Development that meets the needs of the present without compromising the ability of future generations to meet their own needs.1
This is how the United Nation’s Commission on Environment Development defines sustainability. This definition encompasses the essence of a sustainable mindset, and should be top of mind when making decisions. A 2021 white paper from the Quality Assurance Agency for Higher Education and Advance HE defines sustainable development as ‘an aspirational ongoing process of addressing social, environmental and economic concerns to create a better world'.2
Sustainability is a mainstream issue. Business performance can no longer be judged purely on short-term financial returns to shareholders. Groups including customers, workers, broader society, governments and investors demand greater organisational transparency beyond the traditional financial metrics. Sustainability has fast become the lens through which an organisation is judged. However, sustainability is also an important opportunity to build resilient organisations for the long term.
The sustainability call to action plays to the strengths of finance professionals. Our skill sets and knowledge in organisational governance, strategy, risk management and performance through metrics and targets mean that we — as individuals, teams, and finance functions — are poised to make a difference in this area. We own the processes, systems, data, management information and reporting that can support a transition to a more sustainable business. We support sustainable decision-making through our business analysis and by providing assurance on both financial and nonfinancial data.
Often, the terms sustainability and ESG (environmental protection, social inclusion, and governance) are used interchangeably. However, the two terms don’t mean the same thing. ESG focuses on a specific set of metrics centred around lowering financial risk, increasing returns for investors, and making organisations more resilient to shocks. Sustainability, on the other hand, focuses on an organisation’s impact on the planet, beyond its financials and investment returns. When organisations operate using a sustainability lens, they take on projects and activities that will have a positive impact on the environment and society, and they are ready to sacrifice profit maximisation to protect the planet for generations to come.
The sustainability landscape
Sustainability cuts across the three pillars of ESG — environmental protection, social inclusion and governance.
Environmental considers how an organisation performs as a steward of nature. This factor includes the nature and extent of nonrenewable resources used in production, as well as the release of potentially harmful elements into the air, land or water.
Social examines how an organisation manages relationships with employees, suppliers, customers and the communities where it operates. Social issues range from human rights and health and safety to other responsible business practices, such as product marketing and privacy. Expectations around these issues, as well as environmental issues, define what is often called ‘the social license to operate’.
Governance deals with an organisation’s leadership and effective business management. In addition to overseeing strategy execution, performance, and management of risks, effective governance ensures maintenance of the social license to operate. Specific governance considerations include executive pay, regulatory compliance, and shareholder rights, as well as internal controls and internal and external audits.
The following is a list of topic areas the finance professional could encounter, be asked to analyse data sets for, or be asked to report on. This list is drawn from a comparison of three sustainability frameworks and standards provided by the Sustainability Accounting Standards Board (SASB), Global Reporting Initiative (GRI) and World Economic Forum (WEF).3
Note that, although diversity, equity, and inclusion are key issues under the social inclusion pillar, these will be explored in more detail in a future mindset pack.
The four sustainability lenses
There is increasing pressure for organisations to demonstrate their sustainability credentials. Therefore, CFOs, finance functions, and finance professionals must define, enable, shape, and tell their clients’ and organisations’ sustainability stories.
When thinking about business resilience and sustainability, a great place to start is with the four lenses of governance, strategy, risk management, and metrics and targets. These lenses come from recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) for evaluating and reporting on climate-related risks.4
Governance
Governance boards have an important role to play. To be effective, as Mark Carney, in his book Value(s): Building a Better World For All, highlights, it is essential that ‘Every board committee should have the relevant ESG factors integrated into their work, and should inform the full board on how ESG issues affect the company’s risk management.’5
Finance professionals also have a crucial role to play by producing assessments for boards that ‘aim to reduce the ignorance of the decision-makers.’6 Decision-making can then be enhanced by finance professionals and boards engaging with scientists and academics ‘to verify the technical and scientific legitimacy of any action’.7
Once boards are equipped with better information, they must spend more of their time engaged in robust discussions and oversight, making more-informed sustainable investment decisions for their organisations. This oversight includes reviewing strategy, risk management policies, business plans, and performance systems and ensuring a balance across the environmental protection, social inclusion, and governance pillars. In essence, this is the sustainability mindset in action.
Strategy
A key governance theme is an organisation’s or client’s purpose. Once agreed on, the purpose must be built into the organisation’s strategy and exist at the core of its business model if it is to be viewed as authentic.
It is also important that once articulated, a balance of environmental protection, social inclusion and governance mitigations are embedded into the control systems of an organisation. These systems include strategic planning, budgeting, performance measures and performance reviews.
Investors and other stakeholders will want to understand the resilience of an organisation’s or client’s strategy and how the strategy takes into consideration the different ESG risks and opportunities. This includes future product and service innovation and reassurance that when material issues arise, there are reporting processes in place.8
Finally, it is important to demonstrate to stakeholders how an organisation’s or client’s strategy contributes to society.
Risk management
Finance professionals need to be transparent and able to articulate processes for identifying, assessing, and managing sustainability risks. This should include stress testing and scenario planning to identify trade-offs that will inform strategic and business model decisions. When considering the sustainability risks and opportunities to your organisation and clients, an excellent place to start is with the World Economic Forum (WEF) Global Risks Report 2022. Eight of the 10 most severe risks on a global scale over the next 10 years are environmental or societal:
Climate action failure (1st)
Extreme weather (2nd)
Biodiversity loss (3rd)
Social cohesion erosion (4th)
Livelihood crisis (5th)
Infectious diseases (6th)
Human environmental damage (7th)
Natural resource crises (8th)9
Any of these could challenge the effective long-term management and leadership of any organisation.
Metrics and targets
When thinking about metric and targets, the problem is achieving a balance between short-term and long-term governance factors. Adopting ESG metrics alone will not fix short-termism. Rebecca Henderson, in her book Reimagining Capitalism, states,
Many ESG metrics remain hard to construct, rarely comparable across firms and often difficult to audit, and even those that are well thought through are insufficient to capture the universe of useful nonfinancial factors that may drive performance.10
Finance professionals have a leading role in shifting away from traditional metrics of economic success and developing new methodologies and metrics that drive sustainable growth and prosperity over the long term for current and future generations.
Investors and analysts increasingly need complex sustainability data to make more informed investment decisions. This usually involves organisations and clients providing metrics that answer difficult questions. However, there is a tendency to not answer the difficult questions and instead substitute them with metrics that are more easily collected yet lack strong causality. The substitution for an easier metric or target ‘will lead to an answer that does not give different aspects of the evidence their appropriate weights, and incorrect weighting of the evidence inevitably results in errors.’11
