Chief value officers and ESG investors: What could green finance look like in the new normal?

Both internally and externally the tools are being developed and a movement is emerging to kickstart a new era of sustainable business.

The tragic impacts of the coronavirus pandemic have also had an adverse effect on the global economy, as it slumps towards levels of the financial crash of 2008/2009. Asia’s economy is down 20% for the first three months of the year, the FTSE 100 has suffered its worst quarterly performance since 1987 and the UN projects that foreign direct investment flows could fall between 5% and 15%.

More than 100 environmental NGOs and one million European citizens have joined the calls from the likes of the European Corporate Leaders Group (CLG Europe) and the Committee on Climate Change in pursuing a “green recovery” of the economy that assists with the ongoing fight against the climate crisis.

Even at a political level, European Commission’s Green Deal chief, Frans Timmermans, assured EU lawmakers that “every euro” spent on economic recovery measures after the Covid-19 crisis would be linked to the green and digital transitions, While the COP26 President Alok Sharma and indeed Prime Minister Boris Johnson have both issued promises that the climate crisis needs to be at the heart of recovery plans.

Whether calls transform into tangible actions remains to be seen, but if the new normal of a post-pandemic world does usher in the green roots of a financial revolution that avoids the mistakes of the 08/09 financial crash, then what impact will that have on sustainable business and the sustainability professional?

Chief value officers

The very basic answer to this question is that a business’s financial focus becomes a lot more intertwined with the long-term ambitions of a sustainability strategy. If the finance sector moves to de-risk portfolios from climate impacts, it becomes a financial imperative for businesses to focus on sustainability.

As such, the, at times, yawning gap between finance and sustainability will continue to shrink, as it has done in recent years. The rise of integrated reporting and the mainstream support for the Task Force on Climate-related Financial Disclosures (TCFD) have started the process of marrying sustainability and finance and post-pandemic recovery could be the honeymoon period.

This will have impacts both internally and externally. According to Delphine Gibassier, an associate professor of accounting for sustainable development at the Audencia Nantes School of Management, the focus on green finance could see today’s chief financial officers (CFOs) move into the fledgling new role of “chief value officer” (CVO).

“The new CFO is a CVO and while they have a traditional accountants background, much more of their team is focused on sustainability and what that means for finance,” Gibassier tells edie. “They no longer just have financial capital in mind, they have a 360 view and look through the lens of a multi-capital approach.

“CFOs are making these changes, not necessarily in their titles, but in the way they approach finance.”

Gibassier has 18 years’ experience in non-financial accounting & reporting and has previously worked in a carbon accounting role at Danone. She has also worked with Jill Atkins, who coined the CVO term with Mervyn King as part of their 2016 book “Chief Value Officer: Accountants Can Save the Planet”, which suggests that businesses should assess decision-based on a multi-capital value creation approach and not through a financial lens alone.

While the concept is in its infancy, Gibassier notes that her research team is now getting more calls from traditional CFOs wanting to understand the value of sustainability. It is also starting to pick up pace amongst businesses. In 2017, as part of Olam’s first Integrated Annual Report, the agri-business began reporting against six non-financial capitals to help demonstrate how they contribute to the creation of long-term value for Olam. Social, human, manufactured, intellectual, intangible and natural capital are all now considered by the company.

There is a role for the sustainability professional in assisting the creation of the CVO and teams may even become more integrated as a result. Gibassier notes that strategies focused on the living wage and science-based targets are just two ways to start looking at value creation through non-financial binoculars.

“The shift towards multi-capital CFOs is a good thing for responsible business, it gives them the data to do the right things,” she adds. “It builds the conversation internally and helps informs the board with the risks and opportunities. This is good news for the sustainability professional.

“What we need to see is transformative accounting that doesn’t look in the past, but tries to predict the future and outlines business model changes and new types of products. It is very different from what we’re seeing today. We need key indicators for the future, and we’re starting to see it with what the TCFD is trying to do.”

Boardroom focus

As the CFO becomes more aligned with the sustainability strategy – and as chief sustainability officers rise up the corporate ladder – the long-term risks and opportunities of the low-carbon transition get a prominent seat in boardroom discussions. But while the door to the boardroom opens, it doesn’t mean that the looming threat of climate change will be understood.

Chapter Zero was launched last June by the World Economic Forum and is a “network of company chairs, committee chairs and non-executive directors, committed to developing their knowledge of the implications of climate change for UK business”. The coalition features more than 750 members, and represents half of the FTSE100 companies. While currently only applicable to members from listed companies, Chapter Zero is hoping to embrace a wider range of organisations by 2021.

Chair of the Chapter Zero Steering Committee, Julie Baddeley told edie that even during the current coronavirus pandemic, many of the Chapter members were focusing on ensuring that climate “doesn’t slip off the corporate agenda” and businesses pivot focus on the short-term impacts of the outbreak.

“Boards are focused on dealing with the immediate crisis and what that throws up,” Baddeley says. “But it is vital that we keep climate and the longer-term sustainability risks in the boardroom and on the agenda. Many of our members are using this time to become as knowledgeable as they can of the challenges of climate change and how they might be impacted by Covid-19.”

The main benefit of having non-executives enrolled in a sustainability coalition like Chapter Zero is that it helps un-silo sustainability from an individual department. Another key aspect, and one that is rising in prominence as a result of the pandemic, is that it gives boards much more insight on the risks of climate change and the importance of making businesses resilient to future climate shocks.

Gillian Karran-Cumberlege leads Fidelio Partners Board Practice and is a member of Chapter Zero’s steering committee. She notes that resiliency is a key component of any boardroom that is taking long-term value seriously.

“Board are playing a more proactive role and giving full support to the executive, but they have more opportunities to think longer-term and how we build out of [the pandemic],” she says. “I’ve been struck as to how much focus board members are giving to KPIs to measure performance and what those should look like in relation to the environment. In the 08/09 financial crisis, this type of thinking froze, but following 10 years of governance, it is continuing through this challenge and long-term thinking is part of the build-out.

“Exploring the inter-relations between what is happening now and the fragility of supply chains and the pressure on the environment is crucial. Resiliency is hugely important, and you’d be failing as a board if you weren’t looking at it.”

The investor puzzle

Both Karran-Cumberlege and Baddeley agree that the sustainability agenda is also rising in prominence outside of the boardroom, both at a consumer and investor level. While it may well be too early to tell how consumers react and change behaviours post-pandemic, investors have clearly nailed their colours to the mast and the colour is most certainly green.

The likes of BNP Paribas and BlackRock have recently doubled-down on commitments to phase-out high-carbon activities from their portfolio and the issuance of Environmental, Social, and Governance (ESG) bonds has increased by 272% year-on-year, as investors and insurance firms take proactive steps to respond to the coronavirus pandemic.

Baddeley notes that “boards have a role to ensure that what is being communicated is relevant” to investors, but it is just as important that the investor community has a firm grasp on their long-term transition and what the end goal should look like.

The low-carbon transition is murky water for a lot of banks, for example, with the likes of Lloyd’s, Zurich and Munich Re supporting oil tar sand projects despite committing to combatting the climate crisis.

Indeed, the lack of definition around what constitutes green finance has created a new market of start-ups in the financing sector, all of which are keen to accelerate sustainable finance opportunities.

One such organisation is Clim8, an app-based platform for sustainable investments that has raised £1.35m in pre-launch crowdfunding from 1,200 investors.

The platform is due to launch this summer and has already exceeded its funding targets by more than 300%. The investment platform will focus on “truly green” business and will target companies that are focusing on clean energy and technologies, sustainable food, electric mobility and recycling. Clim8 has over 5,000 people on the pre-launch waiting list. 

Clim8’s founder Duncan Grierson believes that while the rise of ESG prominence is welcome, it doesn’t truly negate investors from funnelling money towards cases of greenwash.

“What we’ve seen the last few years is asset managers and wealth managers moving more into the ESG space and so lots of money has already moved into ESG funds,” Grierson tells edie. “That is broadly a good movement. But I think that the challenge is around the definition of what is green and sustainable.

“A lot of the investments in the underlying ESG portfolios are not what I think the average person on the street would think are green and sustainable. And so, there’s a bit of a challenge for investors to cut through the terminology and try to find those funds that are genuinely making a difference on climate change.”

The coronavirus pandemic has raised concerns that fossil fuels could be locked into the economy through bailouts, while campaigner calls to tie bailouts of heavy-emitting industries to low-carbon targets has largely fallen on death ears.

But even if the new normal doesn’t commence with an immediate focus on green stimulus, Grierson is hopeful that a renewed focus on resiliency from businesses, investors and consumers alike will spur a truly green movement.

“I’m hopeful that this pandemic will mean that people are thinking much more about the resilience of systems more broadly,” he adds. “The response to this is moving to a greener economy. And things like local energy, local generation of energy, the use of solar, battery storage, all these kinds of technologies that are now mature could benefit.”

The financial recovery from the pandemic may be filled with different shades of green, but both internally and externally the tools are being developed and a movement is emerging to kickstart a new era of sustainable business.

Matt Mace

Action inspires action. Stay ahead of the curve with sustainability and energy newsletters from edie