Weather extremes weren’t the only records shattered this past year. As climate-related challenges grow, so do investors’ demands that companies set targets to reduce their emissions to mitigate the damage.
As we look back on 2022, we’re quick to note the growth of ESG considerations in organizations’ financials. This year’s proxy season — when shareholders review financials and vote on issues — included a record number of ESG-related proposals from the largest U.S. companies.
The heightened focus on ESG regulation is flooding finance teams with new reporting demands. The change inevitably carries a shift in expectations for CFOs. Fortunately, this shift can be a positive one for companies that embrace new ways to track and recoup revenue through ESG-related initiatives.
The Changing Role of CFOs
Traditionally, CFOs have been tasked with making decisions that maximize the financial return on well-understood and easily audited transactions, like accounting and financial reporting.
It’s no small ask for finance teams to start tracking the social and environmental impact of these transactions — let alone use that information to make strategic financial decisions. Doing so requires a shift in mindset and exposure to new ESG concepts for CFOs as they mine new data sets.
However, the shift is a critical one. As noted by Gary Simon, Chief Executive and Leader of FSN’s Modern Finance Forum: “Understanding how ESG activities impact the bottom line is critical to creating ESG reports that attract investors, impress financial institutions, and appease regulators.”
The SEC’s proposed climate rules have put wind in the sails of this trend. In many organizations, ESG and Sustainability functions are already shifting to report to the CFO.
Reconsidering the Cost of Doing Business
Fortunately for finance teams, sustainability isn’t just another cost center to manage. With new ESG requirements come new opportunities for cost savings and, ultimately, a path to tremendous success.
To help companies get there, NYU Stern Center for Sustainable Business has developed a Return on Sustainability Investment (ROSI) methodology to aid in identifying and monetizing sustainability strategies.
One automotive company that the Stern Center researched realized $88 million yearly in savings by reducing its VOC emissions. A pharmaceutical company recouped nearly 25% more revenue for a non-exclusive drug by implementing green chemistry principles that also lowered production costs.
Four Ways to Engage Your CFO on ESG
While it’s clear that corporate financials are increasingly interdependent on a solid sustainability strategy, most finance teams are still getting on board. Sustainability leaders can accelerate the transition in the following four ways:
1. Be a Good Data Steward
Evaluating the return on a sustainability investment is complicated. ESG benefits can be hard to quantify and accounting systems are often ad-hoc.
Fortunately, newer technologies and platforms can help teams track waste initiatives and emissions data and maintain continuity year after year. Make it easier for CFOs to translate and monetize sustainability by ensuring your data collection methods are comprehensive, consistent, and accurate.
2. Learn the Lingo
All too often, finance and sustainability teams speak right past each other. (It doesn’t help that they use different terms and reporting methodologies to communicate progress to leaders and shareholders!)
Sustainability leaders can bridge the gap by using common financial principles like return on investment (ROI) and earnings before interest and taxes (EBIT) to demonstrate the organizational benefit and economic value of sustainability initiatives.
3. Get Proactive
As noted earlier, cutting waste can yield huge returns for businesses (according to the Stern Center, the missed potential for large companies is in the billions). Proactive risk management can circumvent other expenses altogether.
This year served as an example of the financial cost of heavy reliance on fossil fuels. Companies like Target, Tractor Supply, and Monster Beverage all felt the hit to their bottom lines when gas prices soared to record levels earlier this year. Shoring up inefficiencies and financial risks before they become a problem can avoid both anticipated and unanticipated future setbacks.
4. Get Strategic
Applying a sustainability lens to core business strategy empowers companies to reconsider their assumptions about market opportunities and sunk and future costs. While this certainly includes prioritizing greener strategies for social and environmental reasons, it also presents a massive opportunity to reach new customers, cut costs, and increase profits.
Involve finance and strategy teams in scenario planning around market trends and risks. Evaluate ESG risks, in particular, based on their likelihood to occur and the scale of the impact on the company. Collaboration is a meaningful way to get CFO and sustainability leaders to help each other see opportunities and risks from a new perspective.
Finance and Sustainability Go Hand-in-Hand
Sustainably-minded companies are forward-looking companies, which means they are more likely to gain an edge over the competition. Bringing finance teams on board is a critical way to gain the buy-in to advance your most impactful initiatives.
Collaboration is just as crucial for sustainability professionals. By working in lockstep with finance teams, you’re more likely to efficiently and effectively target the initiatives that will deliver a big impact and a big return.
Do you need help engaging a CFO on ESG-related issues? We’re happy to help. Book a demo with our team and we’ll show you how investing in carbon software can mean a big return on your investment.
