Thursday, June 9, 2011

7 Sustainability Trends Every CFO Needs to Know

Chief Financial Officers (CFOs) are in a unique position to drive sustainability into their organizations for competitive advantage. This article highlights seven sustainability trends every CFO needs to know.

CFOs are already involved in many aspects of sustainability. Numerous functional teams that work on parts of sustainability report to the CFO. These groups include investor relations, risk management, EHS, legal, procurement/supply chain, IT, facilities/real estate, and HR. Moreover, the corporate finance team often leads key business processes, such as budgeting, capital appropriations, internal and external financial reporting, executive compensation, and energy management that directly affect the achievement of sustainability goals.

1. Sustainability Reporting is Mainstream

Despite the recession, Climategate, and the lack of cap-n-trade legislation, sustainability reporting has become mainstream in business. The number of companies responding to the Carbon Disclosure Project has grown from 235 to 3,050 in just eight years, and this number will grow dramatically as Walmart and other large companies encourage their suppliers to also report to the CDP. The number of companies using the GRI framework has increased as well, from 100 in 2000 to 1,800 today.

Most large companies now publish CSR reports that include carbon emission data. Companies that don't publicly report sustainability data are increasingly viewed as laggards by investors, customers, employees, and other stakeholders.

Sustainability reporting is weaving its way into RFPs and customer evaluation programs. In some industries, companies have seen a marked increase in requests for environmental data in RFPs. Bank of America , General Mills, IBM, Procter & Gamble, Walmart, and others are now asking their suppliers for details about carbon emissions and energy use.

CFOs need to ensure that good quality sustainability data is reported publicly to prospects and customers.

2. Green Ratings Matter

Green ratings such as the Dow Jones Sustainability Index, Greenpeace Supermarket Seafood Sustainability Scorecard, and countless others continue to be more influential for a company's brand image. Product-level rating initiatives, like Good Guide and the Sustainability Consortium, are also maturing their approaches. Companies ignore these trends at their peril.

3. Investors Care

Investor interest in sustainability continues to grow. According to INCR, shareholder resolutions were up 40 percent last year. The reputation of companies like Apple and Berkshire Hathaway is at risk because of their continued refusal to publish carbon emission details. Voluntarily reported emission data sent to the CDP now appears on Bloomberg terminals and Google Finance alongside audited financial information for detailed peer company comparison and trend analysis. Last year for the first time the SEC issued guidelines on reporting climate risk.

4. Companies Combine Financial and Nonfinancial Reporting

Increasingly, companies are now combining traditional financial reporting with sustainability reporting. Novo Nordisk now combines its CSR report with its annual report. Timberland even reports quarterly sustainability metrics along with its quarterly financial numbers.

Financial accounting standards boards are also beginning to support supplementing financial reporting financial information. The International Integrated Reporting Committee (IIRC) is an effort to combine non-financial environmental data with financial reporting and is supported by FASB and other accounting organizations.

5. Sustainably Impacts Key Business Processes

In many companies, sustainability is treated as a marketing effort. "Ensure we get the good green ratings, but don't touch operations" is a common approach but is shortsighted. Consider sustainability like quality, and infuse it in all relevant business processes throughout the company. Capital appropriation requests need to include energy cost estimates when comparing alternatives. Profit and loss owners need bonus incentives and tools to reduce energy, water, and waste use. Supplier evaluations need to also account for sustainability attributes of suppliers.

6. Corporate Energy Management Emerges

While energy prices have dropped since the economic crash in 2008, they are starting to rise again. Leading companies are aware of this trend and also realize that energy is the flipside of carbon. Reduce energy use and carbon emissions decline. In response, boards of directors are adding a corporate energy reduction goal (often expressed as an energy intensity goal) to complement a previously established carbon emissions goal.

More companies are adding corporate energy managers to increase visibility in energy use across all locations and to expand corporate energy management beyond simply energy procurement. Companies are learning to view energy as a cost that can be managed and not simply a "fixed expense" that cannot be controlled.

7. Spreadsheets Are Not Sufficient to Support Emerging Processes

Spreadsheets are wonderful and flexible tools for tracking energy and sustainability data, but they are insufficient as these processes mature and as public transparency of corporate sustainability data increases. Similar to financial processes, sustainability and energy management processes require database-driven software with standard features such as user management, audit trails, and easy ad hoc reporting to reduce risk to a company's brand image with top customers and stakeholders.

Because of the large number of functional areas that report to the CFO, sustainability offers the CFO an opportunity to drive sustainability into the organization for cost savings and competitive differentiation. Your organization needs your leadership in this area.

1 comment:

David Delcourt said...

Couldn't agree more. I'd add that sustainability tracking no longer happens once a year for an annual report, throwing a few figures together. In order to stand out, sustainability (through EE, renewables, etc) needs to be attended to in a real time basis. Thanks for the post. Look forward to more.