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How CFOs can drive climate actionby
As the sixth IPCC report delivers a “final warning” on the climate crisis, ICAEW’s Peter van Veen tells Neil Cutting how CFOs can drive change within their organisation.
The dilemmas now facing businesses in the environmental, social and governance (ESG) space are around financial materiality, specific risks to the enterprise value in the business, and the impacts that go beyond ESG.
But while there is a lot of talk, there is often little action at the board level.
Ahead of Earth Day on 22 April, I recently caught up with Peter van Veen, the director of corporate governance and stewardship at the Institute of Chartered Accountants in England and Wales (ICAEW), to discover how CFOs can respond to pressures from investors, regulators, stakeholders and the wider economic consequences and transform their finance function to the gold standard of ESG reporting.
Areas of disruption
It’s clear from the IPCC report that we’re going to overshoot the 1.5 degrees Celsius above pre-industrial levels target. The growing challenge for businesses is whether we’ve reached the limits of adaptation. In response to the scale of the crisis the UN secretary general has called to bring the net zero timetable from 2050 back to 2040.
While reports like the IPCC provide indirect ammunition for boards to take action, van Veen explained that there are other external and internal factors that also act as catalysts for boards to take climate action.
1. Investors and regulators
As van Veen explained, ESG is an investor terminology, while the concepts and measurement tools are all investor driven. “The investors are continuing to drive that, despite some recent pushback and even what some US states are trying to do by making it illegal somehow to measure ESG,” he said.
“The fact that regulators are getting involved shows that the investors are having the right impact, and that regulators including the FRC are saying, we need to have a level playing field, we can’t just have those with more pressure from investors, doing the right stuff, and those that aren’t under investor pressure, get a free pass,” said van Veen.
But while the regulators are trying to even the playing field, van Veen thinks they can go further because “non-listed companies are still at the back of the queue” in terms of pressure.
2. Other stakeholders
The other drive for change comes from within the organisation. “People don’t want to work for a company that is polluting the environment and no one takes pride in talking about their company if you’re seen as the bad guy,” said van Veen. “Your long-term survival is dependent on you attracting the best staff and being able to keep them.”
Consumer-facing companies are also sensitive about how their brand looks. A negative brand perception has a “direct impact on their bottom line in terms of whether consumers feel good about the brand and whether they want to purchase products,” he said.
3. Wider economic consequences
A small business in the East Midlands might wonder why a heat wave in central Asia would matter to them. But using the example of the recent floods in Pakistan, van Veen explained how this caused chaos to supply chains as a consequence.
The macroeconomic effect of rising temperatures may not be something CFOs are thinking about, but it’s important that boards understand the second-third-fourth risks that cascade out of them.
Assess the gaps between current and desired state
Many companies may still have an ad hoc spreadsheet to collate their reporting on sustainability, but with the constant changes in requirements and expectations it’s often difficult for them to stay on top of what good reporting looks like.
To achieve best in class in ESG reporting so that investors, regulators and stakeholders are happy, van Veen discussed ESG reporting in terms of three categories:
- Bronze: Meet minimum regulatory standards and only tell the positive
- Silver: Meeting existing and emerging standards, evidence-based reporting, including outlining areas where there is still work to do
- Gold: Reporting on how they are contributing to Sustainable Development Goals (SDGs) beyond their own operations and their impact on society more generally.
Measure and manage transformation
The first step to managing your transformation is to know your supply chain end-to-end and try to influence it.
Find out who your suppliers are. Have you considered what your supply chain looks like? Not just your first tier, but the second and third tiers? What does that look like? Where do your materials come from? And are there issues with those raw materials? Invariably the answer is yes.
“It’s very hard to produce anything without there being issues in part of your supply chain. Whether it’s cobalt in microprocessors or sugar and cocoa if you’re in the food business, there are issues in every supply chain,” said van Veen. “So do you know what those issues are and where they are? The first step is mapping that.”
- The second step is to know your products and see what you can do to influence or change them.
Consider how you can influence your supply chain. “Now, clearly, if you’re buying microprocessors from Intel, your ability to leverage unless you are a large computer manufacturer is going to be quite small,” said van Veen. “However, there are still ways that you can minimise that supply-chain impact. So that’s the second step – can you change suppliers? Or can you work with your supply chain to improve the outcomes, whether it’s living wage throughout the supply chain, or whether it’s minimising environmental impacts? Those are all things that every company has an influence on to a greater or lesser extent.”
- The third step is to think more strategically about the wider environment you’re operating in and what you can do to influence it.
Think more strategically and consider your sustainable development goals and your organisation’s role in achieving them. So how can you positively influence good outcomes in the countries and in the societies you operate? What are the things you can do to influence a better outcome?
Using the example of a brewery he used to work with, van Veen said the initial focus was purely on how do we minimise electricity and water usage?
“From a CFO perspective, you’re reducing costs at the same time, so it’s a win-win, but then the question really was: ‘We are brewing in a region where there was water scarcity, and where there is a lack of sanitation and drinking water.’ So the next question was could we utilise that brewery to produce drinking water for the local community. They ended up using that same capability that purified water for beer brewing to generate drinking water for the surrounding communities.”
The end result was not just a good story to tell the investors on SDGs but building goodwill with the local community and doing something really positive that has lasting benefits.
Keep driving continuous improvement
The direction of travel is that non-financial reporting will require the same kind of auditing processes as financial reporting. For CFOs to drive continuous improvement, they need to have the right skills and competencies in their departments. The problem only exacerbates when many of these skills aren’t defined already and organisations have to implement the correct systems to process reporting in the future.
Knowing where to start in bridging your organisation’s skills gap can be difficult when bombarded with sustainability courses from universities that claim to turn their pupils into “world experts”.
Accountancy bodies like the ICAEW have introduced sustainability certificates as a starter to close this skills gap. The institute, for example, is currently working that journey from excited and enthusiastic beginner through to competent, and then expert. The next step is getting clarity over what competent is and understanding what an expert looks like.
Due to the interest in developing the finance people of the future to become green analysts and accountants, ICAEW’s director of sustainability Richard Spencer will be speaking to AccountingWEB in the summer ahead of COP28 in Abu Dhabi and talk to us about developing green competencies in an organisations and closing the skills gap.
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Neil Cutting is a transformation director at Oracle. Over the course of his career, he has held many CFO and transformation leadership roles with complex global organisations.
Most recently he was vice-president of finance at Jacobs Solutions Incorporated, a $15bn Fortune 250 organisation. He is also a member of ICAEW’s Business Committee...