Shareholders, customers, employees, policy makers, and communities are looking to businesses not only to produce profits but also to deliver progress on global economic, social, and governance issues such as climate change, corruption, deforestation, gender and ethnic diversity, and the right to work for all. Companies are shifting priorities to meet these demands in a way that drives value. But there is more to this than meets the eye. In 2021, SEBI, the Securities and Exchange Board of India, mandated that India’s top 1,000 listed companies (by market capitalization) would now need to introduce new sustainability reporting, highlighting their disclosures in the format of a Business Responsibility and Sustainability Report (BRSR). This is an important departure from the earlier Business Responsibility Report and is being seen as an important step towards raising sustainability reporting to global financial reporting standards. The new BRSR format is based on the nine principles of the Indian government’s “National Guidelines on Responsible Business Conduct” (the “RBC Guidelines“), which are intended to define responsible business conduct for Indian companies. The RBC Guidelines are driven by leading international standards and practices including the UN Guiding Principles on Business and Human Rights, UN Sustainable Development Goals, the Paris Agreement, and the ILO Core Conventions. The principles address a range of sustainability matters including business ethics and transparency, human rights, environmental safety, and fair labor practices.
No longer will CFOs and finance function professionals be able to perceive sustainable business initiatives and reporting as outside the scope of their external reporting responsibilities or something to be handed over to other functions. This is now well within the ambit of the CFO’s function. The best part is that members of the finance function, have unique and critical skills that may very well render the work of the sustainable business team more complete, accurate, and business-relevant.
Though many professionals view the term sustainability through the lens of external demands for information on how a company affects society and the planet on issues such as climate change and deforestation, organizations the world over have begun to set broad sustainable business goals based on their purpose, values, and strategy. Numerous organizations have also become members of the United Nations (UN) Global Compact, which expresses voluntary consent in aligning a company’s efforts toward improving our increasingly global society, as articulated in the strategic development goals (SDGs).
The truth is that establishing the business case for sustainable business initiatives must be connected to and inter-linked with clear and sustained financial outcomes. While measuring such practices was considered challenging in the past, significant research by leading financial institutions, consulting firms, and academics in recent years have established a clear and complimentary connection between sustainable business practices (also referred to as ESG for environmental, social, and governance) and better performance; reduced bankruptcies and the cost of debt; improved top-line growth, lower costs, and fewer regulatory inquiries; market value; liquidity; and expected future cash flows. As a result of increased attention to ESG issues, more companies are issuing external reports to meet the demands of investors and other stakeholders. For example, in 2019, the Governance & Accountability Institute reported that between 2011 and 2018, the percentage of S&P 500 companies preparing sustainability reports increased from 20% to a whopping 86%.
It must be noted that the finance function is overburdened by reporting, governance, and compliance matters, all of which continue to increase in both volume and complexity. For many companies, this has limited the ability of the finance team to take on new corporate disclosure demands. But the mandate to integrate sustainability into the finance and accounting mix is fairly novel. In the very recent past, those leading the organization’s sustainable business activities and external reporting typically sat outside the CFO unit with some companies even looking to outside agencies and consultants to address their sustainable business issues. However, both SEBI’s new reporting mandate and the objective of enhanced performance and value creation by integrating sustainable business practices are creating a call to action for CFOs and their finance teams. What is also important to consider is that while this may currently be relevant for only the top 1,000 listed companies, experts believe that this will, over time, have a cascading effect on smaller companies as well – with many expected to take this on, voluntarily or due to pressure from their boards or external stakeholders.
Historically, accountants have struggled to account for and systematically integrate nonfinancial value into financial reports. As the SEBI instructions show, that will now change for India’s largest companies who will now include the monitoring of nonfinancial performance in their strategic reviews and disclosures. Globally, and in line with the evolution of the profession towards accounting practices that include sustainability, a new job title has made it to the surface. Welcome to the dawning of the “Sustainability CFO.” A CFO is the senior executive responsible for managing the financial strategic decisions of a company, such as the company’s investments, capital structure, and financial planning. A Sustainability CFO, however, is a new separate position that complements the existing CFO ecosystem. It is exclusively responsible for the nonfinancial performance of the company—also referred to as sustainability performance. This may not be the norm but begs the question – why not? As Gregor Alexander, CFO, SSE succinctly puts it, “I would argue that the CFO is at the center of a change that is happening within business. Corporate responsibility is no longer the philanthropic side-line that is a million miles away from the core business; it is now an essential part of the CFO’s toolkit.”
Hanadi Khalife Senior Director, MEA & India Operations, She is the one moderated the session and quoted