Recent trends in corporate sustainability are changing the CFO’s role in the three critical areas of investor relations, external reporting and financial risk management, according to an Ernst & Young report.
The report says that while sustainability issues have traditionally fallen outside the jurisdiction of the chief financial officer, job silos are crumbling as investors, customers and other stakeholders increasingly evaluate companies on their “triple bottom line” (see illustration, above). Increasingly, CFOs are getting involved in the measurement, management and reporting of companies’ environmental activities.
CFOs must now help communicate a robust sustainability story through the company’s investor relations, Ernst & Young says. “Work with your sustainability team to develop a sustainability story for your organization. If current trends continue, the CFO could be the one telling it,” the consultancy reports.
The report argues that institutional investors are starting to view financial and non-financial performance as two sides of the same coin, while credit-rating agencies such as Moody’s and Standard & Poor’s now want to know about companies’ sustainability practices. Then there are the more than 100 ratings, rankings and indices focused specifically on sustainability.
What’s more, shareholders are speaking out strongly on these issues. In the 2011 proxy season, about 40 percent of all shareholder proposals that were voted on focused on social/environmental issues — the largest category of all shareholder resolutions, Ernst & Young said. And while less than 3 percent of social/environmental resolutions reached the crucial support threshold of 30 percent of votes cast in 2005, this year 31.6 percent of resolutions hit that level.
The report said that customers increasingly want to know that a company’s distribution model has a low carbon footprint; that its procurement policies take “fair trade” issues into account; and that its supply chain uses alternative energy sources. One of the best ways to communicate these practices is through sustainability reports, and some believe that integrated sustainability and financial reporting could be the norm before the end of the decade, Ernst & Young said.
One key asset that CFOs bring to reporting is their vast experience with third-party assurance providers, the report said. “They understand both the rigors and the benefits of an external audit, and are familiar with the systems and controls used in nonfinancial reporting. This experience can greatly benefit corporate sustainability teams in selecting and working with a third-party assurance provider,” E&Y said.
Sustainability has also found its way into controllership and financial risk management, Ernst & Young said, most notably in SEC guidance, which says that a company’s CEO and CFO must certify that the company has installed “controls and procedures” allowing it to discharge its climate change disclosure responsibilities. Sustainability activities must now be treated like financial activities, with a controller to monitor and account for them, the report said.
But,“as yet, there is no dedicated sustainability reporting software comprehensive enough to provide the necessary level of control,” the report noted. “For that reason, among others, CFOs will have to pay closer attention to the sustainability-related aspects of company operations.”
The report listed five actions CFOs can take now to enhance corporate value through sustainability:
- Actively pursue a sustainability and reporting program
- Ensure that those responsible for sustainability matters do not operate in isolation from the rest of the enterprise — especially the finance function
- Enhance dialogue with shareholders and improve disclosure in key areas, particularly those related to social and environmental issues
- Ensure that directors’ skills are relevant to the chief areas of stakeholder concern, including risk management tied to social and environmental matters
- Consider using nontraditional performance metrics, including those related to environmental/sustainability issues. Doing so could help align compensation with risk, Ernst & Young said.