Why chief financial officers are key to achieving the SDGs
Earlier this year, the UN Global Compact launched a new coalition uniting chief financial officers to drive progress towards the Sustainable Development Goals (SDGs). Speaking exclusively with edie, the coalition’s co-lead, Jerome Lavigne-Delville, explains exactly why leveraging corporate finance is so crucial to this agenda.
During the UN Global Compact’s Annual Local Network Forum in Dubai this March, the organisation formally launched a new coalition of chief financial officers (CFOs) for the SDGs. Its aim in doing so was to ensure that corporates with SDG-aligned commitments and/or strategies are properly putting their financial mettle behind these efforts – which has been particularly crucial amid the backwards progress in several geographies due to the Covid-19 pandemic.
The coalition has been steadily growing over the past six months and now includes the CFOs of more than 60 large businesses including Verizon, Danone, Unilever, Cemex, H&M Group and Holcim.
Jerome Lavigne-Delville, who jointly headed up the creation of the coalition and now jointly oversees its work, explained that it launched at a time when CFOs were “an obvious missing link” in closing the CFO finance gap.
He tells edie that, for the past two decades, the Compact’s work with businesses has involved getting decision makers “to treat sustainability as a strategic priority rather than a side piece, a volunteering programme”.
He says: “There has been a lot of meaningful progress here. In parallel to that, a lot of conversations since the introduction of the SDGs have been about the cost of financing delivery. We felt this was always looking towards pension funds and other large financial institutions. In that equation, the role of corporates to offer investments and to issue most financial assets in the world was, we felt, lost.”
“Our goal was to emphasise that corporates were critical, across their operations, supply chains, and in those very remote parts of the world where there are no capital markets.
“The model of engagement at the Global Compact, at that time, only involved CEOs and strategic teams. We talked about finance but the obvious missing link were the CFOs.”
The UN estimates that there is currently a $3-5trn funding gap annually for the SDGs. As in, the level invested from all sources is at least $3trn lower than it needs to be for all ambitions to be realised by 2030.
Lavigne-Delville tells edie how the Compact, in analysing data available from the World Bank, concluded that corporations invest around $17trn in long-term expenditures each year, mainly in the form of CAPEX. Through working with CFOs and CEOs, it has calculated that 30-40% of this money could be “credibly” aligned with the SDGs. In theory, the private sector alone could more than close the funding gap for developing nations – or perhaps, with ambition, the whole world.
Blueprints, principles and reporting
Of course, getting this finance aligned with the SDGs is no feat. There will need to be clear parameters, increased collaboration between Coalition members, joined-up reporting, and so on.
Lavigne-Delville explains that the Coalition’s Taskforce has been working to create a “blueprint” for ambitious, joined-up action on the SDGs from participating businesses – and from the private sector as a whole. This has taken the form of four key principles.
Participating businesses are required to develop an SDG impact thesis, identifying which Goals it can have the most impact on and in what manner (i.e. in which geographies, through which kinds of finance). It should then integrate this as a strategic priority, properly allocating resources and finance as criteria. Future investments for these firms should be run through SDG-based criteria. These are all fairly new concepts for most of the corporate world.
Crucially, there is a requirement for businesses to “identify and mitigate significant negative impacts on relevant SDGs”. This can help allay greenwashing or impact-washing concerns.
Lavigne-Delville states: “Changing investment, making sure it does not do any harm, is important. But we thought there was a bit of a vacuum in terms of information on what companies are doing to contribute to opportunities.”
Throughout these processes and beyond, businesses need to provide SDG-related reporting that is properly integrated with their financial disclosures and sustainability reports. One of the most important “basic” reporting requirements, in Lavigne-Delville’s opinion, is the requirement for businesses to disclose which proportion of their investment they believe to be positively contributing to the SDGs and to explain why.
“These disclosures should be at least the same quality level of financial information – and you need the CFO on board to get this,” he notes.
Firms should also set KPIs related to the delivery of SDG-linked projects and goals, with a financial link. For example, executive pay could depend on delivery, or the company could work to deliver a linked bond, with penalties for failing to meet goals and/or rewards for meeting and exceeding goals. This, Lavigne-Delville states, can “elevate” the positioning of sustainable development within a company.
An Alvarez & Marsal report published in April revealed that more than 50% of the FTSE350 firms are linking remuneration to policies and practices on environmental, social and governance (ESG) indicators. On bonds, an estimated $110bn was raised using sustainability-linked bonds globally in 2021 – more than ten times higher than in 2020. This growth trend looks set to continue into 2022.
The devil’s in the data…
The Coalition’s principles state that participating businesses should “leverage a full range of financial instruments… ranging from short to long-term maturities”. Bonds are very much in the mix. The principles also state that the “credibility of SDG-linked financial products” should be “maximised”
With this in mind, we ask Lavigne-Delville whether he believes that the few bonds currently claiming to be aligned with specific SDGs are “credible” – and whether sustainability-linked bonds which do not currently have a stated alignment with the SDGs can, nonetheless, contribute meaningfully to progress.
He replies: “I don’t see much of a difference between a sustainability-linked bond and a potential SDG-linked bond, in general. Connections to specific SDGs are easy to make.
“The [sustainability-linked bond] market has grown very quickly, but we know that the dangers are the targets not being sufficiently ambitious, or the financial incentive to reach them not being material.”
In his opinion, a key challenge is the fact that most corporate bond frameworks place a lot of emphasis on reducing emissions, with far fewer linking to goals with indicators that are perhaps harder to quantify than emissions accounting.
The focus on decarbonisation is doubtless welcome as ever more nations heed updated climate science and work to align net-zero pathways with a 1.5C temperature trajectory. Net Zero Tracker’s latest update revealed that 90% of global GDP is covered by net-zero targets set at the regional or national level.
But there is a danger of carbon tunnel vision. Carbon is perhaps the wrong focus, Lavigne-Delville argues, for businesses in low-emission sectors with more material issues to focus on.
He states: “Companies need to get more and more comfortable with either stating that GHGs are not their most material issue but a good proxy for the broader sustainability approach, or with including different data – like biodiversity data and social data.”
The good news is that several major projects are underway to standardise measurement and reporting – and to, therefore, define best-practice – in work on a range of environmental issues. These include science-based targets for water, the Task Force on Nature-Related Financial Disclosures (TNFD) and FLAG (forest, land-use and agriculture) guidance from the Science-Based Targets initiative.
Some businesses are also already getting creative in terms of measuring their social impact, Lavigne-Delville explains. He has seen businesses measure the number of additional people connected to clean energy (SDG 7), provided with water access (SDG 6) or given the means to access digital infrastructure.
Moreover, research bodies are breaking down the SDG financing gap into specific geographies and specific goals. “Just as there are national and sub-national, sophisticated reports on overall finance, this knowledge is starting to be used to assess what level of investment would be needed for sustainable development – mostly for the energy transition,” Lavigne-Delville says.
With the energy price crisis raging on in Europe and energy access issues still a key topic of discussion in sustainability spaces, this may well be the focus for the remainder of 2022. This should hopefully ensure that more corporate finance goes to the right options for a just energy transition, at the right time. Time will tell how the figures will be crunched on other issues in the rest of the decade.
Another key thing to watch will be whether nations put in place, in collaboration with the private and public sectors, the appropriate market infrastructure and policies are in place to enable SDG-linked and SDG-aligned finance to become the norm. This will be the focus of a new paper set to be launched by the coalition in the coming weeks, in a bid to get these discussions on the table at COP27 in Egypt in November.
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