The multiple hats of the CFO on the sustainability agenda

How CFOs can contribute to a sustainable future through credibility, personal leadership and balancing short and long term.

A summary from the CFOs with Impact round table event.

Against the backdrop of increasing doubts about humanity’s ability to remain within the global warming limit of 1.5 degrees, new targets need to be set and progress needs to be tracked more effectively. But which targets? And how can we best track them?

Just as important is the compelling question of how companies that are prepared to absorb the associated cost of creating a more sustainable tomorrow compete with organizations disengaging from the dialogue, whose strategic focus today is elsewhere? Can companies expect to attract top talent in the future, without having genuine sustainability ambitions? With critical shareholders applying sharper focus and unceasing scrutiny on sustainability accomplishments, how can companies write fact-based narratives and secure funding for building a more sustainable business for the future?

Plenty to talk about during the CFOs with Impact round table, bringing together a select group of CFOs of multibillion companies operating in different industries in the Netherlands. Former prime minister Jan Peter Balkenende moderates the discussion, with keynotes from AkzoNobel CEO Thierry Vanlancker and EY Global Vice Chair on Sustainability Steve Varley.

‘Business Sustainable’ is the name of the game

According to the keynote speaker Thierry Vanlancker, companies should not simply talk about sustainability. They must avoid the risk of going overboard. Not just launch sustainability initiatives for the sake of sustainability, but choose projects that benefit the company too. There is less tolerance for greenwashing and – sooner or later – these organizations will be seen as suffering from the ‘imposter syndrome’.

So be prepared to articulate the unpopular, be comfortable in discussing the uncomfortable, says Vanlancker. Dare to walk away if you feel the narrative is more storytelling than evidence-based reality. Science-based targets only work if emission reduction objectives are set and met.

Leaders should also not assume sustainability is by definition bad for the bottom line. If you take a closer look and make the right choices, you will arrive at solutions that make your company more sustainable while maintaining – and even improving – profitability. This is what Thierry Vanlancker calls ‘business sustainable’.

CFOs should not underestimate how much credibility they bring to a company’s sustainability agenda, in both external and internal communications. As part of the leadership team, CFOs often bring the focus on the numbers, the cost curves and the balance between the short and longer term. When that focus is hard-wired to sustainability plans, it makes everything you do more credible.

From a shareholder perspective, business results and performance should be in good shape in order to receive positive reactions to sustainability initiatives. Otherwise, sustainability may be perceived as a politely-phrased European way of explaining why you are underperforming.

Shareholders and investors speak a great deal about the importance of sustainability, but in reality it is often the last agenda item during meetings. When a CEO discusses sustainability with shareholders or other stakeholders, the audience will have one eye on the body language of the CFO. Is this just a great narrative, or do the facts actually stack up?

It is important to be truthful, even if it means you need to make restatements. Let’s face it, many companies will need to make restatements in the coming years as the data below the statements becomes more accurate.

When sustainability goals are in line with your business model and goals, the relationship between CEO and CFO works in lockstep on this topic.

However … a CFO who is overly enthusiastic about sustainability will likely be perceived with mixed enthusiasm by business leaders. The numbers shouldn’t lead our lives.

Creating credibility as financials, leaders and human beings

So what is the talk of the table? CFOs are in agreement that sustainability is something an organization should live and breathe, and that they have a role to play as financial specialists and leaders.

As professionals with a background in data, reporting and numbers, CFOs have a key role to play in backing up the sustainability agenda and narrative with facts. Storytelling on sustainability that is too far from reality is killing. At the same time, we must be aware there may always be a gap as the data and definitions are not always mature.

At the same time, CFOs and finance teams can make a solid contribution by creating awareness if sustainability isn’t already fully embedded in the day-to-day life of everyone at the company. Reporting on facts and achievements can inspire people to be more mindful of sustainability in your company’s operations.

Alongside their roles as finance professionals, CFOs as part of the leadership team have a positive impact on their company’s talent to walk the talk on sustainability. If they internalize a more sustainable future as human beings, and find personal examples of what can be done, it inspires others to do the same, instead of externalizing the issue and finding reasons why other factors restrict one from contributing.

Also here, it was noted that sustainability can contribute to company results. There is a clear value creation combination to be made if you as a company are a front runner in sustainability and are able to clearly communicate around it. Value creation is easier when you move first.

When awareness is there and companies do live and breathe sustainability, an interesting question arises if the role of the CFO can be smaller on this topic? Or, in other words, how can Finance stay out of sustainability as much as possible? Sustainability should be fun to work on, and people already want to jump on the bandwagon.

CFOs can help companies make sustainability as simple and honest as possible, which keeps the organization focused on doing the right thing. CFOs should not make sustainability and ESG too complex and should “take the bullet” on reporting so it doesn’t bother the rest of the company, as people will lose interest if you take the fun out of it. 

Balancing short-term performance and a long-term view

Credibility is immensely enhanced if companies perform in terms of sustainability and bottom line. The financial function has a key role to play in stress-testing sustainability impact plans, business cases and long-term projections when making investment decisions or contemplating business model pivots. Particularly when sustainability projects require significant investments – also in relation to company size – and external factors rapidly change, well-informed decisions can make or break company’s results and future.

When asked for their reaction to the start-up and development of sustainability initiatives around the company, CFOs welcome ideas that add value beyond the bottom line. However, they see it as their responsibility to allocate budget in accordance with the many other and sometimes conflicting operational projects that need to be funded. Equilibrium is everything; to go beyond is just as bad as to fall short.

The same applies in setting the direction and priorities for the talent in the organization (in and outside of finance). This balance, however, does not come without risk. People will want to contribute to sustainability projects, which is in itself a good thing as long as other priorities are accounted for. How to, for instance, prioritize your talent’s efforts when working on sustainability projects while business continuity is at risk, without losing your talent?

Capitalism as the muscle behind companies to become more sustainable, faster

In most industries, shareholders are still not a dominant force in the push towards a more sustainable future. One could argue it would rather be a push backwards, as the sharpest focus is still on shareholder return. However, for some sectors or companies – take for instance a utilities company, an oil & gas operator or an airline – sustainability can be an existential threat and a fact-based dialogue with shareholders of the utmost importance to secure future funds.

CFOs can and should play a role beyond reporting. Reporting is important, but in the end just an annualized snapshot. An important role for the CFO is to help understand how sustainability impacts future prospects and cashflows/valuation – which is the ultimate ask of an investor –, integrate sustainability considerations in capital allocation, and shape the equity narrative.

For others, shareholder dialogue is less pressing whereas factors such as (a new generation of) employees or client demands provide a push for more tangible actions towards a sustainable future.

Roundtable participants agree that leaders should not wait for shareholders, financial institutions or customers and employees to become more demanding – the urge to become more sustainable needs to come from within.

EY guest speaker Steve Varley stresses the importance of financial institutions and CFOs’ dialogue on the sustainability agenda. The increased instability and division of the world (consider China vs US, some countries disengaging from global climate change action, etc.) will not benefit the journey towards a sustainable future. Therefore, the world of private enterprise is even more important. The facts, the numbers, the indicators, they will all need to be adopted in the wider financial and capital world for things to change. If we’re not shifting gears, and we don’t see more focus on sustainability indicators from financial institutions, will companies go fast enough? That raises the question: can capitalism be the muscle behind companies truly becoming more sustainable, faster?

Keeping your company competitive, and safe

According to Steve Varley, CFOs are expected to keep their companies safe. With sustainability targets and commitments being reset, national and business leaders will make bigger pledges and may find themselves even further out of their skis.

In many ways, sustainability and ESG is like the Wild West without a sheriff, with no clear regulations and substantial litigation risks. More scrutiny may well result in companies backpedaling and reporting less instead of more and better - green hushing.

When you need to come back on your promise, or continuously make restatements, the confidence that consumers have in (your) business is at risk. Only by providing the facts and being transparent can you maintain trust. With even bigger promises being made by business leaders, it becomes equally important for CFOs to provide accurate insights and the facts behind the sustainability narrative.

CFOs should keep the competitive edge by being more sustainable and keeping associated business results in mind. Tell the story as it is, and don’t be afraid to show how and why you’ve improved business results by being more sustainable. That way, the muscle of capitalism can start working in your favor.

The tensions between short termism and the long-term agenda

The discussion made very clear how important the role of CFOs is regarding sustainable business practices. Convictions and values are key. Always take the business model into account. Add value to the company. Sustainability has to do with impact and also with reputational aspects. Avoid greenwashing. Be aware of the tensions between short termism and the long-term agenda.

It's good to underline that these discussions are part of a much bigger agenda: the SDGs, climate change, the circular economy, combatting inequality. At a European scale we have the Green deal and Fit for 55. This international agenda is also relevant for the debate on the future of market economies and of capitalism. We can hear different wordings like stakeholder, moral, conscious, responsible, inclusive and progressive capitalism. But the common elements are always: choose for the long term, serve all stakeholders and realize a much better balance between economic, social and ecological developments. The global agenda and the debate on capitalism also affect the discussion on rethinking business models. The 'business of business is business'-model of Milton Friedman will be increasingly replaced by 'creating shared value' of Michael Porter. It's good to be aware of all these changes.

Moderator Jan Peter Balkenende summarizes it is clear to underline the importance of long-term value creation, the necessity of good measurement and reporting and the essential notions of honesty and credibility.