CFO and Technology » Resilient CFOs bet on ESG to overcome economic downturn

Resilient CFOs bet on ESG to overcome economic downturn

CFOs view ESG strategy as a means to overcome the impact of economic headwinds, driving increased investment in their ESG scheme

CFOs plan to continue investing in ESG strategies regardless of the economic challenges ahead, research finds.

The 2023 BDO CFO Outlook survey of 625 CFOs from organisations with revenues ranging from $50 million to $3 billion revealed that nearly 80% of respondents intend to maintain or increase their ESG investments even if macroeconomic conditions deteriorated.

According to Christopher Tower, managing partner of sustainability and ESG at BDO, CFOs recognise the need to build business resilience when faced with worsening economic headwinds.

“Investment in ESG can help companies, amongst other things, secure their supply chains, improve recruitment and retention, and weather uncertain conditions,” he tells The CFO. 

CFOs enjoy ROI on ESG strategy

Businesses with an ESG strategy in place reported having higher profitability and revenue than their counterparts who did not.   

“In the last year, amid intensifying geopolitical, supply chain, and talent challenges, companies that have proactively managed those and other ESG risks and opportunities have begun to seize the competitive advantages,” Tower says. 

According to the report, CFOs of thriving companies – those that saw increased profitability and revenue – are three times more likely than their competitors to have ESG ingrained in their business model.

The survey found 45% of companies are actively incorporating ESG practices into their business strategies. In contrast, companies with lower growth and success had a lower percentage (34%) of companies that did not embrace the initiatives.

According to Tower, CFOs recognise the need to build business resilience when faced with worsening economic headwinds.

Regulations add incentives

 Tower adds that government-led incentives have made investing in ESG strategies appealing for businesses to continue their investments.

“Key developments like the passing of the Inflation Reduction Act have incentivised companies of all sectors – financially and otherwise – to invest and participate in the clean energy transition,” he says.

In 2022, the US government signed the Inflation Reduction Act into law. Among other things, the Act promises to subsidise $396 billion investment in green technology through grants, loans, and tax credits to public and private entities.

Since the bill passed, automotive companies like Audi, Tesla, Mercedes-Benz, and Volkswagen have shown interest in taking advantage of the tax breaks by investing in the US.

Compliance fuels ESG strategy

Despite the financial returns generated by ESG investment, a large portion (66%) of the middle market CFOs still view ESG as a compliance exercise or are just getting started.

The survey revealed that the majority of the respondents from the five highlighted sectors – life sciences (61%), manufacturing (60%), energy (53%), healthcare (51%), technology (49%), and retail (37%) – are primarily focused on complying with the ESG requirements.

The evolving ESG regulatory landscape around the world has pushed CFOs to consider the topic within their business strategy, whether they see it as necessary or not.

Briefly covering the legal reporting landscape, Tower summarises, “companies and their finance departments are confronting new regulatory changes in the US and internationally. Governing bodies like the SEC and European Commission are demanding more transparency from organisations operating respective jurisdictions about how they measure, assess, manage, and mitigate environmental, social, and governance risks.”

“The regulations in many international jurisdictions are quite evolved, putting significant reporting pressures on businesses with global operations,” he adds.

Breakdown by sectors

Although the majority of the sectors’ CFOs see ESG investment as a compliance exercise, there is a variance in the level of how far ahead a sector is in their sustainability program than the others.

According to the report, 22% of healthcare CFOs and 18% of retail CFOs reported having a mature ESG program embedded in their business model. These two sectors’ CFOs were also most prevalent in working to integrate sustainability and governance into their business strategy.

In contrast, only 3% of life sciences CFOs and 6% manufacturing CFOs stated having a mature ESG program embedded in their business model, the lowest among the other surveyed sectors, including energy, healthcare, technology, and retail.

While the financial incentives certainly make ESG an appealing pursuit for these sectors, Tower notes that stakeholders’ scrutiny also plays a role in pressuring companies to invest in their ESG strategy.

“How seriously an industry’s finance leaders take ESG investments depends in part on the demands of key stakeholders such as regulators, consumers, and NGO watchdogs. The scrutiny is extremely high in the retail, technology, and life sciences sectors due to sector visibility and proximity to the consumer,” T0wer explains. 

“All in, CFOs in these industries, even those who have already incorporated ESG into their business models, face extreme stakeholder pressure.”

Data challenge and technology solution

While the majority of the CFOs look to continue their investment in their ESG strategy, they still face the ongoing challenges of data inaccuracy and reporting.

For an ESG strategy to be effective, data accuracy is crucial. However, the lack of standardised reporting impacts the data quality and could potentially give businesses an inaccurate overview of the situation.

Tower explains, “the controls and processes around ESG data collection, assessment, and reporting are not nearly as mature as those of traditional financial reporting. As such, CFOs can encounter inconsistencies and inaccuracies in ESG data.”

However, Tower notes that CFOs have opted for technology solutions to tackle the data reporting challenges, although he believes that there is room for maturity.

“CFOs have begun implementing sustainability-related accounting and reporting software and developing robust non-financial reporting controls and protocols to address the data challenges.”

“This process is iterative, demanding, and long-term, but as non-financial reporting matures in Corporate America, so will the tools CFO have at their disposal.”

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