CFOs must show ambition in sustainable ESG goals amid SFDR
First published on ExecutiveFinince.nl, June 24, 2021, by Ronald Bruins.
The Sustainable Finance Disclosure Regulation (SFDR), which has been in force in the European Union since March 10, may be aimed at financial markets, but CFOs are also taking notice. Bart van Praag, general manager EMEA at Workiva concludes, “The demand for reliable data on non-financial aspects is growing and growing.”
The SFDR aims to provide transparency on how financial markets integrate sustainability risks and opportunities into investment choices and recommendations. The SFDR introduces a classification system with information requirements for investment products.
“If the EU asks financial parties that question, you can assume that they will return the question about data from sustainable aspects of business operations to the companies in which they invest. That question is then the first on the CFO's plate, who must be able to hand over reliable information about the ESG factors (Environmental, Social and Governance, ed.) in addition to the information management about finances.”
Corporations must do what they promise
The SFDR thus fits into a social trend, Van Praag believes. “Society or the public demands large institutions to be transparent and do what they promise. You see this in politics, but also in large corporations. Corporations should not make promises they cannot keep. Recently, we've seen a few large multinationals that have run into problems with this and are being punished publicly by regulators, and also via the stock price.”
“In addition, millennials are demanding that the companies they work for play a decent role in society. So the pressure comes from within. For example, several stakeholders simultaneously ask for non-financial key data about the organization of the CFO. From CO2 emissions to working conditions in the chain and the use of raw materials…”
Chief Value Officer
Being able to cough up non-financial information by definition belongs to the CFO, says Van Praag. “The CFO is chief value officer. He or she continuously considers what value the company adds to its service or product. Today, that value is broader than just profit and keeping cash flows in order. In addition, the CFO is the one who already monitors the provision of information about finances. Viewed in this way, he or she is given an additional task to bring the non-financial data to the same, high level of reliability. So that stakeholders, including now shareholders, can assess the company accordingly.”
“So you are the guardian of the financial and non-financial data and the control mechanisms on it. As a business partner, you then advise the business on continuous improvements in financial and non-financial aspects. The game of integrating non-financial KPIs into the business is now on the wagon.”
Goals and objectives
It is the game of goals and objectives. “If you don't know what the goal is, you can't score. Working on sustainability therefore starts with setting realistic goals. After which, as CFO, you also properly set up the building of management control around non-financial KPIs.”
Van Praag also sees this from the perspective of risk management. “Anyone who can foresee risks in the non-financial parameters also knows what the financial consequences are, and can launch scenarios and take mitigating actions. Studies show that companies that pay attention to non-financial parameters therefore do better and create more value.”
License to operate
The building of non-financial information starts with formulating a goal, a purpose. Van Praag: “What do we want to achieve in terms of sustainability? A more diverse workforce? Better working conditions in the chain? Less CO2 emissions? The United Nations Sustainable Development Goals are a good starting point for the boardroom to think about. Which goal suits us best? And more importantly: where can we make the most social impact? The fact that you work on this also gives you a license to operate in society.”
Developments gain momentum
With this, Van Praag outlines the ingredients for working on sustainable goals. “But I also realize it's not easy because non-financial information has to come from different sources from different corners of the business. Going through all files and folders is impossible and you do not create an audit trail either. As the CFO of a multinational, you will therefore need a cloud-based collaboration platform that connects the necessary disciplines worldwide. A platform that brings together the data and workflows surrounding non-financial information and combines it with financial data.”
“With such a platform, you consolidate information flows just like you do with financial reports. In this way, measuring, knowing and working towards a goal go together. I think that's the biggest challenge for the CFO in the next five years. At the CFO, the trends in the transparency of information provision, sustainable goals and technology come together. This development is gaining momentum almost every day. It is up to the CFO to keep up.”
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