A 2021 UN warning made it clear that we can no longer stop climate change; the only thing we can do is slow it down to reduce its impact over the long term. Consequently, several countries pledged to reduce their carbon emissions by 2050, with some pledging to be net zero by or before then. Sweden and Germany created legally binding targets to be net zero by 2045. France, Ireland, Fiji, Denmark, Spain, Hungary, Japan, Korea, Canada, New Zealand, and Luxemburg have set their targets for 2050.
As the corporate world has accepted that there is no Planet B, ESG has become a mainstay. By its very nature, ESG also covers governance and social issues, but in 2023 its primary focus is on environmental sustainability. As the most recent World Economic Forum Global Risks Report highlighted, climate change is a “our house is on fire” situation that demands our full attention.
Aside from being crucial to avoid a climate disaster, ESG is also becoming a badge of honor for businesses. A major purpose of ESG reporting is to illustrate that compliant businesses strive to make a positive impact on the world, often prioritizing the good they can do over their own bottom line.
The truth of the matter is that full ESG compliance is not out of reach for any company in any industry. In fact, the top-rated US company in terms of ESG score is Worthington Industries, a global diversified metals manufacturing company. Worthington Industries has an ESG score of 75.82. Close on its heels is J.B. Hunt Transport Services, a transportation and logistics company, with a score of 73.09.
A company’s ESG score ranges from 0-100 and allows investors to compare its performance to its competitors. A score of less than 50 represents poor performance, and a score of more than 70 represents excellent performance.
One thing is clear: ESG is here to stay, and it is growing in importance, but ESG doesn’t happen on its own. It needs committed executives to champion it. Enter the CFO.
Not too long ago, the role of a CFO mainly involved overseeing cash flow, creating financial plans, and identifying any financial strengths and weaknesses within the company. However, things have changed in recent years. CFOs are increasingly expected to be leaders in sustainability and ESG matters within their organizations. As organizations contend with perceptions of “greenwashing”, or even “greenhushing”, front-line accountability often resides with the CFO. In fact, data shows that more than two-thirds of CFOs are now responsible for their company’s ESG compliance and reporting, and more than 200 CFOs from a selection of 8,000 companies mentioned ESG during their quarterly earnings calls (as shown in figure 1).
This is not surprising, as finance teams already possess many of the skills necessary to drive ESG outcomes, such as monitoring and reporting, cost optimization, and risk management. The numbers show that when a CFO takes on the responsibility of developing ESG programs, it leads to a stronger alignment with the company’s objectives, as much as 26-29% more (as shown in figure 2).
Of course, taking on extra responsibilities related to ESG can be challenging for CFOs. They must find a way to balance long-term sustainability goals with the need to meet short-term financial targets. It is a delicate balance. A CFO is also required to foster even more cooperation with other functional areas across the organization when overseeing ESG in order to obtain the appropriate data for measuring and reporting, identify areas where ESG performance can be improved, and drive change throughout the entire company.
In addition to managing conflicting interests, a CFO’s role in ESG management requires them to be knowledgeable of a variety of ESG topics. For CFOs to stay ahead of ESG trends and developments, they must constantly upskill and update their knowledge. Faced with an ever-evolving ESG landscape, continuous professional development and education are a must.
“Faced with an ever-evolving ESG landscape, continuous professional development and education are a must.”
Most commonly, the CFO’s role in an organization’s ESG initiatives involves ensuring compliance with relevant regulatory and policy frameworks, as well as setting and achieving the organization’s ESG objectives. Countries, industry regulators, and stock exchanges are increasingly incorporating stricter ESG compliance and reporting requirements into their regulations and laws as investors, consumers, and voters push for more effective safeguards to be put in place to protect the environment, communities, and economies (as shown in figure 3).
The role of the CFO in an organization’s ESG initiatives has expanded beyond traditional internal responsibilities. Historically, CFOs were primarily responsible for communicating financial performance to external stakeholders such as investors, consumers, and the broader market. However, with increasing focus on ESG, beyond their accountability to the Board and Audit Committee, CFOs must now also report on the company’s progress on ESG issues and initiatives to external stakeholders, and quite often activist investors, who are increasingly considering ESG factors in their investment and resource allocation decisions. The failure to demonstrate a commitment to ESG can result in reputational risks, financial consequences, not the least of which is eroded access to capital, and loss of business and market share as more and more consumers demand sustainable practices.
Failing to meet ESG standards not only puts companies at risk of losing investors and consumers, but also of losing future talent. A recent study by WeSpire found that Generation Z prioritizes purpose over compensation, meaning that younger employees are more likely to seek out companies that align with their values and contribute positively to the world, as shown in figure 4. This trend is expected to continue, with future generations placing even greater importance on environmental and social responsibility in the workplace. As a result, not complying with ESG standards could lead to challenges in attracting and retaining top talent for companies in the long term, regardless of the salary or benefits offered.
In spite of these challenges (or rather, as a result of them), the CFO’s leadership in ESG matters is more important than ever before. Through full ESG engagement, CFOs can not only mitigate risks and enhance the public’s perception of their company, but also contribute to the creation of a more sustainable future.
It is important to understand that incorporating ESG into the CFO role touches on several key areas that can have a significant impact on your organization.
All in all, CFOs can help their organizations be more financially successful and socially and environmentally responsible by viewing their role through an ESG lens and keeping sustainability, diversity, equity, and good corporate governance top of mind.
A CFO’s ESG strategy should consider several metrics. The most pertinent ones include:
As a CFO, being an ESG leader begins with measuring key ESG metrics, setting improvement goals, and ensuring company-wide buy-in that supports each. It is important to note, however, that there are still additional considerations that need to be taken into account.
The first of these considerations is the fact that CFOs will be expected to report on their ESG performance. Fortunately, there are a variety of platforms and tools CFOs can access to make this reporting easier, namely internal systems like sustainability reporting software and external platforms like the Dow Jones Sustainability Index. What gets measured gets managed.
“What gets measured gets managed.”
Choosing an ESG framework to use as a measure of progress is crucial before starting the reporting process. There are currently two primary frameworks – the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB). Despite being the most common, the GRI and SASB are by no means the only ESG frameworks out there. There are also the Carbon Disclosure Project (CDP) and the Climate Disclosure Standards Board (CDSB). The best framework (or frameworks) for your organization will depend on its unique needs and goals.
It would be an understatement to say that the realm of ESG is developing at lightspeed. That also means that CFOs who act as ESG leaders need to make a concerted effort to stay up to date with the latest ESG news. At the start of 2023, the most pertinent ESG developments are:
It is likely that other regulatory bodies and countries will soon follow suit in implementing rules and policies that mandate the honest reporting of ESG metrics in order to safeguard not only the environment, but also the interests of consumers and investors.
As the world awakens to the importance of sustainability, CFOs find themselves in the driver’s seat of evaluating the financial impact of their company’s green initiatives. They have the tools and the expertise to dig into the numbers and understand both the financial and non-financial outcomes of their sustainability efforts.
“CFOs have got the tools and the expertise to dig into the numbers and understand both the financial and non-financial outcomes of their sustainability efforts.”
However, it is not just about crunching numbers; CFOs have the power to help reimagine their company’s approach to sustainability and chart a course toward a more sustainable future. They can also build efficient data infrastructure and rally cross-functional teams to tackle sustainability challenges head-on.
When it comes to communicating a company’s sustainability performance to stakeholders, CFOs’ unique insights into the convergence of sustainability and financial performance make them the ultimate ESG ambassadors.
Christian Ehl is a Partner at Stanton Chase Düsseldorf and the Global Practice Leader of Stanton Chase’s ESG Practice. He has 19 years of experience in executive search, leadership advisory, sustainability, and ESG.
He finished his studies in international business administration at the Accadis Business School. He also completed a separate degree from the University of Newcastle (UK). He speaks German and English fluently and has a good understanding of Spanish.
Cathy Logue has over 30 years of executive search and financial leadership experience and is a founding Managing Director of the Stanton Chase Toronto office..
As Global Leader of Stanton Chase’s CFO & Financial Executives Practice, Cathy is a trusted partner to many long-standing clients. She is also certified in Hogan Assessment.
She sits on the Board of the Association of Executive Search and Leadership Consultants (AESC) and previously served as Vice Chair on the Stanton Chase Board of Directors.
Prior to her career in executive search, Cathy obtained her Chartered Accountant designation, and was awarded the Fellow (FCPA, FCA) designation in 2017. In 2021, she was recognized by the WXN Top 100: Most Powerful Women in Canada for her efforts in advancing women in leadership.
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