Upcoming regulations around the world on sustainability reporting are creating a seismic shift for the better in corporate practices. Not only are they pushing the reporting and disclosure activities to the CFO’s office, to better leverage the rigorous practices for disclosure quality already in place, they are as a result elevating the role of the CSO’s office to truly integrating and managing sustainability across the organization. However, CFOs and CSOs will need to work together if they are to achieve the benefits of adopting a sustainability mindset, both for the company and ’the planet’.
Corporate sustainability practices have greatly evolved, from predominantly philanthropic and community-based engagement activities to risk and opportunity management, and increasingly impact management. Informing stakeholders about the company’s practices has also come a long way, from a voluntary communications exercise to more structured reporting.
The global recognition of the importance of sustainability-related issues to the proper conduct of business, both for creating enterprise value and addressing environmental and social issues, is now leading to the regulation of this reporting. Moreover, these regulations are driving disclosures to be standardized, audited, and digitized for large scale consumption and interoperability – the underpinnings for comparability. It’s also driving the convergence, and ultimately the integration, of financial and sustainability accounting and reporting, that is to say provided at the same time, in the same document, for the same reporting period.
Sustainability Reporting Is Moving To The CFO’s Office
These accounting, reporting, and disclosure megatrends are causing a seismic shift in corporate practices, specifically in where the sustainability reporting activity lives. Whereas previously it might live in the communications, compliance, investor relations, corporate social responsibility, or more recently ESG department, it’s migrating to what some might consider its natural home: the finance and accounting department.
Indeed, this is the function where existing regulatory reporting and disclosure activities take place. Over many years, companies have developed and optimized a data management process underpinned with robust internal controls to capture, manage, and report financial data. This finance infrastructure benefited from a 50+ year maturation period, and then from the digitization revolution that has been sweeping through companies of all sizes. Leveraging this infrastructure, and expanding it with new environmental, social, and governance data management systems, will now enable companies to prepare audit-ready sustainability data, in much the same way as financial data… and there is an urgency to act.
Another, as yet overlooked benefit of involving the CFO in sustainability reporting is the strategic role they play in transitioning – or transforming – the business model to a sustainable one. For example, they’re instrumental in evaluating the capital investments necessary to reduce emissions from manufacturing activities, or approving an R&D budget to reduce packaging waste or water consumption. Their agile thinking and adaptation skills – a valuable legacy of the Global Financial Crisis – can help shift corporate sustainability mindset from a nice-to-have to a strategic imperative in managing key risks and opportunities.
Sustainability Management Lives In The CSO’s Office
While reporting can indeed be centralized in a single department, management of sustainability-related issues cannot be. Simply put, these are multidimensional, cross-organizational issues living in many different departments within the company. Therefore, while the CFO’s office can take on sustainability accounting and reporting functions, it cannot manage the multitude of underlying sustainability issues. That’s where the CSO’s office plays a pivotal role.
As a full fledged member of the executive suite, the CSO’s role is evolving to focus on truly embedding sustainability into the company’s strategy and business model, and being accountable for delivering sustainable outcomes. Delivering in this context means proactively managing risks, leveraging opportunities, and raising company consciousness on these important topics so they become part of routine operations. Freed from the task of reporting, CSOs can redeploy their time and resources to managing issues, developing and implementing policies where needed, and implementing action plans with clear performance measures and targets.
To do all this they will need high-quality data more than ever, not simply to fill the pages of a report but to continuously track their progress, know how they are performing, and take corrective actions when necessary.
Sustainability Is A Collaborative Effort
To be effective, CSOs cannot operate in a bubble (who can, really?!). They must break silos that still persist and see the bigger picture of how sustainability considerations are woven into virtually every facet of an organization, creating an interconnected ecosystem. Their real strategic role is that of interacting and partnering with all departments, such as risk management, strategy, compliance, operations, as well as topic owners in environment, human resources, supply chain management, and information technology, to name a few.
Undoubtedly, the CSO’s greatest collaboration partner is the CFO. From strategic planning and budgeting to data management and audit, their work remains closely intertwined. It organizes and magnifies the many interactions that already exist between business unit heads and the CFO.
Why is this collaboration so critical? Because only when the CSO and CFO work together can the company truly execute on managing sustainability-related risks and opportunities and reap the benefits of doing so. Sustainability then becomes a lever for every dimension of the business, including strategic planning, operating efficiency, human capital management, research and development, supply chain management, and even customer satisfaction. In turn, this leads to better operating and financial performance, optimal risk management, lower cost of capital, and positive impacts for the environment and society. Clearly, the days of the CSO and CFO at best uninvolved in – and at worst unaware of – one another’s work must fast come to an end!
Case in point: a production manager may weigh equipment replacement decisions based on production volume and maintenance needs, whereas the CSO may consider the life-cycle analysis of the equipment, its emissions generation, its end of life strategy, or the human rights record of the supplier, and the CFO may consider total cost and impact of owning vs leasing the equipment based on utility consumption and GHG emissions, as well as the financial impact of those emissions.
Time Is Of The Essence
In the face of rapidly changing markets, CFOs and CSOs need to recognize the seismic shift that is happening, embrace it for the benefits it brings the company, and be intentional in implementing it as quickly as possible. The proactive and purposeful collaboration between finance and sustainability is critical to long-term corporate success, and to achieving a state of sustainability for all.