This has been a critical year for sustainability and business. At the Rio+20 Corporate Sustainability Forum in June, more than 1,000 corporate leaders pushed for new regulations and measures to incentivize moves to a green economy. Pending European Union regulations are expected to make certain types of nonfinancial reporting, including environmental reporting, mandatory in the near future. And the International Integrated Reporting Council (IIRC) is putting the finishing touches on its first framework, which is expected to debut in 2013.
Sustainability has obviously arrived on many corporate agendas. And judging from the results of a new Deloitte Touche Tohmatsu Limited (DTTL) study of CFOs, it has also landed squarely on the CFO agenda. In fact, while sustainability may have taken a back seat to dealing with the global economic malaise of the last few years, it has now emerged as a finance priority not just because of regulations and the push for transparency—but because it has been demonstrated to be a valuable weapon in a CFO’s cost-cutting arsenal.
The 2012 Sustainability & the CFO Survey*, conducted by Verdantix on behalf of DTTL and its member firms, found that some 53% of the CFO participants say their involvement in sustainability issues has become more pronounced in the last year and another 61% expect their role to increase at least somewhat in the next two years. Their motivation is clear: 49% of the 250 CFOs surveyed—representing companies in 14 countries with an average of US$12 billion in revenue—see a strong link between sustainability performance and financial performance. And in this edition of CFO Insights, we discuss why sustainability has made such progress on the CFO agenda and outline how finance executives can extract even more value from their sustainability endeavors.
Behind the Green Gains
In a 2011 study conducted by DTTL of 208 CFOs, many CFOs had other priorities—or more accurately, imperatives, such as liquidity and sometimes even survival (see The Sustainability Imperative, CFO Insights, November 2011). And while there is no sole catalyst, there are several forces pushing sustainability to center stage.
For example, given the improved quality of solutions (think highly programmable energy-saving thermostats) and the visible success of early adopters (think Toyota and Johnson & Johnson), companies have the tools and the benchmarks for launching sustainability initiatives. At the same time, external forces are demanding companies and CFOs embrace sustainability. Rating agencies are requiring more information regarding firms’ sustainability practices; indexes such as the Dow Jones Sustainability Index and the FTSE4GOOD index seek to rank firms’ corporate responsibility standards; and stakeholders, including investors and employees, continue to clamor for more nonfinancial information.
The main driver, however, is economic. In an era of high cash balances and careful investing, CFOs have recognized the benefits of initiatives that can be done with little capital and payback periods of two to three years. And as they strive to maintain margins in a low-growth environment, they are pushing those savings even more: Some 56% of CFO survey respondents, for example, are planning investments in telepresence and video-conferencing equipment in the next two years; 55% plan to build energy efficient equipment; and 52% specifically cite plans to invest in data center efficiency equipment.
CFOs see further savings in taking a holistic view of sustainability. According to the survey, more than a third of companies have already implemented an organizational transformation in response to sustainability risks and another 22% plan to do so in the next two years. What that means is that companies are trying to develop solutions that will make their business much more resilient going forward. Water use offers many possibilities. One leading manufacturer, for example, is using less water in its finishing process in an effort to guard against climate change damaging cotton crops. And a major brewer seeking to reduce its water footprint has launched a water stewardship campaign to educate customers and employees in the process.
The implications for CFOs themselves are clear: According to the survey, CFO reporting authority for sustainability has increased from 17% last year to 26%, and in countries such as Australia (40%) Germany (32%), it is much higher. Moreover, 66% said they were “always” or “frequently” involved in driving execution of sustainability strategy in their organizations and another 65% are involved in forming the sustainability strategy. And given the opportunities sustainability offers for both cost savings and growth, the increased responsibilities offer a bridge between the CFO’s steward and strategist roles.
Risks, Stakes and Stakeholders
Where CFOs’ sustainability responsibilities will increase will obviously depend on industry and circumstances. But the survey raises some common questions CFOs should be asking at this juncture:
- Has my company fully leveraged sustainability initiatives for cost savings throughout the enterprise? At this point many companies have picked the low-hanging fruit sustainability offers, but savings can still be achieved with programmatic changes, such as a comprehensive energy management strategy. In addition, CFOs should ask if the tax implications of sustainability, such as incentives for green initiatives, have been fully explored.
- Is my company adequately prepared for the different environmental compliance scenarios that may play out in the coming months? CFOs are bracing for new rules and regulations on the compliance front, including the new EU disclosure rules and the recently implemented carbon tax in Australia. Some 74% plan to conduct a compliance risk assessment this year, and 68% say that compliance will have either a slight or significant impact on their financial management over the next two years. Given the uncertainty of new rules, particularly in the United States, CFOs would be wise to include scenario planning in those risk assessments.
- What can finance do to hedge against such risks as rises in commodity prices and shortages in valuable resources? Over the past few years, the prices of energy and commodities have negatively impacted corporate profits and many CFOs expect the volatility to continue. Some 71% name energy and resource management as either challenging or very challenging. And when asked to name the biggest risks to financial performance over the next two years, energy (22%) and commodity prices (20%) ranked highest on a scale of one to seven. What CFOs do to manage that volatility—through hedging, reducing use, technological solutions and so on—as well as to manage potential shortages, particularly concerning water, could protect against tremendous damage to a company’s income statement and balance sheet. (See “Ripple Effects: Why Water is a CFO Issue,” CFO Insights, August 2012.)
- Where do my company’s stakeholders stand on sustainability and are we meeting their expectations? Shareholder interest in corporate social responsibility and sustainability continues to increase. Some 78% of CFOs acknowledge that it is either “important” or “very important” to communicate the financial implications of sustainability to shareholders. Yet 32% said they have no plans to integrate data on energy, environmental or social issues into their financial reports, up from 20% last year. As the liaison to the board, CFOs must balance the push for additional transparency around nonfinancial metrics with the company’s ability to identify and measure those metrics and be prepared both internally and externally to defend how the company is accounting for and measuring sustainability risks.
- Is integrated reporting a viable option for my company? Some 2,000 sustainability reports that adhere to the Global Reporting Initiatives (GRI) guidelines have been produced to date. But in most of the world, except South Africa, integrated reporting is still a voluntary task. Whether more companies choose to disclose using GRI guidelines or adopt the upcoming IIRC framework remains to be seen. While 36% say they already integrate nonfinancial data, CFOs will have to decide if adhering to voluntary international standards is worth the time and effort of their finance departments.
Meeting the Sustainability Imperative
When you consider the amount of money being invested in sustainable business programs, it only makes sense that CFOs are taking on more responsibility in this area. In fact, according to Verdantix, the total spend on such programs by large companies (revenues of more than US$1 billion) in Australia, Canada, the U.K. and the U.S. will reach US$60 billion in 2013.
What those figures also give CFOs is the permission to integrate sustainability into their finance agendas. To do so successfully, however, requires the following actions:
- Gather good sustainability information. Only 12% of CFOs believe they have “excellent” sustainability information, while 37% rate their information “good.” Savvy CFOs should examine data sources, management information systems and reporting to key audiences to make sure the right analysis is being performed and conveyed to an increasingly well-informed array of audiences, both internal and external.
- Evaluate your resource use and the full array of solutions. Energy management seems to have become the normal course of business for many CFOs as fewer are naming it “challenging” or “very challenging” this year. Bringing a similar scrutiny to less well understood issues such as water and land management can also provide new opportunities and diminished risk. Similarly, while CFOs don’t have to become technology experts, understanding the full gamut of clean-tech solutions available to address resource problems can be a game changer and is probably one reason 26% of CFOs rated “investment in clean-tech products” as a “very important” initiative.
- Leverage the enthusiasm of your stakeholders. As companies transform based on sustainability initiatives, the changes will be felt throughout the organization. This year’s study shows that sustainability has gained quite a bit of traction among employees. In fact, 39% of CFOs believe it is “very important” to communicate about sustainability to employees, versus 23% in 2011.The substantive bump in perceived employee consciousness of sustainability is good news for CFOs, who can benefit from having a workforce that increasingly embraces the imperative as much as they do.
Today’s CFOs are charged with sustaining the enterprise as opposed to the environment. But viewing the CFO’s role through the lens of sustainability ensures that a company’s long-term economic viability coincides with a balanced view of the environmental impact.
A Look at CFOs’ Views on Sustainability Around the World
The DTTL study interviewed finance chiefs in 14 countries and found a world of difference. Some of the specific variances include:
- Australia. Thanks to a growing commitment to the GRI, Australian CFOs are becoming well versed in sustainability efforts. In fact in the last two years, the number of GRI reports in Australia has almost doubled. Little wonder that according to the survey, some 40% of CFOs are accountable to their boards for their company’s sustainability strategy; 40% are always involved in driving the execution of that strategy, while 30% are frequently involved; and in the last year 80% say their sustainability involvement has increased, at least slightly.
- China. It seems the official Chinese attitudes toward and commitment to sustainability may have already affected Chinese CFOs. For example, the current five-year plan calls for dramatic moves to reduce fossil energy consumption, promote low-carbon energy sources and invest in a sustainable future. That may explain why 54% of the Chinese respondents say their involvement in sustainability strategy has increased in the last year at least slightly, and another 54% expect their role to increase even more in the next two years. In last year’s survey, none saw themselves as “fully involved” in sustainability strategy and governance, and almost half expected this not to change in the next two years.
- Europe. In Europe, where the EU is readying new legislation that would require non-financial reporting by companies, respondents from France, Germany and the U.K. seem to be bracing for the changes. For example, in both France and Germany, some 48% of CFOs expect to see some increase in their sustainability-related responsibilities in the next two years (only 38% in the U.K.). Still, in the U.K., almost a third of CFOs say they have inadequate or nonexistent management information about sustainability-related business challenges, while the figure is 21% in France and just 4% in Germany. In Ireland CFOs are embracing sustainability in a bigger way than many of their global counterparts and are increasingly involved in the management, measurement and reporting of companies’ sustainability programs. In the second quarter, the Deloitte Ireland CFO survey—in conjunction with Business in the Community Ireland—looked at CFOs’ views on various aspects of sustainability. (See Deloitte Ireland CFO Survey Q2 2012: Sustainability and the CFO). Ninety-three percent of Irish CFOs believe there is a direct link between sustainability programs and business performance. Moreover, 58% of CFOs noted that it was extremely important or important for sustainability programs to be part of the CFO’s role, with a mere 6% of CFOs deeming it unimportant. As one respondent noted, “Sustainability is…simply a matter of common sense and good business.”
- Middle East. Despite the fact that the Middle East is one of the most water-short regions in the world, sustainability does not seem to be a top CFO priority at some companies. In fact, none of the CFOs report that they are accountable to the board for their company’s sustainability strategy and only 9% say that they are always involved in the execution of that strategy (27% are frequently involved). That doesn’t mean they aren’t affected, however. Some 72% of CFOs expect sustainability to impact capital raising at least slightly over the next two years, and another 63% expect it to affect financial reporting.
- South Africa. With the addition of Russia to the survey sample, South Africa now ranks second in the number of CFOs who say they are always involved in driving the execution of sustainability strategy (50%). But over the last year, 60% of South African CFOs have seen some increase in their sustainability activities, and 73% expect to see an even larger increase in the next two years. Driving the increase may be new rules for listed companies on the Johannesburg Stock Exchange that require integrated financial reports that detail environment impact.
- United States. In the U.S., where the outcome of the election could influence the direction of environmental regulations, 60% of CFOs expect to become either slightly or significantly more involved in sustainability strategy in the next two years. In the meantime, U.S. CFOs are bracing themselves for expected changes: 84% expect a slight or significant impact on compliance and almost half expect sustainability to affect their M&A activities. In addition, almost 30% rank commodity prices as a significant threat to their financial performance and a similar number name energy prices (scale of 1-7).