The Institute of Management Accountants recently released a pair of reports on how CFOs can help their organizations provide more sustainable business activities, an especially important goal as businesses deal with the coronavirus pandemic.
The first report, “CFO as Value Creator: Finance Function Partnering for the Integration of Sustainability in Business” is accompanied by a white paper, “CFO as Value Creator: Finance Function Leadership in the Integrated Enterprise.”
“This paper came about last year,” said Shari Littan, manager of corporate reporting technical activities at the IMA, who co-authored the reports. “We started to observe and hear about an uptick in interest by external users and drivers for more information in general. Yet we also heard sort of misinformed urban legends about how the mainstream finance and accounting functions at most companies are uninterested and uninvolved in sustainable business practices. We wanted to understand, at the level of the professional and the team, what’s really happening at companies.”
She and her co-authors did a series of interviews with experienced professionals in finance and accounting, as well as the sustainable business units at companies, to see what was happening on the ground.
“As we put that together it seemed like an important theme was emerging, that the finance function led by the CFO at companies were making the most progress by incorporating a sustainable business mindset and viewpoint into their planning, risk management and innovation,” said Littan. “At those companies there was a robust partnership forming between what we’ll call mainstream finance and accounting and sustainable business teams. They were getting together, and there were pathways that were being created for them to collaborate internally toward shared organizational goals.”
The C-suite report explains how the CFO and the finance function can meet demands from their constituents about the integration of enterprise-wide sustainable business goals and activities by effectively partnering with the company’s sustainable business team and other business units. The document includes a practical framework for finance and accounting professionals to serve as active business collaborators in sustainability initiatives.
The C-suite report builds on a joint paper from the IMA and ACCA (Association of Chartered Certified Accountants) written in 2014 that establishes an approach – the Finance Partnering Framework – to help the corporate finance function lead cross-discipline collaboration to achieve shared organizational goals. Applying this framework to integrating sustainable business initiatives, the C-suite report provides three components for successful partnering:
- Create a mandate for partnering on sustainable business activities
- Fix the information by enhancing quality of data insights
- Deploy the talent with the mindset to meet challenges
The white paper supports the framework in the C-suite report and includes the interviews with senior executives in various industries, with insights about the finance professional’s role in sustainable business. It tracks the evolution of the CFO’s role from one that emphasized compliance to one focused on governance, strategy, and operations, consistent with companies increasingly incorporating sustainable business activities and adopting integrated enterprise approaches. Collaboration between teams throughout the organization — finance, sustainability, and human resources, among others — enables businesses to do a better job of analyzing financial and nonfinancial performance. It identifies several functions that CFOs and finance and accounting professionals serve within an integrated enterprise:
- Connecting sustainability performance measurements to value
- Improving internal and external reporting
- Enhancing information quality through oversight of internal controls
- Managing risk in relation to sustainable business initiatives
- Improving supply chain oversight
Sustainability reporting can be part of the integrated reporting that more companies around the world are using, including both financial and nonfinancial information such as how a company is performing in environmental, social and governance areas.
“With integrated reporting, there are some differences of opinion about what that actually means, but traditionally it means some combination of mainstream or traditional corporate reporting and ESG for sustainable business reporting, in a way that communicates the factors that the company uses to foster and create long-term value,” said Littan. “We looked at integrated reporting, and we found that the processes and the information that develop toward issuing an external report are just as valuable and just as important from an internal planning, strategy setting, risk management innovation perspective. So it’s not just a reporting question. It’s a management question as well.”
The IMA is agnostic about what standards should be used for sustainability reporting, whether they’re from the Sustainability Accounting Standards Board, the Global Reporting Initiative, the Carbon Disclosure Project or another standard-setter. However, the COVID-19 pandemic is forcing more companies to confront questions about their long-term sustainability.
“Reporting is a question of information, and usually it means what external stakeholders are demanding,” said Littan. “I think one of the things the pandemic raises that interact with the sustainable business mindset is, first of all, long term vs. short term. We’re starting to talk about a business model built for resilience, so these sustainable business factors become a really important part of that equation. The second aspect that we’re observing is that a good portion of sustainable business and integrated reporting is a question of intangible value. What is the intangible value? Look closely at that in the sense of relationships: relationship building, customer relationships, employee relationships, trust and accountability with various stakeholders. The pandemic reveals the critical importance of these relationships. Companies have built or managed and kept an eye on these relationships that create intangible value. A good part of what ESG is about is building that intangible value for the long term to help build the resilience that the pandemic brings to light. That’s dependent on resources and resource availability.”
Diversity in the profession
Companies have also been dealing more with racial justice questions in recent months amid the Black Lives Matter protests sparked by the killing of George Floyd, and prompted them to consider whether their efforts at diversity and inclusion are truly working.
“Diversity leads to better performance for a number of reasons,” said Littan. “The issue with these relationships is that we know they exist. We know they contribute to performance. We know they contribute to value over the long term, but we don’t have incredibly good tools to measure them the way we have built into traditional accounting. We need to find ways to understand them better and translate that to performance. Another way of looking at sustainable business and integrated thinking is the concept of multistakeholderism. The Business Roundtable came out with a statement last year on the purpose of a corporation, and we think about all these different stakeholders, not externally, but as resource providers. These are contributors to our company, to our enterprise. The customers are contributors and our employees are contributors. Think about how much talent is sitting there. When we open up with diversity and inclusion, we bring so much talent to the table. It becomes a resource
that’s available to the companies, and it enhances our relationship with the community at large.”
“It’s a moral and ethics question as well as a financial question,” she added. “It is both. It does…