These new responsibilities can be catalysts for finance transformation initiatives intended to help the business grow, improve efficiency, and manage risk and compliance. In fact, such sustainability-related triggers can create opportunities to improve reporting, transparency, and business performance, as well as mitigate business risk.
Where Do They Intersect?
Sustainability's emergence as a core business issue adds a new dimension to finance, including setting finance strategy and vision, and designing and implementing changes across the finance organization. Sustainability initiatives can trigger finance transformation in six key areas:
Enterprise value. Sustainability initiatives can be evaluated as investment opportunities rather than just costs, so sustainability considerations can be incorporated into finance strategy, and the finance organization can provide input into sustainability investments decisions and maximizing potential returns.
Stakeholder relations. Scrutiny of corporate sustainability performance continues to grow among many stakeholders, so a sustainability communications strategy can help position the company as a sustainability leader and influence its investment opportunities, recruiting and retention, and product and brand loyalty.
Reporting. Many organizations seek sustainability information from companies today. It is critical to define and develop internal and external reporting strategies, processes, and controls to communicate sustainability information accurately and consistently.
Tax and regulatory drivers. Governments often influence private-sector sustainability initiatives through tax laws and regulatory requirements, so leading companies incorporate sustainability considerations into tax planning, risk management, and operational performance assessments.
Greenhouse gas and waste stream impacts. Greenhouse gas (GHG) regulations effectively introduce a cost of carbon and monetize an organization's GHG reduction efforts. Leading organizations factor carbon pricing and GHG and waste stream emissions into financial planning.
Enterprise risk management. Reduced energy, commodity, and resource consumption can lower business risks of dramatic price increases. Leading organizations are incorporating sustainability-related risks into their risk maps and accounting for the impact of fluctuating resource prices in their planning, forecasting, and treasury activities.
All six of the sustainability-driven triggers warrant consideration. However, sustainability reporting and tax and regulatory drivers, in particular, have risen to the top of many CFO agendas.
Sustainability reporting has external and internal dimensions. External includes regulatory compliance reporting and reporting to investors, shareholders, business partners, non-governmental organizations, and other constituencies. Internal supports ongoing development, performance, and analysis of sustainability initiatives and processes across the enterprise for management decision making and other purposes.
Differences in the way a company reports sustainability information to distinct audiences can create significant exposure to regulatory sanctions, shareholder actions, and reputational risk. Sustainability disclosures are subject to monitoring by environmental and financial regulators, shareholders, and other key stakeholders. Sustainability results are put on public view through scorecards such as the Global Reporting Initiative, the Carbon Disclosure project, and Newsweek's Green Rankings.
As a result, reporting requirements can drive activities across the four dimensions of finance transformation:
Strategy and vision. Defining metrics and key performance indicators around sustainability initiatives to help communicate progress and status to key stakeholders.
Organization. Staffing the finance organization with practitioners, who can monitor sustainability activities, analyze relevant data, and report results with accuracy and clarity.
Processes. Developing leading external and management reporting processes for reporting specifically how sustainability efforts translate into shareholder value.
Systems. Implementing technologies to enhance management reporting capabilities and integrating systems and migrating to a "one report" design for issuing financial and nonfinancial results.
One approach to creating an effective sustainability reporting capability is to create a "center of excellence" for sustainability policies, procedures, and communications. Such a center can become the focal point of responsibility for coordinating internal and external sustainability reporting and aligning it with financial reporting, supported by the appropriate infrastructure. The finance organization is uniquely equipped to create and manage such a resource.
Tax and Regulatory Drivers
Many companies are aware of potential tax credits and incentives available for sustainability activities. However, these benefits often aren't fully captured because companies pursue them on a one-off basis and because "business units" or facilities may make sustainability decisions without seeking tax department input.
The finance organization, through its tax function, can drive a more strategic approach to sustainability-related tax opportunities, getting the tax department involved upfront in sustainability decision making. The tax department can conduct a range of business case and ROI analyses; implement internal controls and reporting mechanisms; stay abreast of federal, state, local, and international tax regimes to identify potential additional benefits; coordinate and leverage tax-related activities across jurisdictions and geographies; and maintain tax compliance over time to address the risk of losing tax benefits, with potential financial reporting implications.
As with sustainability reporting, tax activities may benefit from creation of a center of excellence for sustainability policies, procedures, and communications. Also, tax and regulatory requirements can drive activities across the four dimensions of finance transformation:
Strategy and vision. Incorporating sustainability ¬associated tax and regulatory perspectives into the development of finance strategy and the related operating model.
Organization. Staffing the finance organization with practitioners who understand tax and regulatory issues, and who can analyze relevant data and report results with accuracy and clarity.
Processes. Developing leading practices to leverage potential tax relief for sustainable capital investments; performing tax planning related to sustainability regulations; enhancing tax and other regulatory compliance processes to account for sustainability; and completing required calculations, disclosures, filings, and related reporting.
Systems. Assessing and deploying technology tools to track tax benefits and compliance requirements.
With sustainability growing as a priority for corporations, the finance function is uniquely equipped to take a lead role in this emerging area of corporate activity. Finance can bring increased focus, rigor, and consistency to sustainability efforts, while adding value to the organization as a whole by transforming itself to meet tomorrow's demands and opportunities.
Thanks to Chris Park, Samuel Silvers / Penton Media, Inc. / Business Finance Mag