December 13, 2023
ESG: A Guide for CFOs

The term 'environmental, social, and governance/ESG' has lately become popular in the investment world. The transition from greed to green has become the talk of the town, and cautious investing has become the topic of discussion. ESG is a broad concept that is often misunderstood due to its many titles, such as impact investing, green finance, ethical investment, and so on. In a nutshell, ESG helps in the evaluation of a company's or business's long-term stability.

It considers three central factors namely:

  1. Environmental factors influence how companies treat the environment.
  2. The social factors refer to how companies treat people.
  3. The governance factors refer to how a company is being run.

When it comes to a company's CFOs (chief financial officers), they are frequently hostile to the ESG framework. While CFOs are concerned with ROI (return on investment), the ESG rules encourage them to concentrate on lowering emissions and waste. Most companies need financial and sustainability data to be reported separately, which causes confusion and complications. This describes how most companies regard the two domains as completely separate.

However, in order to stay up with the changing dynamics of the corporate world, viewing finance and the environment as two different domains is today archaic. Companies all across the world are pledging to improve their environmental, social, and governance performance, making non-financial indicators an important deciding factor. Not only that, but when factors like carbon emissions are taken into account, they translate into a massive number of sustainability-related savings, resulting in firm growth and a strong reputation.

Here's how CFOs worldwide can befriend sustainability:

  1. To identify substantial ESG risks and opportunities, use a structured framework and tools like TCFD (Task Force on Climate-Related Disclosure), SASB (Sustainability Accounting Standards Board), GRI (Global Reporting Initiative), Natural Capital Protocol, and others. Financial experts can also determine their impact on financial performance using this method. CFOs can also conduct scenario analyses for climate-related financial risks and opportunities, which they can then use to plan and make spending decisions.
  2. Integrating ESG risks into corporate planning and strategy development is a critical function for a CFO to play. This simplifies the company's financial and sustainability reporting.
  3. Additionally, increasing the company's awareness of sustainable products and encouraging their manufacture. Incorporating this into the company's communication plan might also assist shareholders to diversify their financing alternatives.
  4. To address the expectations of shareholders, CFOs must advocate for an integrated report that includes both financial and non-financial reporting. It's also critical to keep strong relations with the company's investors and ESG raters and rankers.

It is critical that ESG is a strategic priority. Several companies are contributing to and following the principles of sustainable finance. Listed below are a few examples:

Havells Ltd. is an electrical equipment company based in India that has been in business since 1958. The company stopped using Kr-85, a radioactive isotope. The company no longer produces any products that include radioactive materials. It also installed four water treatment plants, two renewable energy programmes, and biomass and solar lamps.

In a similar vein, Godrej, an Indian multinational firm, increased its renewable energy portfolio by 30%. In addition, the company reduced greenhouse gas emissions by 37% and diverted 99.5% of its waste from landfills.

As part of an effort to increase awareness and prevent plastic trash from reaching the ocean, the Procter & Gamble Company, an American multinational consumer goods company, introduced Fairy Ocean Plastic bottles consisting of 10% ocean plastic and 90% post-consumer recycled plastic.

To summarize, because the ESG framework benefits both the company and society, it is time to move the focus from "when" to "how." Accepting ESG and pursuing sustainable financing is a step in the right direction for long-term success.

Irrespective of where you are on your ESG journey, Oren has a solution for you. Contact us today to speak to our panel of experts that are right for your industry.

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