Given the popular view that a company’s ESG profile can have a material effect on its financial performance, you might expect that combining sustainability and financial oversight within one executive role was simply a matter of time. After all, it is increasingly common for executives’ remuneration packages to be determined to some extent by ESG criteria and so why wouldn’t boards want more direct involvement in determining the extent to which these targets are met?
It is therefore interesting that the recent decision by Acciona (a global sustainable infrastructure group) to integrate its finance and sustainability departments is seen as a relatively novel move. The new merged department also comes with a new job title for the person in charge: Chief Financial and Sustainability Officer (or CFSO).
There are several reasons why we might start to see more companies follow suit:
- as ESG targets are increasingly adopted by companies alongside more traditional targets such as EPS and/or TSR in remuneration arrangements, there is a corresponding demand to measure and report on ESG performance with the same discipline as its financial counterpart;
- there is a growing level of economic risk associated with ESG issues. The Carbon Disclosure Project recently estimated that the world’s 500 largest companies are exposed to around $1tn of climate-related risk. The World Economic Forum has ranked climate action failure as second highest global risk in terms of impact (second only to – perhaps unsurprisingly – infectious diseases) and likelihood (with the frontrunner being “extreme weather”, an arguable corollary); and
- investors are demanding that oversight of ESG issues be redesignated as a formal board matter to ensure that those with ultimate decision-making power are turning their mind to it. There is a concern that if ESG matters are syphoned off into a standalone department, it can result in silos that limit an organization’s potential to drive change.
There are therefore good reasons for both executives and investors to at least consider the formal integration of ESG and sustainability into existing board roles, and we will be watching this space with interest.
"Unless company boards demonstrate willingness to be directly accountable for oversight of sustainability, investors may question their commitment to change"