The four sustainability lenses of governance; strategy; risk management; and metrics and targets
There is increasing pressure for organisations to demonstrate their sustainability credentials. Therefore, CFOs, finance functions and finance professionals must define, enable, shape and tell their organisations’ ESG stories. When thinking about business resilience and environmental sustainability, a great place to start is with the four lenses of governance; strategy; risk management; and metrics and targets. These lenses come from the TCFD framework recommendations for evaluating and reporting climate-related risks. If you take out the specific climate references from their recommendations, it still provides a broad framework for working with any of the core elements of sustainability, whether environmental protection, social inclusion or governance.
In the 2019 white paper Re-inventing finance for a digital world: The future of finance, we explored the role of the finance function and its primary activities. These are the primary activities of information, insight, influence and impact. Whether you are assessing risks, reconciling accounts or compiling management information reports, the process activities remain constant. By overlaying the four sustainability lenses to the basic finance activities, we can understand where to focus our time and resource.
By focusing across these four areas, the finance function’s basic activities are:
Assembling information for sustainability metrics and targets
Analysing for insight to build sustainability issues into risk management processes
Advising on sustainability risks and opportunities to influence organisational governance
Applying for impact by building sustainability into strategy and organisational control systems.
Governance lens What is the organisation’s governance around the environmental risks and opportunities?
When it comes to environmental issues, governance boards must spend more time engaged in robust discussions and making more informed decisions for their organisations. The senior executives and board directors of an organisation are the individuals best enabled to reduce environmental risks. However, to have an informed debate, they require relevant, insightful content and the ability to take the long horizonal view. Their focus needs to be a stewardship role, which can be difficult when, in some organisations, financial incentives are used to continue with ‘business as usual’.25
Finance functions have a role to play in producing assessments for boards that, ‘aim to reduce the ignorance of the decision-makers’.26 This can be achieved by finance functions and boards engaging with scientists and academics, ‘to verify the technical and scientific legitimacy of any action’.27
Strategy lens What are the actual and potential effects of environmental risks and opportunities on the organisation’s business model, strategy and financial planning?
The TCFD recommendations use scenario planning to help build resilience into an organisation’s strategy. It asks organisations to consider different climate-related scenarios, including a two degrees Celsius increase in global temperatures. Using scenario planning across the environmental issues can help understand the effects and implications over the long term on an organisation’s strategy and business model. Once articulated, environmental factors can be embedded into the control systems (such as strategic planning, budgeting, performance measures and performance reviews).
Risk management lens How does the organisation identify assess and manage environmental risks?
David Omand, in his book How Spies Think, accuses the business world when managing risks, ‘of remaining too short term and transactional’.28 Environmental risks are anything but short-term or transactional.
Firstly, there needs to be an organisation-wide conversation on your environmental risk appetite. Once there is common agreement, this needs to be built into your organisation’s Enterprise Risk Management (ERM) processes.
When thinking about the risks and opportunities to your organisation, an excellent place to start is with the WEF Global Risk report 2021. There are six global environmental risks that ‘if it occurs, can cause significant negative impact for several countries or industries within the next 10 years’.29 These are:
Biodiversity loss and ecosystem collapse
Climate action failure
Extreme weather events
Human-made environmental damage
Major geophysical disasters
Natural resource crises.
It is about translating these risks into a language your organisation understands and debating strategy and business model implications. At the very least, your organisation must consider which are transition risks to becoming a lower carbon entity and which are physical risks to the business.
Finally, it is worth exploring the network drivers of the six global environmental risks to understand possible future cause and effect relationships.30 This will help understand how risks and opportunities integrate across the pillars of environmental, social and governance.
Metrics and targets lens How are metrics and targets used to assess and manage environmental risks and opportunities?
Investors and governance boards increasingly need environmental data to make more informed investment decisions. They also want comparable and consistent data. For finance functions and finance professionals this means setting and managing environmental organisation metrics and targets that lead to disclosure that is reliable, verifiable and objective.
However, these must also be science-based targets where there is strong evidence of causality. Authors Carl Bergstrom and Jevin West point out that we must understand the difference between correlations and causation when using metrics and targets for environmental risks. We must all watch out for evidence of correlation being miscast as evidence of causation.31
A final lesson, again from Bergstrom and West (above), is that just producing metrics and target data on environmental factors are not helpful on their own. Finance functions and finance professionals must also provide context.
