As the CFO of a Fortune 500 company for six years, Elyse Douglas realized that for her business to reap the full benefits of ESG efforts, she would have to lead the agenda.
“I understood that the best way to build the business case for sustainability was for the CFO to embed ESG activities into corporate strategy and plans, allocate needed capital, and hold people accountable,” says Douglas, the former CFO of Hertz. “Otherwise, it will not achieve the level of prominence and importance ESG deserves.”
Those lessons stayed with her, and today Douglas is the Senior Scholar at the Center for Sustainable Business at New York University. There, she helps CFOs and other corporate leaders prove the importance of ESG (environmental, social, and corporate governance) initiatives for business management and performance. A strong business case for sustainability is increasingly important as stakeholders (including investors, employees, customers, suppliers, communities, regulators, and the news media) scrutinize the ESG profile of companies.
“Companies that fail to factor ESG into their strategy, operations, and overall strategic decision-making are at risk of missing opportunities that may significantly impact their revenues and profitability,” Douglas explains.
Bottom Line Impact
CFOs are uniquely positioned to take a leading role on sustainability strategy, disclosures, and reporting to their boards on related opportunities and risks. They just may not realize it yet.
They also may not realize that investors, consumers, and employees are already making decisions about companies based on their sustainability agenda and record. Non-financial factors play a prominent role in the investment decisions of 91 percent of investors, according to a July 2020 survey by professional services firm EY.
“Companies that fail to factor ESG into their strategy, operations, and overall strategic decision-making are at risk of missing opportunities that may significantly impact their revenues and profitability. ”
“CFOs that fail to understand the tangible financial benefits associated with a strong sustainability strategy—the ability to attract capital, talent, positive media coverage, and customer loyalty—are unlikely to assess, measure, and mitigate the related risks,” says Douglas. “In turn, this can lead to employee retention issues, higher costs, and poor brand reputation.”
European Union regulators have proposed new regulatory requirements on ESG reporting by publicly-listed companies. In April, the EU proposed that public companies disclose information about their impact on the environment, as well as social metrics regarding their treatment of employees. Large US banks with subsidiaries in the EU also would have to comply under the proposal.
Some banks are evaluating financing decisions, and insurance companies are making underwriting decisions based on customers’ ESG disclosures. For example, global insurer Chubb will not underwrite insurance for utilities that generate more than 30 percent of their energy production from coal. The six largest US banks recently committed to reaching net-zero emissions by 2050. Since 2017, Bank of the West has restricted financing for coal-fired power plants and other environmentally harmful activities like fracking and Arctic drilling.
To meet stakeholders’ demands and get ahead of future sustainability concerns, CFOs can start by building the business case in their organizations. Imagine, for example, a CFO recommending that human resources adopt an employee well-being program to create a more sustainable workplace. If the CFO knew what retailer REI learned when working with the Center for Sustainable Business—that their employee well-being program produced $34 million in net benefits in 2019—the recommendation would make perfect sense.
A Clearer View of Sustainability
To assist CFOs looking to lead on the topic, the Center for Sustainable Business has developed the Return on Sustainability Investment (ROSI) methodology. The ROSI framework consists of four pillars.
Applying the ROSI approach, using an example of a chocolate manufacturer, might look like this:
Assess material ESG factors relevant to corporate operations:
The maker of chocolate assesses the elimination of suppliers whose practices result in deforestation—a factor for which ROI is not immediately clear.
Determine financial and societal benefits of a specific initiative:
Next, the chocolate company determines all possible benefits of a sustainability practice, both financial and non-financial, such as improvements in operational efficiency, risk management, supplier relations, and media coverage. The company may determine that by sourcing sustainable palm oil, society will benefit from a reduction in global warming. In turn, the policy may lead to greater brand loyalty and improved operational efficiency, as the company sources from fewer suppliers.
Quantify specific benefits:
The company quantifies the perceived benefits derived from sustainable practices. The chocolate maker’s commitment to deforestation-free palm oil may result in a specific percentage increase in employee satisfaction levels.
Apply a dollar value to the benefits of the sustainability-focused initiative:
The company calculates a dollar value that may accrue from the intangible benefits associated with the sustainability practice. This might be an estimation of the monetary value of positive news coverage or the value of increased employee retention.
These varied benefits suggest unexpected financial returns emanating from atypical sources—such as higher operational efficiency deriving from sourcing deforestation-free palm oil. Douglas says that companies in diverse industries that have implemented the ROSI methodology have generated both direct and indirect financial returns. For example, the Center for Sustainable Business collaborated with the CFO and the chief sustainability officer of a power company planning to phase out coal-generated electricity ahead of the US government’s 2030 mandate.
“The CFO had a handle on the operating efficiencies and other direct tangible benefits that show up on the corporate P&L, but solicited the center’s help in calculating the value of the intangible benefits,” Douglas explains. “Ultimately, we were able to quantify the potential financial return on four of seven intangible benefits—the cost of debt financing, a lower cost of equity, decreases in employee turnover, and higher employee productivity.”
The financial returns from the four intangible benefits added up to about $30 million.
Another example is apparel maker Eileen Fisher, which partnered with the Center for Sustainable Business to determine the benefits accruing from investments in lower carbon transport and a circular take-back program for recycling and upcycling products. Using the ROSI methodology, Eileen Fisher revealed the transport change and take-back programs generated net benefits of $1.6 million and $1.8 million, respectively, in 2019.
Valuing Intangible Benefits
A CFO’s unique perspective into the business is crucial in tracking intangible benefits of sustainability, related, for example, to brand and reputation. Strengthening the connection between these non-financial assets and financial performance is important for investors, lenders, insurers, and other corporate stakeholders to gauge the long-term value of sustainability practices, says Douglas.
CFOs interested in leading on enterprise ESG activities might start by downloading the sustainability standards developed by the nonprofit Sustainability Accounting Standards Board (SASB). The SASB standards identify the subset of ESG issues most relevant to financial performance in 77 different industries, “highlighting what is material for CFOs in a particular industry to track and disclose,” Douglas says.
As CFOs take charge of sustainability, their efforts will extend beyond tangible and intangible financial benefits, building a more sustainable, resilient business that is well ahead of the curve.