Summary Report: Sustainability as a CFO Imperative

 

Background

Deploying sustainability strategies is a real challenge for the CFO. The complexity of the issue on sustainability investing and ESG is illustrated by the clash of thoughts and evidence from within Blackrock itself – one of the world’s preeminent asset management firms and a premier provider of investment management.

Blackrock vs. Blackrock (Brief Excerpts)

(Please see references for full information)

Larry Fink, Chairman & CEO, in open letters to clients in 2020[1] and CEOs in 2021.[2] Tariq Fancy, Blackrock’s first chief investment officer for sustainable investing. (hired 2017, left 2021)[3]
  • In 2020, we completed our goal of having 100% of our active and advisory portfolios ESG-integrated. We intensified our investment stewardship focus on sustainability. And we introduced nearly a hundred new sustainable funds, helping to increase access and provide investors with greater choice.
  • In 2021, we are asking companies to disclose a plan for how their business model will be compatible with a net zero economy. We are asking you to disclose how this plan is incorporated into your long-term strategy and reviewed by your board of directors.
  • The more your company can show its purpose in delivering value to its customers, its employees, and its communities, the better able you will be to compete and deliver long-term, durable profits for shareholder.
  • While leading the charge to incorporate ESG considerations into all of our US$8.7 trillion of investment activities at BlackRock, I started realizing that there’s not a lot of value at all in this data. It didn’t – and it does not – work in most [investment] strategies, since many are short-term and don’t care about long-term issues.
  • Relying on Wall Street and big business to “self-regulate” is a recipe for disaster.  I could clearly see that the markets would not “correct” themselves without government action.
  • I also started to realize that all the stuff on “stakeholder” capitalism was hollow marketing — it seemed almost intended to dupe the public into believing that we don’t need the overdue government regulation that we need immediately to address the climate crisis.

As the investment world continues the debate, maybe, the need of the hour is that both – the government and the private sector – act with urgency. The former must realise that the time for incentives and nudges are over, and strict regulations need to be issued and enforced; and the latter to be onboard and prepared to incorporate sustainability solutions into its long-term strategies.

In the UAE, mandatory reporting on ESG has been issued for listed companies. Listed PJSCs are required to prepare a sustainability report reflecting the company’s long-term strategy and its impact on the following fields[4]:

  • the environment – the impact of the company’s operations and decisions on the environment and the communities in which the company operates.
  • society – how the company’s policies and operations contribute or could contribute to social justice, the well-being of workers and employees and the surrounding community.
  • the economy and governance – how the company is contributing to the economic benefit of society and the impact of the company’s operations on the local economy.

Currently, there is no ESG legislation for the private sector in the UAE, but it could be on its way. The Capital Club Dubai hosted a roundtable discussion on the topic, moderated by Pedro Pereira, to bring together the diverse thoughts of business leaders, especially the CFOs, who bear the primary weight of this responsibility. They shared some main challenges and call to action.

Moderator: Pedro Pereira, Head of Climate Action and Responsible Innovation, SAP EMEA South

Participants

  • Naresh Phanfat, CFO, Wharton; Coach Corporate Finance, Pearson; Adjunct Faculty; Mentor
  • Frederic Duranton, CFO, Mantrac Group
  • Jean-Philippe Linteau, Consul General  – Consulate General of Canada
  • Meghna Lakhani Talreja, Founder & CEO, One Modern World
  • Paul Marsh, Chief Strategy Officer, The Futurist Company
  • Karen Jakobsen, retired
  • Manish Sharma, Group Financial Controller, Oasis Investment Company (Al Shirawi Group)
  • Maria Paula Oliveira, Chief Innovation Officer, MENA, EY
  • Salman Rajput, Director, S I Capital
  • James Payne, Group Chief Financial Officer, Mattex Group
  • Debra Webster, Amani Circle Founder, CEO

Challenges

  • CFOs need to create value for the company, and there are pressures from external and internal stakeholders. With limited funds, it is challenging to resolve the conflict between investment and ROI, and very difficult to convince the CEO, Board and shareholders to strategise for the long term. So, compliance could actually help the CFO, because then everybody must align internally with regulations. Yet, compliance itself can also be a challenge, especially when it is complicated and difficult to show how the new layer of sustainability practices will create value. The CFO is under pressure to present many complex financial performance and sustainability metrics.
  • We must disincentivise for bad practices or we will continue doing it. Unless we are able to link ‘bad behaviours’, like carbon emissions, with tariffs and consequences, we will be left with good intentions and no real change. Compliance is urgently needed.
  • It is challenging to properly evaluate what solutions are fully sustainable long term. Tesla, for example, has been able to convey a message about sustainability that is so compelling that the market rewards it. However, the huge problem of lithium batteries waste disposal is not widely known. Similarly, UBS and others recently have issued green bonds, but we cannot simply conclude that the bond and its issuer are good investments from an ESG perspective.
  • Financial markets reward short to medium term vision and can be a distraction from doing the right thing. There is an interesting saying, “markets have the ability to remain irrational, longer than human beings can remain sane”.
  • Another challenge is in collecting and evaluating large amounts of relevant data. Data on its own is not useful, because the real problem around data is that it’s too complex. You cannot improve what you cannot measure, and there is a push for a sustainability ledger, that reports on carbon emissions throughout the supply chain and business processes. However, there are too many complex frameworks and standards, and no universally standardised matrix – like the accounting standards. In the new paradigm, most companies’ systems are not designed to track ESG data.
  • It is a challenge for shareholders to change the way they perceive and calculate profitability. The relationship between sustainable investments and profits is a curve-linear relationship, with the initial phase not showing high financial results, but over a period of time, the financial results are better and more stable. The return on invested capital is different from return on capital employed. The latter is used for capital budgeting decisions whilst the former is what you need to make sense of profitability.
  • The CFO and the company could create a false sense of contribution if the metrics are just aspirational. It would be better to move from the realm of metrics to KPIs with measurable, actionable benchmarks and improvements. The danger of a placebo affect with no real change or meaningful impact is real and the CFO needs to watch against this.

Call to Action

  • Define metrics around proper goals and establish how they can be percolated to all levels of the organisation, with reporting on a universal standardised framework.
  • Champion companies that succeed in aligning the sustainability agenda with shareholders and the board through strong corporate governance and can be strong role models.
  • Walk the talk. Just execute. Strategise what you can do and start the work that matters.
  • Communicate effectively to multiply impact and educate.
  • Employ the carrot & stick method. The carrot is linking sustainability results to CEO bonus; and the stick is regulations and compliance.

Concluding Thoughts

Sustainability is no longer an option but a business imperative, and an existential crisis. The hope is that the government and private sector will join hands to find solutions.

A quick look at around the world would help gain some perspective on what others are thinking about responsible investing.[5]

  • “In Asia, we have seen ESG awareness build momentum. Asset owners and asset managers are showing more interest and putting pressure on companies.”
  • “In Australia, the local investor community has a strong awareness of the risks and opportunities linked to climate change.”
  • “ESG integration within the global emerging markets (GEM) has mostly been a tale of catch-up over the past 20 years.”
  • “Overall, the ESG investment landscape is evolving quickly across Canada. Many parties are not only interested in furthering ESG awareness, but also in pushing companies to publish more, as well as more reliable, ESG-related data.”
  • “In the USA, the managers of some US$12 trillion (around a quarter of US assets under professional management) consider some sort of sustainability element as part of the investment process.”
  • “Asset managers in the UK need to continue integrating ESG factors into their decision-making and create innovative, sustainable products. The materiality of the risks, as well as the expectations of clients, policymakers and society, demand it.”
  • “In March 2021, the EU’s Sustainable Finance Disclosure Regulation (SFDR) was triggered and requires asset managers to disclose information about the ESG risks in their portfolios, and how they address them.”[6]

At Capital Club Dubai, the mood was sombre yet optimistic, as the business leaders concluded the meeting, reflecting on the urgency of the matter. They agreed that markets were unreliable and good intentions would not get the job done. Successful leaders will be those that understand and put into practice the mutually dependent relationship between profitability and sustainability – which is now part of the CFO’s mandate.  The conversation to be continued.


[1] https://www.blackrock.com/corporate/investor-relations/blackrock-client-letter

[2] https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter

[3] https://www.greenbiz.com/article/blackrocks-former-head-sustainable-investing-says-esg-and-sustainability-investing-are

[4] https://www.lexology.com/library/detail.aspx?g=82d38685-3977-4edd-9930-77b2e9e36d78

[5] https://www.aberdeenstandard.com/en/insights-thinking-aloud/article-page/responsible-investing-around-the-world

[6] https://www.refinitiv.com/perspectives/regulation-risk-compliance/europes-esg-regulations-green-investing-meets-red-tape/