CFOs have historically been responsible for making financing and investment decisions based on ROI and NPV. In the next ten years, there will be increasing pressure on them to deliver valuation that incorporates the environmental, social and governance (ESG) factors that shape the success of business in the long term.
Currently, ESG investing has increased by 44% to about $11.6 trillion globally. Money managers, institutional investors and shareholders are increasingly focused on how businesses address issues such as climate change, diversity and inclusion, and overall societal impact, as evidence of how the business manages risks and opportunities overall.
The fastest-growing segment of ESG investing is not negative screening to eliminate “sin” companies, but ESG integration focused on a proactive approach to ESG. Integrated annual reporting, which reviews the position of the company across financial, governance, environmental and social factors, is on the rise.
Redefining value is about the core purpose of the business: why the company exists, beyond making a profit, and its unique contribution to society. CFOs, along with their boards and executive teams, who deeply understand and align behind this fundamental “why” of the business will need to take steps towards delivering the long-term value. This could be achieved by redefining the purpose of the corporation as maximising stakeholder value – including employees, customers, suppliers and local communities – rather than shareholder value.
An example of a company where the CFO is taking a broader approach to value is Apple Inc. Apple offers a green bond report that explains how it chose, identified and ranked “green projects” in which to invest.
Apple’s Green Bonds
Apple has been a top financial performer and was the first company to reach a trillion-dollar market capitalisation.
In 2018, the company offered insight into how it selects and funds projects that will increase stakeholder value – particularly in the environmental space.
Typically, when the CFOs are planning a capital budget, they examine the investment opportunities available and select those that provide the highest Net Present Value.
Apple took a similar approach, as it decided how to fund green initiatives in the 2018 fiscal year. The company issued a $1 billion green bond to fund “green” projects within the company. The company decided which projects to fund, by requesting multiple proposals from a variety of departments. The proposals were judged against a set of environmental criteria, which included categories such as material conservation, greener materials, water efficiency and environmental design. Ultimately, the company decided to fund 28 projects that contribute to its three environmental priorities where it believes it can have the largest impact. Funded projects included a “materials recovery robot” that can extract the valuable materials from iPhones at the end of their useful life, solar energy installations, and the trials needed to validate a new recycled aluminium alloy. In total, funds of about $995.2 million were allocated to these 28 projects.
The paradigm shift toward stakeholder value will only be lasting and meaningful if CFOs invest in programmes and capital that strengthen shareholder and stakeholder value simultaneously. Integrated reporting is the natural next step for companies that commit to a vision of stakeholder value. This will enable businesses to drive positive systemic change and maximise their value to society.