The role of finance in a company is traditionally focused on liquidity, funding, and risk management, but that role has expanded as businesses continue to evolve. Finance has moved into a more collaborative and advisory role in many companies, and often intersects with sales, procurement, technology and legal. Finance leadership must, in turn, be willing to collaborate across the business to drive objectives, especially when it comes to environmental, social and governance (ESG) strategy.
Investors and rating agencies are demanding increased ESG reporting. Investors believe that companies with strong ESG programs perform better and are more stable in the long-term. Poor ESG practices pose environmental, legal, and reputational risks that can damage a company’s bottom line. A company’s ability to secure funding and win over investors has become tied to their ability to operate responsibly and sustainably. Finance is critical in weaving ESG initiatives into a company’s strategy and operations, and chief financial officers (CFOs) will need to lead the charge. Here are three ways that finance leadership can help drive your company’s ESG strategy.
Businesses need to evaluate the maturity of their company’s ESG disclosure process and identify opportunities for reporting improvements. Finance leaders will need to rise to the occasion as ESG is increasingly tied to a company’s bottom line.
When it comes to collecting data and ensuring that it meets quality standards, CFOs and the finance function are the most mature in managing corporate reporting. Financial disclosures are already regulated and scrutinized, and companies should approach ESG reporting with similar rigor to financial reporting. CFOs can drive the adoption of technology solutions that can quickly consolidate information to get quicker insights, provide benchmarking against competitors, and visualize their businesses’ current state against prominent ESG disclosure frameworks.
With changing stakeholder expectations, corporate reporting must demonstrate that a company’s purpose is not all talk. The company’s actions need to benefit both stakeholders and shareholders, and reporting needs to demonstrate how financial objectives and ESG strategy intersect to drive results. Understanding how ESG initiatives help drive a business’ purpose will help a company’s leaders to better position their company for a more sustainable tomorrow.
LOWERING BORROWING COSTS AND IMPROVING BUSINESS OUTCOMES
A CFO’s ability to keep the company’s ESG goals on track and accurately report them can have a significant impact on the company’s financial outlook. It is a growing responsibility of today’s CFOs to demand purchasing discounts related to their company’s ESG efforts and to do business with other ESG-conscious organizations. CFOs and the finance function are a company’s hub for purchasing opportunity and insightful metrics. Finance leadership is instrumental in demonstrating to potential partners and lenders that they should be doing business with your organization.
One significant area of impact is the rise of financial products that link to ESG performance. A corporate borrower’s interest rate may rise or fall depending on whether the company meets sustainability targets that have been agreed upon with the lender. To that end, loans can help companies link their financing terms to their ability to generate positive outcomes.
Embedding ESG practices into the company strategy does more than lower the cost of capital. In a recent survey conducted by Deloitte Global and Forbes Insights on the impact of sustainability efforts of 350 executives, more than half of respondents indicated a positive impact on revenue growth and overall company profitability. Beyond positive financial implications, 48 percent of respondents indicated increased customer satisfaction, while 38 percent indicated that embracing strong ESG values enhanced their ability to attract and retain talent. By driving ESG accountability, the finance function is driving positive outcomes across the business.
OWNING THE ESG ROADMAP
Today, the most effective CFOs must be able to acquire and interpret an immense amount of data and use it to influence operational decision-making and strategy. Finance needs to be embedded throughout the business, providing decision support to key functions such as operations, commercial, manufacturing, and procurement. To that end, CFOs that have visibility into every area of the business are well-positioned to drive a company’s ESG strategy.
A company’s entire leadership team is ultimately responsible for the success of its ESG strategy, and every function has a role to play. The role of finance and of the CFO is that of a quarterback, calling the company’s ESG “plays.” When putting together an ESG roadmap, the CFO can advise on the financial viability of each part of the ESG strategy. By working with HR, operations and procurement, the CFO can ensure each part of the strategy is on-track. And through continuous analysis and reporting, finance can advise the rest of the business on where and how to improve to meet goals.
As the importance of ESG grows, so will the role of the CFO and the finance function. The role of the CFO is becoming more dynamic, and they stand at the intersection of profit and purpose. By prioritizing ESG initiatives, finance has the opportunity to help create a better tomorrow, not only for their company but for the world in which it operates.