Why CFOs Should Keep it Green
Sustainability initiatives were once only talked of by green-fingered marketing executives, highlighting the unique selling points of a brand or product for the primary benefit of a boost in customer perception. This was swiftly followed by innovation teams getting to grips with environmental sustainability goals and the ever-evolving acronyms attached.
Fast forward to 2022 and sustainability is now a major corporate decision-making driver, fuelling growth through investments, innovation and acquisitions. International governments are responding to the urgency of our climate challenge, seen through global collaboration, including setting out climate action targets in the Paris Agreement. What was previously deemed a ‘nice to have’ in the eyes of CFOs and finance teams is now an integral part of our role in future-proofing capital and aiding risk management solutions, whilst positively impacting investor perceptions.
We’re at the convergence of two core sectors, sustainability and finance teams, that need to positively co-exist for the benefit of the planet, along with future growth as businesses. Whilst this relationship will take time to propagate, for large corporates, adopting and disclosing their sustainable practices is an imperative.
We are witnessing flourishing climate-related disclosure regulations worldwide. The UK’s largest traded and private companies must disclose climate-related financial information through the Task Force on Climate-Related Financial Disclosures (TCFD) for financial years starting on or after April 2022. In March and April 2022, three major sustainability disclosure proposals were released: the American financial watchdog, the SEC, proposed a new rule that would require public companies to provide detailed reporting of their climate-related risks, emissions, and net-zero transition plans; in Europe, EFRAG released guidance on a range of sustainability-related disclosure requirements, including the European Sustainability Reporting Standards; additionally, the International Sustainability Standards Board (ISSB), which was introduced with the sole purpose to streamline ESG disclosures on a global scale, disclosed its General Requirements for Disclosure of Sustainability-related Financial Information and Climate-related Disclosures drafts. We will not analyse here how those requirements converge or diverge but will simply note that the TCFD framework forms a shared input to those requirements and proposals. However, a 2021 report from the Climate Disclosure Standards Board (CDSB) identified that only 18% of EU businesses are providing clear disclosure of their resilience to different climate scenarios. Time is up for laggards who aren’t following the sustainability status quo.
At H&H Group, sustainability is at the cornerstone of our Group decisions and operations. We know we can achieve profitable business growth while at the same time looking after our people, driving strong and transparent governance and reducing our footprint on the planet to ultimately make a positive impact on society. It’s our bread and butter and we’re now putting our ethos into action and seeing the success play out: in 2022, we drew down a new loan facility which is a sustainability-linked facility with three ESG performance targets. In the new bank syndicate formed after this new loan facility draw-down, quite a few international banks which are keen to participate in ESG-related financing became our cornerstone lenders. We have also attracted more ESG-focused investment funds to be our institutional shareholders. Within the Group, we have established an ESG Committee with the purpose to better position our Group for the management of sustainability issues and enhance the quality of disclosure in relation thereto. We’re currently in the process of developing clear and ambitious carbon emission reduction targets in line with the Science Based Targets Initiative and are mapping our climate-related risks and opportunities with the aim to further comply with the TCFD. We are also prioritising our move towards 100% recyclable, biodegradable or compostable brand packaging. Casting the net wider, we know that our sustainability impact doesn’t stop at our carbon footprint, and we’re taking considerable action to promote the benefits of a healthy lifestyle through community and employee investment. Honouring human rights and fairness throughout our group and brand-level disciplines is also an important sustainability impact areas for us and we have prioritised diversity, equity and inclusion as one of our focus areas for 2022.
One of the key areas to improve the relationship between finance and sustainability is measurement. Coherent and transparent sustainability metrics are a must across each line of business to understand how they can move from seeing sustainable investments as a cost into a value-driven opportunity.
Even with the evident policy onus on corporates to act, the financial sector has been slow to adapt for several reasons. The seemingly complex language and metrics used by sustainability departments which focus on the measurements of water, waste and carbon don’t easily correlate with financial markers on cost of capital or even shareholders’ interest. We’ve also seen that the lack of diligence when it comes to tracking the gains of existing sustainability investments is a significant barrier, too. Although the jargon of ESG can feel out of reach for many boards, this is certainly not an excuse not to act; climate change – and an evolving corporate landscape – has no sympathy for ignorance in this realm.
Looking at the sustainability movement through a practical lens, another problem area has been for sustainability teams to tangibly present the positives of their ESG initiatives in correlation to monetary benefits. Demonstrating return on investment has been impacted further by the lack of accounting systems available to capture ESG performance data. Put simply, without proof of return on investment, it was historically hard to paint the picture of why investing in this area was worthwhile.
Although the debate of whether investing in ESG and sustainable practices is beneficial has been prevalent for some time, recent research shows that ESG investments outperform conventional ones. The average annual return for a sustainable fund invested in large global companies is 6.9% a year, while a traditionally invested fund would make 6.3%: there’s a genuine commercial opportunity at hand for CFOs to jump on for investor relations.
One of the key areas to improve the relationship between finance and sustainability is measurement. Coherent and transparent sustainability metrics are a must across each line of business to understand how they can move from seeing sustainable investments as a cost into a value-driven opportunity. To move forward, the opportunity to fully integrate financial metrics with these sustainability metrics will help to effectively report long-term investment strategies to stakeholders, that really are long-term.
Putting the huge growth opportunities aside, there is also a risk mitigation angle that’s impossible to ignore. In the current climate, being able to assess how climate change may negatively impact business performance is increasingly important and so must become part of your company strategy. We need to be able to review, analyse and report on certain elements such as the use of energy within the business to allow us to make financially sound decisions internally as well as recommendations to shareholders in areas such as reduction of costs. Current affairs highlight the benefit of being on the front foot of ESG when looking at the ability to mitigate costs. While we can’t predict volatility to such a niche detail, acting responsibly with an ESG lens on financial and corporate decisions can help to mitigate the long-term instabilities we face as businesses which are impacted by a global landscape that is rocked by environmental issues.
As CFOs, we have a clear view of the entire company structure, leading the capital allocation and accountancy of a company. We are therefore in a position of significant power to introduce internal carbon pricing or triple accounting methods that will eventually make us more effective in leading and meeting our environmental goals.
Having sustainable credibility as a corporate is no longer a USP strictly managed by aspirational team members; it’s now a fundamental aspect of business operations and CFOs who ignore this will undoubtedly feel this impact on their commercial performance.
Jason Wang is the CFO of H&H Group.