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Industry 5.0 | accountingweb | How Industry 5.0 can help CFOs create ESG value
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How Industry 5.0 can help CFOs create ESG value

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Anders Liu-Lindberg of the Business Partnering Institute, tells Neil Cutting how the fifth industrial revolution will put even more pressure on CFOs and finance leaders to adopt environmental, social and governance reporting.

13th Jun 2023
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There is a shift happening from the digital integration of the fourth industrial revolution, or Industry 4.0, to Industry 5.0. Whereas Industry 4.0 was defined by manufacturing goods for profits, the transition to Industry 5.0 seeks to create a more balanced relationship between technologies such as artificial intelligence (AI) and humans. It will embolden finance leaders to transform their businesses into ones that are more concerned with sustainability, resilience and being human-centric.

Anders Liu-Lindberg understands the challenges facing chief financial officers (CFOs) and financial directors (FDs) who are going through this transformation in his role at the Business Partnering Institute, where he helps these finance leaders influence business leaders. 

As part of this transition to Industry 5.0, the pressure will be on CFOs to create value through environmental, social and governance (ESG), as opposed to seeing it just as an expense. 

The big challenge facing boards

Liu-Lindberg said more and more businesses are moving from Industry 4.0 to Industry 5.0, where challenges like cyber-security, talent management and economic development will be at the centre of the transition.

The challenges of talent management are classic boardroom themes and ones we’ve covered in our interviews with PwC’s Hamish Halliday and BDO’s Carly Bleathman when we explored the outsourcing opportunity. 

But when you consider how economic development is going to change under Industry 5.0, the question of ESG comes up and Liu-Lindberg is quick to point out that “it’s not a matter of just reporting anymore. It’s a matter of business strategy, business modelling and how to stay relevant in the future.” 

He added that boards, together with senior management, need to take a position on what does that means for their company.

This is partly driven by the incoming Corporate Sustainability Reporting Directive (CSRD) in 2024, which concerns how companies can create value through ESG, as opposed to it just being an expense or lowering the return on investment of projects, for example. With these new reporting standards coming in from the EU, it only underlines that ESG is not just about reporting, it’s about what it means for businesses. 

The shift from Industry 4.0 to Industry 5.0 will see humans take back control from machines. Liu-Lindberg said it will lead to a “new economy which needs to be sustainable, human-centric and resilient”, and ESG will be crucial to this discussion. 

Gap analysis

To start the journey to Industry 5.0, CFOs first need to assess how the current 4.0 world differs from the desired state where ESG is being taken seriously.

Liu-Lindberg said the 4.0 economy was driven by the quarter-by-quarter earnings before interest, taxes, depreciation and amortisation (EBITDA) performance for the investors. He said it was based on maximising shareholder value, having a growth mindset, driving the bottom line and it was based on an “above zero” world. In many respects, some companies saw ESG almost as a bonus. 

“It’s really just companies taking from their surroundings. That could be the environment in terms of resources, it could be from their staff in terms of taking more energy from them than what they actually give back or what they pay for them, and it could be from the different kinds of stakeholders in society.”

He said the move from 4.0 to 5.0 will come with five specific shifts.

1. From shareholder value to stakeholder value: “The value we create will be for more than just shareholders. If we don’t create value for our employees, for the community and for the wider society, we won’t be in business mid to long term.” 

2. From mindset growth to wellbeing growth: “If we’re having a human-centred economy, we need to have people that are happy, engaged and well in what they’re doing,” said Liu-Lindberg. “If we’re pushed to step outside that comfort zone all the time, we burn out. And that’s what we’ve seen in the past five to 10 years – we have more and more burnouts, and more and more mental health issues.”

3. From bottom-line-driven to purpose-driven: “If you ask the younger generations today, both coming into the workforce and already being in the workforce, they don’t want to work for companies that don’t have a clearly defined purpose that aligns with their own values.” 

Similar to the Institute of Chartered Accountants in England and Wales’s Peter van Veen’s brewery example in a previous article in this series, Liu-Lindberg highlighted the Danish company Ørsted, which in the past 10 years has completely transformed from a natural gas and oil company into a green energy and wind company. 

“That can only be done if you have a strong purpose guiding you, rather than just the bottom line because it’s very expensive to do the transformations and they could have made a lot more profit. But then in 10 to 15 years, they would have been out of business. So there's a lot of good sense in making these shifts.” 

4. Above zero to net zero as a minimum: “When I say ‘as a minimum’, it means that it’s good that companies have net-zero strategies but we can probably all do the maths that if you only go to net zero, we probably still have a world that keeps on taking, just because there’s a lot of growth. So we need to continue to push ourselves. So what happens after that zero? Well, then you need to go in minus…”

He added, “Net zero is not just for the environment, it can also be for the staff. If you keep taking energy away from our staff, they will not continue to perform, they will not continue to stay in the company.”

5. From introspective to extrospective: “We have to look outside and see what is the impact we're having on the world and are we happy with that. If you’re not happy with it, what are we going to do?

For example, does the world view your company as one that is driving the ESG agenda? “If not, you can be sure the talent is going to find other ways and maybe even customers and suppliers are going to find other ways,” said Liu-Lindberg. “Because even if you’re a supplier to a company, you might still be required to report all sorts of ESG metrics, for instance, and it’ll be obvious to people if you’re supplying to the ‘wrong’ companies. So it’s not so simple anymore.”

Purpose and value

Within these five macro shifts, you can see the importance of ESG in terms of employees being aligned to the purpose and the values, whether it’s that sense of wellbeing by doing something that’s driving a good ESG agenda or whether it’s moving from the minimum zero net carbon to being negative zero for carbon.

Those shifts outline why ESG is important. Therefore if that’s what the broader stakeholders and shareholders are going to expect, a company will increase its value by doing those things.

Meeting the desired state

Asked what CFOs can do tomorrow to meet the desired state in the next 12 months, Liu-Lindberg shared these three key starting points.

  1. Knowing that we’re moving from Industry 4.0 to 5.0.
  2. Reviewing the business case investment process so it is robust enough to prepare for Industry 5.0.
  3. Realising how companies can create value through ESG, as opposed to it just being an expense. 

By doing this, you can start to implement within your organisation a broader stakeholder review/investment decision for ESG, so you don’t accidentally make decisions based on the past way of shareholders expectations rather than the future way of shareholders expectations.

Indeed, CFOs need to look at ESG in the same way they’ve approached IT projects over the years. 

Many CFOs will have spent millions of pounds on IT projects after promises that it will help them to leapfrog their competition only for it to erode their profitability, and so CFOs need to prepare for managing ESG-related projects by using the knowledge available so they don’t go through the same hard learning like many bad IT investments. 

Liu-Lindberg agreed: “ESG shouldn’t be a separate thing that we do on the side. We need to start reporting on it from a business and economical shift point of view. There’s not a choice here.” 

At the heart

So how can you take ESG from a reporting exercise we do on the side into something at the heart of the company that creates value? Liu-Lindberg advised the following.

  1. Ensure that ESG is embedded into strategic choices as a company. Rather retrofitting ESG into current plans, Liu-Lindberg advised: “Whenever a company makes a choice, consider ESG as part of that choice.”
  2. Identify the significant risks and opportunities. He said risk and opportunity needs to be a company-wide effort. “It cannot be a risk management function that sits in corporate and fills out some schedules when a big project comes along.” He added that the CFO and finance team need to be available to question the risks and maturity involved in the shifts in the economy.
  3. Have ambitious targets. If businesses do both these action points, they can then agree on ambitious targets for their company and pick the right metrics to measure their progress.

Measure and manage

Liu-Lindberg acknowledges that CFOs are not going to go out tomorrow and change the entire strategy of their companies. It’s something that will happen over time. But what is key is that when the CFO picks the right metrics to manage the transformation, they understand the assumptions behind the strategy. 

He also recognised that it’s not for the CFO and the finance function to execute all the initiatives but they should be curious about how the stakeholders’ and investors’ expectations will change in the future around ESG. The CFO then can help the board understand how things are going, and help them understand if they’re actually on track or not. 

The other measurement that will be under scrutiny as we transition to Industry 5.0 is that the ESG sustainability numbers are correct. There will be an increased expectation from investors and the stakeholders that the company operates within the supply chain of having audit robustness applied to the numbers. And this expectation will fall on the shoulders of the CFO to start reporting those numbers. 

Liu-Lindberg agreed: “Just like with anything else in business and in finance, and particularly, if the data is not right, then how can we be telling a consistent story?

“We’re starting to implement standards and how to report and what to report on. You cannot just tell whatever story you want anymore, you actually have to show the numbers and the data behind it.” 

Evaluate and improve

Finally Liu-Lindberg advises CFOs to reflect on what they have achieved over the 12 months since starting their transition to Industry 5.0, and through this they will be able to evaluate the best way to continuously improve. 

Looking through the prism of whether the organisation has created value through ESG, CFOs should consider the following.

  • Have you successfully changed the dialogue in the organisation? This is the bare minimum level of improvement. 
  • Has the CFO redefined the success criteria for an investment decision? They should review how their portfolio has changed, such as which projects and investments has the company now stopped because they don’t make sense in this new economy. 
  • How are you scanning your business environment for new Industry 5.0 value creation opportunities? While 12 months is too short a period to implement a large-scale business transformation, you should at least be developing the capability to scan the business environment for new ways of doing business and new ways of creating value.

Taking these steps in the next 12 months, will help you create value through ESG for the future.

 

If you work with boards and would like to be interviewed by Neil then please send Neil a DM or make a comment below.

Replies (13)

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By Hugo Fair
13th Jun 2023 17:36

Sorry ... I'll admit to not having read anything of this latest instalment beyond the 1st sentence:
"There is a shift happening from the digital integration of the fourth industrial revolution, or Industry 4.0, to Industry 5.0"!

I haven't met anyone (from bright 6th form school pupils through to recently retired global CEOs - and the many points in between) who would understand what those two made-up labels actually mean.
Although I suspect they might raise a glimmer of recognition amongst the inhabitants of the groves of academe (so I should have qualified my previous comment with reference to 'in the real world').

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Replying to Hugo Fair:
Jake Smith, AccountingWEB
By Jake Smith
13th Jun 2023 17:51

I'd suggest a proper read of the piece then Hugo, I think there are some really good insights and useful suggestions of the type of changes needed at companies of all sizes to move towards a greener future.

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Replying to Jake Smith:
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By Hugo Fair
13th Jun 2023 19:19

Touché ... but that's why I admitted (upfront) to not reading on (which is rare for me)!

Amongst my many failings I'm not a trained psychologist, but I'm fairly sure that many readers are 'turned off' when they encounter made-up labels - *especially* at the start of an article.

IMHO (and yes I am basically humble) these new-jargon words and phrases are a fairly direct descendent of Orwell's 'newspeak' ... a means of hiding complex concepts, by wrapping them in a simple label, so that the reader/listener doesn't enquire too deeply into the underlying concepts (which might cause them to back away with more direct reason if they understood better).

To be clear, I'm NOT saying the deliberate obfuscation to which I've alluded applies to this author or his article ... merely that he has fallen into the trap so prevalent of those in business-related academe of trying to sell a concept via new-jargon, rather than trusting his arguments and his readers to come together.

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Replying to Hugo Fair:
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By JustAnotherUser
14th Jun 2023 13:48

A quick google trends search show the rising relevance of Industry 4.0 Starting around 2013, then into decline as industry 5.0 came on the scene and begins to rise...
While industry 3.0 peaked in the early days of the web and declined as Industry 4.0 takes over.....
421,000 results for industry 5.0
26,600,000 for 4.0

I am only checking the entire history of the internet to see if this is a thing or not, Hugo its ok if you've not heard of something before, just move on from it and pick up the conversation in another thread.

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Replying to JustAnotherUser:
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By Hugo Fair
14th Jun 2023 18:03

I'm fine with encountering things of which I'd not heard of before ... it happens on a near daily basis across a wide spectrum of factual topics (after all human knowledge is continually growing and I aim to follow not far behind).

But I'm getting a little tired of your passive aggressive innuendos (in this case that I'm just a dodo that needs to find it's own environment - preferably elsewhere)! You appear not to enjoy hearing opinions that run counter to your own - which is not a good basis for increasing your own knowledge.

FWIW as I'm sure you know, search counts are not a demonstration of factual truth - otherwise you wouldn't find far greater volumes than those you quote for patently untrue conspiracy theory terms.
Indeed your quoted figures are extremely low for any word/phrase that is truly mainstream ... I even tried making up 'industry 7.0' and got 89,500,000 results!

If you want to live a virtual world of Google's construction then that is your choice ... I was merely pointing out that no-one in those not so rarefied meetings that I attend (whether SME or global conglomerates) has admitted to recognising the terms quoted here.
And that makes them a poor choice to highlight in the opening paragraph - where an author usually tries to entice the reader to keep going, on to the meaty bits.

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Replying to Hugo Fair:
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By JustAnotherUser
15th Jun 2023 08:15

Hugo, you read one line and stopped reading, then claimed the author has made this up because of your own cognitive bias, the author suggested you read the article to which you did not, and doubled down that the labels are once again "made up".
I would say this constitutes "a pattern of indirectly expressing negative feelings instead of openly addressing them", or being passive aggressive, these negative feelings often arise in crypto related threads we regularly converse in, where once again your own cognitive bias interrupts the conversation.

Correct if you Google Industry 7.0 you get these results, this is because you are searching for two separate items "industry" and "7.0" , if you want to search for an exact match you would use "Industry 7.0" for which there are only 1,920 results.

The most fascinating thing for me is how someone who often engages "with retired global CEOs" , had never heard of industrial revolution phases.

Why would anyone spend the time trying to call out an author on a topic they have never heard of before without reading the article, twice??

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Replying to JustAnotherUser:
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By Hugo Fair
15th Jun 2023 14:33

I'm not interested in continuing what has become a personal attack rather than a discourse ... but "the author suggested you read the article to which you did not" is simply not true (on both counts):
a) it wasn't the author who asked me to read on through, and
b) I then did so (without encountering anything that changed my perspective on the only point on which I was commenting).

Anyway, I'll leave you to your old trick (of lumbering me with statements that I've never made) ... such as "never heard of industrial revolution phases".
1st, 2nd, 3rd and 4th (since 2000) of course ... but the new 'version number' type are a recent invention that have not made it into general use within the corridors of power (although academe and business management gurus tend to love a new piece of jargon on which to hang some profitable engagements).

You seem to take everything as adversarial ... I didn't "call out" the author, merely proffered the opinion (advice if you prefer) that opening with those jargon words wasn't the best way to encourage readers into progressing further.
Oh and I did read the article (carefully) in between my two original posts ... but you seem to prefer to make assumptions and then state them as facts.

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Replying to JustAnotherUser:
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By ColA
15th Jun 2023 14:40

I think ‘L.O.L.’ is all that’s needed here!

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By RichyC
15th Jun 2023 10:37

ESG is full of nebulous terms, Bud Light embraced ESG and look at ABinBev current market cap since April...

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By ColA
15th Jun 2023 10:37

Don’t worry, the accountancy profession is still struggling to emerge from the 20th century so will take another couple of decades to wake up.
53 years as a professional, mostly in commerce & the public sector convinced me a wake-up call is needed, not gimmickry.

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By listerramjet
15th Jun 2023 10:46

I think I am going to stick with normal human 1.0. To me going green happens on an ship during periods of high wind. I guess the real challenge all of this offers is to increase the unreadability of financial reports.

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Replying to listerramjet:
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By ColA
15th Jun 2023 14:38

I remember too many instances of seas off the Inner Hebrides or in the Pentland Firth not to rush to agree with you.
As my post said, au courant gimmickry is the last thing any professional in post needs - we all end up dealing with the flak.

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By jon watkin
15th Jun 2023 11:15

Whilst I too, despite 35 years in practice and industry, did not immediate appreciate the meanings of Industry 4.0 and Industry 5.0, and a whole lot more on-trend labels that pepper this article, I did read it through. For most OMB's (which is the majority of businesses by number of entities) this will be largely seen as irrelevant, because there will usually be exemptions for smaller entities. It only becomes relevant when it becomes mandatory to report it or if the entity is unfortunate enough to be part of a long supply chain that requires it from the upper echelons. Nevertheless in old money terms, I suppose we are talking about Stakeholders, of which there have always been many besides just Shareholders, and latterly environmental considerations, energy consumption, waste generation, carbon footprint and so on. It's all good that such matters are considered, appreciated and indeed reported if they can be, with reasonable accuracy. Unfortunately it's usually the hard-pressed Accountant whom it falls upon to deal with it. There is more work to be done for sure but I think a less label-intensive style could deliver the message more succinctly.

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