What is sustainability? And what has it got to do with the CFO?

written by Carol A Adams and Ken Weldin

sustainability reporting shutterstock_232764463 (2)Your answer to the question of what “sustainability” has to do with the CFO will, of course, depend on what “sustainability” means to you.  If it means continuing to earn profits for the next strategic review cycle, and maybe even beyond, our guess is you are in good company with your fellow CFOs.  The term is common place in regular financial reports to Boards where it’s used to refer to the financial sustainability of the business.

To many senior business people, particularly those who aren’t accountants, “sustainability” means measuring your social, environmental and economic impacts.  And this has nothing to do with the sustainability of the business.  Or has it? In fact, increasingly (although still in a small minority of cases) these two apparently contradicting definitions are being connected.

Republished from: Adams, CA and Weldin K, “What is sustainability reporting? And what has it got to do with the CFO? CFO India, November-December 2014, pp 68-69. View original article here.

The definition of “sustainable development” in the Brundtland Commission’s (1987) report ‘Our Common Future’ for the United Nations World Commission on Environment and development (WCED)  makes regular appearances in corporate sustainability reports.  It begins with: “Development that meets the needs of the present without compromising the ability of future generations to meet their own needs…”

Following on from the Brundtland definition of sustainable development, we regard “sustainability”, in the context of running a business, as making a positive contribution to planet Earth’s ability to sustain quality human life which in turn involves reducing global wealth, education, human rights and gender inequalities and maintaining the planet’s natural assets.

Businesses are increasingly recognising that contributing to this form of sustainability is essential in achieving business success and longevity.

Mark Joiner, former CFO and Finance Director of the National Australia Bank, one of the world’s top 40 banks and a pioneer of integrated reporting, says:

“A dinosaur business has the view that the job is to maximise profit even to the point of bending the rules. I think companies that stay in that mode will struggle…  There is a paradigm shift between the way my generation thought about business and the new generation coming through… The emergence of social enterprise is changing business models.  It is attractive to talent and customers.  You can no longer think about returns to financial capital.”

Benefits of reporting on sustainability impacts include: highlighting gaps in data; making visible performance on issues which would otherwise fall under the radar; encouraging competition between business units for better performance on the disaggregated social and environmental data; and, demonstrating accountability.

The process of developing the report involves engaging with a wider range of stakeholders to identify material environmental, social and governance (ESG) risks.  Good reports should set targets and the process of developing them requires some strategic and cross-functional thinking about trade-offs, opportunities and actions required to achieve them.

The CFO can bring a rigour to the data identification and collection and target setting processes.  S/he can bring the key social and environmental indicators into the regular monthly management and board reporting processes.  This small step of ensuring this data is monitored makes a very significant impact on performance.

The CFO can also help move thinking beyond measuring impacts, important as that is, to also developing innovative ways of capturing the benefits of value created by some of these initiatives.

“At the very core of the concept of Integrated Reporting (IR), is the growing recognition that a number of factors determine the value of an organisation – some of these are financial or tangible in nature and are easy to account for in financial statements. However others, like people, natural resources, intellectual capital, markets, competition, etc., are harder to measure.” says Tata Steel’s Integrated Report 2013

The challenge for the CFO is that not all of this value is measured in monetary terms which are included in the financial statements or in capital investment decision making.  For example, strong relationship with key customers and suppliers create value, but do not go on the balance sheet.  And infrastructure decisions should encompass consideration of greenhouse gas emissions which may go beyond a financial cost/benefit analysis.

Mark Joiner is concerned about biodiversity, carbon management, water management and how sustainability issues should impact on business decisions to ensure long term success.  He says: “The CFO needs to put a company on a path to sustainable performance.  The CFO should not look short term by e.g. not investing in IT, talent etc.  The modern CFO needs to think about performance over 10 years about the robustness of the business model to support long term value creation.  This is not just about capex, it is more and more about reputation, attracting talent etc.  The CFO needs to enable adaption of the business model to changes in attitude, regulation, availability of resources, etc”

One of the things CFOs particularly need to be mindful of is providing information that investors want.  Investors are increasingly concerned about Environmental, Social and Governance (ESG) risks, which given the power of social media, can turn a profit into a loss in an instant. They want to understand the sustainability context in which the organisation is operating and understand the key sustainability drivers which will impact on achievement of strategy and future performance.

The CFO is in a position to get the Board to pay attention to sustainability issues and ESG risks. This is important because having a Board which takes responsibility for this (and some Boards still pay lip service to it) is a key driver in organisational change to embed sustainability considerations.

Around the world there has been, and will continue to be, an increasing amount of compliance reporting requirements on social and environmental issues and responsibility for these is falling to the CFO.

In concluding it is worth focusing on the ‘G’ in ESG and noting that governance represents the systems and processes used to manage and direct activities of an entity with the overriding goal of ensuring transparency, accountability and probity. With these goals in mind, the CFO’s role in validating the content of any sustainability or integrated reporting as a subset of all corporate reporting is important in ensuring the accuracy and consistency of all market messages, to comply with any continuous disclosure obligations as well as maintaining control over corporate affairs or investor relations activities which determine who within the company can say what, where, when and to whom.

From this perspective, t is easy see why today’s CFO’s need to be able operate from a broader base that takes them ‘beyond the numbers’. Many advisors and consultants in the market now talk of such breadth across the affairs and operations of the business as coming together to form the ‘DNA’ of the modern CFO as finance functions move away from being scorekeepers and compliance focused to enablers.  It is reasonable to assume that such expectations will continue as the next generation of CFOs and finance leaders emerge.

Republished from: Adams, CA and Weldin K, “What is sustainability reporting? And what has it got to do with the CFO? CFO India, November-December 2014, pp 68-69. View original article here.

Ken Weldin

Ken Weldin

Carol Adams and Ken Weldin are members of ICAS.

Carol Adams consults and is a part time Professor at Monash University and writes on her website Towards Sustainable Business 

Ken Weldin is an experienced governance and assurance professional with a particular interest in the dynamics of personal relationships and interactions that drive corporate decision making. He can be contacted at kenweldin@gmail.com

 

 

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