Partner & Director, Center for CFO Excellence
Sustainability has become inseparable from financial success, making finance leaders key players. Only they can hardwire this new priority into steering and performance management.
There’s a success factor for climate and sustainability agendas that most companies have overlooked: CFO leadership. The finance function leads this agenda at 20% of companies, according to BCG’s CFO Excellence Index. These companies scored, on average, 9 points higher in the index’s climate and sustainability performance benchmarking than companies that have other functions lead the agenda.
CFOs’ leadership role in sustainability falls within their growing responsibilities as the custodians of corporate performance. Indeed, sustainability performance has become inseparable from financial performance, making companies’ ability to act on sustainability-related issues a key differentiator in achieving corporate success. Moreover, many individuals and organizations now expect companies to have a strong reputation for sustainability before engaging with them as investors, customers, employees, or business partners.
To meet the sustainability imperative, finance functions must apply their core capabilities for driving performance through target setting and transparency. Our benchmarking found that the best finance functions apply these capabilities to excel in four types of actions: measuring and disclosing their company’s carbon footprint, managing emissions across the value chain, forging strong relationships with stakeholders, and embedding sustainability in capital and investment decisions. Across these activities, finance functions’ enterprise-wide view of company operations gives them a more objective perspective than other functions have and helps to ensure cross-functional alignment. (See “About BCG’s Finance Sustainability Benchmarking.”)
Several developments highlight the inseparability of sustainability and financial performance, pointing to the imperative for the finance function to lead climate action. (See Exhibit 1.)
The growing importance of climate action has expanded the scope of companies’ ESG transformation initiatives. To manage these effectively, CFOs need to apply finance capabilities to key topics in three broad categories. (See Exhibit 2.)
A global chemical company’s approach to core finance topics illustrates the great extent to which finance capabilities are essential to delivering a transformation.
The benchmarking of finance functions identified four types of actions in which the top climate performers stand out as they pursue their climate agendas. (See Exhibit 3.)
Measuring and Disclosing the Carbon Footprint. Measuring and disclosing the company’s carbon footprint supports efficient performance management and enables regulatory compliance. The top performers publicly disclose their carbon footprint—across scope 1 (direct emissions from operations), scope 2 (indirect emissions from operations), and scope 3 (supply chain emissions). Scope 3 disclosures are the most onerous because they concern operations outside the company’s control. Initiating and maintaining an infrastructure to measure and disclose Scope 3 emissions requires significant effort and resources. Success requires setting up effective teams, processes, and systems and then continuously monitoring progress against targets. Companies that master the challenges at the initial stages will be able to make course corrections to achieve their net-zero goals.
Managing Emissions Across the Value Chain. Leading companies actively manage their organization’s carbon footprint throughout their value chain, including, for example, the emissions generated by their suppliers and by the disposal and treatment of products at the end of their life cycle. Taking this action allows companies to improve their bottom line by tapping into value pools created by, for example, recycling, sustainable packaging, and renewable energy.
Forging Strong Relationships with Stakeholders. Close relationships with regulators, investors, suppliers, the public, and other stakeholders enable companies to communicate their progress, gain valuable insights into expectations, and tap into larger sources of capital. These relationships also support efforts to actively track and manage climate impact across the value chain (including for suppliers). Successful companies use their strong relationships to improve their public image, thereby attracting better talent and more customers.
Embedding Sustainability into Capital and Investment Decisions. Including sustainability considerations in capital and investment decisions makes the company’s strategy and long-term vision future-proof by preparing it for any uncertainty that might arise from regulations, compliance requirements, and higher costs. The top performers redefine investment policies to promote sustainable investments and rebalance existing portfolios.
It should come as no surprise that when the finance function oversees climate performance, companies significantly outperform their peers. For companies that are truly committed to achieving their ESG objectives, the CFO’s leadership is essential for hardwiring these new priorities into steering and performance management. Moreover, as new ESG regulations come into effect, finance functions have the right competencies to translate the requirements into internal policies and systems. Simply put, corporate success depends on having strong climate performance—and CFOs are the right people to make it happen.
The authors thank Hady Farag, Udit Mehra, and Juhi Mittal for their contributions to this article.