ESG in the eyes of a CFO

The role of Chief Finance Officers (CFOs) has evolved over time and has grown beyond the traditional financial duties of tracking cash flow, financial planning, analysing a company's financial strengths and weaknesses, and proposing corrective actions. Environmental, Social and Governance (ESG) represents non-financial factors to evaluate companies' sustainability and CFOs are now presented with both immense responsibilities and great opportunities to prepare their organizations for increased scrutiny on performance indicators from investors, lenders, customers, regulators, other stakeholders, and the public.

Today’s CFOs are expected to play four diverse and challenging roles of steward, operator, strategist, and catalyst. These varied roles make a CFO’s job more complex than ever before in the advent of greater emphasis on ESG considering recent events, for example, the 2021 United Nations Climate Change Conference, also known as COP26, that was held in Scotland recently.

Firstly, as a strategist, the CFO sets strategic goals, makes decisions, derives finance strategy, and helps to shape overall strategy and direction of an organisation. Given the increased stakeholder interest, sustainability is becoming a key criterion for strategic decisions in the boardroom. We are seeing a shift in the CFO role around the world as a result, encompassing a broader mandate through increased involvement in sustainability strategies and investments. The CFO will play a critical role in ensuring that both short term and long-term investments made by organizations enhance sustainability and reduce climate risk. Using their financial skills and financial analysis, CFOs can help quantify the financial value that is created with investments in sustainability and resolve potential conflicts that come from embedding sustainability into the overall corporate strategy.

Secondly, as a catalyst, CFOs implement strategy and steer operations by stimulating and driving a timely transition, not only within the Finance function, but also across the entire enterprise. Finance executives can promote the transition to sustainability by rethinking their company’s underlying performance model through new accounting frameworks, for example., ensuring that these non-financial KPIs become a central pillar of the incentive system, CFOs can create more drive towards sustainability within the organization.

Thirdly, as a steward, it is the CFO’s job to manage compliance and control systems. Finance departments have a key role to play in making sure that the sustainability information provided to external stakeholders is relevant, compliant and accurate. It is essential to develop a good understanding of the most pressing ESG issues and quantify their impact on long-term performance. By expanding the process of risk identification, CFOs can make sure they address and measure sustainability related risks.

Finally, as an operator, the CFO plays a role in ensuring the skills, quality, efficiency, and effectiveness of the finance function are sound. Demands for more reliable sustainability information are increasing among stakeholders. Finance departments have a key role to play in ensuring companies can report non-financial information. In this sense, the CFO’s overview of both financial and non-financial performance is unique. With quality financial and non-financial insights, Finance departments are able to reliably support execution of a sustainability strategy ensuring that their organizations are responsive to emerging ESG needs.

It is expected that as the conversations on sustainability of operations of various organisations to accomplish overall positive climate action continue, now is the time for Finance departments and indeed the CFOs to kickstart transformation, guiding the enterprise towards sustainability and making sure it stays on track.