Finance – the unexpected but crucial sustainability enabler
CFOs need to take on board their responsibility as strategic advisors. A clear majority of Swiss CFOs see the role of finance being involved in the implementation and execution of their company’s environmental, social and governance (ESG) strategy. This can be done by integrating the objectives into existing planning and reporting processes, by provisioning data and by breaking down overall strategy into relevant KPIs or metrics.
In recent years the role of CFOs has changed. Our survey from 2019 shows the expected top three areas of change for CFOs during the next 10 years: increased use of digitalisation & automation; wider strategic and advisory functions; and adoption of artificial intelligence. The current fast-changing environment and the need for real-time finance and data analytics shows how important these topics are. In many companies, CFOs are now taking on a greater strategic role and the finance function is more involved in business processes.
One area of strategic involvement is the corporate environmental, social and governance (ESG) strategy. Nowadays investors expect companies to deliver not only strong financial performance but also a positive social and environmental impact. Other stakeholders, such as consumers and regulators, take a similar view. Sustainability is increasingly seen as part of compliance. Its role is becoming ever more important. In the latest CFO survey Deloitte Switzerland asked how CFOs see the role of finance in the implementation and execution of their company’s ESG strategy.
Chart 1. The role of Finance in ESG strategy
More than a quarter of respondents work for firms without an ESG strategy. However, this varies with the size of the company and is clearly more common in smaller firms. If you look at companies with an annual turnover of more than 1 billion CHF, 96% have an ESG strategy.
There are different ways for the finance function to contribute to successful implementation and execution of an ESG strategy. The most often mentioned is “by integrating the objectives into existing planning and reporting processes”, followed by “provisioning data” and by “breaking down overall strategy into relevant KPIs or metrics”. Only 11% of respondents do not see any role for finance in ESG strategy. That low share is a positive finding. The results from last year’s survey show that ESG performance is now seen not as just a “nice to have” add-on, but as a factor that affects the cost of capital for many companies.
ESG’s impact on the cost of capital is very likely to increase
Already a year ago half of the Swiss CFOs surveyed expected their ESG performance to have a moderate or high impact on the cost of capital. Asked about the impact in three years’ time this share increases to 74%. The rise in the percentage of those considering it of high importance from 6% to 26% shows CFOs’ increased awareness that ESG will have a growing influence on their cost of capital. The respective European numbers are in a similar range.
Chart 2: Perceived effect of the company’s performance on ESG issues on the cost of capital
Finance departments have a key role to play
These findings show that the new role for finance should also include reporting of reliable non-financial information – externally as well as internally. To ensure high-quality reporting finance functions will need professionals with good knowledge of ESG topics, including the relevant laws, and data modelling capabilities. Businesses should take advantage of automation with the goal of carrying out real-time reporting without a lot of manual input. But the first task is to know what to report. According to the CFO survey in H1 2020 only 50% of CFOs have a good understanding of the ESG disclosures that matter most to their investors and lenders, and a third of CFOs agree that there is a gap between the ESG data they can provide and what is expected by the capital market. There is clearly potential for improvement here.
However, the Finance function’s responsibility and possibilities go far beyond external reporting. To achieve the desired targets, it is key to involve all stakeholders and departments to shape a corporate strategy in which financial and ESG-related goals reinforce one other. The finance function can play an important role, ensuring that there is both the will and the budget to implement the required initiatives and plans. Moreover, it can also reduce borrowing costs: there are sustainability-linked loans that allow companies to lower the interest rate they pay if they meet certain targets. High investor demand is another factor driving CFOs to put emphasis on ESG. According to the Forum for Sustainable and Responsible Investment one in three of the more than $50 trillion of assets under professional management is invested in ESG strategies in the US.
Where to start
- Achieve clarity on the broad range of stakeholders that will measure your company’s ESG performance
- Start the dialogue on the inter-relationship between ESG performance and financial health. The latter is a prerequisite for the first, and ESG performance is key to long-term financial health.
- Make sure your management reports reflect the company’s strategic objectives and the relevant KPIs are explained by underlying action-oriented drivers.