Did you know that investors are more likely to evaluate a company’s environmental, social, and governance (ESG) metrics before investing a single penny?

The current climate crisis continues to deteriorate and it’s something that should be on every company’s radar. After all, achieving a sustainable future is a team effort – including the finance sector, which holds more power to bring about positive change than you might think.

But what is sustainable finance? And how can a CFO help their organization prepare for ESG and sustainable finance?

In this article, we dive into the true meaning of sustainable finance and ESG. We also share some helpful ways to drive your company towards a more sustainable future.

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What is sustainable finance?

We have a lot to unpack here. So let’s begin by answering the question on top of everyone’s minds – what is sustainable finance?

Sustainable finance is when companies consider the environmental, social, and governance (ESG) impact of their sustainable investment decisions. It’s a topic that has flared a great deal of conversation amongst finance teams lately, as well as those working in financial institutions and financial services.

If you’re looking for investors, it’s time to put the environment at the forefront of your financial efforts. Many investors are reluctant to part with their cash unless a company’s ESG assessment comes back glowing.

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An ESG data assessment determines how economic a company is by evaluating its performance relating to each area of ESG (Environmental, Social, and Governance).

Here’s some more information about each:

Environmental

How much does your company contribute to climate change and other environmental factors? This could include anything from waste and asset management to energy efficiency and manufacturing processes.

The Environmental criteria assess:

  • Resource depletion
  • Waste management
  • Pollution
  • Decarbonizing and reducing emissions
  • Deforestation
  • Climate change/ Climate risk
  • Energy efficiency
  • Greenhouse gas emission
  • Emissions
  • Energy
  • Supply chain
  • Materials
  • Water
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Social

What's your company’s social impact on social issues within its local community and beyond?

The Social criteria assess:

  • Working conditions
  • Conflict
  • Local communities
  • Health and Safety
  • Human rights
  • Diversity and inclusion
  • Labor standards
  • Employee benefits, retention, training, and education
  • Non-discrimination
  • Public policy/political contributions
  • Marketing and labeling
  • Customer Privacy
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Governance

What does sustainable finance look like for your company? And how can you prepare for a more sustainable financial future? ESG Governance standards are in place to make sure accurate and transparent accounting methods are in place.

The Governance criteria assess:

  • Executive payment
  • Donations
  • Anti-corruption
  • Board diversity
  • Tax strategy
  • Governance structure and composition
  • Conflicts of interest
  • Board ESG role/responsibility
  • Grievance mechanisms
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Why should finance teams care about ESG and sustainable finance?

According to Gartner, 85% of investors considered ESG in their investments in 2020. So, we’re not going to sugar-coat it for you. If your organization doesn’t meet ESG criteria, investors will see you as a risky proposition.

In 2022, investment strategies are focusing on the importance of ESG and the impact that businesses (including the financial sector) have on the carbon economy. Here are a few more statistics from Gartner to bring it home:

- One in 10 investors locate the ESG in they’re searching for in corporate disclosures.

- 99% of banks, 71% of fixed income investors, and over 90% of insurers check ESG.

Investors care about ESG enough to turn away from a potential partnership for good. This isn’t the best news for companies that need investors to scale.

So, why does this drive for ESG investing and sustainable finance exist? Here are a few reasons:

1. Input costs

2. Innovative strategy

3. Business ethics

4. Consumer preferences

5. Corporate reputation

6. Competitive positioning

7. Regulatory intervention

8. Supply chain reliability

All the reasons above work together to achieve the common goal that all investors share - reduced investment risk.

7 benefits of ESG and sustainable finance

Why should CFOs and finance teams consider sustainability in their decision-making process? Here are 7 benefits of sustainable finance and ESG:

1. Cut costs and improve efficiency by using fewer resources.

2. Align ESG criteria with the financial outcomes of your organization.

3. Demonstrating that your organization meets ESG criteria gives you a competitive advantage. Therefore, your organization will appear more appealing to potential investors.

4. ESG and sustainable finance has proven to have a positive impact on revenue growth.

5. Sustainability increases innovation. It also helps finance teams to prepare for the future by updating business models, processes, and technology.

6. Putting people first is important. Try being considerate about the health and safety of your employees to improve your retention rate.

7. Build stronger stakeholder relationships and improve your reputation at the same time.

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How to deploy an ESG strategy in your company

You know the answer to the question – what is sustainable finance? But how can you deploy an ESG strategy in your organization and move towards a more sustainable future?

The entire finance team can help move the organization towards sustainable finance. However, the CFO will likely have more success laying the foundation. So, make sure you have them on your side if you’re not the CFO yourself.

The first step is to develop a vision for how the finance function will drive ESG. You must make ESG and sustainable finance a priority for the company.

Communicating that strategy to the CEO and board of directors comes next. Brace yourself for some conversations about what sustainable finance is, and why it’s beneficial to the company (and its impact on the bottom line).💰

Next, align company performance metrics to your ESG goals. Generate value for stakeholders by connecting key metrics to the overall impact of ESG. It’s one thing to implement a company-wide ESG strategy. But, if you don’t align it to business goals, you’ll have a hard time proving its value and positive impact.

Finally, you’ve got to measure the results of the ESG strategy. Track and assess the effect of ESG initiatives and be completely transparent in your financial reporting standards.

Your ESG reporting/sustainability reporting should include key ESG metrics that assess the company’s environmental, social, and corporate governance criteria.

What is sustainable finance in business? Areas CFOs can improve sustainability

When assessing a business’ ESG performance, investment managers often use investor-based reporting frameworks and/or questionnaires.

Some key topics of interest to investors include emissions of greenhouse gases and climate risk disclosures. They also tend to use reporting platforms such as Task Force on Climate-related Financial Disclosures (TCFD).

Specifically, you can expect investors to ask for your company’s metrics on emissions totals and the emissions intensity of your products and services.

If you want your organization to be as attractive as possible to investors, be strategic about your ESG strategy.

We talked about what is sustainable finance, the benefits, and tips for employing an ESG strategy – but what areas of the business can become more sustainable?

Some key areas include the overall company strategy. For investors to take an interest, you must be seen as a responsible investment opportunity and prove that the company’s goals align with ESG-related goals.

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You’ve also got to demonstrate how ESG factors are driving value for the business, such as efficiency or sales productivity.

Another area CFOs can improve sustainable development in your company is via your financial track record.

Does it accurately showcase how the company has allocated capital to green initiatives?

Has the company moved towards recyclable packaging?

Consider ways to prove your company is moving towards sustainable finance and focusing on environmental efficiency.

If you want to keep investors, employees, customers, and other stakeholders happy, you’ve got to commit to the cause, especially in times of disruption.

Investors will likely want to review your company’s ESG strategy because it'll showcase the type of risks you face.

Use this as an opportunity to show your continued commitment to ESG issues through things like:

  • Supporting the mental health of your employees.
  • Showcasing how your ESG strategy is helping to improve customer retention and mitigating financial and sustainability risks.
  • How your company has focused on climate-related changes such as reducing carbon emissions, switching to renewable energy sources, etc.

Key takeaways

  1. If you want to secure investors, start building your ESG strategy. Don't forget - 85% of investors consider ESG in their investment choices!
  2. Develop a vision for how the finance function will drive ESG. You must make ESG and sustainable finance a top priority for the company.
  3. Align company performance metrics to your ESG goals. Generate value for stakeholders by connecting key metrics to the overall impact of ESG

Want to learn more about ESG and sustainable finance? Check out some of our other articles on this topic right here.