Climate change and sustainability. How sustainability has expanded the CFO’s role
 |
3 Decembrie 2011 |
 |
ERNST & YOUNG S.R.L. |
Adresa
Strada Dr. Felix Iacob, Nr. 63-69
Cladirea Premium Plaza, Etaj 15
011033 Bucuresti, Sector 1
Telefon
+40-21-402.40.00
Fax
+40-21-310.71.93
Website
www.ey.com
What sustainability means for you
Traditionally, sustainability issues have fallen outside the jurisdiction of the Chief Financial Officer. CFOs ran the numbers, letting others handle soft issues such as social responsibility and corporate citizenship.
But those job silos are crumbling. Investors, business customers and other stakeholders have shown a growing desire to connect a company’s financial performance to its social and environmental impact. To make that connection, they have begun evaluating the company’s performance in the Environmental, Social and Governance (ESG) arena, sometimes referred to as the organization’s “triple bottom line.”
As a result, sustainability issues and financial performance have begun to intertwine. CFOs are getting involved in the management, measurement and reporting of the companies’ sustainability activities. This involvement has expanded the CFO’s role in ways that would have been hard to imagine even a few years ago.
The changes stem partly from a realization by institutional investors that climate change and sustainability issues often bear directly on companies’ risk profiles, their reputations and their financial performance. Equity analysts, for example, have begun to look at the sustainability practices of the companies they cover. More than 300,000 Bloomberg terminals around the world provide corporate sustainability information such as emissions data, figures on energy consumption, corporate policies and board composition. That information, until recently kept hidden or shared quite sparingly, is now available at the touch of a button.
As ESG factors are incorporated into investment analysis, companies have started to view environmental and social initiatives as contributing directly to their economic performance. CFOs and other market-facing executives will need to become more familiar with their companies’ most vital ESG issues. They’ll also need to prepare for hard questions from stakeholders, and to demonstrate a heightened commitment to ESG performance.
These trends are changing the CFO’s role in three critical areas: investor relations; external reporting and assurance; and operational controllership and financial risk management.
Telling the sustainability story - Investor relations
The art of investor relations (IR) is the art of storytelling. Investors want facts about a company’s profit potential; the company weaves those facts into a compelling tale that showcases its prospects in a dramatic and credible way.
Sustainability can be viewed as a new character introduced into a familiar plotline. The story is still about financial promise, but with a new twist: increasingly, a company’s sustainability story is being heard and read by the same people who read its annual financial reports. Banks, insurance companies, private equity funds and other institutional investors are considering the sustainability rankings of the companies in which they invest. Managers of socially responsible investment funds are looking at ESG indicators to meet the requirements of shareholder initiatives such as the United Nations’ Principles for Responsible Investment (UN PRI). Although not the only initiative of its kind, the PRI is one of the largest, with 800 signatories including large funds, such as BlackRock and TIAA-CREF, that manage more than US$22 trillion in capital.
As sustainability issues intertwine with business strategy, institutional investors are starting to view financial and non-financial performance as two sides of the same coin. Good IR can be a key factor in the price of a company’s shares and the interest rate it pays on its debt. For that reason, CFOs must stay up to date on their companies’ sustainability policies and initiatives and on ESG issues more broadly.
Shareholders speak out
Shareholder voting patterns provide convincing evidence of investors’ belief that a company’s social and environmental policies correlate strongly with its financial performance. In the 2011 proxy season, for example, approximately 40% of all shareholder proposals that were voted on focused on social/environmental issues — the largest category of all shareholder resolutions.
Moreover, these resolutions are garnering strong support. As recently as 2005, less than 3% of all shareholder resolutions on social and environmental issues reached the critical support threshold of more than 30% of votes cast. By 2010, 26.8% had hit that level. This proxy season, it was 31.6%.
.........................................................
Sustainability has become embedded in CFOs’ traditional areas of focus.
.........................................................
The mutual fund industry provides a clear example of the growing support for environmentally related shareholder proposals. According to an analysis by Ceres, anon-governmental organization, average support by mutual funds for climate change–related resolutions grew from 14% in 2004 to 27% in the 2009 proxy season. Opposition to those resolutions fell from 76% to 55% during the period, reflecting a sharp departure from traditional voting policies.
Sustainability is also influencing corporate governance, as shareholders pay closer attention to resolutions that tie social and environmental performance to issues such as compensation and the qualifications of board members. One recent resolution, for example, advocated using sustainability metrics as inputs in determining executive pay, while another sought to ensure that board members had sufficient expertise to deal with sustainability and related environmental issues.
Ratings agencies evaluate sustainability
Credit-rating agencies, such as Moody’s and Standard & Poor’s, have long provided shareholders with a source of company information. In a departure from their traditional focus, they now want to know about companies’ sustainability practices. So do the more specialized providers of sustainability ratings. The Dow Jones Sustainability Indexes (DJSI), for example, give stakeholders information about companies’ social, ethical and environmental impact.
As analysts and ratings agencies incorporate sustainability performance into their research, CFOs will need to help communicate a robust sustainability story — one that’s embedded in a financial framework. Inevitably, this need will expand both CFOs’ responsibilities and their workloads. In addition to the DJSI, there are more specialized ratings and rankings, such as the Carbon Disclosure Leadership Index,the FTSE4Good Index Series and the NASDAQ OMX CRD Global Sustainability Index. These are just three of more than 100 ratings, rankings and indices designed to help investors and other stakeholders separate the sustainability leaders from the laggards.
All of this adds up to the proverbial writing on the wall. Market pressures are requiring IR communications to provide more in-depth sustainability reporting. Everyone in the IR department should be fully aware of all sustainability initiatives and performance metrics across the organization. CFOs and their immediate reports must help corporate IR teams in this undertaking.
Actions to consider
- Work with your sustainability team to develop a sustainability story for your organization. If current trends continue, the CFO could be the one telling it.
- Learn who’s who among the specialized sustainability rating agencies in order to prioritize the ratings most vital to your organization.
- Pay attention to the sustainability-related shareholder resolutions that come up at annual meetings and advise your board and CEO on which issues to pursue.
- Take preemptive action on governance-related sustainability issues to avoid being forced to react to them.
