How CFOs Can Drive Sustainability Transformation
As corporate sustainability ambitions increase and investors demand increased accountability, companies must rethink the traditional responsibilities and activities of the Chief Financial Officer and broader finance function in light of the urgency of the climate challenge. Jeff Waller, Senior Director, Head of Financing Solutions at ENGIE Impact, outlines the barriers for CFOs and finance teams to be aware of in relation to sustainability transformation and explains how they can align the finance function with the wider organisation to ensure a sustainable future.
There’s little doubt that companies are getting serious about climate change and sustainability. In the last 15 years, companies disclosing sustainability data to the Carbon Disclosure Project (CDP) have increased carbon reduction targets threefold, from an annual average reduction of 2% to 6% today. Moreover, timelines to achieve these goals have narrowed; rather than setting goals 25 years in the future, companies intend to meet their goals in an average of just eight years. Companies are also looking beyond their own operations to examine their entire supply chain, as made clear by recent announcements from companies like Apple, BMW, and Microsoft.
Despite this progress, few companies are on track to meet their climate goals. While many leaders embrace bold targets, they struggle when it comes time to implement because they haven’t established the capital allocation strategies and governance structures needed to match their strategic intent.
The finance department sits squarely at the heart of this challenge. With sustainability goals becoming ever more ambitious and investors demanding increasing accountability, there must be a reimagining of the traditional responsibilities and activities of the CFO and the broader finance function if companies are to overcome barriers to sustainability transformation and meet their targets.
Barriers that slow progress in sustainability transformation
The first barrier is the failure to systematically integrate environmental factors into enterprise risk management. Historically, sustainability issues were addressed within the Chief Sustainability Officer function, receiving only occasional attention from financial leadership. However, earlier this year, 3,000 global leaders convened in Davos to discuss their roles as key stakeholders in a sustainable world and, for the first time, climate change contributed to all five of the top global risks in The World Economic Forum’s Global Risk Report. But for many companies, sustainability still is not considered a core competitiveness issue, and it doesn’t receive the financial and human capital necessary to tackle a challenge of its size.
Sound decision-making relies on accurate and useful data. But companies encounter a significant barrier when their reporting systems fail to capture the data needed to inform capital allocation decisions. Yet, even with improved access to relevant data, many companies still lack the ability to properly manage environmental sustainability. Quantifying climate risks and opportunities is critical to managing exposure to energy price volatility, water scarcity risks, water and waste regulations, and environmental impacts in the supply chain.
From an organisational perspective, existing processes and metrics aren’t designed to foster engagement between sustainability and finance functions which can delay or impede the achievement of sustainability goals. For example, sustainability teams are often brought into project planning too late to influence project design and cannot make an effective case to financial decision-makers. This can lead to finance teams overlooking meaningful short- and long-term financial benefits of sustainability strategies, such as enhanced reputation and reduced climate risk. Without having shared, quantifiable success metrics, such as reduced carbon emissions, teams lack effective incentives to innovate and collaborate across departments.
Finally, for years corporations have cited a lack of available capital as the primary barrier that slows or halts implementation of critical sustainability projects. As a result, a myriad of service models, debt instruments, and new forms of capital have emerged to lessen the financial burden, share risks, shift the needs for upfront capital, and even reconsider the importance of asset ownership. While there’s a growing awareness of sustainable finance strategies like sustainability-linked loans or internal carbon pricing, knowing when and how best to implement them remains a challenge.
By identifying the barriers most acute in their respective companies, finance leaders can take action to minimise the costs and risks associated with sustainability projects and ensure their organisations successfully capture both the environmental and financial benefits at stake.
Stages of integration for aligning finance and sustainability ambition
The rise in increasingly ambitious sustainability goals clearly demonstrates that corporate leaders see value in climate action – both to address stakeholder demands and to mitigate near- and long-term risks. The finance team plays a critical role in realising this value but, to do so, they must be fully integrated into – and feel a sense of accountability for – the company’s sustainability transformation.
Earlier this year, 3,000 global leaders convened in Davos to discuss their roles as key stakeholders in a sustainable world and, for the first time, climate change contributed to all five of the top global risks in The World Economic Forum’s Global Risk Report.
Drawing on our work with global organisations, ENGIE Impact has identified three stages of evolution in this integration process: opportunistic, thematic, and holistic. Progression through these integration stages is essential for companies, both to achieve their sustainability goals on the required timeline and to unlock the full spectrum of direct and indirect benefits.
Stage 1 – Opportunistic: The leadership team of companies in the opportunistic stage often understands the high-level benefits of sustainability programs. Nevertheless, these companies have not set specific targets; rather, sustainability projects are pursued on an ad hoc basis and are typically approved if they meet basic financial thresholds, such as a quick payback. This narrowly focused approach usually results in limited operational cost reductions and achieves only incremental emissions reductions.
Stage 2 – Thematic: In the thematic stage, a company’s CFO and finance team lead the analysis of company-wide programmes that support the organisation’s sustainability ambition. The company sets time-bound targets across its operations that follow generally accepted frameworks and methodology and has identified a portfolio of similar projects—such as energy efficiency or on-site solar generation—to meet these goals. Typical target outcomes at this stage include reduced long-term costs of energy, increased price certainty, and more efficient use of capital.
At this stage, the CFO also begins to seriously investigate sustainable finance options which allow the company to expand its bank and investor network and lays the foundation for financing a broader set of decarbonisation measures in the future.
Stage 3 – Holistic: A company with a holistic approach develops a comprehensive understanding of the importance of sustainability to the success of its organisation and positions sustainability at the core of its business. Its leadership relies on cross-functional collaboration to set and achieve ambitious corporate goals, such as science-based decarbonisation targets. The finance team takes a lead role in shaping the company’s roadmap of sustainability initiatives that deliver financial returns as well as incremental values such as accelerated decarbonisation, enhanced brand value, decreased risk, and, ultimately, improved market position.
By identifying a company’s stage of integrating sustainability into its finance function, finance departments and CFOs can track their progress to ensure that they’re keeping pace with the company’s overall sustainability objectives and taking actions that contribute to the overall transformational success of the organisation.
With corporations growing ever more ambitious in addressing climate change, CFOs and their finance teams play a central role in ensuring that their companies can meet their sustainability transformation goals. Only by integrating a sustainability mindset can the finance function properly prepare for risks that unlock the true value at stake, effectively structure investments, and adopt changes that drive meaningful progress toward sustainability goals.