Enhancing value through sustainability: Tips for the finance team

Investors, customers and employees are increasingly pressuring companies to measure and report social, economic and environmental performance, which could lead to enhanced accountability and disclosure of workplace safety, human and labour rights, and environmental practices.

And that is expanding the role of finance professionals, who are increasingly managing sustainability aspects of investor relations, the financial risks of sustainability and external reporting and assurance of such data.

“Sustainability is about making money, saving money and managing risk,” says Stephen T. Starbuck, CPA, who leads climate change and sustainability services at Ernst & Young in the Americas. “And what’s the role of the finance department? Make money, save money and manage risks.”

Starbuck spoke about the role of finance in sustainability on Tuesday at the AICPA’s International Business Conference in Washington. He offered context surrounding the emerging role of sustainability reporting and tips for finance professionals.

Customers are the top driver of sustainability reporting initiatives, Starbuck said.

“The pressure companies are getting today from their business customers is immense,” he said. “The sustainable supplier programmes are creating huge burdens on companies to measure and report to their business customers on their environmental and social performance.”

Business customers are trying to determine whether the companies they’re dealing with are operating effectively from an environmental and social standpoint to drive out costs, and to manage reputational risk, he said. “If you’re a shoe company and you’re having your shoes manufactured by a company that’s using child labour or has a human rights and labour policy that’s not conducive to your values, your reputation could be shot.”

Investors, recognising these risks are paying more attention. When E&Y surveyed executives in 24 industry sectors last year, 66% of companies reported an increase in sustainability-related inquiries from investors compared with 2010. Seventy per cent of inquiries focused on company efforts to reduce energy consumption and on greenhouse gas emissions.

And as more companies report such non-financial information, demand for independent verification is also increasing. “As companies start engaging accounting firms to do the [assurance or] audits of sustainability reports, it’s the CFO and the finance function that will work with the auditors,” Starbuck said following his presentation Tuesday.

It’s important that the finance team help the sustainability team understand what an audit is and what it is not, he said. “Make sure if they’re paying for an audit, they’re really paying for an audit.”

Among his other suggestions for companies developing sustainability reporting initiatives:

• Don’t operate in isolation. It’s important that the people responsible for social, economic and environmental reporting “aren’t just sitting there in some office doing it without some benefit of having a cross-functional, cross-geographical team working with them,” Starbuck said.

• Involve R&D. “R&D is huge because the development of new products to meet the sustainability demands of the market – and the involvement of R&D in the measuring of the environmental footprint in the lifecycle of a product – is important,” he said.

• Tell your sustainability story. A company’s sustainability story has offensive and defensive benefits. On the offensive: “If you’re not telling the story, you’re not getting credit for it, and somebody else who’s not doing as good a job as you might get the credit,” Starbuck said.  Defensively speaking: “To the extent that you do have a foot fault, having established a strong sustainability framework, you can lean on that to get yourself through the potential firestorm – particularly if you get hit with something that goes viral.” A strong sustainability framework – one that transparently reports on what the company is doing well and what it needs to work on – may lessen the blow.

Starbuck also suggested that finance professionals:

• Learn who’s who among the specialised sustainability rating agencies to prioritise the ratings most vital to your organisation.

• Pay attention to sustainability-related shareholder resolutions that come up at annual meetings, and advise the board and top executives on which issues would be best to pursue.

• Take preemptive action on governance-related sustainability issues to avoid being forced to react to them.

—Jack Hagel (jhagel@cgmamagazine.org) is the editorial director of CGMA Magazine.