The Role of Finance is Changing: How CFOs Can Navigate the Path to Sustainable Finance

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Thursday, December 16, 2021

Profit and sustainability don’t have to be mutually exclusive, and it’s up to CFOs to steer the right course to sustainable finance.

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The Role of Finance is Changing: How CFOs Can Navigate the Path to Sustainable Finance

With climate change one of the biggest threats facing mankind and green issues at the forefront of almost every government agenda in the world, sustainability has never been a more important topic for industry.

While 'going green' and 'finance' haven't always been connected, this is now starting to change. The financial industry is now realizing that profit at all costs is no longer an option and that, to succeed in the long term, it must embrace sustainable finance.

And, as ever, it’s likely to be finance teams led by CFOs that are pivotal in driving change and helping to build a more sustainable future.

What is sustainable finance?

Sustainable finance simply means supporting economic growth while reducing pressures on the environment, according to the European Union's definition. That means considering environmental, social and governance (ESG) factors at the same time as weighing up financial returns during the decision-making and investment process.

Although financial firms might have already been actively avoiding companies that are widely viewed as very environmentally damaging, many are now waking up to the idea that they need to go beyond this and actually invest in green businesses if they are to create value in the future.

It's the difference between aiming to do no harm and aspiring to actively do good.

Why is finance getting involved?

Finance has always played an important role in allocating investment to productive businesses, but sustainability is going to require altering fixed ideas about what productive actually means. For example, a bank might move from investing in a company that can make a lot of money in a year but burns a lot of fossil fuels, and instead put its funds into a business that’s slower to profit yet speeds up the transition to a carbon-neutral future.

As the public becomes more aware of the need for sustainability, people are going to be willing to spend more with companies that can display strong ESG commitments. At the same time, failing to see environmental factors as important puts the capital of financial institutions and their clients at unnecessary risk.

What's more, profit and sustainability aren’t mutually exclusive. According to the International Finance Corporation, there are an estimated $23 trillion of climate-related sustainable finance opportunities in emerging markets alone in the years to 2030.

With ESG-focused organizations actually more profitable, highly-valued and adaptable, the question should surely be: why not finance?

As Iron Mountain's Kevin Hagen told Harvard Extension:

"Thinking differently about environmental and social performance can drive change that delivers more business value while harnessing the power of enterprise to deliver better outcomes for people and the planet."
 

How can finance become more sustainable?

To ensure finance becomes more sustainable, it's going to be essential for CFOs to recognize investment opportunities in areas such as renewable energy and integrate risk into lending decisions.

This might be done by:

  • Earmarking funds for initiatives such as public projects to insulate buildings
  • Influencing clients to embrace greener business practices
  • Holding businesses more accountable to change instead of simply pulling financial support
  • Putting ESG credentials into end-of-year financial reports and highlighting next steps
  • Building alliances with environmental groups and community partnerships

The key issues (and how CFOs can help)

How can sustainability be ensured long-term?

Better sustainability is very much a marathon and not a sprint, with pressure to perform in an environmentally sound way likely to continue well into the future. To ensure this, it’s going to be vital for CFOs to continue to examine suppliers and their behavior for risk that could cause reputational damage.

This will only be possible using careful planning, trusted data sources and detailed analytics on factors like the impact of ESG goals on communities, gender pay gaps and anti-corruption indicators. In this way, companies should be able to ensure both trust in commitment to ESG ambitions and resilience in clients and suppliers.

How can CFOs ensure they have the personnel?

With careful analytics the only way to ensure ESG compliance, it’s essential to have the people in place to carry it out. However, with many firms still relying on outdated technology to assist them, this could become a major pain point in terms of ensuring the finance industry is seen as a desirable place to work for those with sought after skills.

To attract the best talent, financial institutions will need modern tools with seamless interfaces that reflect the sophistication of the tech younger workers are using at home. They’ll also require opportunities for learning, training and skills development to boost creativity and job satisfaction while maximizing resources at the same time. As ESG Architect Graham Sinclair told Harvard Extension:

"People who learn (or help invent) this new space are likely to help their company create more value, accelerate their own careers, and create the opportunity to use their day job to make a big difference in the world.”
 

As the threat of climate change to the planet grows, it’s time for those in the finance industry to do all they can to make the case for sustainable investment. And, as awareness grows, this is a topic that CFOs are likely to increasingly find themselves discussing with their colleagues and clients moving forward.

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