Will CFOs Ever ‘Get’ Sustainability?

For years, the chief executive officer was seen as the key individual responsible for viewing a company through the lens of sustainability. That made sense: If you can’t get the person at the top to pay attention, why should anyone else?

That’s changing. Today, it’s the chief financial officer who reigns supreme in sustainability in some companies. And that also makes sense: He or she who manages risk, compensation, disclosure, and financial performance will more or less set the stage for how a company addresses its environmental and social impacts.

But getting CFOs on board has been a lot harder than engaging CEOs. The latter has higher visibility — and, thus, higher exposure. He or she is more likely to speak publicly to customers, analysts, and thought leaders; is more likely to have those utterances amplified by the media or blogosphere; and is generally seen as the company’s figurehead. What the CEO says about the company’s sustainability commitments, internally and externally, sets the tone. The CFO does few of these things.

That’s not the only challenge. CFOs, by definition, are primarily focused on the company's financial well being. But not everything related to sustainability can be fit onto a conventional balance sheet or profit-and-loss statement.

A recent report from the global accounting firm Ernst & Young aims to help companies connect CFOs with their company’s sustainability efforts. (Download here as PDF.) “Sustainability issues and financial performance have begun to intertwine,” it begins. “CFOs are getting involved in the management, measurement and reporting of the companies’ sustainability activities. This involvement has expanded the CFO’s role in ways that would have been hard to imagine even a few years ago.”

There’s good reason for the shift. Institutional investors like pension funds, insurance companies, and university endowments increasingly are viewing sustainability issues — climate change, toxic ingredients, natural resource constraints, labor issues — as risk factors bearing on a company’s reputation and financial performance. Equity analysts — individuals who study companies and markets in order to assess a company’s future financial and stock performance — are beginning to incorporate sustainability metrics. Today, more than 300,000 Bloomberg terminals provide corporate sustainability data — on emissions, energy consumption, sustainability and governance policies, and more — to analysts and traders worldwide.

That is to say: The CFO’s principal stakeholders, both internally and externally, are tuning in to sustainability, as my colleague Paul Baier noted recently.

According to Ernst & Young, there are three key areas where CFOs play a role in sustainability:

1. Investor relations. E&Y describes this as “the art of storytelling,” which surprised me, given investors’ interest in numbers, not stories. But sustainability, says the report, “can be viewed as a new character introduced into a familiar plotline. The story is still about financial promise, but with a new twist: increasingly, a company’s sustainability story is being heard and read by the same people who read its annual financial reports.”

As sustainability issues intertwine with business strategy, institutional investors are starting to view financial and non-financial performance as two sides of the same coin. The report urges CFOs to “Work with your sustainability team to develop a sustainability story for your organization. If current trends continue, the CFO could be the one telling it.”

2. External reporting and assurance. Transparent reporting of sustainability performance is important, and not just to investors and ratings agencies. Business customers are requesting information about a company’s environmental footprint — witness the growing number of supply-chain initiatives centered around a company’s sustainability commitments and performance.

E&Y also points to the growth of corporate sustainability reports, but especially to the growing wave of integrated reports that combine sustainability metrics and conventional financial reporting. “It may be a voluntary trend that gains momentum, or a development driven by government regulation,” writes E&Y. “Either way, the potential shift in the direction of integrated reporting adds to the importance of involving the corporate finance team in the sustainability reporting process today.”