The obligation to create transparency and manage results on the sustainability agenda is currently in the CFOs court. But the rulebook is not yet written, the demands will keep growing and there is no end in sight.
In most companies, the sustainability agenda and the urgency to act have been on an internal journey. Initially, the aspirations were anchored with engaged policy owners, such as sustainability officers, QHSE managers, strategy professionals or others. This group of stakeholders has been speaking with a growing weight as the acceptance of the sustainability challenge is spreading, and as a result the challenge now has a few new owners.
In the leading companies, the heads of product development, procurement, operations and/or commercial already play active or even leading roles in formulating green propositions and radical changes to supply chains or production logics, but in most companies, the bug has currently stopped at the CFO’s table. Why is it so? Three factors are contributing:
- Transparency is the first step in any change journey, and the Finance organisation is typically where you have the capabilities and discipline to deliver consistent numbers. They have done that for 100 years on finance figures – externally and internally.
- The maturing EU regulation and growing external demand for consistent statements on sustainability require more formalised reporting and documentation, and corporate reporting and documentation is normally a CFO responsibility.
- Most potential initiatives have a cost or investment angle, and both are ultimately governed by the CFO.
In our conversations, these three topics keep coming up, and usually via a mixed message of “I am truly engaged in being part of the solution here”, but also “it keeps me up at night that we report on numbers based on stretched assumptions”. Let us take a look at each of the three factors, before heading into our approach to addressing the challenge.
Transparency is the first step
We sometimes meet the viewpoint that reporting does not change anything. If you are being very literal, that may be true. But if you replace ‘reporting’ with ‘transparency’ the conclusion changes dramatically.
For nearly every company we meet, transparency really is the first critical step. We can see a clear progression where each step may take between one and a few years to kick in:
- First leap: Transparency. It starts with a clear view on what factors are material for this particular company, and what the baseline is for those factors. But soon the discussions start on the granularity of transparency and the ambition that guides the choice: On company level? On site level? On product level?
- Second leap: Incremental improvement. Transparency gradually makes it clear what is big and small, what is important and less, and what is easy to address or not. When this knowledge matures and spreads, it sparks innovation and can initiate improvement. It is not just about “what gets measured, gets managed”. It is more a profound change; that the sustainability agenda gets real and relevant at every level of operation.
- Third leap: Radical ideas. It is almost a physical law that with incremental change comes frustration about moving too slow and struggling with red tape – or someone just gets impatient and wants more done, faster. This is where the big changes start to come to the surface: Can we change the product? Can we change our relation with customers? What is really our purpose?
The rules and requirements are ‘work in progress’
It would be easier to follow the rules if they were written… But for many companies, they find themselves in a position with an obligation to report on sustainability results, but no legal standard to follow on how to do it.
Most of you probably remember the massive fuss around GDPR regulation. Everyone had to master a lot of complexity with very little time and invest in robust solutions. At least that problem could be broken down and solved. The sustainability regulation, which has accelerated significantly through the EU Green Deal and other initiatives, is completely different; it is being developed and released over multiple years, and it will grow in both scope and depth as maturity increases.
The same applies to the demands you meet from customers or partners in the supply chain. The conversation is happening, the questions are asked, but in most situations, it is really hard to know if you are truly comparing apples to apples.
This could very well drive complacency – does it matter anyway? – but that is a risky path to follow. We cannot continue kicking the can down the road for whoever comes next; eventually, the can is so dented that it cannot move anymore. Doing nothing just secures that you are at the back of pack regardless of where it is going.
Is sustainability a cost or an investment?
As with most big questions, the answer is really in your own hands: If you look at sustainability obligations as a nuisance to be dealt with, it is, and will remain, a cost. It requires resources to set up KPIs, monitor them and create reporting and if you do nothing with it, all that it brings is legal compliance.
However, there is a real opportunity to make investments that not only lower risk, but also grow revenue and earnings. These investments are on the operational side of the business and will often require an end-to-end view. Could you create a new offering, with a different business logic and real operational benefits? Could you help your customers on their sustainability agenda and gain a competitive edge? These are the cases that deserves investment and attention.
As a CFO you may want to make sure that attention is directed to this type of change in your investment governance, rather than on broad ‘enablers’ with unclear benefits.
What to do
So, what is the CFO to do with all this? We advise:
- First of all: Get started – or keep moving. It is always preferable to be imperfect and clear about the situation than be waiting for perfect – e.g. the ‘clear rulebooks’ to be announced.
- Look at the effort as an incremental process, where the governance is maturing annually and the insight is improved step by step in a prioritised order.
- Use existing tools and tech to the extent possible and improve only where needed. If someone tries to sell you a future-proof solution – bear in mind that they have no idea about the future.
- Don’t build investment cases for governance and transparency. You may burn a little cash to get started, but take it as operational cost increments and save the big tickets for actual changes to your operation with a real impact.
If you want to know more about transparency and sustainability and what to do as a CFO, please reach out to our experts:
Erik Lind Olsen, Partner
E: [email protected]
Richard Thorsen, Partner
E: [email protected]
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