Evolving role of Chief Financial Officers in driving sustainable finance and ESG integration

In today's rapidly changing global economic and business landscape, environmental, social, and governance (ESG) considerations have become imperative for organisations aiming to achieve long-term success and resilience. Whilst the responsibility for ESG initiatives often sits with Chief Sustainability Officers or dedicated sustainability teams, it is crucial for CFOs and Finance departments to take ownership of the sustainable finance agenda. By leveraging their financial and strategic expertise, CFOs have a pivotal role in driving ESG integration, shaping and responding to regulatory requirements, and aligning capital allocation with green finance objectives. Ultimately, maximising the financial and non-financial benefits from ESG, whilst mitigating the risk and reporting requirements falls squarely with the CFO and their function. 

Empowering CFOs to lead 

Traditionally, Boards have taken a reactive approach to ESG, waiting for regulatory mandates before acting. However, for meaningful progress to be made, Boards must proactively set the tone on ESG matters. Knowledge of financial products and an awareness of the end-to-end business resulting in the reported numbers makes the CFO best placed to determine how to redirect capital to green growth, thus, allowing them to have more influence at the Board level in embedding ESG objectives. By integrating ESG considerations into the organisation's strategic objectives and leveraging ESG data insights, CFOs can ensure sustainable finance becomes an integral part of the decision-making process. 

Beyond strategy mandates, CFOs are well-positioned to develop sustainable finance frameworks that provide a structured approach to ESG integration. This entails prioritising relevant ESG metrics, establishing goals and targets, and designing KPIs to effectively measure, assess, monitor, and report on sustainability performance. By taking ownership of sustainable finance frameworks, CFOs can align financial and sustainability goals, fostering internal collaboration across different functions including sustainability teams, whilst driving positive sustainable outcomes.  

Defining clear goals and addressing greenwashing risks 

To translate a sustainable finance agenda into tangible and meaningful outcomes, organisations need to continuously assess and improve performance against targets, using relevant and timely ESG data insights^[1].  

By establishing a robust sustainable finance framework, CFOs can drive a standardised and consistent approach enabling organisations to be held accountable on sustainability commitments, capital allocation to green assets^[2] and sustainable solutions, and improving sustainability disclosures aligned to stakeholder requirements.  

Additionally, CFOs need to be vigilant about greenwashing risks^[3]. Greenwashing occurs when organisations present a misleading or exaggerated picture of their environmental impact and sustainability efforts. CFOs must ensure transparency and accuracy in ESG and financial risk assessments, impact monitoring and reporting by adhering to market best practices. The time is now for the CFO to focus on the same rigour, control, and reporting focus on ESG data as they have done for other financial reporting information – this is a big opportunity and a risk.

CFOs can support to safeguard against greenwashing, and instil trust amongst stakeholders including investors, by embedding mitigating controls to prevent, identify and address greenwashing risks. Consequently, organisations can also avoid legal action as recently seen in the case of Delta Airlines facing a greenwashing lawsuit over $1bn carbon neutrality claim^[5].  

The advancement of consistent sustainability reporting standards, such as the recent ISSB standard^[4] will help address the significant challenges with having too many reporting standards and inconsistencies. 

Considering social implications of climate financing 

Climate financing and investment decisions have profound social implications that should not be overlooked. CFOs need to carefully assess the consequences of divesting from "brown" assets in regions or improving parts of their supply chain that are high emitting early on the transition journey. CFOs must engage in dialogue with stakeholders, policymakers, and local communities to develop equitable and inclusive transition strategies. Identifying alternative green outcomes and facilitating a timely just transition can mitigate social upheaval and foster a sustainable future. Simply because something is green (and so meets the E criteria) doesn’t always mean it is “just” and meets the S criteria, so care is needed to advance a balanced E,S and G agenda. 

Likewise, in regions prone to climate hazards, CFOs must recognise the urgent need for immediate climate financing solutions. CFOs in collaboration with sustainability experts and key stakeholders across financial markets and development financial institutions can lead efforts to develop innovative financial instruments and risk management products, to catalyse significant investment for climate adaptation, mitigation and resilience; and minimise associated social and economic risks. The collaboration of financial markets, corporate markets and adequate and timely policy responses from governments is key. 

Developing strong transition plans and upskilling 

While sustainable finance is gaining traction, most organisations are still at a nascent stage in developing robust transition plans. CFOs must take a leadership role in spearheading the formulation of comprehensive and cohesive transition plans that encompass the entire organisation, from front to middle and back office, and its value chain. This requires cross-functional collaboration, and external stakeholder engagement. By aligning strategies, processes, and systems with sustainability objectives, CFOs can facilitate a smooth transition towards a more sustainable business model. Again, this is not straight forward and involves a clear strategy, clear communication and a lot of collaboration across the organisation – EQ as well as IQ needs to be exercised by the CFO and their function. 

CFOs should recognise the need for further upskilling across their organisation, to enable effective implementation of transition plans. Continuous education and training for finance and wider teams on ESG principles, emerging regulations, and sustainable finance frameworks, can bolster overall sustainability efforts. 

Incentivisation and carbon pricing 

To drive positive change, organisations should consider adopting compensation structures that align with ESG targets. Incentivising employees based on sustainability outcomes can motivate individuals and teams to prioritise ESG considerations in their day-to-day activities, and enable a culture shift focused on a triple bottom line of planet, people and profit. However, careful design is crucial to prevent unintended consequences, such as incentivising short-term gains at the expense of long-term sustainability.  We also need to recognise that non-financial risks of today such as greenwashing and conduct will become major financial risks to the bottom line tomorrow if not addressed and managed with skill. We expect to see more major regulatory scrutiny in this space, guided by stringent rules on greenwashing, such as proposals by FCA^[6] and EU directive on green claims^[7].  

Furthermore, it is worth examining the merits of removing carbon from the ESG equation. While carbon emissions are undeniably critical to environmental impact, focusing solely on carbon may not capture the full scope of ESG considerations. CFOs should aim to strengthen their understanding of carbon pricing mechanisms and the cost implications associated with reducing carbon emissions. By broadening the ESG lens, organisations can address other priorities such as biodiversity, social justice, and corporate governance, in a comprehensive and balanced manner.