Stakeholder capitalism is taking roots. This implies looking at the impact of a company’s actions on all its stakeholders rather than just aiming to maximise shareholder returns. At the same time, there is an increasing focus on environmental, social and governance (ESG) issues. Customers and investors are increasingly looking at a company’s performance on ESG parameters before undertaking purchasing or investing decisions. Both these shifts will necessitate the CFO to operate differently. From having the central responsibility for delivering financial results to shareholders, the CFO will have to co-opt the COO, CMO, CIO, and the CEO to help her figure out the ESG issues that impact financial performance.
The CFO of tomorrow will need to have an integrated view of the company. Thus, she will have to look at performance across the company’s operations, talent, and, supply chains. Integrated thinking will ensure that not only the company sees gaps in all areas of the organisation on both ESG and functional parameters but starts taking steps to improve performance. Beyond identifying, improving and measuring performance, the CFO will have to rethink reporting. Integrated reporting (IR) that puts together strategic, financial and ESG performance of the company will become more commonplace. CFOs will have to relearn how they measure and report performance.
CFOs will also gradually realise that focus on share price, and EPS are not enough. The financial statements need to be retooled. The balance sheet and profit and loss statements need to capture economic, social and governance (ESG) elements. Take the case of emissions. Although difficult to measure the potential harm due to emissions can be captured on the balance sheet as an expense. Similarly, estimates of lack of diversity will appear on the income statement as an expense. These measurements are like those used for valuing externalities. Essentially, there is a need for a framework that generates an “ESG” EPS.
There is a slew of new financing mechanisms that are now available to help CFO raise funds for her company’s ESG actions. Green bonds, sustainability linked bonds, impact bonds, sustainable development bonds etc. dot the financing skyline. These financing sources will help the CFO transform the company from brown to green.
The CFO has traditionally relied on her in-depth knowledge of accounting standards. Newer standards are regulations have come up – TCFD (Taskforce on Climate-related Financial Disclosures), SASB (Sustainability Accounting Standards Board), Integrated reporting, Business Responsibility Reporting, GRI reporting, etc. Keeping track and building knowledge on these standards and guidelines will be a daunting task for the CFO.
At the end of the day, the CFO will need to ask herself:
- How can my leadership and I build a perspective and shared understanding of the fundamental purpose of the business beyond profits?
- How do I evaluate projects and proposal beyond maximising value and incorporating ESG concerns?
- How do I rank and evaluate investments that provide long-term value with responsibility?
- How do I keep abreast with ESG rankings and frameworks? How do I choose the one that works best for my company and me?
- How do I communicate my approach to stakeholders through communication and engagement?
- What internal and external reporting practices do I develop that ties up both finance and purpose?
- Like everyone on else what new skills and abilities do I develop to function in the ESG centric world?