From Fiduciary To Visionary

In recent years, sustainability has become more a matter of governance to shore up performance, rather than merely being compliant to existing laws and norms. Companies focus on sustainable practices to ensure their operations are environmentally friendly, cost-effective, profitable, result-oriented, and deliver higher value to stakeholders. It is a process of taking decisions and actions to achieve long-term goals. It involves setting goals, developing strategies, and implementing plans.

Stakeholders’ reporting, rather than mere shareholders’ reporting, is another key feature to provide sustainability metrics that are relevant, compliant, accurate, and support the overall execution of the strategy. There is increasing pressure from stakeholders, including government regulators for compliance with non-financial requirements, investors and analysts who prefer comprehensive sustainability reporting, and customers who shift buying behaviour towards sustainable products.

As environmental, social, and governance (ESG) factors become important in investment decisions, the question of their financial materiality informs the discussions in energy sector, and transportation (metro rail), the two areas that CMA Prasanna Kumar Acharya, Director (Finance), NLC, has worked on. Materiality is a measure of the relative financial importance of a factor among a company’s ESG considerations. The Sustainability Accounting Standards Board defines material issues as those “that are reasonably likely to impact the financial condition or operating performance of a company and therefore are most important to an investor.” It is empirically validated that companies with higher ESG scores do better than those with lower ones in terms of stock performance, and underlying financial metrics. The former are less likely to be subject to fines, or reputational damage. They tend to be equal opportunity employers with enhanced workers’ rights and increased employee satisfaction.

Environmental Pillar:

Environmental factors are centered around the resources a business consumes, and waste it produces. Implementing sustainable practices is another element to the environmental criteria. They are critical points of contention in buyers’ decision-making process, as their tastes lean towards a willingness to pay premiums for sustainable products and services. “Some of the complexities include supply chain management, resource usage, and product sustainability. Sustainability, minus these factors, turns into greenwashing – where exaggerated or misleading issues paint a company’s sustainability and environmental focus in a better light than what they truly are,” explains Acharya.

For a successful environment strategy with a long-term vision, one should focus from conception to end users. “For example, in a bid to shift to clean energy, during my stint at Chennai Metro Rail, we built separate verticals for renewables. At NLC, a conventional power and mining company, we did the same. Since solar and wind energy is not available 24x7, we went into green hydrogen, and farm storage,” says CMA Acharya.

Social Pillar: 

These factors address the relationships, both within the organization, and with external stakeholders, including customers, suppliers, and local communities. Factors like diversity and human rights take the front seat in business operations. Businesses that do not value them are no longer viable. Not only is equity a key for building a better world, but businesses that focus on it reap the benefits of the availability of broader skill sets, perspectives, and heightened out-of-the-box thinking. Consumer protection is crucial to ensure that buyers are not cheated, or sold unsatisfactory goods. Other areas include animal welfare, data protection and privacy, labour standards, and community relations.

Governance Pillar:

Effective governance ensures that organizations fortify their internal structures to ensure transparent and accurate decision-making. Some of the key areas include both board and executive compensation transparency. Ensuring correct compensatory balance helps a company’s performance and reputation. Within these factors come management structure (how hierarchy is organized), employee relations, and internal culture, as well as the need to disclose executive compensation. Governance factors prompt businesses to consider their stakeholders when taking important decisions, not just those related to profits. Organizations that are transparent with their reporting do not engage in preferential treatment, or illegal activity.

In mining, for instance, governance implores companies to deal with central and state governments, as well as local communities. Such issues can be addressed through transparent and efficient corporate governance norms. “At Chennai Metro Rail, we had a single and transparent platform for board decisions. All the meetings were available in a single system, via a single software. The statutory requirements and compliances were monitored through the transparent system,” says Acharya.

A company’s goals should be SMART: specific, measurable, achievable, relevant, and time-bound. One may wish to reduce greenhouse gas emissions by 20%, or increase social impact by supporting 100 local communities. The goals need to reflect the material issues that affect business and stakeholders, such as ESG factors. “At NLC, we included them in a report in 2022. We integrated them with business plan. We identified needs, standards, and action plans,” explains Acharya.

Selection of indicators that track progress and performance towards these goals is crucial. Indicators are quantitative or qualitative to measure changes or impacts. But they need to be relevant, reliable, valid, and comparable. Collection and analysis of data is done through various methods, such as surveys, interviews, audits, observations, or records. Data needs to be accurate, complete, timely, and ethical.

The final step is to communicate results to internal and external stakeholders, such as employees, customers, investors, regulators, or media. Communication can be done through reports, presentations, websites, newsletters, or social media. Clear, concise, and compelling language and visuals is crucial. Open and transparent communication builds trust, reputation, and engagement, and inspires action.

In several sectors, the role of CFO has moved from fiduciary end of the spectrum to visionary end. It is about strategy rather than stewardship, and about value realization and optimization. As the direction shifts, finance professionals’ role in harmonizing diverse strategies becomes critical to align risks and rewards. As this strategy devises and leverages new investment structures, CFOs need to evaluate how the below-mentioned models are structured and managed.

Governance model: The CFO needs to increase collaboration and transparency to support decision-making, and reinforce accountability.

Inorganic growth: In addition to creative transaction structuring, the CFO needs to display a dispassionate corporate conscience over valuation, and priority among options.

Portfolio optimization: “The CFO needs to be custodian and craftsman of sources of shareholder value, instilling the discipline to optimize the parameters and composition of portfolios,” feels CMA Acharya.

Capital allocation: CFOs need to sharpen the criteria employed to assess alternative investment uses so that allocation of capital flows to the most attractive blend of available options.

Market positioning: Once the enterprise has selected ‘where and how to play,’ there is a need to communicate it in a compelling manner. The CFO needs to articulate positioning and value.

Risk management: Several factors are redefining the nature of risks and uncertainties. These challenges require the CFO to rethink how to frame relevant risks, and reassess how to evaluate and mitigate their impacts.

Performance management: After strategies and deployment decisions are executed, outcomes become the yardstick to judge if results conform to expectations. The CFO shapes the assessment framework.

Sustainable development is a fundamental break that is going to reshuffle the entire deck. There are companies today that are going to dominate the future, simply because they understand this premise.