Why CFOs are a critical voice in enhancing ESG performance

Continuous disruption is becoming the norm for companies on the journey of sustainable transformation. New ESG commitments, disclosure requirements, risks and opportunities are all emerging at an increasing pace. Typically, the Chief Sustainability Officer (CSO) shapes a company’s ESG vision and strategy. However, the entire C-suite shares a responsibility to usher the business through this dynamic operating environment. Within this context, the Chief Financial Officer (CFO) can play a key role in developing, financing and executing the strategies that will drive change.

Most Canadian sustainability professionals recognize the importance of engaging the CFO in this process. According to a recent KPMG survey, 73 per cent reported their CFO is a leader or significant contributor in defining their firm’s sustainability strategy – second only to the CSO and tied with the CEO.

There’s a growing awareness that ESG risk is financial risk, says Roopa Davé, partner in KPMG in Canada’s ESG practice.

“The CFO understands the risks and opportunities that an effective ESG program needs to address. Along with their team, CFOs have the technical skill set and corporate positioning needed to support companies in establishing well-governed ESG practices and move them forward.”

Processes and controls around risk management, measurement and KPIs are all critical pieces of a robust ESG program. That’s why it’s important to establish a partnership between finance and sustainability. Ms. Davé believes that can yield a team with the transferable knowledge, experience, skills and access to relevant systems needed to turn ESG data into meaningful, measurable information.

“The CFO and their team of analysts, modelling and finance experts can bring what they already know about financial management and accounting to other disciplines, such as carbon emissions modelling and projections, or quantifying the financial impacts of ESG risks,” she says.

Ms. Davé notes that CFOs are well-suited to bring to an ESG program the same rigorous, formalized approach that they already apply to financial and regulatory governance.

“Companies will need to create bespoke operating models to collect, analyze, manage and report on a whole new world of ESG data and information.”

She says the disclosure of that data and information is becoming increasingly regulated. Soon, ESG disclosure practices will begin to feed into and align with financial disclosures.

“The oversight for this disclosure and reporting will likely start as a dotted-line to the CFO, with the responsibility for the underlying reporting controls, processes and disclosures eventually falling under their purview,” Says Ms. Davé.

As ESG information becomes more mainstream, CFOs will be responsible for not only reporting on it but also for leading financing, capital allocation and strategic decisions based on it.

“As companies make public commitments around their ESG initiatives and performance, the important investments that will turn commitments into action will need to be financed. The CFO and their team will be critical for creating the business case that brings these commitments to life,” says Doron Telem, KPMG Canada’s national leader of ESG.

Identifying ESG-related financial opportunities will be particularly important for companies looking to take part in a growing list of government incentives. Those are available to companies willing to invest in building Canada’s green economy.

With its latest federal budget, the federal government introduced a series of incentives that include tax credits for carbon capture and targeted investment in smart renewables and clean fuels. While these initiatives will serve as a catalyst for sustainability investment, Mr. Telem believes Canada is just scratching the surface of where ESG spending is headed.

“The United States government set the bar high for investment in clean technologies with its Inflation Reduction Act, pouring hundreds of billions into initiatives that are innovating in this space. While Canada followed suit with its 2023 budget, the devil may be in the details. A clear approach to accessing credits and government commitments to this and other support mechanisms will be crucial.”

Mr. Telem thinks companies that have deferred investment in ESG transformation might want to revisit that decision given the recent inflow of government spending. “Companies can look to their CFO to assess how the cost-benefit equation may be shifting for them, and decipher which projects along with which supports might now create a positive ROI.”

Ms. Davé emphasizes that CFOs will play a pivotal role in identifying creative ways to finance ESG programs that don’t meet the business’ traditional return-on-equity expectations.

“In the face of mounting regulator, client and investor pressures to invest in ESG, companies need to find the funds to take on important initiatives such as supply chain decarbonization and clean technologies. Many of these initiatives may not result in a commensurate increase in profits or valuation, especially in the short term. But they’re critical to a company’s medium- and long-term viability as well as its reputational, regulatory and ESG risk exposure. The CFO can be a driving force in these decisions.”