Sustainable finance strategy was once a ‘nice to have’, by no means integral to running a successful company. Nowadays, no modern enterprise can expect to face a prosperous future without a sustainable business model in place.
Since the millennium, we have seen a tremendous uptake on the idea of sustainability and business as a force for good. This is changing the face of corporate behavior. Eco-friendly messages have made their way into every facet of business. From marketing campaigns to hiring strategies and sourcing decisions.
And the finance function is not immune. Green decision-making is beginning to impact strategy, budgeting, reporting and payroll, as chief financial officers seek to balance profit with planet.
The key here is not to wait for government directives to make a change. Take the initiative to get ahead on sustainability issues or risk a declining brand reputation and the accompanying loss of financial investment.
What are green finance practices?
Green finance refers to any financial tool, practice or investment that leads to measurable and additional benefits to the environment. It also operates as a framework supporting finance teams in developing and implementing sustainable business models, investment decisions, partnerships, projects and policies.
The growth of green finance
The very first green bond was issued in 2008 from the World Bank. Just over ten years later, the green bond market is worth approximately $58.8 billion.
Investors use the United Nation’s Sustainable Development Goals to measure the impact of these bonds. The SDGs cover sustainability issues relating to the environment as well as society and equality.
Today, more than $30.7 trillion of funds is held in sustainable or green investments. This is up 34 percent from 2016, according to the Global Sustainable Investment Alliance.
Clearly, sustainability and economic growth run together. Tom Murray, emissions advisor at the Environmental Defense Fund confirms, “We’ve moved past this concept that business versus the environment is a tradeoff.”
The green CFO
Earth stewardship isn’t a role that has always landed with the CFO. But nowadays companies cannot expect to achieve their sustainability goals without the support of the finance team.
CFOs must deliver strategies that are both bottom line-friendly and green. They can do this by integrating the environment into day to day operations within the finance department.
A sustainability strategy factors green issues into every facet, from operating performance to profit and loss.
Chipotle set an example with their sustainable practices which are very much integral at every stage, not an afterthought. The Mexican food chain prides itself on its ethical and humane raw ingredients. And though these ingredients are expensive, the company’s cost structure is such that profit margins stand at 12.1 percent compared to the industry average of 4.6 percent. Thanks to their holistic strategy that targets sustainable development at every stage, Chipotle run a profitable business with healthy cash flow.
For Walmart, taking a wide-angle view on their business allowed them to slash carbon emissions and improve their financial performance. By introducing technology to reduce the energy consumption of idling trucks, they managed to improve fuel efficiency by 90 percent. Good for the environment and good for business.
When budgeting, finance executives must leverage green finance into their funding strategy, investment portfolio, and even employee pension funds.
As it stands, there are no rules on what counts as a green investment. Many cut ‘non-desirables’ from their portfolio. That includes businesses such as oil, weapons, tobacco, alcohol and fossil fuels. Others go further, seeking investment opportunities relating to renewable energy, carbon offsetting or community projects.
Google, Amazon and Facebook made headlines when they vowed to invest in renewable energy. It’s estimated that this commitment saves them approximately 10 percent on their energy bills as well as earning them the requisite public approval.
Indeed, this shift towards a low carbon economy is paying off across the board. Barclays found that bond portfolios with strong sustainability attributes are outperforming those with weak environmental indexes.
This year, Nomura acquired Greentech, a green investment banking firm ranked as the number one in sustainable M&A by Bloomberg. This shows how lucrative green investment is becoming when such respected financial institutions are jumping on board.
Finance reporting plays a key role in planning, advocating for and enacting green finance projects.
Businesses should amend existing reporting to highlight profit opportunities. Where can we make savings? Where are we wasting natural resources? How can we achieve value creation whilst contributing to environmental welfare?
In another exciting case study, Nike Inc. found a way to weave trainers more efficiently. Reducing raw material consumption and labor time, saving 3.5 million pounds of waste from landfills since 2012. They also made huge short-term savings on transport costs and waste disposal. The pioneering brand is now working towards a circular economy where they recycle old trainers to become the latest models. The elimination of the need for raw materials is sure to keep the bottom line strong and Nike’s position on the financial markets stable.
Similarly, reconfigure reporting to identify potential threats. Risk management reporting offers businesses the chance to understand how climate change will affect the organization. The reporting should examine reputation, physical climate risks and strategic risks to business models. Will weather affect shipping lead times? Is the scarcity of a natural resource going to drive up cost prices?
Green reporting will allow businesses to track the impact of sustainability measures. Reporting should feature indicators that track the results of environmental and social governance (ESG). This could be the emissions reductions and cost savings of a new supply chain or improved energy efficiency.
Proctor and Gamble, the US producer of consumer goods, signed up to meeting science-based targets to reduce its emissions. Thanks to reporting, they were able to identify leaks and plug them. Energy efficiency measures have already saved P&G $500m with potential for even more savings ahead.
Identify further savings by taking advantage of government incentives. At present in the UK, businesses investing in low-carbon assets can deduct them from their annual tax bill. This can include low CO2 cars, energy-saving and water-saving equipment. Finance teams must factor this into their reporting.
One area of inefficiency that finance reporting might highlight is that of payroll. Traditional financial systems for paying staff are laden with physical paperwork and the accompanying inefficiencies. This is particularly true in the case of global organizations operating across borders.
With a global payroll technology provider, paperwork becomes unnecessary. The software produces online payslips which are accessible to each employee on-demand via the Employee Self Service system. Everything takes place online, from expenses to bonuses, benefits to tax. The result is lower running costs and improved accuracy and efficiency. Also, staff are happier with a more interactive system.
Safe to say, sustainable development and green finance will soon become the cornerstone of commercial and ethical businesses. For your business to thrive, you need to adopt the new strategy of profit plus planet.
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