CFO: Key Player in Sustainability

For a long time in corporations, sustainability had been a soft issue – nice to highlight in the annual report but not thought to affect the bottom line. Not any more.

Now it’s considered, including by the Securities & Exchange Commission (SEC), to have direct impact on what capitalism is all about. And, that’s shareholder value.

During the 2011 proxy season, 40 percent of shareholder resolutions were related to concerns ranging from energy efficiency to carbon footprint. Therefore, it’s no surprise that the traditional role of the corporation’s chief financial officer has taken on key responsibilities for sustainability. Those include integrating and reporting on sustainability initiatives and outcomes in investor relations, external filings, compliance, risk management, and tax incentives.

Of course, this represents a major paradigm shift for the CFO function. Two recent accounting firm whitepapers – one by Ernst & Young, the other by Deloitte Touche Tohmatsu -- document not only that CFOs are embracing these trends, but why. More than 70 percent of CFOs surveyed agreed that sustainability is part of their core duties. The “Why Factors” list is long and growing.

At the top of the list is the cost of energy. It’s become volatile. No one anticipates a downward trajectory in price. Therefore, boosting efficiency for office operations, processing, supply chain management, and distribution has a major impact on profit. Of course, by law, corporations have to maximize shareholder value. That’s what the CFO helps oversee.

For some forms of traditional energy, such as petroleum, supply is also uncertain. It’s in the corporation’s, as well as the national self-interest to find alternates. The same applies to water in a growing number of regions. Both conservation and technology are part of that solution.

Then there are the risks, ranging from tornados to rising temperatures, associated with climate change. CFOs at companies which take on that kind of liability, be they insurance or utility, better quantify it. So must they at companies which take the hit from unusual weather patterns such as Hurricane Irene.

The possible harm to the environment from raw materials, processes, products and services negatively impacts sales, community relations, global goodwill, and the ability to find partners. Also, they can lead to class-action lawsuits. Too many companies, reported Deloitte, have a blind spot about merging with or acquiring organizations with poor sustainability track records. For so long, it just hasn’t been on the “due diligence” radar screen. However, sooner than later that could saddle them with lawsuits and bad public relations.

How companies are doing in these and other categories are tracked on 3000 Bloomberg terminals. They are also ranked in 100 other official ways such as the Dow Jones Sustainability, Carbon Disclosure, and FTSE4 Good Index Series Indexes. And, you better believe that institutional and individual investors are now paying attention to those metrics.

Given the importance of the CFO’s augmented role, experts have recommendations for what they should be doing. The most common are:

  • Be proactive about green initiatives 
  • Embed ways to report on everything related to sustainability in traditional functions. Those include internal controls, compliance, tax regulations, and performance indicators. 
  • In the spirit of transparency, CFOs need to brief often shareholders as well as other key constituencies such as the board of directors often about what’s improving and what isn’t, at least not yet. Also, anticipate their concerns. 
  • Have the sustainability mindset and approaches be linked seamlessly throughout the corporation. Usually organizations operate in silos or separate entities, with their own decision-making and implementation.
  • Create teams having the skills to speed-read developments which could become emerging issues and then parachute in with solutions. 

All this begins, of course, with the ability to monitor what kinds of energy and water supplies are being used, how much is consumed, and in what ways. Sophisticated but affordable web-based technology is available to do that. And, it should be Job No. 1.