The present epoch has bestowed an all-embracing ethical imperative on businesses: sustainability. Though corporate financial officers (CFOs) increasingly rank sustainability high on their agendas, this commitment paradoxically appears most susceptible to the merciless blade of budget cuts. This article aims to unpack this puzzling dichotomy, shedding light on the issue’s root causes and attempting to forward potential solutions.
“As the guardians of an organisation’s financial integrity and performance, CFOs navigate an increasingly complex landscape. They are continuously caught in the crosshairs of maintaining fiscal health and facilitating sustainable development,” comments Mike Medley, a seasoned finance executive.
We live in a time of heightened social consciousness, with a surge in demand for businesses to contribute to environmental preservation. “Businesses are not just about making money anymore. They are expected to be vital in creating a sustainable and equitable world.”
However, amidst this evolution, a paradox has arisen. While sustainability is climbing the priority ladder, it’s also the area most vulnerable to budget cuts, especially in challenging economic times. How can we reconcile this contradiction?
The Sustainability Paradox: Root Causes
The primary reason for this dichotomy lies in the inherent short-termism of our financial systems. Profits and returns are expected promptly, often within the quarterly reporting cycle. “Sustainability efforts often require long-term investment and patience to see the payoff. This investment can sometimes seem at odds with the immediate profit-maximising goal of businesses,” explains Paul Chaplin
Furthermore, sustainability efforts are often considered ancillary rather than central to an organisation’s operations. This perspective is rooted in a somewhat outdated model of business that prizes profit above all else, creating a blind spot for the potentially symbiotic relationship between sustainability and profitability.
The second contributing factor is a lack of standardised metrics and frameworks to quantify sustainability initiatives’ return on investment (ROI). Without solid, measurable outcomes, it is hard to convince stakeholders of the necessity of these initiatives. “If you can’t measure it, you can’t manage it,” says renowned sustainability consultant Catarina Esteves.
An Argument for Sustained Investment in Sustainability
Challenging these barriers, however, are CFOs who recognise that sustainability is far from a gratuitous endeavour. A growing body of evidence suggests that long-term financial success and sustainability are inextricably linked.
A 2020 study by the University of Oxford and Arabesque Partners found that firms with robust sustainability practices demonstrated better operational performance, which ultimately translates into cash flows. “Sustainability is not just about doing good; it’s about doing well,” echoes Niamh O’Sullivan, a CFA co-founder of Nuveen’s responsible investing platform.
Pioneering CFOs realise that forward-thinking investors increasingly focus on companies’ environmental, social, and governance (ESG) performance. As Saker Nusseibeh, Chief Executive of the International Business of Federated Hermes, asserts, “Investors are demanding transparency and progress on sustainability matters more than ever. CFOs that fail to recognise this run the risk of losing investor interest.”
Moreover, focusing on sustainability can positively impact a company’s brand, driving customer loyalty and employee engagement. As famed management consultant Peter Drucker once said, “Culture eats strategy for breakfast.” Employees and customers want to associate with brands that reflect their values, and sustainability is increasingly one of them.
The Road Ahead: A Call to Action for CFOs
There’s a dire need for CFOs to lead the charge in integrating sustainability into the core of business strategy. Firstly, this involves recognising sustainability not as a discretionary expense but as an essential investment. This reframing can significantly influence decisions regarding budget allocation.
Secondly, CFOs should advocate for the development of standardised sustainability metrics. By capturing and communicating the tangible benefits of these initiatives, they can forge a stronger case for sustained investment in sustainability.
The successful integration of sustainability within business operations will require a shift in perspective from short-term gains to long-term value creation. As O’Sullivan aptly puts it, “The mandate for CFOs has evolved. They must juggle the necessities of the present while laying the groundwork for a sustainable future.”
Despite the paradox, the future role of CFOs will undoubtedly be underpinned by sustainability. In the face of cuts, it’s crucial to remember the timeless adage: ‘Penny wise, pound foolish.’ Regarding sustainability, short-term savings could cost dearly in the long run for individual businesses and our shared global future.
Can legislation help?
To shift the current sustainability paradox and support CFOs in prioritising sustainable practices, legislatures can consider the following action points:
Legislate for Long-term Reporting: Consider modifying reporting requirements to emphasise long-term performance over short-term gains. This could include reporting on sustainability efforts and their impact on long-term company growth.
Standardise Sustainability Metrics: Encourage developing and adopting standardised metrics for evaluating and reporting on sustainability initiatives. This will provide a solid framework for businesses to quantify their return on investment in sustainability.
Tax Incentives: Offer tax incentives or other financial benefits to businesses that are committed to sustainable practices. This would serve as a tangible reward for businesses prioritising sustainability.
Increase Transparency: Enact laws that require businesses to be transparent about their sustainability initiatives, including their impact and their contribution to overall business strategy.
Promote Sustainable Investment: Encourage investment in sustainable businesses by offering benefits to investors who prioritise businesses with a strong commitment to sustainability.
Educational Programmes: Support educational programmes that increase knowledge and understanding of sustainability within the business community. These could range from short courses to more in-depth qualifications in sustainable business practices.
Green Bonds: Support the issuance of ‘green bonds’, which are used to fund projects with positive environmental and/or climate benefits. This can offer a financial solution for sustainability projects that require significant capital investment.
Support Collaboration: Promote collaboration between businesses, non-profit organisations, and government bodies on sustainability initiatives. This could be facilitated through funding, networking events, or legislation that encourages collaboration.
Regulate Unsustainable Practices: Implement stricter regulations and penalties for businesses that engage in unsustainable practices. This might include higher taxes or fines for actions that significantly negatively impact the environment.
Promote Sustainable Procurement: Encourage businesses to integrate sustainability into their procurement processes by offering guidance, support and even incentives.
Typical Priorities for CFOs in their day to day life
1 Financial Stewardship: Managing and overseeing all fiscal and fiduciary responsibilities for the organization, in conjunction with the executive team and the board of directors.
2 Financial Planning and Strategy: Developing financial strategies to support the company’s growth plans. This includes forecasting, budgeting, and long-term financial planning.
3 Financial Reporting:
Ensuring timely and accurate financial reporting, in compliance with all applicable laws and regulations.
4 Risk Management: Identifying and managing financial risks, implementing effective risk management strategies.
5 Investment and Capital Strategy: Overseeing investment activities, managing investor relations, and making decisions about capital spending and financing.
6 Cost Control and Efficiency: Identifying opportunities for cost savings and efficiency improvements.
7 Cash Flow Management: Ensuring the company has sufficient cash flow to meet its needs. This includes managing receivables, payables, and working capital.
8 Audit Coordination: Coordinating and liaising with internal and external auditors.
9 Stakeholder Communication: Communicating financial performance and forecasts to stakeholders, including investors, board members, and employees.
10 Sustainability Integration: Championing and integrating sustainability practices into business strategy and financial decision-making.
How Sustainability Provides Competitive Advantage
| How Sustainability Provides Competitive Advantage | |
|---|---|
| 1 | Brand Reputation and Trust: Companies that demonstrate a strong commitment to sustainability can improve their brand image, earning the trust of consumers, employees, and stakeholders. This can help differentiate them from their competitors. |
| 2 | Cost Savings: Sustainability can lead to operational efficiency, reducing waste and lowering costs. Energy efficiency measures, for instance, can result in significant savings. |
| 3 | Regulatory Compliance: Early adoption of sustainable practices can prepare a company for future regulatory changes, providing an edge over competitors that are less proactive. |
| 4 | Customer Loyalty: Customers are increasingly valuing businesses that prioritize sustainability, often showing loyalty towards such companies. |
| 5 | Investor Attraction: Investors are increasingly interested in companies that demonstrate sustainable practices. A strong sustainability profile can attract investment. |
| 6 | Employee Attraction and Retention: Many employees prefer to work for companies that align with their values. Demonstrating a commitment to sustainability can help attract and retain talented employees. |
| 7 | Innovation: Embracing sustainability can stimulate innovation, as companies seek out new technologies and processes to reduce their environmental impact and enhance their social contribution. |
| 8 | Risk Management: Incorporating sustainability into business practices can help mitigate various operational, regulatory, and reputational risks. |
| 9 | Market Access: Some markets, particularly in Europe, have strong sustainability requirements. Companies that adhere to these can gain access to these markets, giving them a competitive advantage. |
| 10 | Long-term Viability: Companies that embrace sustainability are likely to be better prepared for future challenges and changes in their industry, enhancing their long-term viability. |
