Why CFOs Need to Consider Sustainability

Why CFOs Need to Consider Sustainability

With sustainability capturing the attention of consumers, regulators, activists and the media, organizations can no longer afford to put it on the back burner. Sustainable initiatives are now integral to a company’s overall business strategy and as such, the responsibility for driving these programs falls on all departments across the organization — from procurement and compliance to marketing, finance, and sales. While procurement plays a vital role in making sure products and services are being sourced from vetted, sustainable suppliers, financing sustainable initiatives is just as important.

Starbucks recently allocated $500 million from its first ever U.S. corporate sustainability bond to drive sustainability improvements in its supply chain, demonstrating that corporate social responsibility is an integral part of its business strategy. The intention is to finance initiatives that make a positive social and environmental impact on the coffee supply chain and other areas across the business.

Chief financial officers should care about CSR because in addition to being good for the world, there are financial benefits. For example, the Beyond Supply Chain report by the World Economic Forum (WEF) indicates sustainable supply chain practices result in a 9% to 16% cost reduction. According to a study-of-studies by Oxford and Arabesque, 90% of the studies on the cost of capital show that sound sustainability standards lower the cost of capital.

In addition, businesses that fail to invest in sustainable supply chains are missing out on significant opportunities to generate value. Over the past five years, the annual returns of publicly traded “green giant” companies have averaged 11.7% higher than their leading competitors. The nine companies, including Toyota, Nike, and Whole Foods, are generating more than $100 billion in combined annual revenue from their green business lines alone.

Sustainability can also contribute to a better brand image, one of the most valuable assets for a business. As more consumers become socially conscious, businesses that make sustainability a priority will see a measurable uplift in their brand value, to the tune of 15% to 30%, as reported in the WEF study.

And what about a company’s investors? Investors care more about sustainability than many executives believe. A recent study by the Boston Consulting Group highlights that investors see a strong link between sustainability and financial performance and are now looking at sustainability-related data when analyzing potential investment decisions. In fact, 75% of senior executives at investment firms see a company’s sustainability performance as materially important to their investment decisions.

When looking for investors and financing options, a company’s sustainability efforts will likely be a determining factor in whether they receive financial backing. There’s a great opportunity for CFOs to keep their company on the forefront of investor’s minds by having a holistic, measurable sustainability program in place.

The Business Benefits of  a Sustainable Supply Chain

Sustainable procurement can be a true value creation initiative, bringing many business benefits to light. The three main areas sustainability impacts are cost reduction, risk reduction, and revenue growth.

Cost reduction. When a sustainability focused culture is integrated within an organization, cost reduction follows. The first initiatives that come to mind are things like turning the lights off, reducing paper waste, and lowering energy consumption. Reducing packaging can result in a 20% increase in value, and using an ultra-efficient engine in truck fleets can generate 35% savings in fuel consumption.

But sustainable procurement programs can take those results a step farther. Ensuring a sustainable supply chain will also reduce costs associated with taxes and fines from non-compliance. With an uptick of laws aiming to protect supply chain workers from abuse, including the U.K. Modern Slavery Act, the U.S. Trade Facilitation and Trade Enforcement Act, and France’s Devoir de Diligence (expected to be in force by 2017), non-compliant businesses risk incurring fines if they don’t take concrete steps in sustainability.

Risk reduction. There is no longer any question that the globalization of supply chains has increased the risk for multinationals. Having suppliers spread all over the world exposes companies to widely varying regulations and enforcement around CSR issues such as environmental protection, ethics, labor laws, and workers’ rights. But everyone remains under the watchful eye of a growing network of nongovernmental organizations, trade unions, and general fluidity of media (especially social media). The more links there are in the supply chain, the greater the exposure to risk and potential sustainability issues, which can be costly. Lead contaminated paint, for example, recently cost a toy company $100 million in recalled product.

Besides these potential revenue and capital markets disruptions due to supply issues, there are risks to brand reputation. Although no chief procurement officer wants such an incident coming from his supply base, brand reputation is usually not an “asset” managed within procurement. Thus this risk is a cross-departmental issue, which the CFO will feel the brunt of when an NGO or media outlet publicizes an environmental or human rights crisis from one of her company’s suppliers. Such events can extract a massive toll on company valuation in capital markets, exposing CFOs to big potential increases in costs of capital.

Taking the time and effort to ensure all suppliers are compliant and sustainable will reduce the costly risks of product recalls, lawsuits, negligence charges, and decreases in stock value.

Revenue growth. Sustainable procurement can also lead to significant revenue growth. This stems in part from socially conscious consumers who are willing to pay more for sustainably sourced products. For instance, Grainger, a wholesaler of industrial supplies, achieved a 20% increase in green product purchases even during the U.S. economic downturn. As sustainability becomes the standard, though, companies that don’t ensure ethical sourcing will see a decrease in their market share.

As our world becomes even more socially conscious, it will soon be impossible to continue to thrive financially if sustainability is not a priority. CFOs have a tremendous opportunity to advocate for sustainability programs and subsequently deliver impactful value to their organizations’ bottom lines.

Pierre-Francois Thaler 

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All, 2016

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