The Sustainability Game

Sustainable finance is here to stay. Now, CFOs must learn to navigate an often-bewildering thicket of new standards and benchmarks.

When it emerged on the scene a decade ago, sustainable finance was widely regarded as little more than a boutique business for a relative handful of concerned investors. Today, it might be on the cusp of prime time. “They said that 2018 would be the year of socially responsible investing. Now they say 2019,” says Scott Sacknoff, CEO of SerenityShares, a Washington, D.C.-based investment firm.

Over 80% of corporations in the Standard & Poor’s 500 now publicly report their performance against environmental, social, and governance (ESG) standards, up from less than 20% a few years ago, reports the Governance & Accountability Institute. And 72%, according to PricewaterhouseCoopers, mention the Sustainable Development Goals (SDGs), a set of 17 aspirational targets for human development and sustainability—such as “no poverty,” “zero hunger,” and “responsible production and consumption”—that were adopted by the United Nations in 2015 as targets to be attained by 2030.

Companies that rank high according to sustainability criteria tend to boast stronger profit margins and higher share prices than their peers, several studies have found. This is generally true for over 300 of the world’s largest pharmaceutical, consumer goods, oil and gas, banking and tech companies, a 2017 Boston Consulting Group concluded. Sources interviewed for this article offered a laundry list of potential benefits: greater supply-chain efficiency, increased employee satisfaction and reduced labor risks, fewer regulatory fines, more rational use of natural resources, stakeholder (including consumer) engagement, better brand image, and improved productivity.

“When you use ESG metrics and materiality, you can increase the profitability of a company,” says Peter Kellner, founder and managing partner at Richmond Global, a Baltimore-based investment firm. “Material ESG analysis is a demonstrated means for a CFO to guarantee better firm governance and compliance.”

Capital flows are also on the upswing. London-based consultancy Global Sustain Group calculates that in 2016, $22.9 trillion of assets were professionally managed under what it labels “responsible investment strategies,” up by 25% over 2014. Some observers think that figure might be high. The real number is closer to “a couple trillion,” Kellner suggests, calling it “a drop in the bucket” compared to the $180-200 trillion global market. In addition, 95% of that comes from private investors who have certain “social outcomes in mind,” he says. “Less than 5% is represented by firms like my own that invest in public securities.”

New Standards, New Ratings

Yet as the sustainable finance segment grows, a cottage industry of wannabe service providers is blooming–perhaps out of control. “Everyone wants to get on the bandwagon,” says Patrick Drum, portfolio manager and senior investment analyst at Saturna Capital in Bellingham, Washington.

There are some 400 newfangled ratings firms dedicated to calculating ESG scores for corporations, Sacknoff says, sending them a steady flow of requests for information. Sustainability reviews are useful “internally if they help identify risk,” Sacknoff suggests, “but where do you spend your time? Do you hire 20 people to fill out these reports?”

New global and industry-specific standards for sustainable corporate behavior are popping up everywhere. In the apparel business alone, there are over 600, says Thomas Kostigen, director of corporate responsibility and sustainability communications at JConnelly, a U.S.-based communications and marketing firm. “There are so many protocols, how do you know which is the best in the class?” he asks.

“The main challenge for sustainable finance is the lack of standardization,” says Kellner. “Financial reporting is still like it was in the 1930s. It is pretty tough for CFOs. You have to have some empathy for them.”

Those new to the sustainability game may be daunted by the alphabet soup of acronyms flying their way: PRI, SASB, GRI, TCFD—Principles for Responsible Investment, Sustainability Accounting Standards Board, Global Reporting Initiative and Task Force on Climate-related Financial Disaster—to name just a fraction. Add to that a revolving door of terms to describe different aspects of sustainable financing and investing and the fact that insiders can’t always agree on what the terms mean. Even though the U.S. Security and Exchange Commission has issued an official definition of “materiality,” for example, people in the sustainable finance world use the word to mean many different things, Kellner notes.

“The CFO has to figure out what the hell ‘impact investing’ is,” says Hazel Henderson, president of Ethical Markets Media, an American-Brazilian firm that promotes the “green economy.”

The double whammy of increased attention plus lack of standardization might help explain a trend reversal spotted by Emily Dwyer, lead ESG analyst at Brown Advisory, a New York-based investment firm. “This year, companies have reached out proactively to talk about the environmental, social, and governance issues,” she says. “Historically, it has been us reaching out to the companies.”

With a spotlight on sustainable finance, greater standardization should follow. But that won`t let company executives off the hook. “As things become clearer, they are going to get more questions,” says Sacknoff. “As more information becomes available, a company will need to more often justify what it does and why.”

Back to School

Already CFOs and their teams are expanding their horizons. “It is an extremely challenging and exciting time” for CFOs,” says Kostigen. “They have to understand so much more. They have to be polymaths.” They must be on top of externalities such as climate change and gender, he adds, and they must know “all of” the SDGs and what impact their firms have on these.

Notes Henderson, “If you’re in the petroleum industry, you need to understand something about geology. Now they need to learn earth systems science.”

Rather than return to school for PhDs in biology, some executives are opting for certificates in the Fundamentals of Sustainability Accounting (FSA), offered by the Sustainability Accounting Standards Board. The course can generally be completed in 60-90 days, says Kellner.

Company officials are learning how to cope with the plethora of sustainability-related acronyms and protocols. “We’re selective,” says Peter Nachtwey, CFO at Legg Mason. The investment management firm has forged a relationship with Ceres, a Boston-based non-profit that works with companies and investors on sustainability issues.

Nachtwey downplayed the difficulty of keeping up with requests from ESG ratings firms: “We do them selectively. They take a little time, but once you get one down,” it gets easier.

One motivation for increased attention to ESG standards is the greater interest that governments are showing, especially in Europe. SDGs were high on the agenda of last year’s G7 summit in Canada. “There’s already a trend toward regulation, in France for example, and others should follow,” says Tomás Carmona, head of sustainability at SulAmérica, a Brazilian insurance company. “Regulators tend to take the same approach to ESG that they do to traditional fiduciary responsibility when it comes to the disclosure of information.”

Perhaps inevitably, as companies work to get a handle on their ESGs and SDGs, technological solutions are introducing themselves. Blockchain is one of these, Kostigen says, with potential to monitor supply chains and execute due diligence on business partners.

Using an American baseball metaphor, Sacknoff says the implementation of blockchain technology is “not even in the first inning yet.” But Kostigen reels off a list of firms with pilot or experimental programs: Olam International, a Singapore-based agribusiness; Swytch, a U.S.-based energy firm; Hennes & Mauritz, a Swedish multinational clothing retailer; Unilever, the UK-Dutch consumer goods giant; Patagonia, the U.S.-outdoor clothing supplier; and VF Corp., which includes clothing, footwear and gear brands North Face, Timberland, Vans and Wrangler.

For CFOs at these companies and more, sustainability is likely to be near the top of the agenda for a long time to come.