By Don Reed
Historically, sustainability has not been at the top of most CFOs’ agendas. In fact, as a CFO, you may be thinking: “We comply with all laws and have global standards that exceed local standards in many countries. Investors don’t ask me about it. Can we move on?”
Not so fast. Companies are seeing a new generation of customers, investors, employees, and governments requesting and relying on sustainability information for a range of decisions: Do I want to work for this company? Can this supplier help solve my sustainability challenges? Do I trust this management team?
As corporate claims about sustainability proliferate, CFOs are working with General Counsel to make sure they can stand by their answers – especially as claims spread from voluntary reports to SEC filings and investor surveys, social media, supplier questionnaires, government contracts and exploratory class-action lawsuits begin to emerge.
Stimulate better communication with investors
In a recent PwC survey of institutional investors (PDF
), 80 percent of respondents told us they consider sustainability information in an investment context. Simultaneously, the majority of respondents told us they were dissatisfied with sustainability disclosures today – especially it comes to quantifying sustainability-related risks and opportunities in financial terms. The reality is that while the majority of S&P 500 companies produce glossy sustainability reports, they are not designed to meet the specific needs of investors.
A new generation of investor focused standards are focused on this challenge:
- Globally, companies are experimenting with Integrated Reporting to better articulate their business model, explain their strategy and provide transparency into the metrics they use to gauge performance against that strategy.
- In the US, the Sustainability Accounting Standards Board (SASB) is developing industry-specific standards to help companies meet their responsibilities to disclose material trends and uncertainties in the Management Discussion and Analysis (MD&A). Since its inception in 2011, SASB has recruited key Board members like Michael Bloomberg, former SEC Chairs Mary Schapiro and Elisse Walter and former FASB Chair Bob Herz.
Do better at managing risk – and get credit for it
Many companies manage sustainability risks within functional silos—and as a result, risk responses are not always tethered to a strategic, holistic view of risk. CFOs with their bird’s eye view of the organization have an opportunity to turn this state of affairs around. As a strategic business partner, forecasting and modeling the impact of a range of factors on the financial future of the company is central to the CFO’s role. CFOs who are able to help translate sustainability issues into actionable focus areas can both accelerate progress and provide rationale focus. Concentrating on sustainability issues may also surface long-term opportunities that more short-sighted competitors can overlook.
Risk management can create value directly - recently, a Morgan Stanley raised their target price for three of the companies in the branded footwear and apparel industry by 4 to 9 percent by explicitly recognizing their efforts to manage social and environmental risks through differentiated supply-chains, according to 2015 research from Morgan Stanley. CFOs can help monetize sustainability efforts by translating them into language that the market understands.
Get investors for the long-term
Most companies seek long-term investors that appreciate their ability to create value beyond a quarterly investment horizon. A savvy CFO can leverage this two ways. First, keeping the ever- increasing portion of the shareholder base who’re passive investors happy requires quality performance and disclosure on social, environmental and other traditionally non-financial topics. There’s a reason the largest passive investors also lead the list of investors integrating these topics into their ownership strategy.
Second, CFOs who can communicate effectively with investors about how their companies are managing environmental and social risks--as well as how sustainability is creating shareholder value --can win by demonstrating long-term quality of earnings to active investors. And that’s the kind of benefit that can help sustain an organization for years to come.
Image credit: Pexels
Don Reed is a Managing Director in PwC's US Sustainable Business Solutions practice
©2016 PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.