Better data and other supports will help CFOs bring ESG issues to the boardroom.
By John Elkington
It’s intriguing that two of the most outspoken CEOs on the big issues of our day are both former chief financial officers (CFOs). They are Unilever CEO Paul Polman, a former CFO at Nestlé, and Peter Bakker, now President of the World Business Council for Sustainable Development (WBCSD), who previously was CFO and then CEO of the logistics company TNT.
Although we have worked with several innovative CFOs, like Paul Achleitner when he was the German financial services group Allianz and was pushing the social innovation agenda, CFOs as a species are notable for their conservatism, particularly their resistance to key aspects of the environment, society and governance (ESG) agenda.
Accounting For Sustainability: Low On The Totem Pole
My scepticism about the wider role of CFOs was not helped by reading some of the CFO quotes spotlighted in a new report from Accounting for Sustainability, an initiative originally launched in 2004 by Britain’s Prince Charles. Entitled Future Proofed Decision Making, the report kicks off with quotations from two leading CFOs. “It is difficult for accountants and engineers to deal with these nebulous things,” was the way one sums up the problem. “If money goes out the door I am interested,” says the second. “If it is a notional cost to society I am not.”
One conclusion is that although some businesses are beginning to incorporate ESG considerations into their strategy and decision-making, the agenda is often delegated to corporate social responsibility and sustainability teams, with the result that it fails to penetrate to the Board level.
CFOs Uncertain About ESG Data
More positively, the A4S report notes that “the translation of environmental and social impacts into the language of accountancy is a rapidly evolving area.” As a result, CFOs and their colleagues will soon have “a more complete view of the true costs and benefits of an organization’s activities,” enabling them to get a better grip on the relevant risks and opportunities.
More typically, survey work carried out for the project suggests that CFOs tend to be nervous about bringing ESG issues to the Board, believing that the available data are not yet sufficiently robust or reliable, or that colleagues may see the quantification of the related risks and opportunities as spurious or even unethical.
On the other hand, some CFOs were acutely aware that the volatility of markets and the growing importance of resource security challenges can make at least some of these issues strategic for particular companies in particular markets. “Ethical breaches can collapse the company in no time,” said one CFO.
Others think that this agenda will only take root in the CFO brain when the regulations change. “Companies won’t be able to value or substantiate such issues on their own,” said another CFO. “They will need help from the government.”
Awareness Grows About Links Between ESG & Performance
In a separate survey carried out in 2012 by consultants Deloitte, 49 percent of CFOs saw a ‘significant’ link between ESG or sustainability performance and financial performance. Strikingly, though, only 125 of the CFOs surveyed said that they had excellent information on the agenda, with 37 percent saying that they receive ‘good’ information.
Medical scientists know that it can be enormously difficult to get medically useful drugs across the barrier between the bloodstream and the brain, and in the same way people like chief sustainability officers often struggle to get their issues into the boardroom.
So what needs to be done to make this happen?
Five steps are spotlighted by the A4S study, with the central point being that making the moral case for action is rarely going to be effective, even if it should be. Instead, we need to:
- Demonstrate the business case, speak the right language (specifically targeted, for example, on CFOs and chief investment officers),
- Develop more robust information, bridge the knowledge gap (building awareness and skills at the level of the C-suite and Board), and
- Create an enabling environment (which involves aligning business incentives with national and global goals and frameworks).
Water Company Launches “Upstream Initiative”
Three case studies are provided showing how CFOs and other financial experts can play into this space, focusing on the French food and nutrition company Danone, the U.K. water and sewerage utility South West Water and the German sportswear brand PUMA.
Finance Director Susan Davy explains why South West Water had launched its “Upstream Thinking” initiative. “Our operating costs were increasing,” she says, “and, as well as improving the standard technology, we also decided to work ‘upstream’ with local landowners and land users to encourage better upstream management to reduce downstream costs, to try and prevent some [costly remedial] work through better upstream management. This offers a much better long term payback than the more conventional methods.”
That’s putting it mildly.
The benefits to South West Water from Upstream Thinking outweighed the costs by 65 to 1, and that’s without taking into account many of the related environmental and social benefits produced in the process. In addition to building up a database of such cases, the A4S team plans to create a network of switched-on CFOs to share experiences and work together to develop the new tools needed.
At the same time, A4S has announced that it will develop a new training programme for CFOs, designed to explore the benefits of integrating ESG factors into business models, the role of CFOs and wider decision making. This will be co-evolved with the Cambridge Programme for Sustainability Leadership.
Given their central role in steering their businesses through rough commercial waters, it may prove impossible to future-proof the vast majority of CFOs. But initiatives like these hold out the promise that growing numbers of CFOs will be better prepared to spot the relevant risks and opportunities—and to help their colleagues in the Global C-suite to respond in good time and good order.