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1、How CFOs further value creation by leading on sustainability Climate change,nature loss,and social inequality are reshaping the CFOs role.They may require a new way of thinking about value.by Renate de Lange-Snijders,Brigham McNaughton,Kevin OConnell,and Nadja Picard14 MARCH 2023 De Lange-Snijders i
2、s PwCs ESG leader in EMEA.She is a partner with PwC Netherlands.Brigham McNaughton coordinates PwCs engagement with the Sustainability Accounting Standards Board.He is a partner with PwC US.Kevin OConnell is the PwC US ESG Trust Solutions practice leader and the ESG leader for Global Asset and Wealt
3、h Management.He is a partner with PwC US.Nadja Picard is PwCs Global Reporting leader.She is a partner with PwC Germany.Once again,the CFOs job description is being rewritten.Most companies have defined the position with a singular emphasis on measuring,managing,and reporting traditional elements of
4、 financial value.Now,theyre increasing-ly tasking CFOs with various responsibilities that support their sustainability goals.Some CFOs welcome this widening of their remit,seeing it as a natural extension of their focus on long-term value and performance.Others still tell us they see environmental,s
5、ocial,and governance(ESG)factors as unrelated to financial performanceand well outside their purview.As one CFO quipped,“None of this is going to help us sell more or get better prices.”Yet wed argue that CFO leadership of sustainability initiatives is crucial for long-term value creationas well as
6、for ESG objectives.It starts with funda-mentals:many CFOs are already fielding questions from investors,and most companies can expect to face a barrage of reporting and compliance require-ments in the coming years.Here is where they can build trust among stakehold-ers,when supported by the Finance f
7、unction,with its well-established ability to manage information.In addition,Finance has a host of toolsfor forecast-ing,budgeting,allocation,and score-carding,to name a fewthat it can use to bring sustainability factors into every business process and every decision about value creation.How else to
8、provide a value-forward perspective,for example,on climate-related physical and transition risk?Or understand the impact and opportunities of green taxes and incentives?Or deliver reporting and materi-ality assessments that investors and other stakeholders can trust?If companies 3|www.strategy-are t
9、o find the right balance between fulfilling short-term performance require-ments and capturing longer-term opportunities related to sustainability,the CFOs leadership is indispensable.What does that leadership role for the CFO look like?The answer will vary from company to company.In part,it will de
10、pend on what the CEO and board of directors ask from the CFO and how responsibilities are shared across exist-ing functions.The answer also depends on how the company aligns its ESG and business strategies to create sustainable value.At companies where sustainabili-ty initiatives are limited to the
11、requirements of legal and regulatory compliance,the CFOs role may include only formal accounting and reporting duties.But at companies where sustainability is a defining element of strategy,the CFOs ecosystem-wide network of relationships,stewardship of a companys financial data,and oversight of its
12、 systems of data collection make CFOs one of the natu-ral owners of a wider,sustainability-focused organization.Since companies are likely to change their sustainability stances over time,most CFOs will find that their realm of responsibility evolves as well.In our view,CFOs who lead on sustainabili
13、ty need to play four interconnect-ed roles.These are familiar to many CFOs,but all four roles are being reshaped by new demands:Strategic visionary who understandsand guidesthe trade-offs among people,planet,and profit,bringing the longer-term risks and opportunities of sustainability to bear on str
14、ategy and the allocation of resources against it Transformative catalyst who can align a companys strategy,organiza-tion,and culture behind a common sustainability agenda Collaborative integrator who knows how to build networks among busi-ness units,suppliers,vendors,and other stakeholders to uphold
15、 a commitment to sustainability that includes both natural and social capital Grounded communicator who has the data and cross-functional under-standing to present a credible business case,grounded in shareholder value,for a companys sustainability program.4|www.strategy-Strategic visionaryThe scope
16、 of the CFOs role has been expanding for decades,from its tradition-al focus on finance,with an emphasis on preserving value,to a more visionary focus that encompasses future value creation.With sustainability gaining im-portance to companies,the CFOs value-creation mandate calls for a new way of th
17、inking and making decisionsone that uses sustainability information to guide choices about how to deliver strong performance for investors.Working with the CEO and governing board,todays CFOs are integral to the develop-ment of a sustainable business model,bringing financial and nonfinancial data to
18、 bear on a companys strategic goals,its resource and capital allocation,and its measures of long-and short-term performance.Traditional discussions of performance and accounting are often back-ward-looking.They quantify,report,and assure what has already occurred,with various levels of detail and am
19、ounts of controls.But strategic CFOs in an era defined by climate change,among other sustainability pressures,must also look forward.They must be able to distill,from myriad compliance and performance measures,the relative few that will have the most material im-pact on a companys strategy,business
20、operations,products,and services and how they align with stakeholders expectations.That means answering a host of questions when making decisions about such matters as resource allocation,long-term capital buys,potential mergers and acquisitions targets,or any large investment.What is a companys car
21、bon intensity forecast?How accurate is it?How is it being measured?What new environmental taxes might be com-ing along?What competitive advantages might be gainedor risks incurred by making one investment over another?What sustainability performance indicators are requested by funders or investors?A
22、nd which interventions in operations will have the biggest impact on decarbonization,social sustainabil-ity,or nature?Consider a simplified example of a capital purchase allocation.Presented with three assets and enough capital to fund two,historically a company would fund those expected to earn the
23、 biggest returns above and beyond a hurdle rate.Today,companies that have net-zero commitments or that anticipate regulation 5|www.strategy-also need to apply a rigorous approach to integrating carbon metrics and other nonfinancial impacts into their investment decisions.At one European multinationa
24、l,the Finance team seeks to factor a carbon budget and other sustainability targets into those calculations as well.Recog-nizing the“cost”of carbonwhether characterized in terms of kilograms of carbon dioxide equivalent(CO2e)or in terms of monetary value over a projects lifetimeensures a more transp
25、arent conversation around financial value and carbon emissions.From there,the strategic calculus of any given project can in-clude the cost of buying offsets,setting an internal carbon price,or even incor-porating some measure of emissions into a performance bonus.In bringing sustainability factors
26、into business decisions,CFOs must also pay attention to the specific priorities of each region where their organization has a presence.In Asia,for example,the United Nations Sustainable Development Goals have identified both greater developmental needs than in other regions and greater susceptibilit
27、y to climate risk.CFOs there need to consider how to be ambitious about decarbonization in a way that is also considerate of local communities,whose interests may differ from those of communities in other re-gions.CFOs must clearly communicate the potential physical climate impacts on the business a
28、t a local level under different scenarios,along with the compa-nys response to both physical and transition risks.Transformative catalyst At some companies,sustainability is still managed at a functional level,often with limited resources.But finding success in evolving ecosystems and value pools wi
29、ll require paying more attention to how companies interact with the world and the communities around them.As a result,many companies are re-alizing that sustainability is an enterprise-scale issue requiring specific people,processes,and technology to gauge and report the impact of sustainability fac
30、-tors on a businesssuch as the impact of climate change on its supply chainor even a businesss impact on employees,customers,and the environment.Often,whats needed is a sizable,systematic organizational change,if not a wholesale sustainability transformation.6|www.strategy-CFOs may be the natural ca
31、talysts for such efforts.As stewards of most com-panies data and analytical resources,they have a broad view of the technol-ogy,systems,infrastructure,architecture,and tools that have already been built.Often with the support of an ESG controller,they are positioned well to provide the data to suppo
32、rt concrete goals,establish initiatives to deliver on those goals,monitor progress,ensure accountability,and reward continuous improvementmuch as they do for financial performance.As a practical first step,companies need to identify what problems theyre trying to solveand what people,processes,and t
33、echnologies they need to solve them.Upskilling people to meet the demands of sustainability.A successful transformation requires that strategy,structure,and culture be in sync,working seamlessly together.This means that the strategy needs to be operationalized throughout the organization and that me
34、asures of sustainability performance need to be integrated into management reporting and control systemsand of-ten into the remuneration of leadership.Much of this depends on the knowledge and skills of a companys staff.For example,staff members need to understand not just what to do,but also why an
35、d how.Sustainability knowledge needs to be embedded in peoples everyday activities,so it becomes“just the way you do things.”Moving the workforce from where it is today to become sustainability-conscious is not a simple endeavor.Weve seen companies struggle with the transition internally,as employee
36、s be-come familiar with the level of internal controls required by a CFO.Companies also continue to wrestle with compounding external demands that influence their ability to become sustainable organizations.At the European multinational mentioned above,few of the more junior people understood the co
37、mpanys sustainability strategy at even a basic level,let alone technical concepts like Scope 1,2,and 3 emissions.In response,the Finance and Sustainability teams undertook a focused effort to manage inter-nal stakeholders,bringing in a core group of senior people at different stages to conduct steer
38、ing groups,one-on-one conversations,and training sessions.Their efforts built widespread support across the workforce,giving staff the 7|www.strategy-confidence to embrace net-zero commitments and work toward them.Existing technology can enable the process.The CFOs who are furthest along on sustaina
39、bility are looking at their existing technology architecture to see where ESG data and controls can be integrated into their overall governance,risk,and compliance tools.Theyre reviewing how their sign-offs and certifica-tions can be integrated into established reporting processes.Working with the b
40、roader Finance and IT functions,theyre also reexamining enterprise technolo-gies to see where they can use what they already have for other purposes,where theres likely to be a gap,and where theyll need a best-in-class solution.From there,theyll need to start laying out a plan for where to go next.T
41、ake,for example,one global pharmaceutical concern.Like many compa-nies,this one had a highly manual process for collecting,calculating,and gen-erating reports from sustainability data.Performance dashboards were often siloed,and there was no enterprise-wide,executive view of performance.Af-ter conve
42、ning a series of stakeholder workshops,the CFO was able to articulate a sustainability reporting ambition for the company,define standards for gov-ernance,and establish point-specific control processes.The company then de-ployed in-house technologies to automate data collection and analysis and acce
43、l-erate its sustainability reporting capability.The expected improvements are profound.Formerly,the company could review manually collected Scope 1 and 2 emissions once a year.The new sys-temsonce fully implementedwill allow it to do so monthly.The company will also be able to consider completeness,
44、in terms of how many facilities re-ported in a given month,and to compare actual emissions to the overall target for the year.And it will be able to drill into more specific detailsto identify which facilities are the biggest emitters,for example,and which managers are responsible for them.Collabora
45、tive integratorSustainability-focused CFOs have,in our view,two fundamental mandates.They should be able to quantify and codify ESG performance and risks in a way comparable to financial performance.And they should be able to bring 8|www.strategy-sustainability data to discussions of strategy as a w
46、ay of fostering a sustainable,value-creating business model.A number of tactical objectives can help(see table above).The sustainability-integration practices of leading CFOs exemplify a change thats needed more broadly across companies:bringing together people from different functions to work toget
47、her on sustainability initiatives.As the CEO of a multinational brewery noted,with regard to reinforcing that companys sustain-able use of energy and raw materials,“If I dont make this everyones responsi-bility,were not going to be successful.”Consider the challenge of building trust in a companys s
48、ustainability disclo-sures.Businesses face growing demand for rigor and data quality in sustainabil-ity reporting.This demand can feel overwhelming in the absence of well-de-fined reporting and assurance requirements,formal processes and controls,and Tactical objectives to meet a sustainability-focu
49、sed CFOs fundamental mandatesCFOs grounded in sustainability should be able to do all of the following.Source:PwC analysisQuantify and codify sustainability performance and risksMeasure material or statutorily required indicators of nonfinancial performance related to sustainability,and close the bo
50、oks on sustainability data as quickly,accurately,and efficiently as they do financial dataBring a data-focused lens to strategy and investmentFactor sustainability-related performance into investment,strategy,and resource-allocation decisionsProduce audit-quality reports on sustainability that inves
51、tors and other stakeholders see as reliable and trustworthy indicators of progress toward stated goals or statutory requirementsBring sustainability-related data to C-suite and board-level strategy and corporate portfolio discussionsEvaluate and forecast the risks of sustainability-related scenarios
52、Articulate the logic behind sustainability-related strategic and operational decisions,making a compelling business case for investors and other stakeholders9|www.strategy-accountable roles and responsibilities.CFOs can build trust in the dataand make the task more manageableby promoting collaborati
53、on and collective re-sponsibility among various teams that provide it.At a European manufacturing company,the Sustainability Reporting team is part of Finance.It relies on a mul-tidisciplinary cast of climate specialists,auditors,and sustainability assurance specialists working together to ensure th
54、at the companys sustainability data can hold up to the same level of scrutiny as its financial data.CFOs can readily facilitate collaboration for another reason:Finance has re-lationships with everyone across an organizationnot to mention its network of suppliers,dealers,and customersbecause everyon
55、e has a budget.These Isnt that the CSOs job?If measuring,managing,and reporting on nonfinancial measures of sustain-ability strikes you as an improbable fit for a role explicitly defined by finance,you arent alone.We frequently encounter CFOs who express surpriseor perhaps dismayat the notion that t
56、hey might take the lead on sustainability.Isnt that the role of the chief sustainability officer?In some cases,they might be right.Theres a growing class of highly em-powered CSOs whose role looks very much like one we might otherwise have attributed to a CFOwith regard to compliance,but also strate
57、gy,risk,finance,transformation,and human resources.The best among them are ei-ther part of or report into the C-suiteor otherwise have a direct line of con-tact to the board of directors.And as investors clamor for more transparency into how a company will meet its climate goals,for example,some are
58、 even communicating with investors and joining earnings calls.Yet,such CSOs are few and far between.Few companies even have a for-mal CSO roleand many of those that do have relegated them organization-ally to a level well below the C-suite or directed their focus toward corporate social responsibili
59、ty.Ultimately,effectively addressing the disparate demands of sustainability requires collaboration between CSOs and CFOs.10|www.strategy-relationships proved useful at a European company when it came time to re-duce the emissions associated with its products.Since a generalist sustainabil-ity team
60、wouldnt have known each product well enough to find solutions,the company chose to use its Finance staff as change agents instead.By pushing a carbon budget down into the organization alongside the financial budget,the Finance team prompted colleagues in production to recommend myriad ways of reduci
61、ng carbon,such as innovating on product design,implementing adap-tive manufacturing processes,and using different sources of energy.The nudge from Finance made for effective bottom-up solutions because the production staff knew each and every product better than anyone else.Future-focused CFOs will
62、have highly strategic,complex,and enterprise-wide roles.They will knit together and have shared responsibility with risk manage-ment,purchasing,human resources,operations,and tax.For example,the CFO will work with sales and production teams to help quantify impact in both fi-nancial and nonfinancial
63、 terms,using data collection protocols and reporting processes that already exist.Grounded communicator Communicating and managing shareholder expectations have long been within a strategic CFOs ambit.As a class,CFOs are no strangers to adapting to changes in regulatory requirements and reporting gu
64、idelines,and many of the demands of sustainability on CFOs are similar.The job is still about telling a companys story in a fact-based wayonly now it includes sustainability performance as well as financial performance.A grounded sustainability communicator needs to understand and be able to explain
65、 a companys current sustainability strategy and performance,which involves assessing which data is material,aggregating and collecting data,and reporting and assuring measures of performance.This task goes well beyond meeting the statutory requirements for tax author-ities and regulators.Its also ab
66、out communicating with other audiences,which calls for a different,and altogether more complicated,level of reporting.Ven-dors and suppliers,for example,often want specialized sustainability data on the carbon footprint of products so they can measure the emissions of particular 11|www.strategy-busi
67、ness units,track their progress toward emissions targets,and reflect it in performance-related rewards.Then there are investors and lenders,who have been among the most vocal consumers of sustainability information.More than two-thirds of investors surveyed agreed that its important for companies to
68、 dis-close the relevance of sustainability factors to their business modelas well as the monetary value of the effects their actions have on the environment and society.As of yet,nearly nine in ten say they think corporate reporting contains too many unsupported claims(see table above).Ratings agenc
69、ies make up another important constituency,because of their influence with capital providers.Nearly half of investors report relying on sus-tainability scores from ratings agencies to manage risks and opportunities.CFOs must be able to communicate sustainability-related goals and performance to mult
70、iple audiencesAudiences expect sustainability goals and performance to be material,transparent,and solidly grounded in data.Source:PwC analysisAudienceFocusInvestors,lenders,and ratings agencies Identify financial value from new business models,transactions,and transformations Quantify financial exp
71、osure to risks and create trust by preparing and assuring disclosures Ensure transparent reporting through efficient data capture and analysis systems across the value chainRegulators and tax officials Provide assessments of which incentives are available and how taxes are consideredEnsure complianc
72、e with regulatory standards on sustainability needs and prepare and assure disclosures in a manner that earns trustCustomers,vendors,and suppliers Identify and quantify financial exposure to ESG risks throughout the value chain,including physical and transitional climate risk,labor standards,and nat
73、ure-based exposuresInternal Adopt a communication style and methods that align strategy and culture Promote collaboration on transformations,ensuring people,processes,and new technology all work together effectively12|www.strategy-Some asset managers incorporate the findings of ratings providers int
74、o their capital allocation decisions.And some investors and lenders ignore the top-level rating entirely,but still use ratings providers as a source of data that goes into their own internal or proprietary rating.Obviously,different ratings providers look at different aspects of sustainabil-ity,thou
75、gh in general,they consider companies resilience to the long-term im-pact of ESG trends.More importantly,by definition only a certain proportion of companies can be included in each level of ratingsin a kind of forced ranking,with,say,only 5%of companies rated triple-A and 15%double-A,and so on.So i
76、ts increasingly important for companies to be transparent about their activities,to support higher ratings,and justify a lower cost of capital from the markets and lenders.If youre a CFO,the challenge is to make sure you understand the landscape of audiences and their data needs.Talk directly with k
77、ey investors,keeping in mind how theyre using various ratings.Bring detailed checklists to the con-versation to provide more transparency behind the public,often narrow and opaque industry-specific criteria that ratings providers rely on.And be prepared to discuss methodology.Overly general disclosu
78、res that ignore the methodology or the factors it incorporates are seldom a good way to woo investorsor other stakeholders.Looking aheadCFOs who adapt their roles to new modes of creating value have a great oppor-tunity to lead their companies in a rapidly reconfiguring world.Breaking the dynamics o
79、f sustainability into concrete business considerations,embedding sustainability knowledge in regular processes and procedures,and sharing fi-nancial and nonfinancial data and insights within the company and with its stakeholders build transparency,momentumand trust.Certainly,it wont be easy.CFOs wil
80、l need the patience to deal with ambiguity,the vision to navigate through uncertainty,and the courage to make change happen.Those who do will find new ways of creating value.2023 PwC.All rights reserved.PwC refers to the PwC network and/or one or more of its member firms,each of which is a separate
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