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”.