The CFO's Role in CSR Reporting
It goes without saying that Chief Financial Officers (CFOs) pay a lot of attention to the financial performance of their company—in particular anything that could impact that performance in a positive or negative sense. Corporate social responsibility (CSR) is increasingly on the mind of CFOs because it highlights various reputational and operational risks that shouldn't be overlooked, including compliance issues.
Clearly, the expectations of both customers and investors are evolving. CSR is becoming a business imperative regardless of whether the company operates in developed or emerging markets. CSR has presented some companies with substantial business opportunities. For example, General Electric’s Ecomagination line of products brought the company $21 billion in sales in 2011, and Proctor & Gamble reports that between 2007–2011, its Sustainable Innovation Products earned $40 billion in revenue. 1, 2
As previously reported, investors are more interested in CSR than ever and are using it as investment criterion.3 ExxonMobil recently became the first energy company to respond to investor concerns by publishing a report on how it assesses carbon asset risk.4 Energy markets are shifting in fundamental ways, and shareholder value is at stake if companies are not prepared to survive in a low-carbon economy. As oil gets harder to find, unconventional assets are being booked on balance sheets. These reserves are the most carbon-intensive, risky, and expensive to extract. They are also vulnerable to devaluation. CFOs need to reassess how they allocate shareholder capital and strategically adapt their business models.
Deutsche Bank research found a marked correlation between strong environmental and social performance in companies as well as lower cost of capital—something that is clearly of interest to the CFO of any company trying to grow and expand their business.5
CFOs must manage both new assets in which their company invests as well as any potential new liabilities, including carbon taxes and carbon credits. Good compliance increasingly requires companies to provide more accurate CSR information. A 2011 study looked 24 countries that have introduced mandatory reporting requirements since 2005, and increasingly, they require third-party verification of the data disclosed.6
The study went on to conclude that sustainable supply chain practices that combine both social and environmental initiatives are positively associated with corporate financial performance as measured by return on assets and return on equity. According to the study, the positive effects are not always immediately apparent, and a time lag of two years or more is not uncommon.
The issue is not about the CFO taking on the responsibilities of other colleagues. Rather, it is about the CFO assuming a central role in managing a paradigm change in the way business performance is measured, evaluated, communicated, and perceived by stakeholders.
Since 2010, CFOs in the United States must personally sign off on the controls and procedures in place to report material climate change-related risks. Under these circumstances, CFOs cannot afford to take risks as the data must be quality assured, verified, and qualified as both reliable and pertinent. As the importance of such reporting grows, the know-how, resources, and rigor that finance teams have developed for gathering and analyzing data will naturally lead them to take an increased role in managing CSR-related issues.
1"Progress: Ecomagination Report 2011." (2011). General Electric. Retrieved from http://www.ecomagination.com/2011-progress-report-preview
2"2011 Sustainability Report: Commitment to Everyday Life." (2011). P&G Global Sustainability. Retrieved from https://www.pg.com/en_US/downloads/sustainability/reports/PG_2011_Sustai...
3de Leo, F. and Quinn, F. "CSR Index 2013." (2013). Innovatio Publishing Ltd.
4Makower, J. "Exxon, Stranded Assets and the New Math." (2014). GreenBiz.com. Retrieved from http://www.greenbiz.com/blog/2014/03/24/exxon-stranded-assets-and-new-math
5 "Sustainable Investing Establishing Long-Term Value and Performance." (2012). DB Climate Change Advisors and Deutsche Bank Group. Retrieved from https://www.dbadvisors.com/content/_media/Sustainable_Investing_2012.pdf
6 Ioannou, I. and Serafeim, G. "The Consequences of Mandatory Corporate Sustainability Reporting." (2011, revised 2012). Harvard Business School Working Paper 11-100. Retrieved from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1799589