FDs failing to perceive sustainability and profitability link

Many finance directors do not want to lead efforts in sustainability because they do not see a clear link between sustainability concerns and their focus on future profitability.

At a week-long event on sustain­ability hosted by IBM in London in September, which featured a day given over to FDs and chief financial officers, it emerged that despite the advent of government-backed initiatives such as the Carbon Reduction Commitment (CRC) and tax breaks for a greener vehicle fleet that aim to guide businesses into making sustainability part of their business plan, many FDs still do not see it as a business issue and do not see the need to take the lead on the topic.

FDs became de facto managers of their businesses’ sustainability efforts when the CRC came into force because it incurs a cost to implement, naturally putting the emphasis on the finance team. But some FDs believe that without the required push from interested CEOs and investors, sustainability has become little more than a compliance and box-ticking exercise for already overloaded FDs.

Though a speaker at the IBM event and a supporter of embedding sustainability in finance, James Skelton, finance director at Kingfisher UK, told Financial Director that he was disappointed about the lack of FDs in attendance at the finance day.

He thought that it could reflect the fact that FDs do not yet feel the pressure to respond to the sustainability challenge coming from their CEOs, who have not placed it high up on their agenda, or from investors, who do not yet make strong enough demands on companies for sustainability information to rouse the interest from finance departments.

As a result, FDs do not yet see the need to take responsibility for it – even if they are signing off on the cost of implementing various carbon emission reduction initiatives and handling the compliance and reporting burdens.

“My impression is that FDs are slightly underwhelmed and there is no clarity on who leads sustainability in businesses. FDs can see sustainability issues as a problem, but I see it as a growth opportunity. It’s about where future profitability is going to come from,” Skelton said.

Speakers at the event, including Andrew Griffith, CFO for BskyB, and Richard Gillies, director of Marks & Spencer’s ‘Plan A’ sustainability project, agreed that without stronger demands from investors for more information about what they were doing to manage their impact on the environment, FDs may not engage with the opportunity to lead sustainability in their businesses.

Attending as a delegate, Stagecoach finance director Brian Griffiths told the audience that he had never once had a question about sustainability from a fund manager at any of the transport company’s AGMs – despite the company making a particular point of its green credentials and the potential for profitability from it in the future.

BskyB’s Griffith admitted that explaining the efforts the business took in becoming more sustainable “is not an area, to be frank, you spend a lot of time on with investors”.

From the investor viewpoint, a delegate at the event from Schroders provided a useful parallel for the FDs’ predicament in leading the charge on sustainability. “The best way to get fund managers to do what you want them to do is for the owners of capital to tell us what to do,” he told the audience. “If you want us to raise our standards in terms of taking environmental factors into consideration, our customers need to take it seriously.”

Investing in a concept that does not bring short-term gains continues to be a stumbling block for FDs. Bruce Duguid, head of investor engagement at the Carbon Trust, said he found that in his meetings with businesses “there is a rule of thumb that you have to get a payback [from investment in sustainability] in 2 or 3 years, which presumably comes from the finance department”.

M&S’s Gillies said that finance had a responsibility to demonstrate the financial returns on becoming a sustainable business. “If it doesn’t pay back, is it the right answer?” asked Gillies. “The financial rigour is hugely important. We are hugely confident that pursuing this will give us the returns in the short, medium and long term.”

Stephen Leonardo, CEO for IBM UK and Ireland, added that the companies he had worked with on sustainability projects had seen a return “two or three times that of a normal project”.

BskyB’s Griffith argued that the payoff for companies focusing on the business opportunity in creating a sustainable business “will be substantial – customers will stay with you, spend more with you and recommend you”.