ programmes. Corporate finance experts help understand and unlock these opportunities.

Finance is the key actor to identify and reduce risks

Here finance professionals play a key governance role for driving sustainability. They provide credible reporting to all stakeholders. At a minimum, finance must ensure the company understands and complies with increasingly complex sustainability legislation, to avoid penalties.

It is also essential to develop a good understanding of the most pressing ESG issues and quantify their impact on long-term performance. CFOs can expend risk identification to measure sustainability-related risks. The C-suite needs to be involved in this process, as sustainability risks can emerge in all areas of the company. Once quantified, ‘material’ and ‘immaterial’ issues need to be separated in order to effectively manage sustainability.

With our globally interconnected supply chains, environmental factors such as wildfires, water shortages, or plastic pollution can rapidly become serious risks. Companies need to anticipate the impacts of climate on their operations – for example by maintaining low water levels that restrict inland waterway transport, budgeting higher energy costs for refrigeration, etc.

Impact investment: relationship management

CFOs are the first point of contact with impact investors and they will manage this relationship carefully. While there is consensus that “sustainable impact investing” blends investment returns with positive social or environmental effects, many still doubt that fund managers really take green values into consideration on the same level as maximising profit – greenwashing remains widespread. CFOs need to be seen as the honest broker, keeping sustainable value on the agenda for the board and for shareholders, and ensuring that the organisation’s efforts are sincere.

Issues with sustainability ratings

An increasing number of companies are asking to be rated according to their environmental impact, social responsibility and level of “good governance”. But there is no generally accepted standard for tracking and measuring sustainable investing, as there do not seem to be accepted standards and common ways of assessing a company’s ESG score. To clarify this situation, the Belgian financial weekly, De Financieel Economische Tijd assessed the largest twenty shares on the Brussels stock exchange. Its investigation reveals that the sustainability measurement criteria and scores of green rating agencies such as MSCI, S&P Global, Sustainalytics and Refinitiv vary widely. Plotting the ESG scores on a scale of 0-100 (where 100 is best), the study shows that 30% of the companies rated show a difference between best and worst score is 50 percentage points. Some 65% of all-star stocks show ratings that can be 30% higher or lower – depending on the rating agency. In this process, CFOs play a vital role in making sense of this ambiguous situation.

Collective effort and collaboration across Boards, C-suite and all Stakeholders

Now is the moment for finance to take the lead to embed sustainable criteria and green performance in corporate strategies – and show that this value can be credibly measured. In their role, CFOs now have a new opportunity to add new value to their organisation. They are best placed to make the link between the hard numbers and profitability targets at their company, and show how this also makes a contribution to humanity, supports purpose, and creates prosperity for all stakeholders.

To make this transformation happen, finance can be a green catalyst. Together with their C-suite colleagues, CFOs can change the corporate mindset. How to achieve this? The question is, how can a purpose-driven organisation demonstrate creating prosperity for all stakeholders in society and make a profit?

Today most companies are still a long way from this goal. But we are optimistic that the seeds of this transformation exist in the minds of many business leaders. Climate activists remind us that we don’t have a lifetime to transform – time is running out. Our 2030 sustainable development deadline is less than a decade away. Now is the time for finance leaders, boards, and executive teams to step up and take responsibility.

A green future is the vision. Innovative earning models are the tool. And the CFO is the driver that can make this happen.

“Can

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