ESG: The new north star for CFOs
Now’s the time to go green
Sustainable investments have reached a global high of $4 trillion.
A 2021 survey carried out by Deloitte Global and Forbes Insights revealed that over half of the 350 executives asked about the impacts of their sustainability efforts reported a positive impact on revenue growth and company profitability.
This year, investment juggernaut Larry Fink laid out in his annual letter to C-suite executives that firms that are not planning for a carbon-free future risk being left behind.
The BlackRock CEO highlighted that:
“Stakeholder capitalism is not about politics. It is not a social or ideological agenda. It is not ‘woke’. We focus on sustainability not because we’re environmentalists, but because we are capitalists and fiduciaries to our clients.”
Ruthless from Larry, and whilst a large number of investors are citing environmental concerns as their primary reason for supporting ESG investments, his unwavering belief that the fair pursuit of profit is the animating force behind markets ultimately reigns true.
What is ESG?
Environmental, social, and governance criteria “are a set of standards for a company’s operations that socially conscious investors use to screen potential investments” according to Investopedia.
Environmental criteria looks at a firm’s impact on the environment; waste, pollution, energy use, attitude towards nature and wildlife.
Social standards look at a company’s business relationships, both internally and externally. Their treatment of employees, partners, clients, and other stakeholders make up their ‘social score.’
Governance refers to legality and good practices. Essentially, does an organisation employ illegal or dubious methods to gain profits, and are their internal processes transparent and fair?
Trillium Asset Management outlined the kinds of things they’re looking for when carrying out ESG screenings below.
Is it the CFOs job?
Yes.
As Deloitte pointed out in their article ‘CFO as the Driver of Sustainability’ it is often the finance department’s role to integrate sustainability measures into standard operating processes across the organization.
CFOs are stewards, shepherding their organizations towards long-term safety and security, which is now to be done through sustainability.
“At the intersection of sustainability and financial performance, CFOs are in the best position to communicate to stakeholders how a company’s ESG strategy management and performance contributes to overall value creation.”
This sentiment is becoming unanimous amongst financial think tanks, across industries and regions.
The World Economic Forum (WEF) claims that the evidence now points to a “strong correlation between financial and ESG performance.”
Another prediction in Fink’s letter was that the next 1000 unicorns will be green energy companies, rather than social media platforms or search engines.
CFOs looking to improve bottom lines cannot ignore the overwhelming evidence in favour of investing in sustainability, as it’s not just investor interest, but also greater access to cheaper capital.
The WEF highlighted multiple initiatives across the globe, from Italy to Singapore, are being launched to either subsidize or otherwise incentivize sustainability-linked bonds.
It’s undeniable that the planet is going to be the priority for the newer generation of workers, and future C-suite’s will be comprised of people who grew up in the age of impending climate disaster. CFOs have to get ahead of the game in order to survive, and doubling down on ESG is looking like the safest bet to make.
