As the CFO becomes both the litmus test and the enabler of sustainable business, we discussed “The CFO’s Dilemma” with the finance chiefs of Jaguar Land Rover, Diageo, SSE and Bupa. How does today’s CFO balance strong short-term pressures against the recognition that long term value is increasingly being determined by societal trends?
Two factors have made the process of allocating capital against competing priorities harder in recent years. Firstly, a growing list of societal trends need to be factored into decisions, from climate change to resource scarcity and rising levels of government debt. And secondly, with higher standards of corporate reporting and social media, society has now a lens to judge business.
It is no surprise that we are seeing the emergence of “social alpha” – high sustainability companies outperforming their peers in share price and operational performance. Simultaneously, whole sectors such as banking and utilities have paid a price for losing the trust of society.
So how does a CFO allocate capital in a way that finds social alpha? How does a car company maximise returns from existing models whilst investing in tomorrow’s low carbon models? How does a bank balance the high returns from investment banking against reputational risk? How does an energy company draw up a tax strategy in an era of “fair tax”?
We began with a keynote by Gregor Alexander, Finance Director at SSE, on Fair Tax and natural capital accounting. Axel Threlfall then moderated a panel of finance chiefs from Jaguar Land Rover, SSE, Bupa and Diageo. We covered issues such as;
Engaging investors on sustainability issues is a crucial motivator for internal decision making. This table will review A4S’s new guidance on investor engagement developed by the CFO Leadership Network for finance teams, identifying the practical steps that demonstrate commitment whilst linking sustainability to the investor’s agenda. Linking with long term strategy, quantifying the risks, consistent metrics, integration in all communications etc.
How do you empower a company or board to get people to engage in a project?
• Establish the environmental costs and advantages
• The people and labour element of the supply chain
• Make your objective and show your vision to be business as usual
• Ethical trade (which is what the customer expects)
• Disaster EX: Rana Plaza. Which although tragic, overhauls risk management and brand reputation to make right, and sure it does not happen again
• Until you can attribute a value or metric, it is often hard to move forward as boards need clear numbers and spreadsheets not just ideas
• Consumers are a huge influence, but how much does a consumer really respond EX: Primark shoppers still shop after Rana Plaza, Tesco shoppers still buy ready meals
Do Investors ask questions as well?
• YES! Most investors are long term. There is a difference between long and short term investors and the long term investors will make a case for sustainability
• If you are not looking at these issues as an investor you will not have a business to run
• Member of the table disagrees, Investors aren’t asking enough questions, but agree that the long term investors are much more valuable to sustainability
• Do what is right; if the investors are not asking questions they are assuming the company is already doing it. Waiting for an investor to ask questions is bad management, and you don’t need to wait for people to do the right thing.
• Need to use actual sustainability metrics to show the risk in order to incorporate to strategy
When companies like Yorkshire Water starting to use EP&L’s and other natural capital tools, they find they make different decisions. Aided by A4S’s new capex guidance that has been developed by the CFO Leadership Network with their finance network, this table will pool thinking on where the risks and opportunities lie, and rank the practical steps that companies can take to improve capex decisions.
o Getting good data for quantification
o Internal collaboration and integrating data collection/management.
o Slow progress from ONS on adopting standards or approaches on incorporating natural capital.
o Getting SMEs to use it may be a challenge
o How does this marry with integrated reporting?
o Not a complete decision making tool for every type of business. Provides a guide to identifying the top 5 issues for example.
o Unless you can integrate it in the business, then there is no point in doing it.
o Impossible to quantify all types of risk
o Need to understand uncertainties around quantitative data. This can be a heavily qualitative process.
o Need quantitative data alongside the valuations that are use·
o See report
o Getting standards industries behind this is important. ICAEW can help companies get from stage 1 to 2. Opportunity to make money out of it and drive business.
o Engages a finance audience
o Writes the script for a sustainability person to engage finance professionals
o This is a stepping stone to getting towards integrated reporting
o What open source tools are there to help with integrating this – see A4S website and back of report
o Monetisation doesn't work for everyone. Traffic light system may be better, multi-criteria analysis…
o It is a starting point for doing something
o Comfortable pointing ICAEW members towards this guide. Suitably more distant. Not trying to claim the world.
o This makes an approach of a sustainability person to a finance person more credible
The point where major sustainability trends move from the CSR agenda to the organisation’s risk agenda can be a major inflection point. This table will review the guidance guidelines that have been developed by the CFO Leadership Network A4S’s finance network, and pool thinking on how organisations can identify these risks, assess their impact and overcome the obstacles that lie in their way.
1. Review of Accounting for Sustainability (A4S) guidelines:
The Prince’s A4S Project has produced a comprehensive set of guidelines to help companies and CFO’s integrate risks resulting from macro sustainability trends into decision making. The booklet ‘Managing Future Uncertainty’, (one of four in this series), gives background on the following:
- Integrating sustainability in capital expenditure
- How organisations can scale into macro sustainability strategy
- Where companies can invest in risk and other opportunities
- Findings of the study - notably, uncertainty around macro sustainability risk prevents investment.
- How trends are affected by customer preference, government regulation, timing and economic climate.
The booklet provides examples of how to overcome uncertainty and integrate macro sustainability trends into short, medium and long term business strategies through a three step process:
Step 1. Identifying risk
Step 2. Understanding and assessing the impacts
Step 3. Integrating findings into decision making
As a benchmark tool this is a useful publication across all sectors, especially for businesses that may not have a dedicated CSR team to gain an overview of sustainability and risk mitigation. A4S showcase some important success stories and provide instructions on how organisations can individually tailor sustainability risk strategy into their operating frameworks.
2. How can organisations identify risk?
- Find out who is responsible for identifying risks in an organisation and assess whether they have the right resources to do so
- A4S studies show that collaboration with multiple stakeholders is the most effective approach
- Internal collaboration and early involvement of CSR teams to identify problems and work on solutions from the start
- In some circumstances, what is defined as a ‘risk’ has changed as businesses and their outlook on sustainability has evolved. For example, in GE Real Estate health and safety issues around asbestos and contamination developed over the long term into issues of environmental sustainability
- Getting the CEO on board early is key to raising sustainability up the business agenda, for example the appointment of Christopher Bailey at Burberry
3. How can businesses quantify sustainability risk?
- It was agreed by the table that being able to demonstrate commercial returns from investing in sustainability risk is key if the practice is to be fully adopted by organisations. This is difficult because sustainability has previously been unquantifiable, e.g. how do you value the impacts of toxicity in the environment? The table also agrees that although monetising sustainability can help clarify commercial situations, it should not become a ‘one size fits all’ solution. The process of determining sustainability risk and returns can provide valuable insights into understanding what is important to partners and what stakeholders understand to be an acceptable ‘cost’ vs. ‘benefit’.
This table will continue the conversation from the panel discussion, looking at the challenges CFOs face as they balance societal megatrends against short term earnings pressures. It will explore how real the tension is, what obstacles need to be overcome, and the solutions that can make decision-making easier. Who are the principle actors who can unlock this puzzle?
Table 4 (a)
Materiality of sustainability issues
• A number of megatrends may be material to businesses e.g. resource scarcity
• Marketing dept might consider effect on reputation, CFO considers effect on returns
• Need to make sure there is no “ticking time bomb” in the business - identify how business has reduced its exposure to risk
• Quantification should express cost of unsustainable decisions to businesses, e.g. Unilever has said climate change is costing them hundreds of millions.
• CFOs need to publicise positions around sustainability issues material to their business
• Headline figures such as financial savings achieved at M&S through Plan A should be related to strategy and general terminology such as “sustainability” avoided
• Sustainability is not just a nice to have, it’s a future proof. Quantification of risks and opportunities should not only be presented in CSR reports and risk registers. Material facts should be presented with key financial reported results, e.g. for Coca Cola, targets and trends relating to obesity/healthy eating
• A common problem with communicating risks is that even if a business (e.g. M&S) is doing relatively well and highlight their relatively good position in relation to a risk, they still highlight a risk to their business therefore this needs to be framed carefully
• Different communication (information and style) needed for different audiences:
• CFOs need to actively present information to shareholders and help them to understand it
• B2C such as SSE need to ensure visibility of good sustainability stories to customers
• Sustainability Accounting Standards Board (SASB) is developing industry-specific sustainability accounting standards, this is what businesses should be reporting against and identifying to key investors - link to performance
• Use a gradual approach, start reporting a few key topics and then introduce more
• CFOs are using A4S to provide tools as this is outside their specialist area.
• “Social cost” and other terminology needs to be translated into appropriate language/numerical data for the audience
• M&S quantify cost/profit of Plan A, but the calculation is complex and nuanced
• Pension funds and advisors are key actors. Scandinavian, Dutch and some US pension funds are using Trucost analytics when looking at equities and also some bonds, examining areas such as CO2 and water. At this initial stage it can be quite superficial and the approach needs to be deepened and expanded
• Engaging the buy vs sell side: asset management is shifting to responsible asset management. Getting the sales side interested is more difficult and must be done using numbers and showing what is most material, identifying how the business has reduced its exposure to risk
• An equity trader won’t see the business as a whole, only a limited set of numerical data
• Governments need to give framework and context to these decisions through legislation
With the perspective of a variety of different organisations, it is obvious that building the business case and gaining support for sustainability depends on a number of specific and unique factors, including:
• Customer or client facing (and public exposure)
• Size of organisation
• Industry sector (products or services offered and resources used)
• Stakeholder priorities
• Personal interest and individual responsibilities
Sustainability is a very broad concept and some aspects can be fundamental to profit and financial stability, whereas other aspects may be abstract and hard to quantify. The overall feeling is that there is more that we can and should be doing.
“There’s no magic piece of paper to wave in front of the finance director”
“Culture change takes time”
“People can put together a business case for anything they want to do!”
“A multi-pronged approach is a great way to push the right buttons with specific stakeholders”
Creating the business case and gaining support
• Some aspects of sustainability go hand in hand with financial security and longevity;
• Low hanging fruit (projects with shorter-term returns) can help build credibility for sustainability projects with finance departments;
• A precautionary approach (projects with obvious business case) need less justification and can help avoid barriers and counterarguments;
• If a company begins by looking at things through a sustainability lens, new projects are initiated with an obvious financial case (but the same projects may not have been thought of from a traditional approach);
• How a project is presented can determine whether it gets sign-off
o Approach should be adapted according to the stakeholder to whom it is being presented
o Personal interest in a topic of sustainability can drive action, as well as individual responsibility
o Quantifying the intangible aspects of a project is complex but can be a powerful and persuasive tool
o Internal staff may not have the wider knowledge or skills to build an effective business case
Integration of sustainability
• Competitiveness can be adversely or positively affected by including aspects of sustainability
o Clients/customers may not be willing or able to fund the project and take business elsewhere
o Clients/customers may have their own sustainability standards that they expect of a product/service
• Risk, reputation and external pressures can drive sustainability and corporate responsibility
• A lack of communication between those that make financial decisions and those that manage sustainability can lead to missed opportunities, poor external communication and failure to realise the potential of an integrated approach.
Five years ago, tax minimisation was normal and accepted by society. Today, with record national debt and public opinion turning against tax avoidance, tax strategies are becoming more nuanced. What should a 2015 tax strategy look like? Is reputation risk getting greater? Should the sustainability team be involved in tax strategy? Is the Fair Tax mark a good option?
Crowdfunding is a hot topic, but what problem is it solving and how big can it go? Should people in big businesses be interested, either personally or as a solution for their company? The table will include representatives from Crowdcube, the leading UK Crowdfunding site, and recent success stories FarmDrop and The Do Nation. We will also share The Crowd’s plans.
- From the panel discussion it was clear that these CFO’s have been tinkering around the edges, but how can we be transformative? Is that question too difficult?
- Find it easy to get buy-in from finance if the project has a short payback and leads to incremental change. How can we start the conversation about larger shifts in business models?
- What are the drivers that we can tap into when money, employee engagement and reputation are not enough?
- Are sustainability teams letting themselves down by focusing on the short-term benefits and not being more ambitious?
- We have heard that CFO’s have less cynicism, but some delegates believed that there was still reluctance from their finance teams to approve projects based on the qualitative benefits they could deliver.
- Delegates identified organisations that found it difficult to identify drivers for sustainability projects over and above cost savings. These were organisations that typically lacked shareholders and where public reputation was of less significance.
- Is the CFO always the right person to go to? Who else can help us to win hearts?
- Need a strong leader who is receptive, without this there will always be difficulties.
- Have to remember that the CFO has a boss, and can also be accountable to investors. Understanding the drivers of those that influence the CFO can be crucial in getting more ambitious and transformative projects approved.
- Have to understand your CFO:
o Is financial rigour and technical detail key?
o What other influencers can help you, who else needs to be on board and who does the CFO listen to?
o Go back to your company values, how does your project support the achievement of them?
o What non-financial drivers does the CFO care about? Brand reputation, risk, compliance?
- Unilever: has been at the forefront of developments in carbon accounting, and now moving into water and natural capital. The question we have to ask ourselves is how can we retain our leadership by applying our knowledge to new components of sustainability?
o Very much a top-down approach, with the CEO stating that we must double the size of the business while halving its environmental impact. All employees have a personal target to contribute to this aim.
o Evidently this aim does create conflicts, the pursuit of growth has led to an increase in our carbon emissions. But Unilever has been very ambitious, with investments in sustainable agriculture that won’t pay back in the short-term.
o Chief Marketing & Communication Officer leads our sustainability work. Unilever is a marketing company at its core.
o Good example of sustainability led product development is the compressed deodorant cans that Unilever produce. This took over five years of development, but the brands that released these products lost consumer trust as a result of the tabloid outcry around consumers being ripped off. It is clear that marketing is key.
- Apple: company that is based on trust and strong relationships, and is run like a family business. This means that they are able to make decisions quickly, without hurdles, even for more ambitious projects.
o Historically we have been a disruptive brand, but now Virgin is seen as being too mature to be disruptive.
o ‘Purpose’ is key to Virgin’s aims and values. All the business components of Virgin Group must have a purpose that is good for Business, Society and the Consumer.
o The CFO does not drive this initiative at Virgin as the focus is on brand identity, however all projects do have to be good for the business.
- Barclays: CEO has a very important role in this organisation. When a new CEO came in following the banking crisis there was a significant shift in Barclay’s image, focusing on building relationships with local communities. There was an agenda that enabled creativity in order for Barclays to make a positive difference.
- Vodafone: Eco-rating for mobile phones
o Was not a significant cost to implement, but it drew resources from sales and there was a potential reputational risk
o Vodafone’s campaign at that time was ‘Power to You’, which focused on empowering customers
o Had more luck selling the eco-rating project into the CEO, rather than the CFO, due to the focus on Power to You
o Used the Managing Director of the Dutch arm of the business to sponsor the project. This individual gave the project team the insight on Power to You and helped to sell the eco-rating initiative in to the board
How can companies such as IKEA, Apple & Google have billion dollar carbon reduction programmes, whilst others struggle to win internal capital? Are CFOs who rely on ROI / payback calculations missing a trick? What other benefits should be taken into consideration, such as brand benefit or employee engagement, and how can they be factored in?
Traditionally, companies have relied on internal or external experts to come up with innovation. This is being challenged by open innovation platforms that allow organisations to tap the wisdom of their crowd to make better decision, more efficiently. With contributions from companies that use open innovation and the platform providers, we ask is this is the next big thing?
What is open innovation?
Open innovation = Crowd Sharing = Knowledge Sharing
Jim Woods, CEO of the Crowd sat in for Andy Brown who unfortunately was unable to chair the roundtable, opened the discussion by giving us some insights into an example of an online open innovation platform – Wazoku. It is a leading idea management software company that encourages internal innovation within an organisation, to fill any gaps or allow for innovation ideas to be heard and tested.
Open innovation is gaining ground in many business and organisations with Mat Roberts sharing with us his experience with internal innovation platforms at Interserve. They are implementing internal engagement programmes across their international network. In 2014 they created their first open innovation competition called the ‘Big Ideas Hunt’. They opened the competition to their employees asking them to share with them their innovations in 3 areas, no matter how small or big. The areas were: improving service, reducing Interserve’s environmental impact and enhancing internal communications. From its success in 2014, Mat told us that Interserve aim to hold another 4 over the next few years.
Another fantastic example of open innovation platforms is their ability to establish and kick-start knowledge sharing platforms within the social media world and for them to be created from the public not the organisation. Stewart from CIBSE shared with us an example of this.
To put into perspective the power of social media and utilising it for open innovation and knowledge sharing platforms. CIBSE has under 200 employees. Their LinkedIn Group has over 14,000 members. Apart from the massive global interest into CIBSE, the interesting point here is that the group began from a LinkedIn member in South Africa who set up this network. It has enabled an open platform to all those interested in communicating and sharing knowledge on building services and best practice and guidance on sustainable building.
‘Cumulative process’ was passed across the table a few times, highlighting the common understanding of how open innovation is all about increasing the collective knowledge both internally and externally of an organisation. Here are some tips that were suggested for organisations already utilising open innovation platforms, or those that intend to:
• You don’t have to necessarily reinvent the wheel every time
• An innovative idea can be discovered from building on top of what is already out there
• Try and gather the crowd that your organisation or company services’ impact and benefit – this can be both be profitable and valuable through selling an idea into the business from your consumers/customers
• Allow for diversity of knowledge – don’t limited yourself as it can provide you with positive innovation ideas you didn’t expect
• Be careful of vested interests of those either posing ideas or criticising them
• The power of vanity in this digital age can really drive scrutiny of ideas and help provide well thought and analysed innovation ideas
Some down sides to open innovation platforms were raised, such as:
• The issue of there being too much information out there or the issue of the platforms not reaching the appropriate crowd to draw out relevant innovation
• Are there appropriate processes to filter through what is deemed reasonable, realistic and innovative?
• Also, is a company or organisation limiting themselves to a particular crowd?
Many sustainability plans die on CFO’s desk. Two members of the table will take on the role of a reasonably disengaged, busy CFO who has competing capital requests from across the organisation. The table has to come up with ways of winning them over. Create a hypothetical investment if it helps, and consider sensible and left field ideas. What approaches work best?
• Even companies perceived to be ahead on sustainability seem to have little buy-in from their CFO;
• Difficult to make the case for sustainability to a CFO in a very competitive environment e.g. retailers in UK tell investors that they would go out of business if they give the Living Wage to UK staff;
• Often comes back to money and pay backs but sustainability can be difficult to quantitatively value on a spreadsheet;
• Reluctance to take the risk of being the first mover.
Winning over the CFO
• CFOs are important to have on side but too conservative to champion sustainability - need a CSO to drive it forward;
• Personality of the CFO is key - need to choose timing and issue carefully;
• Need to increase the chances of a CFO being on-side before they get to CFO level
- CSOs need to learn about finance so that they can talk in their language and from the perspective of ‘investment decisions’, ‘returns on investment’ etc.;
• Integrated Reporting gets CFO’s attention – have to review and understand the narrative, although still not to the extent of financial metrics;
• Measurement can help:
- Where there are tangible and intangible aspects, put the tangible cases forward first to gain trust
- Agree benchmarks where there are some measurable indicators;
• Set external targets that a CFO will be embarrassed not to meet;
• CFOs are bound by metrics and reporting requirements – need to stop producing quarterly forecasts and reports to free up time for these kinds of strategic decisions. Investors can help push for this change but requires a strong CEO.
Making the business case
This is central to winning over the CFO. Note that strategy and risk are very familiar concepts to a CFO but are not easy to quantify – the business case does not always need to be quantitative.
• Reputational risk can be a key driver in decision making and may drive some decisions more in the UK than elsewhere e.g. on the Living Wage;
• E.g. Tax is a real reputational issue for CFOs – they may be confident that they are taking a legal stance but not confident on how acceptable it will seem to the public;
• But how powerful is this stakeholder pressure when facing the risk of losing business to a competitor?
• What is put in the box of ‘sustainability’ is constantly changing. A number of key ‘sustainability’ decisions are now being made all the time as ‘strategic decisions’ by CFOs, outside of any sustainability budget;
• Strategic arguments can be powerful e.g. building long term supplier relationships and securing future supply;
• Can help for the CFO to consider the net value to the business not the payback time – having a culture of making long-term investments may benefit this
• Is it possible to put forward a strategic case for the ‘good citizen’ elements of sustainability?