How to get your CFO to love your sustainability director
How to get your CFO to love your sustainability director
For years people have been talking about making the business case for sustainability. That process typically entails the sustainability director coming up with an environmentally focused initiative and then spending several months proving it won’t just be good for the company’s ecological footprint but also for its reputation and bottom line.
The whole thing is bunk, according to Yann Risz, vice president of strategy and environmental finance for Environmental ERP software company Enviance.
Instead, Risz says sustainability directors should be looking at their companies’ pain points and thinking about eco-minded initiatives that could help to address them.
Step one: Get out of HQ
The first step to understanding where all a company’s environmental impacts are and how they relate to costs and risks in financial terms is to look across the entire supply chain.
That’s not a new idea, of course. Companies have been tracking their supply chains ever since they got big enough that a sly cellphone snapshot in an Indonesian work room could cost a U.S. apparel company millions in bad publicity. However, while companies keep tabs on suppliers to ensure compliance with various laws, they remain largely in the dark about the broader financial and environmental impacts of their supply chains.
“You wouldn’t imagine managing a company’s finances with no system, but that’s sort of how it is today with supply chains and environmental impacts,” Risz said.
Take energy, for example. A company might look at its own direct energy usage and realize it spends about $1 million in energy per year. Based on that, it might look at what would happen to that spending should energy prices skyrocket. In doing so, it might neglect to account for the additional millions of energy costs embedded in the supply chain and what would happen to the cost of all its materials should energy prices rise.
Next page: Lockheed Martin's supply chain
When Lockheed Martin wanted to take a closer look at its supply chain recently, it didn’t know where to start, whether to make like Walmart and send everyone a survey or figure out what was material to the company’s well-being — both financially and environmentally — and go from there. The company opted for the latter route, working with Enviance to look at more than 2,000 environmental indicators. It was surprised to find that out of 2,000 indicators, many of which the company had deemed materially important, ten areas accounted for some 96 percent of the company’s overall environmental impact.
The top ten were largely centered around energy, and the company realized tracing energy issues related to everything from HVAC systems to data centers through its supply chain helped to paint a clear picture of where it could get the biggest bang for its sustainability buck.
In many cases, the environmental and financial risks and benefits dovetailed nicely. According to the analysis, energy efficient upgrades to lighting, for example, would deliver a 309 percent return on financial investment and a 570 percent ROI in environmental terms (calculated as reductions in emissions and energy usage). In others, like data center upgrades, the environmental benefits (194 percent) outweighed the financial benefits (49 percent), but not so much that they didn’t still seem worth tackling. [Lockheed declined to be interviewed for this piece, but study numbers were recently released in a Gartner case study of the project.]
Step two: Think like a sourcing guy
"If you want to scale sustainability, you don’t start with sustainability and incrementally change it to make it business-friendly," said Risz. "You start with understanding the average day of a procurement officer; he has five minutes to listen to you, so you need to understand what he needs and give him something he can understand in that time."
Just as Risz suggests sustainability officers get to know the pet peeves of procurement officers, he recommends companies trying to improve their supply chains eschew the ubiquitous questionnaire and instead engage their suppliers in a different way.
“Approach them with an analysis of their business that includes the financial and environmental impacts and risks and say we’re trying to reduce impacts and make ourselves more cost competitive and we believe that of the 24,000 suppliers we have you’re a key one that we need to talk to,” he said.
Next page: Look at more than risk
Step three: Learn to speak finance
"As CFO, maybe that's interesting but what does that mean to my job?" Risz says. "What's the financial exposure linked to those factors? We estimated that 35 percent of Lockheed's EBIT [Earnings before interest and taxes] was associated with energy-related commodities in its supply chain. Now that gets the CFO's attention. Suddenly it's not the crazy green guy talking, but the business guy going, 'Hey, we have 35 percent earnings exposure here, so we'd better deal with it.'"
It’s not just about revealing financial and reputational risks associated with environmental impacts, but also about investing the company’s sustainability budget wisely. Prior to Enviance conducting its study, Lockheed Martin’s sustainability dollars were scattered across 450 different projects that at first glance would seem to make sense: Initiatives related to water, energy savings, you name it. Now the company plans to focus on the areas where it can have the most impact.
In its analysis, Enviance found that, while seven of Lockheed’s top 10 environmental factors were energy-related, waste and water were of relatively minor importance. While projects related to upgrading HVAC systems, making data centers more efficient, and conducting building energy retrofits delivered financial and environmental returns of over 100 percent in less than two years, many of the company’s water projects delivered less impressive returns (60 percent or less) in an average of four years, for example. That information can help Lockheed make sure to invest its sustainability dollars appropriately and be very clear about the expected return on those investments.
Overall, accurately accounting for environmental risks and benefits helped Lockheed pinpoint more than $30 million in potential savings.
In the end it may all boil down to simple human empathy and collaboration. “It’s not just about how you communicate sustainability, you have to appeal to your colleagues’ KPIs,” Risz says. “Tie your goals to their goals.”
Image of rollerbrush painting a grassy path provided by Maxx-Studio via Shutterstock.