Building sustainable governance – why the CFO and the CPO have key roles to play

Sophie Graham Profile picture for user Sophie Graham January 24, 2024
Summary:
ESG is a cross-functional priority - Sophie Graham of IFS explores how sustainable governance links to different roles across the C-suite and needs to translate words into action.

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Across many large enterprises today, environmental, social, and governance (ESG) considerations are no longer seen as mere add-ons to corporate strategy. Increasingly, they lie at its very heart.

A recent survey by global management consultancy Bain & Company and sustainability ratings provider, EcoVadis found that ESG activities correlated positively with stronger financial performance, with apparent benefits including faster revenue growth and stronger margins.

While carbon emissions reporting is crucial, ESG requires a holistic approach. Companies, whether they are a heavy manufacturer, a utility or a retailer, need to start embedding sustainability into their business strategy and financial planning, and explain how that works. That is a challenge, but it also brings huge opportunities as outlined above to deliver growth, and ultimately, a competitive edge.

Technology has a critical role in enabling change for the better by facilitating innovation to tackle environmental, social and governance issues, such as driving resource efficiencies to tackle climate change or providing greater visibility across supply chains. Leading companies like Volvo, EcoSpindles, and Rolls-Royce have already embraced the potential of technology to drive sustainability and promote meaningful change.

But capitalizing on the promise of ESG is not easy for businesses. It goes beyond mere metrics, and typically requires a deep understanding of the entire supply chain. While boards now grasp the importance of ESG and its 'why', translating its scale can be daunting. Every business should be adopting an approach where data is maintained at the source, embedded within the relevant business process, or the appropriate software, rather than being kept in isolated Excel spreadsheets, or pockets of functionality across the business. 

In this endeavor, good governance is key but establishing it relies on getting everyone in the organization on board and understanding their roles. Building a sustainable governance structure isn’t about isolated efforts, after all, rather it demands a holistic approach to ensure that ESG data is saved at the source and can be easily leveraged to enhance business processes.

Embedding ESG – a cross-functional endeavor

Every department – from procurement to marketing to finance – has a distinct role to play in implementing ESG within the organization. This isn't a mere rearrangement of responsibilities but an evolution that requires businesses to address gaps in their organizational structure. The embedding of ESG across all functions ensures that sustainability becomes an integral part of the company's DNA rather than a standalone initiative.

That can in part be done through ESG lobbies that help ensure that insights are fed back across the whole organization and are clearly visible across the business units, ensuring that ESG-related supply chain data is seen and understood by the relevant parts of the organization, such as procurement, for example.

In addition to the different departments involved having visibility of the data, it is also key for C-suite members to have the appropriate visibility as well, as they have a particularly important role to play in ensuring ESG success. For some, this is reflected in the establishment of a chief sustainability officer (CSO) in place that help define the vision, goals, and policies related to sustainability and ensure alignment with the company's overall strategy.

ESG continues to be an emerging field, however, meaning the role of a CSO is often missing while the objectives remain. And it is this absence that underscores the importance of other board members like the chief financial officer (CFO) and chief procurement officer (CPO) in a successful ESG approach. 

The CFO – translating strategy into financial action

The role of CFOs in sustainable governance is far-reaching. Increasingly it is seen as a key focus area by this group. In line with this, a recent survey from management consulting firm, Ernst & Young (EY) found that ESG matters are an urgent concern for chief financial officers (CFOs) globally. Polling 1,000 CFOs from 21 countries, the survey found that ESG was voted as a top priority, alongside technology and digital innovation (43%).

CFOs have a multi-faceted role to play when it comes to delivering on the organization’s core ESG-related goals. They are not just the stewards of the company's financial health but also vital ‘translators,’ getting feedback from customers – and then helping develop ESG strategies that embed financial terms, but then translating those into objectives that can be read, understood, and acted upon by the business. In that sense, they are effectively transformation agents for the business.

Building on that role, their ability to interpret and make best use of it empowers them and enables them to drive the organization forward. They preside over the ESG regulations which act like trojan horses in many businesses. They deliver change on one level but when the CFO analyzes them in more detail, they realize that it is potentially delivering much more, enabling them to help build governance structures, design processes and implement relevant policies.

They assess the financial implications of sustainability initiatives, bringing much-needed transparency to reporting. By weaving ESG strategy into financial action, CFOs are paving the way for channeling capital towards ESG investments, thus solidifying the financial feasibility of sustainability. This holistic approach to reporting – merging financial insights with sustainability data – is an essential step in aligning ESG with fiscal goals.

CFOs can influence corporate strategy to ensure ESG factors are considered in long-term planning, investment, and operational decisions. They can help allocate resources to ESG initiatives, ensuring they contribute to financial performance and value creation, which is crucial for investor relations.

CFOs are also key in communicating the organization’s ESG message. They must be able to articulate the company's ESG strategy, achievements, and goals in a way that resonates with the values and expectations of would-be investors. That in itself helps drive ROI for the business, but also allows the CFO to deliver returns more generally by aligning ESG initiatives with corporate strategy and helping ensure the organization pursues sustainability goals that also drive business growth, innovation, and profitability.

The CPO – driving sustainability through the supply chain

Running parallel in importance is the chief procurement officer (CPO), the chief orchestrator of the supply chain's sustainability dynamics. With the critical task of managing Scope 3 emissions, the CPO's mandate is expansive – from ensuring ethical sourcing to minimizing environmental repercussions. In heavy manufacturing, for example, they will need to be focused on working with suppliers to understand the lifecycle of the materials they provide and choose those with minimal environmental impact, or optimize procurement processes to reduce waste, perhaps through methods like just-in-time procurement to avoid over-purchasing and excess inventory.

The pivotal role of effective CPOs is evident in their impact. Companies helmed by proficient CPOs witness significant reductions in their environmental footprint, showcasing how pivotal the role is in managing and mitigating carbon emissions. Beyond this, CPOs are integral in fostering collaboration across the business ecosystem. They are adept at identifying and rectifying ESG chinks in the supply chain, thereby directly influencing a company's ESG ethos.

The impact of the CPO on a company’s ESG strategy is therefore profound but it will be strengthened further if the businesses in its supply chain have embedded ESG data in the systems they use every day. In that way, when the CPO is purchasing something, they can instantly see the emissions impact of everything they are buying and weigh that up against cost and service level agreements etc, to have a more comprehensive view to inform their purchase decision.

A cohesive board strategy for ESG

Sustainable governance is not just about the CFO and CPO. As businesses build their ESG blueprint, the involvement of other board directors becomes paramount. Chief marketing officers defend against greenwashing accusations, while sales directors and chief customer officers delve into emission measurements.

Navigating the intricate web of regulatory frameworks while integrating ESG data demands the expertise of chief strategy officers. And in this data-driven age, chief data officers and chief information officers become invaluable, harnessing vast amounts of data and ensuring its accuracy and scrutiny-readiness.

Governance – beyond board roles

Yet, ESG governance transcends mere board roles. As large enterprises increasingly recognize, having a board-level sponsor for ESG needs to become best practice.

But it's also essential to realize that governance is not static – it evolves. As ESG becomes the collective responsibility of all stakeholders, accountability spreads. This dynamic approach welcomes passionate individuals, fosters innovation through initiatives like hackathons, and yet retains an organized method. In essence, it simplifies sustainability, making it an organic component of the business fabric. Organizations need to concentrate on embedding sustainability into their business strategy and this needs to be the focus of all.

Sustainable governance is the future, and its successful integration rests on robust board leadership. With CFOs and CPOs at the helm, companies can chart a course that not only addresses the current ESG mandates but also paves the way for a sustainable future. The task may be daunting, but with cross-functional collaboration and the right governance structure, businesses can embrace sustainability in its entirety.

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