ESG IS A CHALLENGE WITH IMMENSE OPPORTUNITY - SUSIE CLEMENTS, HEIDRICK & STRUGGLES
ESG is becoming one of the biggest challenges firms are facing, and research shows that it’s CFOs who are bearing the brunt of the burden: Accenture’s 2021 survey ‘CFO Now: Breakthrough speed for breakout value’ found that 68% of respondents said that finance was taking responsibility for ESG performance within their firm.
The finding ties in with the results of a recent Heidrick & Struggles CFO survey, which revealed that more than half of the surveyed CFOs had taken on additional responsibilities since the start of the pandemic, with reporting taking a prominent role in the type of work driving the increase.
From this perspective, and particularly given the additional pressure of the pandemic, it may seem as if ESG is simply another set of tasks in an ever-growing pile. Furthermore, in a time when Chief Sustainability Officers are becoming a more familiar sight in the boardroom, some CFOs may feel that ESG does not need to be high on their agenda.
However, CFOs who choose to ignore ESG do so at their own peril. The financial risks around ESG issues are becoming some of the biggest issues companies are currently facing, and the risk of missing out on those ESG opportunities could be even greater.
“ESG compliance” has been a nebulous term to date, but things are beginning to improve. The main issue has been a lack of standardization in how to quantify the ESG impact of business activities, with a jumble of reporting frameworks from which to choose. In November, the IFRS Foundation used the occasion of the COP26 Summit to announce the formation of a new International Sustainability Standards Board, whose main role will be to create a set of standards designed to meet investors’ needs.
Legislators Step In
While the IFRS move is welcome news, other imperatives are at play as legislators also attempt to impose some order in the increasingly frenetic ESG disclosure discussion. The EU began the rollout of its Sustainable Finance Disclosure Regulation over the summer, while the US SEC is expected to roll out its own climate-reporting framework early in 2022. It seems that the initiative has overwhelming support from asset managers, too.
Currently, the compliance obligations are on financial firms, but investors are already voting with their feet regarding ESG. According to Bloomberg Intelligence, global ESG assets are set to pass the $53 trillion mark within the next three years, amounting to one-third of the total assets under management globally.
As such, CFOs and CEOs must, at a minimum, be prepared to justify financial decisions from an ESG perspective. However, this is only possible in a meaningful way if there’s a way to quantify the ESG impact of decisions and, therefore, it seems hardly surprising that ESG is finding its way to the top of the CFO agenda.
Beyond the compliance and investor relations risks of failing to address the ESG imperative, evidence shows that there are vast opportunities to gain a competitive edge by getting ahead of the game. But many firms are being slow to act.
Heidrick & Struggles’ recent report “Changing Climate in the Boardroom” surveyed C-suite respondents to find out more about how the ESG agenda is shaping attitudes in the boardroom. The survey showed that while 60% of respondents said their board was aligned on the importance of climate change and what to do about it, nearly half – 46% – said that their board had insufficient or no knowledge of climate change’s implications for the firm’s financial performance.
Yet, senior executives from Bank of America and Goldman Sachs have extolled the competitive advantages to be gained from firms that are prepared to go the extra mile when it comes to quantifying and reporting on ESG. ESG data is simply another source of information that can be used to quantify the financial outcome of strategic decisions. Therefore, if a company is considering a new product line, making a strategic acquisition of a smaller rival or divesting part of its real estate portfolio, the relative carbon footprint of each decision can provide an additional lens through which to assess the various options.
If further proof were needed, blue-chip firms are already demonstrating the results of taking an ESG-focused approach to operational and strategic decisions. Deloitte highlights how PepsiCo was able to realize over $375 million in cost savings by focusing on water saving. Another example is Estée Lauder, Company which became an employer of choice after gaining the accolade as Forbes #1 employer for women, thanks to its investment in responsible sourcing and social impact.
Along with a positive impact on revenue growth and profitability, Deloitte noted that 48% of survey respondents highlighted increased customer satisfaction as a result of a more ESG-focused business investment strategy.
The macro challenges of today’s business environment mean that CFOs already have their work cut out to balance competing priorities. But meeting the climate imperative isn’t simply a way to appease shareholders – it could be the difference between financial success and failure over the coming years. For that reason, CFOs cannot afford to become complacent.
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