How to go green, without going into the red
EY's Paul O’Flaherty reveals seven ways CFOs can drive the sustainability agenda within their organisations.
How do you turn your organisation green, without going into the red? That’s the challenge that lies at the heart of every corporate sustainability transformation – and it’s increasingly putting CFOs at the heart of the sustainability agenda.
CFOs have always been responsible for managing financial value and reporting to key stakeholders. But today, those key stakeholders are demanding more than short-term profitability from organisations. They’re questioning how much of a company’s value is reflected in its financial reports alone, and are looking at the triple bottom line, which recognises value generation in terms of people, planet and profit.
This shift to long-term value goes well beyond just a disclosure issue, and is one of the biggest trends we’re seeing in the corporate world right now. It’s being driven by a fundamental shift in what investors, customers, and society regard as value, and recognises the broader impacts - both positive and negative - of an organisation’s activity.
Every organisation, without exception, will have to understand what this change in value perception means to them, and to change the way they operate to support wider environmental, social and governance (ESG) outcomes.
This isn’t a bad thing. As Mark Carney, the UN Special Envoy on Climate Action and Finance, points out, the transition to net zero is creating the greatest commercial opportunity of our age – and smart CFOs are seizing the opportunity.
They’re building increased investor confidence by developing robust ESG reporting and disclosure. This is critical as ESG becomes table stakes for business, and delivers benefits like increased share prices and access to a lower cost of capital.
They’re driving financial savings through greater efficiency, and are looking at sustainable financing and opportunities for grants and incentives. Initiatives that target waste reduction or improving energy efficiency, for example, can drive down costs, reduce carbon emissions, and enable a more future proof economic model.
They’re helping generate strong customer loyalty and attract new customers by being transparent and credible about becoming more sustainable. They’re creating increased operational resilience by identifying, measuring and mitigating the risks of climate change. They’re even helping their businesses attract the best talent, as people increasingly want to work for purpose-driven organisations.
The fact is that the greater the sustainability appetite and ambition of the finance function, the better positioned it will be to support its organisation in its sustainability journey. The CFO has a crucial role to play in developing many of the practical steps required across the organisation to deliver the vital changes needed – and by doing so, can modernise the entire finance function.
EY’s ‘DNA of the CFO’ report found that 73 percent of CFOs cited ‘changing the culture of [their] team is a major priority’ and 71 percent of CFOs agreed that ‘traditional back-office behaviours and mindsets in finance are slowing the modernisation of the function’. Therefore, the changes required by sustainability present a real opportunity for the finance function to lean into this change, redefine itself as the custodians of value for the organisation and become a true business partner, supporting their organisation to navigate the crucial changes ahead.
In preparing for this transformation, we see seven priority actions for CFOs.
- Establish a closer working relationship between the sustainability and finance teams.
- Understand your organisation’s current sustainability issues. Then embed non-financial measures and metrics that reflect key stakeholder issues, key components of your organisation’s ESG strategy, and external sustainability ratings into your reporting.
- Ensure that you have appropriate policies, processes and controls for ESG data, and the right data management systems needed to report new data streams.
- Introduce sustainability-linked criteria into your capital allocation processes (e.g. carbon pricing and water usage.)
- Understand the financial impact of climate-related physical and transition risks across short-, medium- and long-term time horizons to increase the reliance of your organisation’s strategy and reduce financial statement misstatement risk.
- Understand the evolving regulatory landscape for ESG reporting across your operations to pre-empt new data and performance reporting requirements.
- Understand how access to green finance can benefit the business and the reporting requirements associated with related KPIs.
Ultimately, it’s CFOs – and their finance teams – that are emerging as the real drivers of corporate sustainability transformation.
Are you ready for the challenge?