The strategic imperative for CFOs to embrace ESG
Prominent CFOs in India Inc are emphasising the need for global financial leaders to prioritise long-term sustainability and advocate for the value of environmental, social, and governance (ESG) considerations within their organisations. During a panel discussion hosted by ETCFO (Economic Times Chief Financial Officer), industry experts shed light on the ESG roadmap, urging CFOs to redefine their approach to ESG and integrate it into their current and future strategies.
The ESG roadmap
The panellists explored the crucial components of an effective ESG roadmap, identifying four key elements: Strategy, Objective, Reputation, and Risk Management. They highlighted that a comprehensive plan would typically encompass eight core elements, encompassing critical aspects such as climate change, energy and efficiency, diversity and inclusion, board compensation, executive compensation, board diversity, and risk management, among others.
The value case for financial leaders
Naina V G, Head of Employee Business Relationship at the Association of Chartered Certified Accountants (ACCA), emphasised that addressing ESG concerns should not be the sole responsibility of individuals or governments. Instead, CFOs and financial leaders must take the initiative to present a value case to their organisations, moving beyond mere business justifications. V G stressed the importance of embedding long-term sustainability into the fabric of organisational decision-making processes.
The Association of Chartered Certified Accountants (ACCA) has conducted research highlighting the imperative for professional accountants to prioritise climate action and embrace long-term sustainability. This research emphasises the need for financial leaders to reevaluate their approach and recognize the significance of ESG as a core value. Prominent CFOs, such as Nilesh Chitale of thyssenkrupp Industrial Solutions, have acknowledged the transformative impact of ESG on their organisations, emphasising its pre-value nature and the challenges associated with integrating sustainability into the business strategy.
ESG as a core value
While finance traditionally focused on return on capital and depreciating cash flows, ESG has now become a foundational value. This transformation signifies a holistic shift in the approach towards ESG, with particular emphasis on the sustainability (S) aspect. While corporate governance (G), is frequently discussed in relation to ESG, the challenge lies in ingraining sustainability into the business strategy, ultimately aligning with the overall business case.
Evaluating ESG performance
Chitale emphasises the existence of a business case for ESG, while acknowledging the need for evaluating performance in a comprehensive manner. He suggests that current evaluation metrics often overlook critical issues such as air quality deterioration and education for underprivileged children. Consequently, there is a growing recognition of the need for different metrics to assess ESG performance. From a CFO perspective, this represents a significant transformation that requires proper data points and technology for effective implementation.
Financial leaders, including Pankaj Vasani of Cube Highways and Parag Bengali of Bisleri International, shed light on the strategic nature of ESG and the comprehensive approach required for its successful implementation. They emphasise the importance of integrating ESG into an organisation's strategic plan, understanding its diverse elements, and fostering a cultural mindset to drive meaningful change.
ESG as a strategic plan
Vasani views the ESG roadmap as a strategic plan that encompasses an organisation's commitments, actions, and goals. He believes that ESG extends beyond mere risk management and should be focused on long-term value creation. Proactive engagement with ESG is essential for any organisation, and Vasani emphasises the need to adopt a collaborative and comprehensive approach that involves investors, shareholders, customers, and regulators. He highlights that a well-structured plan typically includes elements such as climate change, energy and efficiency, labour practices, diversity and inclusion, board compensation, executive compensation, board diversity, and risk management.
Diverse forms of ESG
Vasani challenges the notion that ESG is synonymous with zero emissions. He explains that different industries have distinct ESG goals based on their specific contexts. For example, a company operating a fleet of cars may focus on transitioning to electric vehicles to reduce carbon emissions, while a food-related company may prioritise reducing food wastage. Similarly, diversity and inclusion may be crucial for companies in the advertising and media sector. Thus, ESG initiatives must align with an organisation's industry and circumstances.
Cultural Integration and mindset shift
Bengali emphasises that ESG is about cultural integration rather than a mere operational approach. He believes that ESG should be viewed as a means of giving back to society, going beyond financial gains or profit. Bengali perceives ESG implementation as a cultural and mindset shift, necessitating a broader perspective for finance professionals. While ESG compliance was previously voluntary, it has now become mandatory, indicating a shift in industry practices. The value derived from ESG lies in its ability to shape behaviour, encourage responsible actions, and contribute positively to society.
Mapping current practices to expectations
To drive effective ESG implementation, Vasani stresses the importance of aligning an organisation's existing processes, practices, and culture with the expectations of investors, shareholders, and other stakeholders. Identifying the gaps between current and desired states enables organisations to formulate strategies to bridge those gaps. This process involves integrating sustainability and best business practices, ultimately contributing to an organisation's reputation and long-term success.
Conclusion
ESG is evolving into a strategic plan that requires a comprehensive and collaborative approach. Financial leaders recognize the need to embed ESG into an organisation's strategic framework, adopting a proactive stance towards sustainability. By embracing the cultural integration of ESG and driving a mindset shift, organisations can create lasting value for society while achieving their business objectives. Implementing ESG goes beyond financial gains, focusing on societal contributions and positive behavioural changes, ultimately shaping a brighter and more sustainable future.
