The New Role of the ESG-Focused Chief Financial Officer

The role of the Chief Financial Officer (CFO) has evolved significantly in past years to include Environmental, Social, and Governance (ESG). Gone are the days of the CFO who focuses only on accounting. Enter the ESG-focused Chief Financial Officer who is required to be fluent in environmental metrics, sustainable supply chain dynamics, and carbon accounting spreadsheets. Today’s CFOs are just as dynamic and passionate as the organizations they work for and are poised to take on sustainability as a strategic area of value creation from a position of in-house leadership.

The recent emphasis on ESG performance is based on growing evidence that companies benefit from strong policies for managing and quantifying ESG. While efforts to support ESG have historically been perceived as a cost center, in recent years that notion has been discredited. Today, 90% of the S&P 500 market value is made up of intangible assets such as, brand equity, R&D, IP, adaptability, customer loyalty, goodwill, supply chain resilience thereby cementing ESG management as a center of intangible value creation. With more business leaders recognizing that ESG bolsters financial resilience and overall performance it falls squarely in the domain of today’s ESG-focused Chief Financial Officer.

The Emergence of the ESG-Focused Chief Financial Officer

CFOs and finance teams are finding their responsibilities transformed as ESG becomes a key business priority. The ESG-focused Chief Financial Officer adds a newly responsibility onto an existing role. Recent job listings found on LinkedIn for finance-related jobs include a Senior Sustainable Finance role requiring “analytical experience in the field of ‘Sustainable Finance,’ as well as a science-based qualification and/or finance/economics degree,” and for a Director, Finance – ESG calling upon candidates “to develop the scope and boundary for ESG reporting and be adept at managing ESG performance metrics/KPIs, target setting, and the data needs to support them, plus to be effective in interaction with senior business leaders.”

Historically, the ESG function has been part of the responsibility of an executive apart from regular functions. Some firms saw the need to create a separate sustainability function with a VP or CSO. However, some ESG-focused Chief Financial Officers have already started leading sustainability for their company and are already seeing positive impacts.

Embedding ESG roles into traditional business functions has helped drive greater accountability and improve the adoption of sustainability practices throughout our company. We moved our ESG reporting and Sustainable Cloud Computing roles from the Sustainability Team to the Accounting and Engineering teams.

Rachel Glaser, Chief Financial Officer, Etsy

SEC Climate Disclosures are likely to bring ESG into the CFOs Ambit

The impact of the SEC Enhancement and Standardization of Climate-Related Disclosures will be significant on CFOs. The rule would require climate disclosures to be included in a public company’s registration statement and annual reports, e.g., 10-K. As a result, more climate related questions will be asked in investor calls, specifically related to the cost of capital (as related to climate risk). It is expected that SEC mandates will not stop at climate disclosures. Eventually, non-financial disclosures across other ESG issues will be made mandatory as well. SEC Climate Disclosures likely will also affect private companies in two ways – 1) if they are in a supplier relationship with a public company, they will be asked to provide relevant information and 2) alternative investments are likely to follow a similar path towards greater investor transparency.

Chief Financial Officers already possess both the skills and impetus to steer ESG

The CFO team already possesses the skills and capabilities required for short and long term success of an ESG program and have visibility into all departments and their data streams, including HR, operations, marketing, sales, development, manufacturing, and logistics. Above all, the finance function has mastered the ‘financial rigor’ required for a well-designed and executed ESG strategy. At least 50% of CFOs have already realized that better ESG performance leads to reduced cost of capital due to better risk management, enhanced investor perception and, increased access to sustainable finance market.

Evidence for the impact of ESG performance on other areas such as revenue growth, profitability, customer satisfaction, employee retention, etc. have also been established. As the owner of corporate strategy and financial performance, the CFO has oversight on the entire organization, is well-connected within all functions and, keeps an unbiased watch on org data. Apart from these he/she owns the capital allocation as well as accounting of the company. Be it introducing an internal carbon pricing, implementing triple accounting methods or just designing/executing a well-integrated ESG program – these capabilities make CFOs 20-30% more effective for leading ESG.

The Topics an ESG-focused Chief Financial Officer Should Care About Most

While relevant ESG topics depend greatly on company size, industry, and unique operations, and every company should define their own priorities based on input from a broad set of internal stakeholders, many ESG topics at a high-level are relevant. Following are some KPIs the Good.Lab team has found are most useful while growing our company and working with the CFOs of medium-sized companies among our client bases.

Climate & Energy, making a case for controlling energy usage in today’s world is a no brainer as reporting on climate and energy is soon to be required for most companies. The ESG-focused CFO needs to be able to assess how climate risks could impact business performance and then must integrate that risk assessment into company strategy which includes defining climate change initiatives that drive financial performance, brand, and shareholder value. Primarily, the CFO needs the data and to analyze and report on company’s use of energy and its contribution to climate change along its full value chain, how and if the company measures and manages its energy use and emissions of greenhouse gases and other pollutants, and whether its products and services contribute to or help its customers’ climate impacts.

Diversity, Equity, & Inclusion, which concerns the policies and programs that promote the representation and participation of diverse groups of individuals in the workplace, can play a part in creating long-term value for shareholders. In fact, a Wall Street Journal analysis found that the 20 most diverse companies in the S&P 500 have an annual stock return of 10% over five years, compared to the 4.2% achieved by their least diverse counterparts. Such findings may be one aspect to help motivate CFOs to assess what more they can do—beyond supporting relevant budgetary decisions—to help their companies implement DEI-related strategies and programs. Removing biases from people processes, such as hiring or compensation, rather than specific quotas or targets helps companies attract and retain the best talent and is therefore an opportunity to drive value into the future. The ESG-focused CFO needs to work closely with HR to ensure performance across this essential metric, which includes operating transparently across the company to define policies to uphold company values as it relates to D, E, & I, ensuring these ESG topics are openly discussed, and implementing actions in this area as needed.

Supplier Management, seems like it may be the domain of an operations team, however, is all about risk mitigation, especially considering the recently passed Forced Labor Law, which compels companies not only to manage their exposure to forced labor, but to also be proactive around understanding their supply chain in exacting detail. For large companies with a robust ESG & compliance program, or a small importer, the requirements are the same. And the ESG focused CFO needs to be able to report and verify that human rights and labor practices are. upheld throughout the entire value chain, having assurance that internal employees and external supply chain labor experience the same labor practices regardless of their race, sex, nationality, ethnicity, language, religion, or any other status.

Corporate Accountability, which broadly concerns the way a company organizes itself and makes decisions regarding ESG topics demands that ESG topics are considered alongside traditional factors in business decisions. This responsibility falls squarely on the plate of the ESG-focused CFO who holds the responsibility for translating companywide strategy into relevant ESG metrics and articulating and communicating that value story to their stakeholders.

What To Do Next

ESG-focused Chief Financial Officers need to take some initial steps today, to prepare for near term mandates from a regulatory standpoint. CFOs looking to create an ESG strategy and comply with pending reporting mandates can begin by:

1. Build a Climate Strategy for your company that aligns well with the SEC proposal
2. Develop and Execute a Data Strategy to identify gaps with a plan to collect relevant metrics
3. Establish a Governance Mechanism for controls and information governance
4. Prepare for Reporting and Assurance Cycles by identifying and implementing a suitable technology solution to automate these processes

To begin addressing these program areas and more, ESG-focused Chief Financial Officers can connect with Good.Lab’s sustainability professionals to learn more about our Sustainability Management & ESG Compliance Solutions for finance and accounting teams. Assess your performance on carbon emissions, supply and value chain impact, and CO2 mitigation action items & carbon offsetting and prepare to follow upcoming SEC regulations for climate risk assessment and management and climate transition scenario analyses and action planning. Let’s talk about your company’s ESG strategy today.