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Sustainability: Why CFOs Need to Pay Attention

No longer just the right thing to do, sustainability can affect an organization's reputation, brand and longterm profitability.

The surging interest in sustainable developments is I d.irr..r by the recognition that corporations, more than any other organizations (including national governments), have the power, the influence over financial, human and natural resources, the means and arguably the responsibility to promote a corporate agenda that considers not only the economics of growth but also the health of the environment and society at large.

Most early sustainability efforts fell under the umbrella of corporate social responsibility, which corporations practiced with a sense that it was the right thing to do. The concept has changed since then, and its evolution has serious implications for the way financial professionals do their work. Sustainability has emerged as a business strategy for maintaining long-term growth and performance and to satis$r corporate obligations to a range ofstakeholders including shareholders.


As they should, profit-oriented corporations prioritize their fiduciary responsibilities and consider mainly the effects oftheir decisions on their direct shareholders. The interests and values of other stakeholders and the rvider society affected by their actions often take iower or no priority.

Under the principles of sustainability, a negative impact on stakeholder values becomes a cost to a corporation. The cost is usually defined as the expenditure of resources that could be used to achieve something else of equal or greater vaiue. Customarily, these costs have remained external to the organization and never make their way onto an income statement. They may include the discharge of contaminants and pollutants into the environment and other abuses of the public good.

Now these costs have begun to appear in corporate financial statements through so-called triple-bottomline accounting. This accounting approach promotes the incorporation into the income statement of not only tangible financial costs but also traditionally less tangible environmentai and social cosis of doing business.

Organizations have practiced such green accounting since the mid-1980s, as they recognize that financial indicators alone no ionger adequately identif, and communicate the opportunities and risks that confront them. These organizations understand that failure in nonfinanciai areas can have a substantial impact on shareholder value. Non-financial controversy has dogged companies such as Royal Dutch/Shell (Brent Spar sinking and Niger River delta operations), Talisman Energy Inc. (previous Sudan investments) and Wal-Mart Stores Inc. (labor practices).

To corporations, sustainability presents both a stick and a carrot. The stick of sustainability takes the form of a threat to attracting financing. Investors, particularly institutions, now ask more penetrating questions about the long-term viability of the elements in their portfolios. If a company cannot demonstrate that it has taken adequate steps to protect itself against long-term nonfinancial risks, including risks to its reputation and brand, it may become a much less attractive asset to investors. Lenders, too, increasingly look at sustainability in their assessment of their debt portfolios.

The carrot of sustainability comes in a variety of forms. Carbon-management credits are becoming a source of income for some companies. Younger consumers are increasingly green-minded, screening their investment and consumption choices by filtering out less socially and environmentally responsibly organizations.

Organizations can learn how to account more completely for environmental and social issues and then define, capture and report on these non-financial indicators as part of their performance measurement. In the process, they can uncover new ways to safeguard their reputation, build trust among stakeholders, consolidate their license to operate and ultimately enhance their growth and profitability.

rflhe surging interest in sustainable developments is
I d.irr..r by the recognition that corporations, more
than any other organizations (including national governments),
have the power, the influence over financial,
human and natural resources, the means and arguably
the responsibility to promote a corporate agenda that
considers not only the economics of growth but also the
health of the environment and society at large.
Most early sustainability efforts fell under the
umbrella of corporate social responsibility, which corporations
practiced with a sense that it was the right
thing to do. The concept has changed since then, and its
evolution has serious implications for the way financial
professionals do their work. Sustainability has emerged
as a business strategy for maintaining long-term groMh
and performance and to satis$r corporate obligations
to a range ofstakeholders including shareholders.
As they should, profit-oriented corporations prioritize
their fiduciary responsibilities and consider mainly
the effects oftheir decisions on their direct shareholders.
The interests and values of other stakeholders and the
rvider society affected by their actions often take iower or
no priority.
Under the principles of sustainability, a negative
impact on stakeholder values becomes a cost to a corporation.
The cost is usually defined as the expenditure
of resources that could be used to achieve something else
of equal or greater vaiue. Customarily, these costs
have remained external to the organization and never
make their way onto an income statement. They may
include the discharge of contaminants and pollutants
into the environment and other abuses of the public
good.
Now these costs have begun to appear in corporate
financial statements through so-called triple-bottomline
accounting. This accounting approach promotes the
incorporation into the income statement of not only
tangible financial costs but also traditionally less tangible
environmentai and social cosis of doing business.
Organizations have practiced such green accounting
since the mid-1980s, as they recognize that financial
indicators alone no ionger adequately identif,. and communicate
the opportunities and risks that confront them.
These organizations understand that failure in nonfinanciai
areas can have a substantial impact on shareholder
value. Non-financial controversy has dogged
companies such as Royal Dutch/Shell (Brent Spar sinking
and Niger River delta operations), Talisman Energy
Inc. (previous Sudan investments) and Wal-Mart Stores
Inc. (labor practices).
To corporations, sustainability presents both a stick
and a carrot. The stick of sustainability takes the form of
a threat to attracting financing. Investors, particularly
institutions, now ask more penetrating questions about
the long-term viability of the elements in their portfolios.
If a company cannot demonstrate that it has taken
adequate steps to protect itself against long-term nonfinancial
risks, including risks to its reputation and
brand, it may become a much less attractive asset to
investors. Lenders, too, increasingly look at sustainability
in their assessment of their debt portfolios.
The carrot of sustainability comes in a variety of
forms. Carbon-management credits are becoming a
source of income for some companies. Younger consumers
are increasingly green-minded, screening their
investment and consumption choices by filtering out less
socially and environmentally responsibly organizations.
Organizations can learn how to account more completely
for environmental and social issues and then
define, capture and report on these non-financial indicators
as part of their performance measurement. In the
process, they can uncover new ways to safeguard their
reputation, build trust among stakeholders, consolidate
their license to operate and ultimately enhance their
growth and profitability.
 

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