Sustainability is a mainstream issue
As highlighted in the Sustainability and business — the call to action: Build back better report, we started a programme of thought leadership to explore accountancy and sustainability. This is part of a series of briefs exploring the topic of sustainability, business and the finance professional’s key role. These briefs will help organisations consider the sustainability issues, how to integrate them into their long-term decision-making, and how to incorporate these issues into internal and external reporting.
Sustainability is a mainstream issue. Business performance can no longer be purely judged on short-term financial returns to shareholders. Groups — such as customers, workforce, society, governments and investors — all demand greater organisational transparency beyond the traditional financial metrics. Sustainability has fast become the lens through which an organisation is judged. However, sustainability is also an important opportunity to build resilient organisations for the long-term.
The sustainability call to action has implications for finance professionals. We are the individuals, teams and finance functions to make a difference. This comes from our skill sets and knowledge in organisational governance, strategy, risk management and performance through metrics and targets. We own the processes, systems, data, management information and reporting that will support our organisations’ transition to sustainable businesses. Finally, we support sustainable decision-making through our business analysis, and assurance of both financial and non-financial data.
The sustainability space — environmental, social and governance (ESG)
The U.N. World Commission on Environment and Development defined sustainability as development that meets the needs of the present without compromising the ability of future generations to meet their own needs.
Sustainability is often thought of as having three pillars or components: economic, environmental and social or, more commonly — profits, planet and people. In this context, its scope is about promoting prosperity and economic growth (profit) while protecting the planet and people across the three interconnected core elements:
Environmental — nature and extent of non-renewable resources used in production, as well as the release of potentially harmful elements to the air, land or water.
Social — Examines how an organisation manages relationships with employees, suppliers, customers and the communities where it operates. Social issues range from human rights, and health and safety to other responsible business practices, such as product marketing, and privacy. Expectations around these issues, as well as environmental issues, define what is often referred to as the social license to operate.
Governance — Deals with an organisation’s leadership and effective management of the business. In addition to overseeing strategy execution, performance and management of risks, effective governance ensures maintenance of the social license to operate. Specific governance considerations include executive pay, regulatory compliance, and shareholder rights, as well as internal controls, and internal and external audits.
The ESG organisational
An organisation’s ESG story is, and will continue to be, a complex one. However, the more an organisation understands how the three pillars of environmental, social and governance sustainability together affect and shape their strategies and business model, the more business-resilient they become. During the COVID-19 pandemic, it has been noted that ‘companies with high ESG rankings have outperformed rivals during the crisis’.1 Although we have separated the pillars into three simple introductory briefs, finance professionals and organisations must take a wide, integrated view across the whole sustainability arena.
To help understand the journey organisations take when considering ESG factors, we have fashioned a three-stage model. This will help finance professionals identify where their organisations are in building ESG business resilience and highlight possible knowledge and skills gaps. The model diagram and descriptions that make up the ESG organisational maturity journey are based upon the Future-Fit Foundation business benchmarking methodology and PwC’s ESG Pulse three stages of evolution.2
The sustainability journey has been an evolution, over many years, from Corporate Social Responsibility (CSR) to ESG. CSR was a self-regulation drive of individual organisations promoting good corporate citizenship in the business world and its roots can be traced to the 1950s. It focused an organisation on its efforts to have a positive impact on its employees, consumers, the environment and wider society. Reporting happened annually and CSR was an add-on to business activities that were often disconnected.
ESG, on the other hand, is seen as core to the way an organisation’s business operates. It measures activities to understand more fully the impact of an organisation’s actions. A focus that integrates sustainability into the strategic objectives, the mission, and everyday decisions of an organisation. This evolution includes an expanded role of organisational governance for the whole of its value chain and longer-term responsibilities around issues such as climate change and carbon accounting.
The changing sustainability landscape also mirrors how business responsibility has been evolving from a narrow shareholder to an inclusive stakeholder focus.
Shareholder perspective —
lacking ESG identification, integration
The focus of a shareholder perspective is primarily on financial returns to shareholders.
There is little consideration of how the three ESG pillars, in combination, affect the organisation’s purpose, strategy or business model.
If sustainability issues are considered, they would likely be reported in a corporate responsibility report and focus on activities of employees in their local communities, demonstrating ‘good corporate citizenship’.
ESG is seen as an 'add-on' — no linkage to the long-term organisational strategy or value.
Focus is on short-term gains and rarely beyond the next quarter’s results.
Stakeholder perspective —
strong ESG identification, limited integration and communication
The focus of a stakeholder perspective is on strong ESG identification, primarily through their risk management processes.
Some integration and overlap across pillars is possible, but unlikely to be embedded into strategic goals or reflected in business models.
Communication still likely to be focused primarily on governance financial reporting.
Sustainability reporting is often confusing with too much information, lacking in relevancy to intended audience, making industry comparisons difficult.
System value perspective —
coherent ESG identification, integration
and transparent communication
The vision of the future and understanding of what must be mastered to move towards desired future state informs decision-making; resources are directed to rapid and radical change.
ESG is embedded into the heart of the organisation; ESG risks and opportunities are stress-tested and scenario planning identifies trade-offs and inform strategic and business model decisions.
The holistic approach feeds through into the communication of ESG risk and opportunity factors that form a transparent story focused on long-term value.
The social inclusion focus
The global perspective
As noted in our environmental protection introduction, environmental issues have been prevalent, in terms of both likelihood and impact, as the annual World Economic Forum (WEF) Global Risk Perception Survey assessed.
Underscoring the impact of COVID-19, the 2021 Global Risk Report, two of the 10 top risks by likelihood are societal threats
These will or are already affecting business continuity and organisational resilience. In terms of top risks by impact, infectious diseases are ranked first and livelihood crises are ranked seventh. The report also highlights that both risks are increasing
the critical short-term threats of ‘social cohesion erosion’ and ‘youth disillusionment’ over the next couple
The impact of the COVID-19 pandemic around the world has led to growing societal fragmentation, with rising unemployment and widening digital divides. The knock-on effects in the medium term will be around risks to economic growth and geopolitical instability. Organisations will need to understand the network drivers that are collectively affecting societal risks.4
Social inclusion and the UN Sustainable Development Goals
In 2015, as outlined in the CGMA guide, The role of the accountant in implementing the Sustainable Development Goals, the United Nations established its 17 Sustainable Development Goals.5 The goals recognise, that ending poverty must go hand-in-hand with strategies that build economic growth and address a range of social needs including education, health, equality and job opportunities, while tackling climate change and working to preserve our ocean and forests.6
Organisations and finance professionals have an important role to play in understanding their business impact and the opportunities for change across the three ESG core elements the United Nations’ 17 Sustainable Development Goals (SDGs) encompass.
There are seven Sustainable Development Goals that are relevant and directly link to the Social pillar.
1 — No poverty
End poverty in all its forms everywhere.
2 — Zero hunger
End hunger, achieve food security and improved nutrition and promote sustainable agriculture.
3 — Good health and well-being
Ensure healthy lives and promote well-being for all at all ages.
4 — Quality education
Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all.
5 — Gender equality
Achieve gender equality and empower all women and girls.
8 — Decent work and economic growth
Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all.
10 — Reduced inequality
Reduce inequality within and among countries.
The goals should not be viewed in isolation from each other. By contributing towards one goal, there could be positive effects on other goals not directly linked to the social pillar. Alternatively, a narrow focus on just one goal may lead to a negative impact or consequences on others.
By reducing poverty, hunger and inequality, it follows that global standards of living will rise. However, as Bill Gates highlights above, these then have consequences on the environmental pillar.
This is good news for every person whose life improves, but it’s bad news for the climate we all live in. Consider that nearly 40% of the world’s emissions are produced by the richest 16% of the population. … What will happen as more people live like the richest 16%? Global energy demand will go up 50% by 2050, and if nothing else changes, carbon emissions will go up by nearly
The point isn’t that we should stop activity to remove poverty, hunger and inequality, but that we employ a ‘systems thinking’ approach across the three ESG pillars. Our goal must be to make it possible for low-income people to climb a ladder without making climate change worse.
As stakeholders and investors increasing rate the health of an organisation on its SDG information, the finance function and finance professionals can help by providing an integrated scenario approach that links the 17 goals to their business model.
For more information on The role of the accountant in implementing Sustainable Development Goals, download our report.
The organisational perspective
For an organisation, the focus of the social inclusion pillar is both internal and external business relationships. It encompasses, ‘the social responsibility of business is to conduct business in a socially responsible way.’8 This view of business responsibility is demonstrated by the Business Roundtable, an association of the Chief Executive Officers (CEOs) of America’s leading companies, who issued a statement on the purpose of a corporation, in August 2019. The statement, signed by 181 CEOs, all committed to lead their companies for the benefit of all stakeholders. ‘Stakeholders’ include customers, employees, suppliers and communities, as well as shareholders.9
In addition to ensuring the social license to operate, embracing social dialogues, acting ethically, providing and promoting decent work, and respecting human rights, these all lead to long-term resilience.
Using three sustainability frameworks and standards to compare terms, the following is a list of more specific social inclusion areas that might be relevant to a business that the finance professional could encounter, be asked to analyse data sets or be asked to report on.10 The list is not an exhaustive one but shows that the finance professional’s remit is more than the traditional finance capital focus.
The breadth of this list underscores the wide network and connections outside of the finance function that may be necessary to enable the collation of social data. This involves interdisciplinary conversations across an organisation, the organisational supply chains and with external stakeholders.
Brand and reputation
An organisation’s brand and reputation have a social dimension, built on the ability to act ethically, respect human rights and provide decent work. Business ethics and trust in a brand are increasingly becoming a significant reputational risk.
Reputation is based on behaviours that build trust with all key stakeholders. Trust is what persuades customers and suppliers to do business with the organisation, employees to work for it, society to believe it will act responsibly, and investors to provide its financial capital.11
Strong brand and reputation are intangible values that contribute to an organisation’s resilience. Organisations that build and protect their brand are seen as less volatile than their competitors, able to recover from economic downturns more rapidly, and viewed as a more stable commercial success for investors.
Trust, which is at the centre of brand and reputation, needs to be nurtured with all the societal stakeholders an organisation interacts with. Trust must be reflected and integrated into organisational value conversations and directly communicated to all the different stakeholders.
In the 2021 Edelman Trust Barometer survey
65% of respondents said that CEOs should hold themselves accountable to the public and not just to the board of directors or stockholders.12
86% of respondents said that CEOs must lead on publicly speaking out about societal issues.13
Time to make sure the range of social inclusion issues highlighted in this section are on your organisation’s radar, are measured, are reported upon, and are used to inform decision-making. For more information on the role of the board as the guardians of trust and reputation download our report, Managing the Trust P&L: A toolkit for boards.
Diversity, equity and inclusion
The COVID-19 pandemic has affected lives and livelihoods and will likely have disruptive knock-on effects as noted above. The disproportionate harms from coronavirus, along with high-profile racial incidents and gender-based violence have also resulted in an increased focus on systemic impacts and the need for renewed efforts on the diversity, equity and inclusion, or DE&I, front by the business community.
The Independent Sector makes the case that, in addition to the moral or social justice argument for DE&I, diverse teams lead to better outputs, diverse organisations are stronger and more efficient and organisations that reflect the diversity of their marketplace will better serve their customers. It also cites a Center for American Progress estimate that workplace discrimination against employees costs businesses $64 billion annually associated with losing and retraining more than two-million workers annually who leave their jobs due to unfairness and discrimination.14
Brief descriptions of the DE&I components
Diversity is often used to refer to race, ethnicity and gender, diversity encompasses age, national origin, religion, disability, sexual orientation, socioeconomic status, education, marital status, language and physical appearance. It can also include diversity of thought — different ideas, perspectives and values.
Equity is the fair treatment, access, opportunity, and advancement for all people. From an organisational perspective, it involves identifying policies, processes, and systems that impact equity.
Inclusion is the act of creating environments that are welcoming and supportive. Recognition of unconscious or ‘implicit bias’ is an important step towards addressing inclusivity issues in your organisation.
Further to the point of diversity adding value, in his book Rebel Ideas, author Matthew Syed links organisational innovation and productivity back to diversity.15 These are the outcomes of an organisation’s diversity and inclusion focus. More diverse organisations can better ‘attract top talent, improve their customer orientation, enhance employee satisfaction and secure a licence to operate.’16 At its core, it is about becoming a better reflection of the society an organisation sits within.
Asif Sadiq, Head of Diversity & Inclusion at Adidas, reminds us that this must not be a tick-box exercise (above).
Diversity and inclusion are not just moral imperatives. They make business sense. We increasingly see businesses recognise that having a high-profile programme or publishing statistics annually isn’t enough. We need to see cultural shifts in organisations that weave D&I into everything they do.17
Asif Sadiq, Head of Diversity & Inclusion, Adidas
Further to the point of equity, there are gender pay gap regulation reporting obligations in Australia, Austria, Belgium, Finland, France, Germany, Iceland, Spain, Sweden and the U.K.18 These require organisations to report on the difference between the average earnings of men and women across a workforce. Where a gap exists, organisations are asked to publish an action plan to fix the inequality.19
Investors are turning to diversity and inclusion, and gender equality to provide a core metric and a proxy indicator into an organisation’s health and long-term resilience. Organisations where diversity or gender equality imbalances exist are more likely to leave themselves exposed to reputational and legal risks.
Health and safety
This encompasses an organisation’s duty of care to its employees in providing a safe workplace and supporting their well-being. Again, organisations that have hygienic, safe and healthy workplaces are more productive and resilient. Traditional measures have been focused on work-related injuries and fatalities, but the COVID-19 pandemic has elevated the need to consider the physical and mental well-being of employees as well. These must support employees’ physical health goals and any mental health challenges, so individuals can cope with stress when managing their work and personal responsibilities.
In a conversation with the director of operations for a public body specialising in culture and education, they talked about the decision process for the location of new global service centres. They work in over 100 countries and as part of the business case for the siting of a new service centre, potential city location pollution data and metrics are used as a criteria measure in the approval process. The public body’s driving motivation was the ‘good health and well-being’ (SDG 3) of staff working in a service centre. However, it also forms part of their environmental framework tool used to manage and monitor their activities (‘life on land’ (SDG 15) and climate action (SDG 13)). This example demonstrates the interconnectedness when contemplating sustainability factors. Actions under the social pillar can have positive and negative implications for the environmental and governance pillars.
Supply chain relationships
A supplier is defined as an organisation or person that provides a product or service used in the supply chain. They normally have a commercial relationship with the host organisation and can include ‘brokers, consultants, contractors, distributors, franchisees or licensees, home workers, independent contractors, manufactures, primary producers, sub-contractors, wholesalers’.20
Mariana Mazzucato, in her book Mission Economy, emphasises the need for collective value creation and collaborations. This means moving supply chain relationships from parasitic to symbiotic ones. ‘Parasitic partnerships are ones where one organisation grows at the expense of another. Symbiotic ones are where both prosper — with a common goal.’21
An independent report reviewing a fashion retailer’s practices found that working practices with its supply chain partners were inadequate. The report found:
Some 93% of suppliers analysed had at least one instance of non-compliance with the company’s audits in recent years on issues including minimum wage and unauthorised subcontracting. Factories were found to have locked fire doors, filthy toilets, and buildings in ‘deplorable’ condition, and ‘no wholesome drinking water.22
This is an example of where ‘weak corporate governance’, a governance factor, led directly to social inclusion risk failures in the organisation’s supply chain. Many organisations, with complex supply chains, hire third parties to carry out social audits and monitor the working conditions of their partners, or join ethical certifications schemes. These must provide public oversight, accountability and challenge business models that in the past were built on supply chain exploitation.23
The social audit of an organisation’s supply chain also overlaps with modern slavery and forced labour, and, decent work and jobs.
Modern slavery and forced labour
Modern slavery is an umbrella term that encompasses forced labour, human trafficking and slavery practices. The International Labour Organization, a United Nations agency, defines forced or compulsory labour as:
All work or service which is exacted from any person under threat of a penalty and for which the person has not offered himself or herself voluntarily.24
Increasingly, organisations are required to strengthen their disclosure and due diligence on modern slavery issues. If not monitored and dealt with, they can translate into legal and reputational risks for organisations. Legislation is also focused upon the greater transparency of an organisation’s global supply chain.
In 2018, the Walk Free Foundation published its Global Slavery Index.25 It included a list of products imported into G20 countries that could be at risk of modern slavery practices. These products included cotton; apparel and clothing accessories; cattle; sugarcane; gold; carpets; coal; fish; rice; timber; coca; diamonds; laptops; computers; and mobile phones.26 With these products in mind, organisations need to think carefully about the social auditing and oversight of their global supply chains.
In the U.K., commercial organisations with a turnover of over £36 million must publish a modern slavery statement annually.27 The statement should include the steps an organisation takes to prevent modern slavery, not only within their business, but also in their global supply chains. There is similar legislation for organisations in Australia, under the 2018 modern slavery act.28 In the United States, the 2015 Trade Facilitation and Trade Enforcement Act prohibits organisations from importing goods produced by forced labour.29 An announcement from the European Union (EU) on new mandatory human rights and environmental due diligence legislation is expected to include modern slavery reporting in 2021.
Michael Rogerson, ACMA CGMA, based at the Centre Business, Organisations and Society in the School of Management at the University of Bath, suggests four ways that finance professionals can help prevent modern slavery in their businesses.
1. Become the business partner your organisation needs.
Work with your commercial, procurement and supply chain management teams on pricing contracts to identify red flags in supplier tenders. If something looks too good to be true, it just might be.
2. Look a little closer to home.
Work with human resources (HR) on checking the status of contracted staff. Check costings by carrying out a basic cost analysis — can the contracting firm make adequate profits from the minimum wage, national insurance or other tax contributions, assumed administration costs and profit margin?
3. Be the critical eye.
Be more broadly critical of the costs and sources of inputs for your organisation and its suppliers.
4. Get involved directly.
There is an increasing amount of legislation on human rights and modern slavery. Much of that legislation is around disclosure, so get involved in your own organisation’s reporting.30
Key stakeholder relationships
The World Benchmarking Alliance launched the Social Transformation Framework in January 2021.31
At its heart is, the societal expectations for business conduct that companies should meet in order to leave no one behind. … At a global level, social transformation means achieving universal human development by respecting human rights, promoting equality and empowering people to pursue the opportunities and choices they value.32
World Benchmarking Alliance
The emphasis here is again, on collective value and collaboration for workers, and the communities, not simply dividends to shareholders. At the very least, this must be focused on understanding stakeholders’ key concerns and the impact an organisation has on them (materiality). This engagement with stakeholders must then be used to inform organisational decision-making when prioritising long-term value.
For customers, this includes processes around data protection and acting ethically with personal data. It also must focus on the social value when developing products and services for customers, taking into account factors such as, affordability, digital inequality and preventing discrimination based on gender or ethnicity.
For the wider society, this includes understanding cultural sensitivities, respecting human rights and contributing to the prosperity of the community your organisation or supply chain partners sit within. Long-term social investment in the community can be direct or indirect and must be at the heart of an organisation’s social license to operate.
Cultural sensitivities were not considered when in May 2020, a mining company destroyed a 46,000-year-old Aboriginal site to expand an iron ore mine.33 Not fully understanding what is of materiality to an organisation’s stakeholders and engaging with them on the issues can damage brand and reputation.
Other key stakeholder relationships could include regulators, governments, shareholders, educators and indigenous communities. More detail on the shareholder relationship is included in the sustainability and business report, Governance introduction: Putting the G
Decent work and jobs
Organisations have a responsibility of care and a requirement to respect the human rights of their full-time, part-time and temporary employees. These include a living wage, decent work conditions, and equal opportunities. In many jurisdictions, you must adhere to legal requirements already in place.
However, these issues must form more than a purely reporting exercise if organisations are to build long-term resilience. They need to be deeper, recognising an employee’s dignity so that they can take pride in their work and their organisation. Organisations paying a decent living wage to their employees are also crucial in raising households’ standard of living and lifting communities out of poverty (SDG 1, ‘No poverty’).
Again, a finance professional doesn’t normally have direct control over issues such as paying a minimum wage, collective bargaining and employee turnover. However, the outcomes of these factors must be considered when making investment decisions and understanding their possible impacts on an organisation’s business model.
In the gig economy, there have been examples of organisations drafting artificial contracts, with workers classed as independent partners, to sidestep basic employment protections.34 The exploitation of workers, through low pay, long hours, no access to sick pay or any redress to unfair dismissal are social inclusion red flags. They are indicators for stakeholders to the overall health of an organisation.
Whenever individuals and organisations go online, they leave digital trails of ‘breadcrumbs’ that companies such as Google and Facebook hoover up to increase their understanding of human behaviour. Investors use this byproduct, labelled ‘exhaust data’, to test other organisations’ ESG reporting robustness. In one example, an investment firm has turned to using the comments left on the Glassdoor employment website to assess an organisations’ health before investing.35 Glassdoor allows employees, both current and former, to anonymously review their organisations and rate salaries. These employee satisfaction reviews are then used by the website to score companies and rate the top-performing organisations.
Investors research the link between staff satisfaction and share price performance for companies before making investment decisions. Usman Ali, from Mobius Capital Partners, found that American companies with the highest Glassdoor ratings delivered higher returns on the U.S. stock market. He explained, ‘If you have satisfied employees, you improve staff retention and productivity. This creates value and satisfaction for customers, which brings loyalty, revenue growth and profitability.’36
The author David Graeber, in his book Bull---- Jobs, noted that,
If 37% to 40% of jobs are completely pointless, and at least 50% of the work done in nonpointless office jobs is equally pointless, we can probably conclude that at least half of all work being done in our society could be eliminated without making any real difference at all.37
He concludes that a high percentage of employees feel they don’t contribute anything to society and hence the title of his book. However, the finance function with its strategic mandate has role to play.38 They can increase an employee’s dignity and worth, through performance management systems, by connecting their productivity to an organisation’s strategy. Then linking the delivery of an organisation’s strategy to societal outcomes and impacts.
These examples underline that social ‘soft’ factors and organisational culture are increasingly driving business resilience and the success or failure of organisations. The lesson — employees are an organisations’ most valuable asset.
Future skills and training
Having talent with the right skills and competencies is essential to maximising organisational potential. To improve organisational performance and productivity companies need to address the skills-gap challenge. This requires increasing investment in the training, educating and reskilling of their workforce. Providing training and improving the skills of a workforce contributes to employee satisfaction and retention. It can also increase the ability of an organisation to attract new talent and drive sustainable value creation over the long term.
As the pace of technology adoption accelerates the WEF estimates that by 2025, ‘85 million jobs may be displaced by a shift in the division of labour between humans and machines, while 97 million new roles may emerge that are more adapted to the new division of labour between humans, machines and algorithms’.39 The changing work patterns will require significant reskilling of employees.
Investors are increasingly looking to an organisation’s average training and development expenditure as an indicator of health and business resilience. Organisations with higher average training expenditure per employee are viewed to have a competitive edge. Not only is the reskilling of employees cost-effective to an organisation, it more broadly benefits society by leveraging human potential.
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 step up to define, enable, shape and tell their organisations’ ESG stories. When thinking about business resilience and social inclusion, 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.
What is the organisation’s governance around the social inclusion risks and opportunities?
When it comes to social issues governance, boards must spend more of their 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 social 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 on the concept of ‘stakeholder value’, which can be difficult when, in some organisations, financial incentives are used to continue with ‘business as usual’.41
Mazzucato highlights the need to link an organisation’s purpose with stakeholder value (above).
A stakeholder view needs instead to reward all stakeholders, not only shareholders: workers, the communities and the environment. This concept recognises that value is collectively created — so the rewards must be distributed equitably — and most of all that companies need to focus on the long term, not the short term. Long-term thinking by definition is linked to thinking about all the sources of wealth creation that must be financed, as well as the different voices that should contribute to decisions about what to finance.42
An organisation’s stated purpose is explored in more detail in the sustainability and business report, Governance introduction: Putting the G in ESG.
Syed advocates the use of ‘shadow boards’ to harness organisational diversity and help expose decision-makers to social insights. ‘Shadow boards typically consist of a group of the most able young people, drawn from across an organisation, who have regular input into high-level decision-making.’43
Since 2016, a U.K. government-backed Hampton-Alexander review has focused on increasing the number of women on FTSE 350 Boards.44 The 2020 review noted that women hold more than a third (33.2%) of FTSE 250 board positions. This is a 10.4% increase since 2017.45 However, to put this in perspective, women account for 51% of the U.K. population, so there is action required to bring true gender equity to organisational governance boards.
Finance functions have a role to play in producing assessments for boards that, ‘aim to reduce the ignorance of the decisionmakers.’46 This can be achieved by finance functions and boards engaging with social scientists and academics, ‘to verify the technical and scientific legitimacy of any action’.47
What are the actual and potential effects of social inclusion risks and opportunities on the organisation’s business model, strategy and financial planning?
Once articulated, social factors can be embedded into the control systems (such as strategic planning, budgeting, performance measures and performance reviews). It is also important to demonstrate to stakeholders how an organisation’s strategy contributes to society. One way of doing this is to identify and quantify impact pathways (e.g., inputs, activities, outputs, outcomes and impacts) through the strategy and link them into the corresponding U.N. Sustainable Development Goals. These pathways will help an organisation understand where they have the most significance and relevant impacts across the ESG pillars.
Risk management lens
How does the organisation identify assess and manage social inclusion risks?
David Omand, in his book How Spies Think, accuses the business world ‘of remaining too short term and transactional’ when managing risks.48 Social risks are anything but short-term or transactional.
Firstly, there needs to be an organisation-wide conversation on your social-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 nine global societal risks that ‘if it occurs, can cause significant negative impact for several countries or industries within the next 10 years.’49 These are:
Collapse or lack of social security systems
Employment and livelihood crises
Erosion of social cohesion
Failure of public infrastructure
Large-scale involuntary migration
Pervasive backlash against science
Severe mental health deterioration
Widespread youth disillusionment.
It is about translating these risks into a language your organisation understands and debating strategy and business model implications.
Finally, it is worth exploring the network drivers of the nine global societal risks to understand possible future cause and effect relationships.50 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 social inclusion risks and opportunities?
Investors and governance boards increasingly need social 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 social 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 social risks. We must all watch out for evidence of correlation being miscast as evidence of causation.51
The issue for finance functions is that most of the social inclusion data collected from around the organisation and the supply chain are output metrics. As Bergstrom and West point out (above), just producing metrics and target data on social factors are not helpful on their own. Finance functions and finance professionals must also provide context.
To tell an honest story, it is not enough for numbers to be correct. They need to be placed in an appropriate context so that a reader or listener can properly interpret them. One thing that people often overlook is that presenting the numbers by themselves doesn’t mean that the numbers have been separated from any context. The choices one makes about how to represent a numerical value sets a context for that value.52
Bergstrom and West
Again, an example of the importance of connecting and demonstrating the links from output metrics through to the social impacts.
Finance professional, finance
functions and organisations
'Organisations around the world are resetting the way they think about sustainability, and this has significant impact on stakeholders’ trust in their non-financial data, risk management procedures and business recovery. As core members of almost every business, government and non-governmental organisation, CGMA designation holders play a pivotal role in providing non-financial and financial management information to drive business performance, develop strategies and influence decision-making.
They bring a unique set of skills and knowledge to the table and can work with stakeholders to integrate responsible practices into their business and operating models'.
Andrew Harding, FCMA, CGMA, Chief executive — Management Accounting, at the Association.
The finance professional
Finance professionals have a pivotal role to play in supporting their finance functions and organisations on their ESG journeys. An obligation to upskill and understand how sustainability issues affect their organisations’ resilience and that of wider society. As accountants, we are the trusted advisers and not only bring credibility to information, but also insight, influence and impact. We must analyse and advise on ESG factors, that tend to be non-financial, to help our organisations make informed and holistic decisions.
The social factors are complex, requiring finance business partners and finance professionals to engage with social scientists, human resource experts and regulators in technical conversations. These are interdisciplinary and transdisciplinary conversations. However, by asking the right questions, investigating the logic and verifying the technical findings, finance professionals become the bridge back into the finance function and can translate results into a familiar business language. Through analysis and validation against an organisation’s business model, they turn social data into commercial insight.
The finance function can then communicate these insights and contribute an objective, responsible perspective to influence organisational decision-making. This is done while, at the same time, guiding actions and ensuring an organisation achieves the required impact through control systems, such as strategic planning, budgeting and performance measures.
If you, as a finance professional, are not yet engaged in these kinds of social areas, it is time to upskill and find professional development opportunities to increase your social inclusion knowledge. But some words of warning — this is not about you becoming an expert in any particular sustainability issue. It is about having a broader understanding about what it means and connecting them into your organisation’s control systems to provide insight, influence and impact into organisational decision-making.
As finance functions work with the rest of the organisation, they can break down siloed activity and thinking around sustainability. They can also encourage diverse ESG thinking from across an organisation and its supply chain. This is because they can circumnavigate the usual top-down ‘chain of command’ approach in favour of a ‘chain of communication’.53
The Global Management Accounting Principles define management accounting as ‘the sourcing, analysis, communication and use of decision-relevant financial and non-financial information to generate and preserve value for organisations.’54 This applies equally, across the ESG pillars, to sustainability information where finance acts:
As a trusted source of the management information providing sustainability data integrity
As a commercial analyst, providing sustainability insight into the drivers of organisational value
As the subject matter expert and steward, contributing the sustainability perspective to strategic decision-making
The finance function is uniquely positioned to understand the end-to-end view of an organisation and the interactions of the organisation with its societal ecosystem. They can demonstrate the delivery of value from its organisation’s products and services and then link these through to capture value for the different societal stakeholders.
In his book Green Swans, author John Elkington, focuses on the software and algorithms controlling capitalism:
Their focus on financial value above all other forms has delivered huge rewards for those in capitalism’s driving seats but also burned through unconscionable amounts of natural, social and human capital along the way.57
For organisations, and in fact for finance functions and finance professionals, to integrate ESG factors into their strategies, business models and reporting requires a change in thinking. It requires moving from mechanistic thinking, where the focus is about increasing efficiency, to systemic thinking, where the focus is about being effective. Dealing with complex ESG issues requires a holistic approach that moves from:
Disconnection to interconnectedness thinking
Linear to circular thinking
Silo to emergence thinking
Parts to whole thinking
Analysis to synthesis thinking
Isolation to relationship thinking58
The evolving ESG landscape
Finally, it is worth remembering that an organisation’s environmental focus will continue to evolve as ESG and stakeholder priorities change. Bergstrom and West have observed that ‘science is a haphazard collection of intuitions, norms, customs and traditions that have developed by trial and error over the past several centuries’.59 The same is true of the sustainability space, and this has implications for finance professionals. We will all need to continually adapt our learning and engage in multi-disciplinary conversations if we are to create and preserve organisational value for the long-term.