‘Age of the CFO’: Why finance officers are key to sustainability success

The world's 30 biggest listed financial firms collectively provided $740bn to the fossil fuel industry in 2020 and 2021.

The emergence of CFOs as pivotal figures in the corporate sustainability landscape is underpinned by a confluence of compelling factors.

The imperative to address climate change, a monumental challenge demanding trillions of dollars in investment, has thrust CFOs into the forefront.

The World Economic Forum (WEF) estimates that up to $3.5trn of additional investments are required globally each year to reach net-zero and restore nature. There’s a pragmatic dimension to the involvement of finance teams in this wider transition — the reduction of greenhouse gas (GHG) emissions not only aligns with sustainability goals but also yields tangible cost savings.

Moreover, the pressure from investors for greater transparency on climate risks has heightened the significance of integrating such considerations into corporate financial disclosures.

Last week, investors with more than $65trn in assets under management released a Net-Zero Voting Guidance. This guidance aims to shape voting policies and practices across the financial sector in alignment with the net-zero transition, focusing on investor engagement to catalyse climate action in line with fiduciary duties.

Speaking at a green finance event last year, Phoenix Group’s chief financial officer Rakesh Thakkar emphasises: “Sustainable investment has many benefits, including mitigation, adaptation, resilience and transparency in reporting.”

From the perspective of a CFO, Thakkar underscores that three areas are critical, including risk management, investment decisions and the transparency of reporting.

Investor mandate: Integrating sustainability

Last year, the UK Government mandated TCFD-aligned annual reporting for around 1,300 large organisations in April. The aim of the mandate is to increase climate-related engagement between investors and companies by necessitating the inclusion of climate risks in annual reporting.

UK jewellery firm Monica Vinader’s chief financial officer Richard Colbert says: “It was relatively early in our journey when we got more and more feedback from the financial institutions that we were talking to about how not only was sustainability important, but it was almost an on-off switch.

“If we hadn’t had put sustainability in there, we would not have had any investment.”

“It is also true that private equity, when buying, is usually looking if they would want to transact the company in three to five years’ time, and if you’re thinking that far ahead, sustainability is very important.”

This strategic foresight aligns with the growing awareness that long-term value creation is intrinsically linked to a company’s sustainability practices.

Adding to this dynamic is the imminent introduction of the Corporate Sustainability Reporting Directive (CSRD) in the EU, set to replace the existing Non-Financial Reporting Directive (NFRD) this year.

Unlike its predecessor, the CSRD brings in stricter guidelines and broadens its scope, encompassing four times as many companies across the EU.

It goes beyond being just a regulatory update; the directive aims to foster a culture of detailed reporting, positioning itself as a critical element within companies’ management reporting and business activities.

As sustainability becomes a key determinant in investment decisions, a transformative dynamic is unfolding between investors and CFOs.

Shifting dynamics in investor relations

The evolving expectations of investors, particularly concerning environmental, social and governance (ESG) factors, are restructuring the traditional roles of CFOs.

Speaking at the same event, ShareAction’s chief executive officer Catherine Howarth says: “We are moving out of a low interest rate environment to an environment where bond lenders and investors have more power to negotiate.

“That is a real opportunity to put emphasis on not just climate, but all of the SDGs consistently.”

While a shift in the dynamics enable investors to demand climate risk reporting, prompting companies to actively integrate sustainability into their strategies, this shift offers CFOs a strategic opening to articulate their company’s sustainability initiatives, attracting socially responsible investors and positively influencing the company’s valuation.

Howarth adds: “I think we are moving into a real good evolution in terms of the sustainability conversation being at least rigorous and ambitious between CFOs and bond holders as it is between shareholders and chief executives, and then all those dots being joined up.”

In a recent survey report, PWC underscores the crucial importance of ESG reporting that stakeholders can trust, considering it as merely the starting point.

The report emphasises a broader opportunity stemming from the finance leaders’ commitment to long-term performance — a shift in enterprise focus from mere sustainability compliance to proactive value creation.

Opportunities to drive value creation

The report recognises that CFOs, by leveraging their financial acumen, are well-positioned to guide businesses towards capitalising on emerging opportunities.

Within this paradigm, CFOs wield influential tools, such as those for forecasting and budgeting, that can play a pivotal role in seamlessly integrating sustainability into the core of business strategy.

Beyond meeting compliance standards, this integration sets the stage for a more comprehensive approach that aligns financial decision-making with sustainable practices.

This includes navigating the landscape of sustainable products and strategically opening new revenue streams by offering products that align with their sustainability goals.

In a bid to do so, the report suggests CFOs to consider sustainability beyond mere compliance and direct efforts towards long-term value.

Additionally, it recommends collaborating closely with the sustainability team to move beyond regulatory requirements and develop an integrated plan that not only fulfils climate commitments but also contributes to driving business growth.

Lastly, it urges CFOs to evaluate the potential of taking a leadership position on environmental issues as a means to distinguish their companies by recognising how such initiatives can contribute to retaining key employees.

Howarth concludes: “We are in the age of the CFO, and I think that’s good.”

Policy-driven change

While CFOs are taking centre stage, this shift is not merely a result of internal initiatives but is significantly driven by external policies advocating for change.

Last year, a survey from Deloitte revealed that CFOs perceive government policy as the most substantial driver of their firms’ response to climate change.

Such policies serve as catalysts, propelling CFOs into proactive roles in integrating sustainability into their organisations.

The urgency to comply with evolving sustainability reporting regulations is palpable, as highlighted in the PWC report.

Based on the survey, approximately 40% of executives, including finance leaders, view the failure to meet sustainability commitments as a moderate or serious risk for their companies.

However, while compliance with these regulations may pose challenges, CFOs are leveraging their traditional expertise in overseeing accounting and controls to accelerate preparedness.

Strategising for the road ahead

According to the report, 39% of finance leaders have already established policies and controls for climate data collection, showcasing their proactive approach in meeting evolving reporting standards.

In addition to establishing policies, CFOs are actively driving internal awareness and accountability. A considerable 46% have initiated updates for their management teams, boards and key employees on climate change and its potential impacts on their business.

Furthermore, 36% have identified and invested in technology to facilitate the collection, analysis and reporting of ESG data, signalling a holistic approach to sustainable practices.

While underscoring the importance of policies in corporate sustainability, Colbert asserts that governments and regulations must ensure that whether or not a company is actively engaged in the sustainability journey, it must still measure and publicly disclose its sustainable progress.

He says: “With big forces to publish in play, it is now impossible to hide.”