CFO clarion call: From financial stewardship to custodian of ESG strategy

Trista Chen and Jaideep Das

WITH the relentless pace of environment, social and governance (ESG) imperatives infiltrating company playbooks across strategy, finance and operations, the chief financial officer (CFO) sits in an immense position of change. ESG is fundamentally a financial discipline in which material opportunities and risks need to be tracked, quantified, managed, mitigated and invested in, and inherently why CFOs must take ownership. 

ESG ownership is no longer bound to the chief sustainability officer (CSO) or the chief operating officer (COO). The CFO’s role has changed considerably after the pandemic as public and governmental awareness of ESG challenges has matured. We anticipate the seismic transformation to address pressing ESG challenges will require deeper CFO involvement to provide the required financial and human capital investments. Over the mid-to-long term, the CFO will not only emerge as a link to ESG counterparts CSO and COO but ultimately become the custodian of ESG strategy. 

In dealing with ESG transitions, it is not uncommon for financial leaders to simply tick the disclosure checkbox. However, therein lies missed opportunities to leverage ESG investments to fuel business growth. These opportunities include new products and services, risk minimisation from stranded assets, and ESG transformation support. On the other hand, we observe that one in four CFOs are shifting to incorporate ESG into their corporate strategy. 

While CFOs recognise the importance of shaping their organisation’s response to ESG risks and opportunities, a recent ERM Connecting ESG, Capital Markets and CFOs report saw a unanimous move from merely managing financial and ESG reporting to getting ahead of the data. This is done in tandem with ensuring robust risk and control processes, readying for the changing cost of capital, obtaining finance-grade ESG data and analytics, and using these insights to inform business strategy with ESG at its core.

How can CFOs make dollars and sense out of ESG to deliver value to shareholders? 

Tighter ESG reporting mechanism

Asia Pacific and global clients have consistently asked us to help identify their material ESG issues and which framework to use to manage disclosures. Identifying the optimal framework and tools like TCFD (Task Force on Climate-Related Financial Disclosures), SASB (Sustainability Accounting Standards Board), and GRI (Global Reporting Initiative) is the first step in determining ESG risks and opportunities and their impact on financial performance. The TCFD should be high on the agenda as we see increasing global calls for such disclosures.  

In private equity, we increasingly see leading financial institutions and corporates beginning their journeys applying the same rigour and controls to ESG as their financial reporting. Those who can measure the performance of material ESG issues, incorporate ESG analytics in financial reporting, and digitise data and reporting with their decision-making processes will be a cut above.

The linkage between ESG and financial performance is more evident as investors and lenders integrate ESG into potential investments and debt issuance assessments. In HSBC’s Sustainable Financing and Investing Survey 2021, 51 per cent of issuers and investors say they care about ESG issues because the focus can improve returns or reduce risks. These considerations include net-zero commitments, greenhouse gas data, climate change risk assessment and ESG plans post-investment. 

Making bold moves to access sustainable financing 

Leveraging ESG performance is one effective way to access sustainable finance. As most banks have key performance indicators (KPIs) for issuing ESG products, companies can better understand these differences to identify those most aligned to their needs. Many banking clients suggest we also work with their customers on ESG KPIs and set performance targets as a mechanism to access sustainability-linked loans and bonds. 

Integrating financial and non-financial metrics into ESG is also about data analytics. Good data drives capital allocation decision-making, such as fossil fuel vs renewables, realising short-and-medium-term decarbonisation opportunities, and using revenue and margin enhancement ESG levers to achieve strategic goals. 

There is substantial upside for CFOs to maximise their top line by increasing innovation, reducing operating costs and lowering the cost of capital through sustainable finance and deeper ESG integration with corporate strategy. Above all, delivering on ESG is about doing the right thing. That change in the role means a marked shift from ESG compliance to corporate strategy for growth, from disclosures to engaging capital markets, and from corporate finance to sustainable finance.

The writers are from ERM. Trista Chen is partner, APAC regional M&A services, financial sector and sustainable finance lead; Jaideep Das is global lead, finance sector and M&A services.