What are you doing to reduce your impact on the climate and the society?"
It's a question a growing number of CFOs are hearing from investors. Board members, employees, consumers, and the general public are joining in the chorus in asking the question and demanding answers. And companies have been getting to work.
A 2020 KPMG report observed a dramatic rise in the number of companies reporting on sustainability issues. This trend appears to be driven not just by pressures from investors or new laws and regulations but also a growing understanding amongst CFOs that environmental, social, and governance (ESG) issues impact a company's bottom line.
"More CFOs are beginning to realise that sustainability issues are fundamental to their company's survival," said Delphine Gibassier, professor of accounting for sustainability and the director of the Executive MBA Chief Value Officer programme at Audencia Business School in Nantes, France.
There are examples of this already: In 2019, the US utility Pacific Gas and Electric filed for bankruptcy after accumulating an estimated $30 billion liability when faulty power lines sparked wildfires in California. While poorly maintained equipment may have been the cause, a study by Columbia University found that "scientists believe that conditions caused by climate change made the fire more likely to occur and more damaging".
Yet, measuring the degree to which their organisation is operating sustainably or creating long-term value across environmental and social outcomes remains an elusive goal for many companies.
That's why some CFOs are beginning to create new sustainability positions — and sometimes entire departments — specifically with accountants in mind. Others have even created roles for sustainability CFOs — high-level finance professionals whose job is to understand and manage a company's sustainability risks. For Roel Drost, Ph.D., the chief value officer for Dutch sustainability consulting company Ecochain, bringing accounting professionals to the sustainability space is a no-brainer.
"Ten or 20 years ago, companies were thinking, 'I need a sustainability strategy,'" he said. "Now companies realise that they don't need a sustainability strategy — they need a sustainable strategy." Specifically, that means adopting business practices that are sustainable in the long run, and this, Drost believes, requires integrating management accounting not just to the financial dimension, but the environmental and social performance as well. Sustainability strategies should also be adopted into core business goals, rather than being siloed into a separate corporate social responsibility or sustainability department.
But what exactly does a sustainability accountant do? And how do CFOs best incorporate their skills into business planning? FM magazine talked to experts for tips.
1. Define the role of the sustainability accountant
A report co-authored by Gibassier titled Sustainability CFO: The CFO of the future? defines a sustainability accountant or sustainability CFO as a professionally trained accountant — often a CPA or chartered accountant — "dedicated to the identification, collection, estimation, analysis, and reporting of physical and monetary information related to nonfinancial topics ... [which] include but are not limited to the measure of environmental footprint, societal impact, stakeholder management, and the protection of biodiversity."
What this means in practice is that they bring the rigour and data mindset of accounting to the nuance and complexity of sustainability, with the aim of creating tools that allow the CFO and other company executives to better include sustainability concerns into the day-to-day decision-making of the organisation.
"Accountants actually have a lot to bring to the issue of sustainability," Gibassier said. "To truly incorporate sustainability into an organisation's core business strategy, you need numbers, dashboards, and tools — and that's what accountants do."
2. Consider the best structure for your company
There are many structures a company might use to effectively incorporate accounting into sustainability: Some companies hire a sustainability CFO to lead the initiative — the model outlined by Gibassier's report. Under this model, the sustainability CFO acts as both the business partner to the sustainability department and also as a liaison between the chief sustainability officer and the CFO.
Other companies — like Singapore company Olam International, one of the major cocoa suppliers to US-headquartered Mondelez International, which makes Cadbury, Oreo, Milka, and Toblerone products — have created a unique finance for sustainability department, staffed by a mix of chartered and management accountants with an entrepreneurial mindset who relish the opportunity to create new and innovative tools.
"I look for candidates who understand accounting principles but have a passion for sustainability and being a part of this change," said Rishi Kalra, the CFO of Olam Food Ingredients. "It's difficult to hire, as there aren't too many people who have this knowledge base, so often we have to train them."
3. Secure approval from the C-suite and board of directors
CFOs interested in creating sustainable accounting positions should start by getting the buy-in from the C-suite and board of directors, Kalra said.
"You need to engage with your board of directors and CEO and sell hard on this issue," he said. "Doing this makes a lot of financial sense, but it also means a lot of upfront investment, and you need to show them that the long-term value is there."
To do this, Kalra recommended educating company executives about how taking a more integrated approach can drive long-term value and how having accountants measure a company's sustainability impact is vital to future-proofing.
For example, because a company's sustainability risks are often not captured by traditional accounting practices, management accountants could be missing hidden costs that cut down on a company's overall profitability. By including social and environmental costs in their ledgers, they can begin to capture these hidden costs. This allows the CFO to see how short-term expenditures — for example, working with farmers to adopt practices like crop rotation that enrich their soil nutrients naturally, rather than relying on fertilisers, which often deplete the soil over time — can pay off in the long run.
"There's a clear financial link between the sustainability aspects of a company and its long-term value creation," he said. "We know the link is there, but accountants have the tools to reflect these facts into dollars and cents."
4. Make sure sustainability accountants work closely and collaboratively with the CSO and sustainability department
While sustainability departments have always produced numbers, they are often more geared towards public relations reports or reporting on corporate social responsibility initiatives and lack the rigour of financial accounting, Gibassier said. It's also quite common for sustainability reports to come out after annual reports, which contributes to the siloing of sustainability from a company's core business strategy.
Accountants, on the other hand, bring their competency in data tools and an analytical mindset but often lack a nuanced understanding of a company's environmental and social impact. That's why success hinges on the two types of professionals working closely together.
"I like to think of it as bringing in management accountants to be the business partners to sustainability," Gibassier said. "This is something that most corporations already do. You would see management accountants working with research and development departments, or with purchasing departments, but rarely would you see them on sustainability teams."
Drost describes the competencies of management accountants and sustainability professionals as "yin and yang".
"The finance professionals understand risk, processes, and controls, while sustainability teams have all the knowledge about sustainability issues but less awareness of data quality and controls," he said. "But if you combine them, you have a power team."
5. Build the right tools
Once the team is in place, it's important to start building dashboards and tools that accountants can use to capture the nonfinancial dimensions of a company's value, such as its social or environmental impact. Because each company's footprint is unique, accountants often have to build these tools from scratch.
"Accounting has been very short-term focused, while value creation is much more long-term," Kalra said. "The value of an organisation is affected by many decisions made on the ground, and the challenge is to capture these values and risks in a numerical form."
To start, Kalra had his team work with sustainability professionals to translate Olam Food's social, environmental, and biological impact into standardised systems.
"We tried to create systems that would allow us to simplify and embed these dimensions in easy-to-understand formats similar to profit and loss and balance sheets," he said. "Then we looked at elements and methodologies that could be adopted so it's consistent and could be embedded into our day-to-day business decisions."
Some of these tools assessed the environmental impact of the farms they worked with — including the impact on soil erosion, and overall emissions — while others looked at how to capture social dimensions such as livelihood and labour issues at the source. Sustainability accountants also need to be willing to work in proximity to challenges that are endemic in certain sectors — such as child labour in the chocolate industry's supply chain or forced labour in the fishing sector — and to work closely with sustainability professionals to come up with tools aimed at capturing and mitigating those risks.
"There are no set standards or guidelines, so the tools really need to be tailored to your needs," Kalra said. "You need to be innovative."
6. Integrate nonfinancial dimensions into annual reporting
According to Kalra, it's vital that this data is integrated into dashboards that the C-suite can use to guide strategic decision-making.
"Once you have this data, you can begin to develop tools to digitise it and establish operating procedures which will allow you to scale it across the entire organisation," he said. "This ensures that when we are doing our monthly reviews, we are looking at these numbers alongside the financial ones."
Integrating the reporting also has the additional benefit of helping investors and shareholders understand the benefits of taking a more integrated approach. Now that Kalra has been working with his sustainable finance team for several years to create more integrated annual reports, he said, the financial benefits of this approach have become crystal clear.
"You can see in the annual report how doing good can actually create value in dollars and cents in the short and medium term," he said. "When you dissect and report information like this, you're able to clearly see how these values link to our business performance — and in the end, this is what finance people understand best."
Malia Politzer is a freelance writer based in Spain. To comment on this article or to suggest an idea for another article, contact Alexis See Tho, an FM magazine associate editor, at Alexis.SeeTho@aicpa-cima.com.