Moving to the Beat of ESG Can Be Good for Business

Are you hearing the public drumbeat for sustainability? If sustainability is not one of your corporation’s top priorities, maybe it should be.

Regulators, investors, customers, suppliers, employees, and other business stakeholders are increasingly interested in sustainability. In brief, sustainability entails the use of resources economically, prudently, and without unnecessary depletion. The drumbeat is growing louder for relevant change, including increased corporate accountability in this regard. According to global consulting firm Protiviti Inc.’s 2023 Global Finance Trends Survey

Report, CFOs and other finance executives ranked environmental, social, and governance (ESG) metrics and measurement – key aspects of sustainability reporting – as the top priority to be addressed over the next 12 months.¹ This view was shared by those in both publicly and privately held organizations.

As finance executives, we must respond to this call for change. We must ensure our organizations comply with regulatory reporting and disclosure requirements, if applicable, and establish controls to ensure all sustainability reporting – internal and external alike – provides quality information. We should also embrace and prioritize sustainability initiatives, creating economic value for our organizations by seeking those initiatives that deliver a positive return on investment (ROI). Finance executives are uniquely qualified and positioned to ensure investment in sustainability is an investment in the bottom line.

This article proposes that – whether your organization is subject to mandatory reporting requirements or not – sustainability decisions are good business decisions. Specifically, you will be introduced to the concept of sustainable business management and gain insight into what has been driving the call for change. Then you will be offered an action plan to prepare yourself to take a leading role regarding sustainable business management in your organization. Finally, you will learn a few practical ideas on how to leverage sustainability to benefit your company.

Sustainable Business Is Good Business

CFOs, along with their CEOs and other business partners, are charged with creating economic value for their organizations, ethically, responsibly, and for the long-term. Creating ongoing economic value requires sustainable business management.

Having recently traveled in Spain, where olives are a staple in many diets, I would like you to consider how olives are harvested. In many countries, farmers harvest olives by hand despite the fact that mechanical harvesting exists and is relatively inexpensive. These farmers know that, while mechanical harvesting would surely make gathering the crop easier, faster, and more profitable, it would likely damage or destroy the olive trees. They are willing to sacrifice profit in the current year to create value for the long term, ultimately benefiting all stakeholders. Similarly, Pennsylvania farmers – whether they grow corn, soybeans, apples, peaches, pumpkins, or another crop – must at times also choose between short-term profitability and the long-term health of their land.

Sustainable business management reflects the concept of optimizing the current year’s harvest while also preserving the orchard or field. By analyzing our current operations and business model, we can identify opportunities to simplify, streamline, and build in best practices. By ensuring our policies and procedures are practical, we can run our operations more efficiently and effectively. We can increase capacity at a lower cost, growing our business while saving money.

Setting the Stage

In 1968, the Apollo 8 astronauts, the first to orbit the Moon, photographed Earth peeking out from beyond the lunar surface. Many point to this iconic photo, called “Earthrise,” as inspiring the modern environmental movement. Specifically, the “Earthrise” photo dramatically shows the boundaries, or small scale, of our planet in a wider universe, evoking the accountants’ centuries-honored principle that “resources are limited” and that effective stewardship of resources is critical.

Two years after the Apollo 8 mission, in 1970, the first Earth Day was held, inspiring nearly 20 million Americans to demonstrate against the negative impact of industrialization on the environment. Within a year of that first Earth Day, the U.S. Environmental Protection Agency was created and environmental laws such as the National Environmental Education Act, Clean Air Act, and Occupational Safety & Health Act were passed. Today, Earth Day is observed globally as a day of individual and collective grassroots action for local, national, and global policy change. And the drumbeat for change is growing louder and more urgent.

Countries that participated in the 2015 United Nations Climate Change Conference (COP21) in Paris agreed to work together to limit global warming, develop national plans (updated every five years) to reduce emissions, and provide funds to support these goals. In 2021, leaders from nearly 200 countries came together in Glasgow for COP26, providing an opportunity to revisit pledges made in Paris and to agree on how to step up action to solve the global climate crisis. The Glasgow Climate Pact, which included commitments to halt and reverse deforestation, reduce methane emissions, and move away from coal power, is expected to set the agenda on climate change for the next decade.

So, what does all this mean for sustainability and ESG reporting? Well, during COP26, the International Financial Reporting Standards (IFRS) Foundation Trustees announced the formation of the International Sustainability Standards Board (ISSB). The ISSB is tasked with developing IFRS Sustainability Disclosure Standards that will become the global baseline for sustainability disclosure requirements.

Call for Corporate Action

The drumbeat for change includes demands for increased corporate action, especially for streamlined and formalized corporate sustainability disclosures.

The ISSB released its inaugural standards (IFRS S1 and IFRS S2) in June 2023, “ushering in a new era of sustainability-related disclosures in capital markets worldwide.”² The first, IFRS S1 – General Requirements for Disclosure of Sustainability-Related Financial Information, will support investors, lenders, and other primary users who are looking for more consistent, complete, comparable, and verifiable sustainability information. The second, IFRS S2 – Climate Related Disclosures, sets out the requirements for identifying, measuring, and disclosing climate-related risks and opportunities.

The European Union’s (EU’s) Corporate Social Responsibility Directive (CSRD) also took effect in 2023. According to this law, large companies and listed small and medium-sized enterprises (SMEs) are required to publish regular reports on sustainability. The reports will highlight the environmental and societal risks an organization faces as well as the impact of its activities on people and the environment.

The U.S. Securities and Exchange Commission (SEC) is also working on new disclosure rules. Specifically, the SEC’s proposal would require public companies to disclose potential risks to their operations due to climate-related events (e.g., rising sea levels, floods, fires, etc.). In addition, companies would be required to provide data on their own greenhouse gas emissions (Scope 1), how much energy they consume (Scope 2), and, potentially, emissions generated by their suppliers and customers (Scope 3). These rules, first introduced for public comment March 2022, are expected to be released in 2024.³

You may say, “My company is private and Pennsylvania-based; we aren’t subject to SEC’s potential reporting requirements or the EU’s CSRD and/or the ISSB standards. So, the call for corporate accountability doesn’t apply to me.” As the CFO of a private U.S.-based SME myself, I can relate to your sentiment. But let me share a story.

In late December, I was reviewing a draft master-services agreement from a potential new customer. This agreement included numerous pages outlining the (European-based) company’s ESG policies and the ESG-related expectations of their business partners. Regardless of regulatory requirements, when conducting business with some customers you may need to address their sustainability reporting needs accordingly.

A CFO’S Sustainability Action Plan⁴

As finance executives, we must respond to the call for change. By leveraging our core competencies – including our analytical, strategic planning, and risk management skills, as well as a business partnership mentality – we are uniquely qualified to do so. CFOs and their teams can link the business case for sustainability to financial performance. We can enable good decision-making by providing useful, actionable information. We can create a sustainability culture by providing leadership, decision-support, and oversight, along with setting the right “tone at the top.” Most importantly, by embracing sustainability initiatives, we can create economic value for our organizations. The following five steps will help you get started.

Build Personal Awareness – Before you can take a leading role, you must build your own personal awareness of ESG trends and recent developments. Read articles (such as this one), attend related webinars, seek out white papers and authoritative literature, follow regulatory developments, and build a network of peers who are also on this path. For example, did you know the U.S. Inflation Reduction Act provides a mix of lucrative taxes and fee incentives to promote renewable energy? Reducing a company’s tax footprint is what CFOs do all the time; there is no reason why this can’t be the case in ESG areas.

Understand Reporting Requirements – Next, gain an understanding of sustainability reporting and disclosure requirements that could impact your business. As a private, Pennsylvania-based company, it will still be beneficial to understand SEC, ISSB, EU CSRD, and other such requirements. If you are doing business overseas, ensure you know the local requirements of where you operate.

Prepare Your Team – Once you have built your personal awareness, educate your staff and cross-functional partners about sustainability-related trends that impact, or could impact, your business. Then provide recommendations on how your organization can proactively prepare for anticipated changes.

Establish Appropriate Controls – According to the Governance & Accountability Institute’s 2023 Sustainability Reporting in Focus report, 98% of S&P 500 companies published a sustainability report in 2022,⁵ up from 90% in 2019 and only 20% in 2011. If your organization is issuing a sustainability report or uses such information – whether for internal or external purposes – ensure appropriate controls over this reporting are in place. Consider leveraging the Institute of Management Accountants’ Statement of Position on Sustainable Business Information and Management and COSO’s Achieving Effective Internal Control Over Sustainability Reporting (ICSR) Supplemental Guidance as resources.

Seek Positive ROI Initiatives – Beyond preparing to meet (potential) reporting requirements, proactively seek sustainability initiatives with positive ROI that can benefit your bottom line. Below, I’ll discuss some practical ideas on doing so.

Seeking Positive and Practical ROI

When I was the finance executive for Campbell Soup’s premier supply chain operation, based in Northwest Ohio, our site was named Food Processing magazine’s 2014 Green Plant of the Year, underscoring our success in implementing sustainable manufacturing practices. Our mandate, though, was not sustainability at any cost. Rather, we were charged with manufacturing high-quality products at the lowest possible cost. Thus, we scrutinized every investment proposal, including sustainability-related ideas, to ensure the underlying assumptions were reasonable and the anticipated ROI was acceptable. Let me put it this way: sustainability initiatives must make good business sense or they aren’t sustainable, are they?

The following are practical ideas⁶ for sustainability that may benefit your organization.

Optimize Machinery and Equipment – Analyze your operations to identify which assets are consuming the most energy. Clean equipment and perform preventive maintenance to optimize performance and extend life spans. Shut off machinery and equipment when not in use, and consider investing in new, more efficient assets. A new blow molding machine or filling line, for example, may offer greater capacity, create less scrap, and be more energy efficient.

Reduce Electricity Use – Install motion-activated lighting, especially where foot traffic is limited like in a large warehouse or production facility. Upgrade from fluorescent lighting to more efficient LED products. Convert to high-efficiency motors that leverage variable-frequency drive technology. Invest in energy monitors that allow you to track usage, monitor trends, and identify changes that may indicate an issue. And, of course, unplug idle electronics.

Reduce Water Use – Identify pipe, joint, or valve leaks by monitoring water usage and conducting routine checks with water pressure and water flow meters. Invest in technology that enables water recycling (e.g., recapturing water in a closed-loop system). Leverage best practice techniques for cleaning production equipment, and install high-pressure, low-volume taps and high-efficiency toilets for water savings. Finally, consider reverse osmosis for water purification.

Optimize Products and Packaging – Design packaging to use less materials and analyze how products are shipped, ensuring all shipping materials used are needed to protect the product. For business-to-business shipments, consider using simple, corrugated boxes or totes vs. decorative packaging. Reuse or repurpose boxes, barrels, and pallets. For example, can your customers efficiently break down and return gaylords (pallet-sized boxes) for reuse? Or could you repurpose these gaylords to collect scrap generated during the production process? When sourcing high-volume materials, leverage gaylords or bulk containers rather than standard cartons. Finally, reduce warehousing costs, packaging costs, and inventory obsolescence via SKU rationalization.

Streamline Transportation – Enable full truckload shipments by consolidating customer orders. Use data analytics of shipping destinations to determine the most efficient trucking lanes. Determine if rail is a more efficient option than trucking for long hauls. Even consider co-locating with key suppliers. At Campbell’s, for example, we negotiated with our bottle supplier to set up an onsite blow-molding operation linked to our beverage facility, reducing the cost of sourcing these bottles and mitigating the risk of empty bottles being damaged in transport.

Promote Recycling – Educate your team on recycling best practices and make it easy by placing well-marked recycling bins in convenient locations. Default copiers to print double-sided, and promote a paper-conscious policy, minimizing what needs to be recycled to begin with. Create a space for collecting reusable packaging, boxes, and stationery items. Consider holding occasional “thin to win” days, encouraging the team to clear out unwanted items from offices and warehouses (your obsolete equipment just might be worth something to someone else).

Consider High-Profile Investments – Investing in a wind farm, biogas facility, or solar field could make sense, depending on your circumstances. While at Campbell’s, we partnered with a third party to build a 24,000-panel solar array on 60 acres adjacent to our operations. This solar field, based on analysis at the time, was expected to reduce the site’s electricity costs by $4 million and eliminate 250,000 metric tons of greenhouse gases over its useful life.

Call to Action

The CFO and the finance team, leveraging their in-depth knowledge of the business and their unique skill set, can play a pivotal role in leading their organization’s response to the growing drumbeat for sustainability. To that end, build your personal awareness and develop your team’s fluency in the language of sustainability. Create effective methods to gather, process, summarize, and deliver sustainable business information and establish appropriate controls over these processes to build trust in its quality. Budget for sustainability-related investments while ensuring such investments are aligned with your organization’s overall purpose and strategies. And always remember that sustainable business is good business! 

¹ Protiviti Inc., 2023 Global Finance Trends Survey Report, pages 9-10.

² “ISSB Issues Inaugural Global Sustainability Disclosure Standards,” IFRS.org (June 26, 2023).

³ Samantha Delouya, “A New Rule Requiring Companies to Disclose How Much They Pollute Is Coming in 2024,” CNN.com (Dec. 30, 2023).

⁴ J. Stephen McNally, “Meeting the Demand for Sustainability Disclosures and Investments,” www.cfo.com (May 3, 2022).

⁵ “New Research Shows Mid-Cap U.S. Public Companies Closing Sustainability Reporting Gap in 2022,” www.ga-institute.com (Nov. 15, 2023).

⁶ J. Stephen McNally, “Sustainable Business: 7 Practical Ideas,” www.cfo.com (April 25, 2023).