How?

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.

Governance lens
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’.⁴¹Mazzucato 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

Mariana Mazzucato

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.’⁴³Since 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’.⁴⁷Strategy lens
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

Infectious diseases

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.⁵¹The 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.