According to mainstream business media, the investment community is ready for sustainable business practices.
The reality is that, outside of the ASX 100, the majority of chief financial officers and finance managers in small to medium enterprises, are challenged on many levels to create the changes necessary to move from the profit focussed past to the planet focused future.
Since the Industrial Revolution, business success has been measured in financial terms without consideration for the impact we have on the people and environment around us. This means that while many businesses are ‘talking the talk’ about sustainability, the majority of CEOs are still driving for profitability at any cost.
In my round-tables with CFOs, they regularly tell me they are unable to break from traditional ways of thinking and doing business in order to align with ESG goals, whilst at the same time, keeping investors and shareholders happy.
The fundamental problem they face is that in order to report profits that investors will sign off on and to provide funding, CFOs are having to go back in time to previous past growth measures that do not encompass sustainable business practices to make the ROI stack up. This means the “profit over purpose” cycle is being perpetuated.
The issue is that change is expensive and getting everybody on the same page is challenging.
CFOs need to be supported by the CEO and other team leaders to balance financial measures with social, nature and environmental impact measures. Motivational remuneration for the leadership team needs to be replaced with an overall company vision that meets the purpose and value of the whole company.
Research has shown that over time, once a company actively outlines its purpose and then puts systems in place, a “seismic shift” can occur whereby a positive performance on ESG issues equates to a superior financial performance.
A study by the Harvard Business School found that companies that developed organisational processes to measure, manage and communicate performance on ESG issues in the early 1990s, outperformed a carefully matched control group over the next 18 years.
The authors of this study also pointed out that “materiality matters” and by honing down on industry relevant material issues can help achieve ESG goals and profitability.
With industry figures showing $1.54 trillion is invested into sustainable markets, it’s clear to see the investor community is becoming increasingly focused on ethical asset management.
This investment assumes that the global private sector broadly understands how sustainable it needs to be to ensure it remains within key planetary thresholds. The uncomfortable truth is that it does not, and this is where the dream of sustainable corporate self-regulation crashes into reality.
The issue is that this is not tracking back to the CFO modelling and internal business case work. One solution is for the business community to ‘get real’ about the cost of carbon.
To move towards a regenerative business, we need to ‘flip’ the business model from being a degenerative to a regenerative one and CFOs can lead the way.
CFOs are ‘key stewards’ that can drive change from within to align business outcomes with earth outcomes to go beyond carbon credits to turn profit into purpose.
An integral part of this is to recognise the true value of the goods and services we are selling. This includes every element of the supply chain, our employees, our suppliers, so that visible and invisible costs are accounted for.
We need to establish new business structures, legal ownerships, governance frameworks and decision-making processes, as well as look at other options for how business is funded and financed.
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Perhaps one of the greatest discrepancies in the corporate business model is the massive price difference between the value attributed to fossil fuel returns at approximately $500 per tonne, versus the value attributed to carbon credit pricing of $50 per tonne.
How does this stack up when it comes to ethical profitability reporting? This is the challenge that CFOs are facing every day in the light of scrutiny from investors, boards and shareholders. The problem is, that we don’t have the time to waste.
The clock is ticking and we need address this disparity and take practical action to implement changes before it’s too late.
