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CFO Dinner 2022
Brave CFOs Turn Sustainability into a Credible Story
What role should the CFO play in the sustainability transition and how does the financial director help ensure that sustainability is embedded at the heart of the organization? This was the central question of Deloitte's CFO dinner in the Nieuwe Kerk in Amsterdam. In any case, waiting for EU regulations is not an option. “Start telling your own story now, measure performance and focus on value creation. One day you will be rewarded for the courage you have shown.”
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- A Balancing Act
- A Changing Role
- The CFO as a Storyteller
- Scope 3 is a Team Sport
- Assessing ESG Performance is a Must
From 2024 or 2025 onwards, large companies will have to report on the environmental and social impact of their activities. This data will be just as important as the financial KPIs. How can CFOs prepare for that now? Many CFOs are struggling to get a grasp of what their new responsibilities will involve. Some 50 financial directors attended the Deloitte’s CFO dinner, where – in line with the sustainability theme –vegetarian dishes and locally sourced products were served.
Companies are capable of making radical changes if necessary. Journalist and discussion leader Jeroen Smit said the war in Ukraine is proof of that. “Many companies pulled out immediately after Russia invaded the country. We want to defend democratic freedom at all costs.” The climate crisis is more complicated, according to Smit. “Not only does it involve an incredible amount of money – it is a crisis in slow motion. The most recent IPCC report, however, is relentless. If we do not drastically reduce greenhouse gas emissions soon, the earth will continue to warm up and we will start noticing the serious implications of climate change.”
The ball is in the court of today's leaders. Smit: “Directors of large companies have a responsibility to make the world a better place. Brussels has also demanded this. The Corporate Sustainability Reporting Directive (CSRD), which imposes new reporting requirements on financial departments, has now been adopted. Since the CSRD is still being worked out in more detail, it is difficult for companies to make policy. Dual materiality is key.” “Materiality is a standard that establishes whether a sustainable goal is significant for a company. It helps companies establish their environmental, social and governance (ESG) risks and opportunities. “Both the climate risks for a company and the impact of that company on the climate are referred to as ‘material’.”
A Balancing Act
The new reporting requirements are a game changer, said Rianne Jans, CFO at Deloitte. “The impact will be at least as great as in 2005 when IFRS, the international financial reporting standard, was introduced.” According to Jans, the first few years will be a balancing act for CFOs. “The business will continue, and so the CFO will need to focus on both the short-term and long-term results. At the same time, directors need to prepare for the implementation of non-financial reporting. The guidelines are still being developed, but companies must already act now.”
The CFO does not only have an executive role. While it is important to ensure that systems, processes and teams are ready on time, the CFO mainly has a strategic role. Together with fellow executives, the CFO is responsible for developing a vision of the future and converting that vision into a concrete plan. According to Jans, the financial director should serve as a catalyst. “The financial director is able to unite all the departments within a company, in order to make sustainability goals a success and make performance and progress transparent.” Jans gave a glimpse of how things work in the Deloitte boardroom: “We have animated discussions about what is feasible, not only for our CO2 footprint, but also in terms of diversity. Analyses help us look five or ten years ahead. I believe that some goals affect us at the core of the organization.”
Hans Honig, Deloitte’s CEO, said every company needs firm ambitions. “Within our own organization – scope 1– it is not so difficult to realize sustainable goals. The same goes for our procurement: Scope 2. Scope 3, the rest of the chain, is more difficult. At Deloitte, we critically reflect on this issue. It is a very complex one. After all, helping less well-performing companies transform into more sustainable organizations is part of our strategy.”
A Changing Role
The CFOs were presented with a number of statements about their changing role. Earlier that day, these had been discussed by a number of invited participants, facilitated by Vanessa Otto-Mentz, Risk & Advisory Partner who works on sustainability at Deloitte. “It soon became clear that there is a great need to exchange views with colleagues.”
The CFO is responsible for the new sustainability story
Everyone agreed. Otto-Mentz added that the CFO could be more of a catalyst for the new sustainability strategy. “CFOs do not yet focus enough on non-financial data. Precisely because companies invest a lot of money in sustainability projects, they must be assured that the KPIs or goals have been properly calculated. As a company, you do not want to find out two or three years down the line that they were not realistic after all.”
Sustainability must be integrated into the strategy
The participants were divided on this: Some wanted to be in control straight away, while others were reluctant. Otto-Mentz understood this: “Sustainability professionals and finance staff speak different languages. The business community will have to bring the two roles closer together. The CFO also needs to be given control over non-financial data. This way, the CFO can serve as a catalyst.”
Statement 3: Do not wait for EU regulations
Most CFOs agreed. “Brave,” thought Otto-Mentz. After all, companies that want to take steps now face an unlevel playing field. They have to compete with companies that are less ambitious where sustainability is concerned. However, according to Otto-Mentz, it is the only way. “Waiting for the EU regulations to be worked out and only establishing a sustainability strategy in two or three years' time would also be risky and potentially much more expensive.”
Link 50% of personal bonuses to sustainability goals
About 25% of the invited participants said they would dare to risk this. Otto-Mentz partly agreed: “Non-financial data are still hard to compare.” But she also had a warning: “In the Dutch business world, bonuses are still rarely linked to the Paris objectives. However, social opinion is changing rapidly. Be alert when increasing numbers of fellow directors decide to link bonuses to sustainability performance in the near future. Before you know it, you will find yourself in negative articles in the newspapers.”
It is realistic to require reasonable assurance on sustainability reporting by 2030
Everyone agreed. Otto-Mentz found it very brave. The CSRD now calls for an audit requirement with a limited level of assurance on sustainability information. “The move to require reasonable assurance could bring nasty surprises,” Otto-Mentz argued. “After all, 24 hours before the deadline, a definition may prove to be incorrect or the correct figures may not yet be available. The CFO has little control over this.”
The CFO as a Storyteller
The highlight of the evening was the presentation by Geraldine Matchett, CFO and Co-CEO of DSM. Not only the content of her speech was impressive – also the very fact she made an appearance. Due to the hectic nature of the war in Ukraine, the top female professional at DSM could not attend the Amsterdam event in person. A creative solution was devised: She appeared on stage from London as a hologram through a live video link.
Matchett explained DSM’s journey made from a chemical company to a company in sustainable food ingredients for humans and animals. She also shared her thoughts and ideas about the role of the CFO during this transition phase. “The CFO in particular is able to tell sustainability as a credible story, since the financial director can substantiate this story with figures and realistic forecasts.
Matchett, who has been Co-CEO of DSM with Dimitri de Vreeze since 2020, turned out to be a great storyteller herself. She passionately explained how DSM underwent its own transformation. It was her predecessor, Feike Sijbesma, who chose a more sustainable business model. His philosophy was: “How can you, as a company, say you are successful in a world that is failing?” Under Sijbesma's leadership, DSM focused on products through which the company can have an impact in the areas of nutrition, climate, and sustainability. DSM wants to tackle problems in food production, such as income disparity and malnutrition among 800 million people, as well as deforestation and astronomical CO2 emissions.
In 2015, DSM told stakeholders that it would be committed to economic success and social value creation from then on. In other words: Doing well by doing good. “At the time, it was not a given that both ambitions can go hand in hand. However, we believed in it even back then. Sustainability was integrated into the strategy. It required courage.”
Scope 3 is a Team Sport
According to Matchett, there are four key aspects of transformation into a purpose-driven company.
- One of the most important aspects is measuring KPIs. Every company could start doing this straight away in order to demonstrate the trend towards a more sustainable business model in the future. “At DSM, financial goals are now just as important as achieving non-financial goals. When we introduced them, the financial world responded in despair. It was going to be disastrous. Ten years later, things had turned out the opposite: We were still just as profitable and had made it clear that we could make a social impact through our business. It is extremely important that the figures are justified with reasonable assurance. That is the only way you can be credible.”
- But how do companies set out on that more sustainable course? Matchett’s advice was to create the right mindset. “By questioning how companies think they can be successful in a failing world, former executive Feike Sijbesma looked at DSM from a different perspective. That resulted in a new realization: Directors of large companies are able to make a positive impact by changing their strategy. Directors have a huge responsibility, and they should not shy away from that responsibility.”
- In doing so, companies need to explore their core meaning. How can they create value for all stakeholders, including investors, employees, clients, shareholders and society itself? Matchett: “Nowadays, everything DSM does is motivated by how we can make a positive impact through our products and method of doing business. Especially in the innovative phase, we are constantly asking ourselves about the environmental impact of new products.”
- The search for collaboration partners is crucial to the sustainability transition, according to the top female professional at DSM. “Company directors cannot change the system on their own. Scope 3 is a team sport.” DSM sought to collaborate with companies that are also motivated to improve and increase the sustainability of the food chain. How do we produce healthier food with a smaller environmental impact? One such collaboration is with dairy manufacturer FrieslandCampina. “DSM developed the feed additive Bovaer, which enables farmers to reduce methane emissions from cows by about 30%. Thanks to collaboration with FrieslandCampina, around 200 Dutch dairy farms are going to start using the more sustainable feed. Production will be scaled up in line with the results.”
Assessing ESG Performance is a Must
The question is: How can CFOs help shape the transition to a more sustainable business? Matchett made a number of recommendations.
- Evaluate how ESG criteria are already integrated into the strategy and to what extent bonuses are already linked to sustainability performance. This sends a strong message to both stakeholders and young talented individuals.
- Switch to internal CO2 pricing. Many companies find it difficult to make truly sustainable decisions that affect their CO2 reduction targets. Sustainable solutions may become interesting by giving CO2 emissions an economic value and including them in investment decisions.
- Create the right mindset among colleagues involved in the new reporting requirements. Standards resulting from the EU taxonomy or the CSRD are still unclear. However, the CFO can already create awareness for the new assessing and reporting method. Ultimately, non-financial data must also be accounted for. Get a head start on that.
The top female professional at DSM closed her presentation with the message that the CFO is the ideal figure to make sustainability credible. “The financial director can substantiate whether ambitious sustainability targets are feasible. They are in the best position to convince stakeholders,” said Matchett. “Having non-financial KPIs certified by an accounting firm helps the company demonstrate its sustainability goals.” Companies demonstrate urgency and importance by linking bonuses to sustainability goals. The CFO, in their storytelling role, shows that the intended sustainability goals are not simply a marketing story. “People often still think that sustainability and profitability do not go hand in hand. But it is not a trade-off.”
The Driving Force
A lot will depend on the CFO and their financial department over the coming period. Sitting back and waiting for the EU regulations to be worked out is not an option. Establishing a sustainability strategy in two or three years’ time would be too risky. Many a boardroom discusses achievable goals, as the CFO dinner showed. Sustainability ambitions will affect many organizations at their core, which was the case at DSM. It is up to the CFO to stand up and become the driving force. As Deloitte’s Vanessa Otto-Mentz put it: “Start telling your own story now, measure performance and focus on value creation. That takes courage, but one day you will be rewarded for it.”