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Why CFOs Need to Care About Sustainability -- Now

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This is the tenth blog in a weekly series on how sustainability can save business. It appears every Tuesday.

Chief Financial Officers (CFOs) and Chief Operating Officers (COOs) are increasingly accountable for sustainability. A study by Deloitte -- Sustainability: CFOs are coming to the table -- found their accountability for sustainability had jumped sharply during the last year. In 2012, 26 per cent of CFOs were responsible to the board for their firm's sustainability strategy, up from 17 per cent in 2011. Similarly, for COOs it was 10 per cent in 2012, up from 3 per cent in 2011. Further, 53 per cent of CFOs said their involvement had increased in the last year, with 61 per cent noting they expected it to increase over the next two years.

The increasing relevance of business sustainability to financial performance and shareholder value was also highlighted in a recent study by the Chartered Accountants of Canada (CAC) -- Sustainability: Environmental and Social Issues Briefing, which noted that "key environmental issues, stakeholder trust and relationships and an evolving environmental and social legal and regulatory landscape are interconnected and impact strategy for competitiveness, risk and resilience."

The report draws attention to the many environmental and social issues of relevance to directors in discharging their oversight responsibilities, including strategy, risk and risk oversight, financial performance, external reporting, and the reliability of reported information.

When Canadian Tire began reporting its environmental footprint and the results of its business sustainability strategy in its core financial documents in Q3 2010, Marco Marrone was the Corporation's CFO. (He is now COO of Canadian Tire Retail.) Rather than issue a separate corporate social responsibility report communicating its environmental footprint, annual productivity gains and reductions in GHG emissions and waste, Marrone oversaw the transfer of business sustainability measurement and accounting from the Business Sustainability function to the Finance and Accounting function, along with adding the associated due diligence of the Corporation's CEO-CFO Certification Process. This enabled the Corporation to build upon the measurement of business sustainability performance in its operating plans, and integrate sustainability into its public quarterly financial reporting. There are a number of reasons:

"When you report measures, you don't want people to question the measures," says Marrone. "So we embedded sustainability measures into our external reporting for two reasons: it is great to provide the external world with updates on our sustainability programs; but putting the numbers through the rigor of our certifications process for external reporting is extremely important. Those numbers have to go before our audit committee."

This is becoming increasingly more important as some academics are questioning the validity of sustainability reporting that is not put through the rigor of the audit process.

Embedding sustainability in a company's financial DNA enables executives to communicate business sustainability issues, strategy and results with confidence to the board, while also signaling to every manager that sustainability is measured on the profit and loss statements of the organization. And as the saying goes, what is measured is managed.

An Ernst & Young study -- Bottom-line benefits of sustainable business practices -- looked at some of the drivers for the CFO's involvement in sustainability. First was managing risks (56.9 per cent); second was cost reduction (52.3 per cent); then stakeholder expectations (47.4 per cent), revenue generation (38.3 per cent) and finally government regulation (33.5 per cent).

Managing Risk
As Marrone notes: "We've looked at what would happen in a carbon-constrained economy. At a cost of $30 per tonne, in many cases, the impact to the cost of goods sold could be in the low single-digit percentages. However in some product categories, the cost of goods sold could be 30 per cent or 40 per cent higher. The modeling has allowed us to quantify carbon price-risk in these categories and identify how we can take energy and carbon out of the equation. That's how we are working to manage risk."

Indeed, there are numerous benefits to placing a shadow price on carbon and examining the impacts on your business competitiveness.

Managing Costs & Regulatory Change
Sustainability is a powerful lens through which to look at your business and supply chain, drive out waste and inefficiency, and address the changing environmental and social regulatory landscape. It is also a powerful tool to engage employees and suppliers in that effort. For instance, package rightsizing initiatives have saved Canadian Tire millions of dollars in operational costs while mitigating the increasing regulatory costs of extended producer responsibility legislation across Canada.

Meeting Stakeholder Expectations
The CAC report noted above also emphasizes that understanding how business sustainability issues affect stakeholders and their expectations can be an important source of insight for management, helping to identify opportunity and risk, with positive relationships contributing to trust, which is essential for competitiveness and resilience.

For example, a staggering 92 per cent of graduating MBAs want to work for a socially responsible company, according to a 2007 MonsterTRAK.com survey. This is becoming increasingly important to Canadian retailers as more and more foreign retailers enter Canada and compete for talent and market share.

Friedman's edict -- that "the business of business is business," and the creation of shareholder profit, its fundamental mandate -- is just as true now as it ever was. Yet what has changed is the context within which business operates, and thus how one interprets and applies this edict.

In 2022, Canadian Tire will celebrate its 100th year in business. The competitive forces acting upon it continue to change; they are fundamentally different today compared to 1922, and they will be different yet again in 2022. And so, executives and directors should not be surprised by shifts in business criteria, scope of considerations and sources of value, or changes in the business activities required to deliver a winning value proposition. After all, in the broadest sense, is not the management of such considerations at the root of a business's sustainability?

Like this blog? Want to read more of them in this series? Then click on this link.

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