More senior finance leaders are seeing the connection between ESG and business resiliency, reputation, and stakeholder relations and adjusting their strategic planning and budgeting accordingly.
“In the last few years, we’ve seen extreme weather, social unrest, and governance failures wreak havoc on otherwise healthy margins, corporate value, and business continuity,” says Christopher Tower, sustainability and ESG strategy and services leader at BDO. “Finance leaders have come to realize that these and other environmental, social, and governance risks are undeniably financially material and that an effective ESG strategy can result in meaningful value creation.”
For some organizations, the push for proactivity on ESG comes from within—employees are demanding better working conditions, and C-suites are pursuing ESG-related missions. For others, external stakeholders like customers, investors, and lenders have begun to exert pressure on management for more sustainable operations. And one must not forget the impact of regulators.
“Regulations focused on a wide variety of sustainability-related topics are materializing in marketplaces all around the globe,” Tower says.
A recent BDO article, “Action Required: Sustainability and ESG-Related Regulations Are on the Rise Globally,” provides insights into the scope and impact of many of these new and proposed regulations. Tower says that the onus quickly falls to CFOs to help their organizations navigate stakeholder demands over a longer term.
“Committing to a sustainability strategy requires them to balance the nature and timing of costs with the desired impact to be achieved,” he says.
Your Role in ESG
CFOs and their teams are principally tasked with managing an organization’s financial health, a duty that includes oversight of financial and operational performance, as well as risk management. Further, Tower says that forward-thinking CFOs have long recognized their critical role in driving lasting change across the organization.
“Those leaders recognize the materiality of certain ESG risks and value of the related opportunities, integrating them into business strategy, goal setting, budgeting, controls and processes, data collection, and reporting,” he says.
The office of the CFO has deep institutional knowledge and strong ties to all business functions, providing a unique opportunity to help the organization advance many ESG strategies, Tower says. While often supporting environmental initiatives, the CFO’s office can also help drive social initiatives such as responsible and ethical sourcing; workforce engagement; recruitment and retention through elevated diversity, equity, and inclusion (DE&I) practices; and greater community stewardship.
“At companies with well-integrated sustainability and ESG strategies, the CFO’s office ensures that the organization regularly measures and tracks its impact on society and the planet, while helping communicate transparently with a wide range of stakeholders,” Tower says.
Sectors Prioritizing ESG Investment
Evolving customer tastes and regulatory activity have been major driving forces behind the retail sector’s skyrocketing investment in ESG initiatives, according to Tower. For many consumers, the sustainability of retail products and their related supply chains has become a deal-breaker in buying decisions—and brand reputation—for retail companies of all market caps, he says.
Meanwhile, regulators are increasing pressure on organizations to combat environmental and human rights issues in their supply chain. The Uyghur Forced Labor Prevention Act (UFLPA), a recent regulation in the United States, expands an existing restriction to encompass all goods made in the Uyghur Region based on the presumption that all such goods are made with forced labor unless evidence to the contrary can be produced. Further, the European Union has proposed the Corporate Sustainability Due Diligence Directive, which, as proposed, would require companies in scope to carry out environmental and human rights due diligence throughout their supply chains. These are among the many regulations expected to impact the retail community.
As for healthcare and life sciences, the pandemic cast a spotlight on health inequities and other critical care challenges, Tower notes. BDO’s 2023 CFO Outlook Survey found that 47% of healthcare CFOs and 44% of life sciences CFOs are currently pursuing ESG strategies, and those numbers are expected to rise.
“ESG investments by healthcare organizations have been largely focused on advancing health equity through improvements in accessibility and patient experience, among other people-centered areas of growth,” Tower says. “Similarly, life sciences companies are investing in ESG initiatives to improve patient advocacy and product accessibility, as well as the sustainability of their supply chains.”
Other trends that BDO is tracking include supply chain mapping, contingency planning, and risk assessments to identify potential vulnerabilities and minimize the impact of supply chain disruptions. Evolving technologies are playing a big role too.
“In addition, we’re seeing the use of AI and machine learning to collect and analyze real-world data to generate evidence necessary to inform drug development, and clinical and regulatory decision making,” Tower says.
Many CFOs Feeling Budgetary Pressures Still Back ESG Investment
BDO’s 2023 CFO Outlook Survey found that an overwhelming majority of CFOs plan to maintain or increase their investments in ESG even if economic conditions worsen. Even more compelling, the BDO survey found that more than a third of CFOs say that ESG investments have improved their business resilience.
“The costs and benefits of investing in this area will naturally vary among organizations and industries, but for almost half of the organizations we surveyed, the shift to more sustainable business practices has already improved financing terms and access to capital, brand reputation, and recruiting and retention,” Tower says.
There are other motivations to maintain or increase spending on sustainability/ESG initiatives even when faced with a challenging or uncertain business landscape. As key customers, investors, and other stakeholders focus on companies’ ESG strategy, decision makers are signaling a willingness to change suppliers that don’t align with their organization’s business practices or show tangible evidence of progress in setting and working to achieve sustainability objectives.
“Customer development and retention is the name of the game, and a business’s failure to begin implementing an ESG strategy is likely to increase the risk of losing customers in the not-so-distant future,” Tower says. “And one must not forget the importance of investors—the private equity community believes that an effective ESG strategy bolsters risk management and brand resiliency, creates value, drives product innovation, and ultimately results in higher exit values.”
According to BDO’s 2022 Private Capital Pulse Survey, 99% of respondents indicated that they have identified an ESG strategy and 79% have raised an ESG or impact fund. Tower says that these tangible benefits and drivers have propelled CFOs to continue deepening investment in sustainability initiatives and ESG strategies.