CVO: How CFOs can drive value through ESG and sustainability

Value is fundamental to the management of performance in organisations and key to their future sustainability. As the role of the Chief Financial Officer (CFO) evolves and expands, so does the opportunity to add value in diverse areas of the organisation, including environmental, social and governance (ESG) matters and sustainability reporting. With the introduction of mandatory sustainability reporting, CFOs should be looking to not only meet the minimum disclosure requirements, but go beyond.

Building on the findings from the BDO and ACCA report ‘Chief Value Officer – The Important Evolution of the CFO’, we co-hosted a webinar with Max Van Biene from Edge Impact to discuss:

• IFRS S1 and S2 sustainability standards and the approach to implementation in Australia
• The key ESG and sustainability drivers CFOs should be thinking about
• How to approach sustainability reporting in a way that adds value, through a long-term lens
• The importance of alignment between the ESG values of an organisation, their employees and reporting.

Read on as we unpack these themes, with a focus on the capacity of CFOs to drive value and evolve their role in organisations. The webinar recording is available to view on our YouTube channel.

What is value in the context of sustainability?

The values attributed to sustainability most commonly involve environmental and climate-related factors, such as the reduction of an organisation's carbon footprint, supply chain energy optimisation and more. While current focus is concentrated on these environmental factors - with good reason – it’s important for organisations to recognise that sustainability encompasses a much broader range of reporting standards including modern slavery, gender workplace inequalities and other non-financial risks.

Considering this, here are four ways sustainability reporting and initiatives — and the role of a Chief Value Officer (CVO) — can add value:

1. Delivering cost savings: Well-known ESG components such as resource consumption reduction, the implementation of renewable energy and capital infrastructure upgrades, are widely accepted due to their capacity to yield short-term financial benefits. Sustainability reporting can deliver cost savings through regulatory compliance — particularly as reporting standards become mandatory, Australian organisations can now position themselves ahead of the curve through laying the foundations of best practice reporting
2. Reducing portfolio vulnerabilities: Sustainability reporting and analysis allows a company to properly understand their non-financial risks and opportunities, and to implement measures to reduce their impact. External, uncontrollable factors — for example, natural disasters, disease and changes in legislation — may increase the vulnerability of an organisation’s bottom line. ESG disclosures help companies understand the material implications of these non-financial risks and make governance adjustments accordingly
3. Increased access to capital: Investors want to know that a business has comprehensively addressed its non-financial risks and opportunities and planned accordingly. As such, reporting on ESG matters collaterally facilitates access to capital. Even if investors aren’t asking for sustainability-related reporting yet, it’s guaranteed they soon will be. Organisations that get on the front foot will be well placed when the inevitable questions or demands do come
4. Promoting innovation and collaboration: Sustainability reporting empowers teams across an organisation to collaborate in the production of products and services that align with social and environmental standards — yielding meaningful goods that also appeal to potential employees and potential clients or customers.

Each of these four areas work to support a business’s long-term financial resilience, providing CFOs with opportunities to increasingly adopt the role of CVO as they consider and quantify non-financial risks and opportunities, and how they impact the company’s bottom line.

Opportunities in sustainability to add value

The model of sustainability reporting being adopted will, in time, expand to the standardisation of reporting on ESG factors more broadly — encompassing biodiversity, workplace safety, and other less traditional factors. Put differently, sustainability has been adopted as a template for the way an organisation addresses – and then qualifies - non-financial risks and opportunities and their associated financial impacts.

In taking a holistic, widely encompassing approach to reporting, businesses can expect the following added value:

• ESG supports employee satisfaction: Implementing ESG measures are correlated with the acquisition and retention of staff members while also contributing to organisational culture
• ESG drives brand awareness in target markets: Given the rising prevalence of mindful consumerism and supply chain awareness, ESG measures appeal to potential clients and customers who consider the environmental and social impact of the goods and services they purchase
• ESG establishes a cohesive, purpose-driven vision: Further contributing to company culture and direction, a company can establish a unifying vision that extends beyond profit through the integration of ESG principles into its core values.

The nature of these benefits is largely recognised and accepted, which was reflected in the webinar’s audience poll. When asked what opportunities they see for their organisation in relation to sustainability, 68 per cent of respondents chose ‘good corporate citizenship’ as the primary opportunity, followed by ‘staff attraction and retention’, as well as ‘the capacity to win more work’. Notably, no respondents believed such initiatives are without benefit and opportunity.

How does finance play a part in driving value through sustainability reporting?

CFOs and finance teams are increasingly considering broader sustainability matters - beyond environmental and climate-related – to factor into reporting frameworks. Finance teams are encouraged to acquaint themselves with reporting frameworks which provide a standard for holistic, full-spectrum reporting – like the Global Reporting Initiative (GRI), for example. In doing so, financial professionals can familiarise themselves with what sustainability reporting will soon involve and how it will integrate with the business’s broader annual statement.

While sustainability reports have generally been released separately from an annual report, companies are starting to combine the two for the sake of enhanced transparency and a more comprehensive representation of their overall performance. They are also getting ahead of the curve, as doing so will soon become a matter of compliance – not just a ‘nice to have’.

The next step is starting an internal discussion regarding the strategic steps that are being — or could be — taken to address ESG-related risks and opportunities. CFOs and CVOs will play a central role in the inclusion of a company’s financial and non-financial risks and opportunities in annual reports, and increased prioritisation of ESG matters.

Considerations for smaller businesses: Get on the front foot

While mandatory reporting requirements are being implemented in the short term for the ‘bigger end of town’, it’s worth noting that smaller businesses will not be immune to the impacts of these requirements. Larger organisations will soon – if they aren’t already – begin pushing for suppliers to also start reporting. Scope 3 emissions reduction targets will drive these demands – with many already applying filters to their procurement guidelines to only use suppliers with reduction targets themselves.

However, even with limited resources, smaller organisations can obtain certifications to show that they meet sustainability procurement criteria. Finance teams and CFOs – as CVOs – have a critical role to play in direct resources to where they need to be focused. Smaller organisations should start engaging with their value chain to understand what’s important to their customers and focus resources there - without wasting effort or cost.

This article from our sustainability team explains what mandatory sustainability reporting means for small businesses.

To discover more about the role of - and opportunities for - finance teams and CFOs in adding value to their organisations, watch the recording of this webinar and our previous webinar with ACCA on the evolution of the CVO. Contact our Business Services team to learn about our holistic approach to helping your business succeed.