Traditionally, sustainability was often, at best, alluded to somewhat vaguely in a paragraph in a company’s annual report, and considered a cost centre and a non-priority.
efore 2013, for example, just 20pc of S&P 500 companies disclosed environmental, social, and governance (ESG) information. By 2019 though, that figure had risen to 90pc.
Since then, ESG-linked funds have grown their assets under management by 29pc to nearly US$1.7tn, according to Morningstar. Elsewhere, sustainable debt issuance is projected to reach US$650bn in 2021, a 32pc increase from 2020; and Moody’s forecasts that sustainable bonds could account for up to 10pc of total global bond issuance this year.
But what’s behind the stampede into this investment approach? Is it an answer to how ESG funds have outperformed many traditional equity benchmarks? Some investors believe so, and describe the phenomenon as a “bubble”. However many others consider the acceleration of ESG to be a permanent change in the way investments are managed.
This view recognises that long-term returns are more likely from companies committed to addressing environmental and social problems – rather than investing in companies that aggravate those issues and rely upon market failures for their profits. In this light, the momentum behind sustainable investing seems understandable and unstoppable.
As more businesses wake up to the opportunities offered by sustainability, competition is increasing, and the imperative for taking action is growing. But where to start? As we transition to a low-carbon economy, there will of course be dramatic shifts, but operational changes can have a surprisingly big impact.
Corporate CFOs have the potential to be the heroes of this story, and many in Ireland are creating new business models and financial instruments to support their ambitious strategies and targets for sustainable development goals (SDGs).
Stewards of millions of euros in corporate investments, they are positioned to shape the future of finance and investment as a catalyst for growth, value creation, and social impact – and they are rising to the challenge. The once quiet accountant that was only concerned with balance sheets and P&L statements now challenges businesses to think big and think transformational, in an effort that is benefits businesses, society and the environment.
More broadly, this is opening up opportunities for them to lead the sustainability conversation by articulating the ways sustainability creates value for their company. That includes quantifiable ways such as cost reductions, new revenue streams, and risk mitigation, as well as less intangible ways like brand value enhancement and customer retention.
Additionally, the finance team plays a central role in communicating the company’s sustainability progress to the investor community by incorporating sustainability metrics into financial reporting.
However, as we shift from crisis to recovery, maintaining a focus on sustainability becomes even more challenging for CFOs as balancing stakeholder needs can disrupt long-held plans.
The priority of repairing finances and trading out of crisis into profitability can skew decisions – but it is nonetheless top priority. Transition to a less carbon-intensive future may be delayed or disrupted by the cost-attractiveness of carbon-intensive fuel. Staff wellbeing may be adversely affected by the need to meet increased demand.
It is precisely at this point that CFOs need to focus on the need for strong governance, robust supply chains and effective engagement with all stakeholders, as well as ensuring they have the right support, resources and skills to deliver on their new responsibilities. It’s a dilemma that goes to the heart of managing enterprises in crisis and recovery: the perceived trade-off between profit and purpose.
Ultimately, finding the right balance will be predicated on seeing sustainability for what it is: a benefit rather than a cost.
In the current market, investors are increasingly focusing on the ESG credentials of their portfolio companies, and so for companies looking to raise capital, sustainability plans will be interrogated now and in the future.
Finally, to deal with this new benchmark, a focused CFO will look at direct opportunities to partner or acquire businesses that enhance sustainability, providing differentiation and disruption.
The surge in both demand for and supply of sustainable investment instruments gives hope that the failure of the market to deal with climate change may finally be corrected.
Granted, CFOs already have full schedules. Yet sustainability is here to stay – and it is presenting opportunities and decisions, posing costs and risks, and influencing regulators and investors.
The question is not whether CFOs have a role to play in sustainability, but rather how they can take charge of it. They say time is money, but now, sustainability is money too.
Alan Werlau is head of investments at Barclays Bank