The CFO: Strategist, Operator, Steward or Catalyst?
With large parts of EU taxonomy already in force and the Corporate Sustainability Reporting Directive hot on its heels, there are huge variations in how Finance functions are responding to the new reporting expectations. Also with the requirement for new funding for the transition, M&A activity fuelled by the transition, and Finance talent wanting to have an impact on the transition, the CFO is being asked to transform Finance capability and impact in ever-new directions.
Some CFOS are stepping up to reinvent Finance as both a financial and non-financial reporting function. Others are hoping it won’t land too heavily on their desk. But when the CEO talks about the company’s purpose and impact at the next AGM, the CFO at their side needs to be confident that the metrics on diversity or emissions are just as robust as the financial performance data. To reach that level of comfort, we believe that Finance must take a key role in the non-financial reporting space. The level of involvement will vary depending on the maturity of reporting established across the organisation but there is a role to bring governance, quality, and agility.
We’ve reached a tipping point this year. Up to now, you could probably get away with a separate sustainability report or sustainability KPIs that don’t directly relate to your financial statements, materiality or risk assessments. In future, the whole corporate performance story will need to hang together. And not just for the regulators. Internal and external stakeholders, shareholders, banks, rating agencies, customers are demanding proof of responsible and sustainable business activities which generate profit and long-term value.
How robust is the governance?
When we look at the direction of travel and the signals related to CSRD, it’s clear that they expect sustainability reporting to be part of what is called the Management Report in the Dutch reporting environment. Which makes it a whole audit committee responsibility. So if you’re on that audit committee and are used to Finance telling you what’s going on, you’ll be wanting that same level of comfort.
There’s a conscious choice that organizations have to make here about the governance of sustainability. Is it robust enough? Are you comfortable you’re not greenwashing or being a laggard and how do you actually get to that point?
At the heart of this issue is the need for good measurement. And the people who are the measurement experts in most organizations are the Finance teams and CFOs.
Ultimately what does a Finance function do? It reports to the external and internal world on the performance of the organization. In other words, there’s already a function in the organization that drives the mindset around validation and reporting. Wouldn’t it be odd not to use that to drive its accountability to external and internal stakeholders on its performance around the sustainability transition?
We’re often asked: what’s the best practice? The unnerving reality is that, if your Finance team is already involved in sustainability reporting, you are the best practice. Everyone’s having to find their new position. As CFO, you don’t want to go too far too fast. Or too slow. So how do you make sure you’re in the cohort that’s moving things forward but not making big mistakes that could cost your company?
The big question that Finance teams need to ask themselves is: what is our function’s role? What is material and how do we then share information control and reporting responsibility in a sensible way across the company to get the level of comfort we want?
Choice points for the CFO
If you accept that the Finance function should be playing a key role, that entails some new choice points for the CFO. Starting with the personal one: Where are you in your career? Do you have appetite to grow a new skin? Is this something you want to get into or are you still sceptical about what the EU is trying to do?
Then there’s the organizational reality: if as CFO you know that the company’s data management is poor, you might be hesitant to change. Even if you’re personally committed to sustainability, the organization’s maturity on this journey may make you less inclined to take ownership due to the personal risk.
The four faces of the CFO
Beyond just reporting, a useful tool for CFOs to track where they are now and what the change agenda could look like more broadly is our ‘Four faces of the CFO’ model. It helps to analyze and re-evaluate the role of CFOs, not only as key stakeholders in a company's successful transition to a more sustainable enterprise, but as predestined drivers to take the lead. It relates not just to the top managers in Finance but to how the entire department is organized.
At the bottom left we see the CFO as Steward of the organization that watches out for potential risks, prioritizes them and quantifies their potential impact on the company. Being accountable to the market for financial performance starts moving forward to the broader area of non-financial performance and confidence around audit processes. Making sure that the organisation complies with all the new requirements and expectations. This is pretty much the foundation being built in many medium and large companies at this time. Being a guardian focused on detail, regulation, compliance is key to this face.
Bottom right is the Operator: this is about building the process, systems and talent needed to meet on-demand request for information by management and investors in a timely and flawless manner. And ensuring a productive interface with others across the organisation who own the data required to be consolidated for reporting. Bearing in mind that the amount and quality of ESG data required is generally not sitting on the systems that Finance teams are managing.
Another key element of being an operator is educating existing Finance staff, not just in IFRS and financial reporting standards now but also a whole new bible of reporting which relates to ESG. And, with many Finance departments facing talent retention stress, it’s the ones that get their sustainability narrative right in the Employee Value Proposition that will attract the best Finance talent to address this challenge. Being an integrator and collaborator is key for this face.
Top left we see the CFO as Catalyst who, among other things, looks at how to drive the right incentivization and allocate resources to projects with positive impact on financial and non-financial targets. What role does the CFO play in the executive team to catalyze the transformation required? Embedding carbon prices into business cases for new investments, ensuring that business finance steps up as a business catalyst for decision making. Being a pioneer and driver in making the transition stick in the organization using finance and performance management as a lever.
At top right, we see the CFO as Strategist, helping the Board to envision the future and translating their vision into a concrete plan. Many companies are developing different business models to become more sustainable, and Finance needs to play an important role there. If the company wants to update production plants to reduce carbon or invest in new lines of business which help with the sustainability transition, Finance must be involved in thinking through the risk-reward return on different ventures and in driving innovation in access to funding and capital to make it happen. The Strategist should be asking: how do we fund that? Do we need new M&A activity? What are possible new commercial models? Should we be looking at different things to invest in? Many CFOs, particularly in leading companies, are very passionate about this. And with the financial services industry under great pressure from EU and national regulators to drive the transition through access to finance, there is lots for CFOs to do to make sure that they are actively innovating and engaging on the financing of the future.
It’s not ‘just reporting’
Clearly the need for organizations to know what their place is in the sustainability transformation is driving a new playing field for the CFO. Some of them are already out there scoring goals, others are watching on the side lines and waiting to see what happens. The role of the Finance function isn’t about ‘just reporting’: CFOs worth their salt help their organizations steer performance. So at the very least CFOs should be investing in sound sustainability reporting expertise and an individual to lead it. And they can make their lives easier by investing in the tooling to ensure robust assurance that the credibility of the data required by stakeholders and regulators is being obtained. As the four faces model shows, CFOs need to be ambidextrous. Or at least know their personal strengths and compensate in the team around them.
So where is your Finance function now? Pioneering toward a proactive strategic role in this new world? Or stuck, like many, in the bottom left-hand corner, simply because the reporting requirements are so encompassing? That’s where the danger lies.
Essay by Vanessa Otto-Mentz, partner and lead sustainability practice at Deloitte Netherlands Risk Advisory, and Harvey Christophers, managing partner risk advisory & lead partner sustainability at Deloitte. This essay was published in Management Scope 04 2022.