Why CFOs should view sustainability as a key element in business strategy, performance and growth.
P.J. Simmons | Sustainability Analyst
Until very recently, most CFOs viewed sustainability as someone else’s job — a matter of compliance or philanthropy unrelated to the pressing concerns that typically keep financial executives up at night.A growing number of prominent CFOs have adopted a sharply different view and, in so doing, are sending the following powerful message to their peers: take a closer look at sustainability, and you’ll find increasing opportunities for value creation — especially in dealing with pressures to reduce short-term business costs and strengthen your organization’s foundation for long-term growth.
This is one of the key findings of a new research effort (PDF) by our organizations — Corporate Eco Forum (CEF) and World Environment Center (WEC) — to examine the evolving roles of CFOs at major global companies in light of rising pressures on companies to connect financial management with sustainability.
“A growing number of leading CFOs now view sustainability as a key element in business strategy, performance and growth.”
Five factors undergird the value proposition driving CFOs to incorporate sustainability into financial analysis and business strategy:
1. Reducing costs and improving efficiencies
Case studies are rapidly multiplying of companies whose sustainability initiatives are helping the bottom line by driving operational efficiencies that root out excess energy use and other forms of waste.For instance, when The Dow Chemical Company, whose manufacturing operations are very energy-intensive, invested $1 billion in capital to improve energy efficiency, it realized $5 billion in economic benefits between 1995-2005.
The magnitude of these savings not only further legitimized the understanding that sustainability is a business process, it also whetted the company’s appetite to do more.
2. Mitigating risks
CFOs long have served as the chief financial stewards of their companies and are accountable to regulatory agencies and professional bodies for ensuring that financial statements are robust and accurate.
In recent years, the number of risk factors being tracked by companies has multiplied significantly and include: the stability of global and regional financial systems; expanded financial regulatory and reporting requirements; changing dynamics of the international political system that affect existing and potential investments; natural resource scarcities that impede food, electricity and other production systems; climate change and other disruptions to existing business operations or public and private infrastructure.
“Sustainability thinking is fueling a new wave of innovation at companies across diverse sectors.”
As a result, CFOs in such diverse companies as Coca-Cola, Ecolab, ExxonMobil, Microsoft and Unilever are playing an increasingly prominent role in evaluating sustainability-related risks whose materiality to company investment plans and operations have become more directly manifest.
3. Fostering innovation and growth
Sustainability thinking is fueling a new wave of innovation at companies across diverse sectors from energy and industrial manufacturing to consumer goods and electronics to apparel and much more. One need only look at the increasingly ambitious revenue targets of companies such as GE, Philips, Procter & Gamble and many others around sustainability innovation products to see the emerging trend.
Sustainability is also helping companies capitalize on potential growth opportunities in emerging economies around the world. For instance, IBM in 2014 announced a $100 million initiative to bring “Watson” and other cognitive systems to Africa to deliver business solutions to needs such as healthcare, education, water and sanitation, human mobility and agriculture.
Such an initiative is the result of a unique internal coalition of business function leaders — CFO, CMO, business service heads and, ultimately, CEO Ginni Rometty — that integrates sustainability with the company’s growth agenda over the next 10 years.
4. Enhancing brands
Every company — whether B2B or B2C — has a brand, and it’s important for CFOs to make a direct connection between sustainability initiatives and strengthening the brand.An important brand attribute for B2B companies is to demonstrate how its own products and services help solve its customers’ problems. Ecolab’s CFO, Daniel Schmechel, participates in his company’s strategy to partner with customers to design business processes to ensure that they will maintain uninterrupted access to water supplies for their operations, an important co-benefit of which is reduced energy consumption.
“The need to align a company’s values with those of its employees is becoming a critical business imperative. ”
As this is true both for developed and emerging economies, companies such as Disney have concluded that expanded commitments to sustainability and transparency directly aid its business strategy and reputation in an increasingly digital era.
5. Recruiting and retaining talent
Recent surveys have concluded that talent acquisition and retention represent one of the most important factors for a company to remain competitive and successful for the long-term.A growing number of CFOs also recognize that skill sets acquired during MBA and other university training often are insufficient to address the growing number of risk and opportunity factors facing their companies. They also seek to avoid the costs associated with a continuing need to recruit and train new employees.
As UPS’s CFO Kurt Kuehn has noted, Generation Y comprises up to a quarter to a third of today’s workforce. With upwards of 40 percent of current employees planning to retire within 10 years, the need to align a company’s values with those of its employees is becoming a critical business imperative.
As the business case for integrating sustainability into a company’s core value proposition gets stronger, more CFOs will follow the lead of the farsighted executives we encountered in our research. There is great potential for CFOs to redirect business strategy as sustainability drivers increasingly manifest themselves in assessments of material risks and investment opportunities.
While not a majority of CFOs think this way at present, an emerging critical mass is increasingly open to engaging in this re-examination of risks and opportunities to drive near-term and future value creation.