The CFO Perspective on Sustainability – Cost or Investment?

As a CFO, you know you are the ultimate gatekeeper of the financial performance of your business. ESG and sustainability transformation initiatives should not only just be on your radar for FY 22/23, but as an intrinsic part of a value creation strategy.

‘But sustainability and ESG are a cost, not an investment?’ is one of the most frequently asked questions from our discussions with executives grappling with the sustainability challenge. 

The initial reaction of viewing sustainability as a cost is understandable, but can potentially impact the ability to demonstrate value to investors, focus on value protection vs value creation, limited investment into employees and less integration with core strategy.

Viewing sustainability and ESG initiatives as an investment offers an opportunity to manage emerging ESG risks, build the sustainability context, drive value into the business’s core strategy, and increase investment into employees.

This is often thought of as the long-game. But developing a sustainability strategy can have short-term payoffs:

Favourable Financing Terms

CFOs have the potential to refinance their loans with favourable terms and conditions that are tied to achieving sustainability goals. In short, by making the switch to a sustainability linked loan (SLL), you can access lower interest rates by hitting ESG targets.

We are seeing this occur more and more in recent months, for example last year leading Australian bank Westpac refinanced a $330 million SLL with one of Australia’s largest residential aged care providers, Estia. Just last month, vitamins company Blackmores linked approximately half of its $75 million total bank loans to sustainability and environmental targets, resulting in a lower rate. 

Sustainable finance continues to grow exponentially in the Australian and New Zealand market – quadrupling from 2020 to 2021 (US$27bn September 2021 YTD vs $US6bn September 2020 YTD), according to Bloomberg NEF. In the next few years, sustainable finance will become a normality among large corporations, allowing them to increase their financial performance by hitting sustainability targets.  

Reducing operational costs

Finance departments can reduce internal operational costs by executing ESG initiatives in their organisations. There is a significant correlation between resource efficiency and financial performance.

Recently, we have seen a rise in operational costs, from surging energy prices to the costs of water and other raw materials – ESG initiatives can help combat these operational expenses. Through tracking and rethinking your resource use, and setting targets for reduction across energy and water consumption, waste shipping/treatment costs, and raw material usage, you can improve their organisation’s overall finance performance.

Studies have shown that companies which implement ESG initiatives can boost their operating profits by up to 60%. Not only do internal ESG initiatives reduce costs, they also improve overall efficiency within an organisation, improving risk management and lessening the exposure to fines and penalties. 

Increase employee engagement

With staff retention becoming a prime risk factor for organisations, increasing employee engagement is key for a company’s financial success. CFOs are central to helping manage these risks because of the leadership role they take in enterprise risk management (ERM), capital allocation and financial analysis and reporting.

Millennials and Gen Z are quickly taking over the workforce, and with environmental and social concerns being a priority for them, you can’t afford to keep ignoring ESG. In Australia it is estimated that by 2025, Millennials will make up 75% of the workforce. According to a Cone Communications study, Millennials want to work for companies with strong social purpose and sustainability policies, and will hold their employers to account.

64% of Millennials say that they won’t take a job if a potential employer doesn’t have strong corporate responsibility practices, whilst 65% of Millennials consider a company’s social and environmental commitments before deciding where to work. 

So, a company’s value alignment with their employees has a direct impact on financial success.

The sustainability landscape

The ESG journey isn’t one size fits all. Regardless of the industry you are in, sustainability has become a central component in driving financial success. 

However, sustainability is a learning curve for financial departments, with the transformation of the CFO role into the sustainability space.

About the Author

Rob Shwetz is a Managing Partner and advisor at The Growth Activists. He is a senior business leader with more than 20 years experience in executive roles across media and publishing, including Fairfax, Publicis, chinadotcom and MediaCom.

Rob’s key practice areas – customer and business insights, media, communications, customer experience and responsible business – deliver competitive advantage for our clients to accelerate their growth. Rob is a B Corp-trained B Consultant, works at board level and advises on business model innovation in the start-up space. To learn more, visit: www.growthactivists.com