Finance chiefs face pressure to get to grips with sustainability
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If presented with bird’s-eye views of oceans, forests or deserts, many chief financial officers might struggle to connect them to financial planning or cash flow management. But with pressure for companies to demonstrate their sustainability credentials, satellite imaging and other technologies are becoming increasingly relevant to the work of the CFO.
The technologies are evolving at a rapid pace. Remote sensors and artificial intelligence tools now make it possible to track everything from water pollution and deforestation to “dark fleets” of vessels whose fishing practices breach environmental or human rights regulations.
These are issues to which finance functions must pay close attention, says André Haag, chief financial officer at Triodos Bank, an ethically focused Dutch financial institution.
“The CFO plays an important role in creating value, and that’s now much more than traditional financial value — it’s about sustainability and creating impact.”
Ultimately, technology will make measuring and managing all this much easier. With unprecedented amounts of data being generated, the application of AI and data analytics can enable far more accurate evaluations of companies’ environmental, social and governance (ESG) performance than was previously possible.
“For sustainability it’s phenomenal,” says Georg Kell, chairman of Arabesque, an ESG quantitative asset manager that uses AI and big data to assess the performance of globally listed companies. “Interpretive power is multiplied [by technology] in its ability to assess investment risks and opportunities.”
The pressure for CFOs to be able to understand and assess ESG-related risks and opportunities is coming from many quarters. Improving the company’s financial position is one incentive.
“They have discovered that for debt financing, whether through bonds or loans, they can get preferential conditions if they choose green or sustainability bonds,” says Mr Kell. “So it’s a market-led inducement that has brought many to this agenda.”
Meanwhile, more investors want to build portfolios that contain companies that are addressing issues such as human rights and climate change.
This means chief financial officers need to understand how to use technology and data to demonstrate their company’s ESG performance and communicate it — whether that be through reporting and disclosures or direct contact — to asset managers and investors such as pension funds and sovereign wealth funds.
A further driver is the shifting regulatory landscape. In the UK, for example, the Financial Reporting Council, the accounting watchdog, is pushing for companies to provide investors with more information on climate risks. And Mr Kell cites the ambitious package of policies known as the European Green Deal, as well as pledges by China, South Korea and Japan of becoming carbon-neutral economies.
“There’s wide agreement, especially after the Biden election, that we’re back to a race to the top on decarbonisation,” he says.
Beyond this, however, finance chiefs also need to respond to changes in
corporate strategy, as chief executives recognise the risks and opportunities ESG presents to their companies.
“The financial return element has shifted this from being simply about sustainability in terms of the benefits conferred on the environment and
society, to what impact this has on companies and their performance,” says Colin Mayer, professor of management studies at the University of Oxford’s Saïd Business School.
For finance chiefs, the shift will not be easy. For a start, they need to understand how money spent on new technologies will provide a return on investment. “Unless you can do that, it’s hard to fund and adopt those technologies,” says Ankur Agrawal, a partner in the strategy and corporate finance practice at McKinsey.
The focus on technology will also demand investments into new kinds of talent. “Whether it’s accounting tools, advanced analytics or natural language processing, you need a different set of finance professionals to work with those technologies,” says Mr Agrawal.
Technology alone will not enable CFOs to make the right decisions with respect to social and environmental impact. This, says Prof Mayer, is because tools such as AI and machine learning behave in the way humans design them to behave — whether that is prioritising profit and shareholder value, or ESG goals.
“The key is who is programming the AI algorithms and for what purpose,” he says. “It raises fundamental issues about whose interests [CFOs] are serving.”
Mr Haag argues that, as well as adopting new technologies, finance professionals need to make a cultural shift. “Most are in the traditional CFO role, maximising shareholder value and profit, and the new profile is shifting to a broader stakeholder model focused on establishing a sustainable economy,” he says.
This inevitably expands the role of the finance function. “Technology and decarbonisation are here to stay,” says Arabesque’s Mr Kell. “CFOs need a more holistic understanding of the market system, and not just of the narrow field of finance.”