How to talk to your CFO about sustainability

The Magazine, January-February 2021

By Tensie Whelan and Elyse Douglas

What's the article about

Many CFOs still see existing sustainability efforts as a cost rather than a source of value. Although most recent research shows a correlation between sustainability and financial performance, there are barriers to CFOs making this link. The Return on Sustainability Investment (ROSI) analytic tool developed by the NYU Stern Center for Sustainable Business enables companies to measure the financial returns on their current sustainability activities, as well as assess the potential ROI of future initiatives.

Dive into the details

The ROSI tool addresses the main barriers to seeing sustainability as a benefit rather than a burden. First, the language and metrics of sustainability and financial performance don’t match. CFOs talk about earnings before interest and taxes and ROI; sustainability people focus on measures such as reductions in wastewater or emissions. The separate reporting of sustainability and financial metrics both internally and externally only exacerbates the problem. In addition, few companies adequately track the returns on their existing sustainability investments or assess the potential returns of future initiatives. This is in part due to the difficulty of measuring intangible benefits and the limited availability of accounting systems designed to capture sustainability performance data.

ROSI is a five-step process that requires cross-divisional cooperation and brainstorming. The process starts with identifying the firm’s current material sustainability strategies. The idea is to develop a materiality matrix—a map of sustainability issues laid out according to their importance to the business and its stakeholders. Some of the strategies that address material sustainability issues include waste management, a focus on innovative products (such as electric vehicles), and water conservation. Broad strategies like these tend to encompass many activities that have not been formally identified as such but which should be included in the ROSI accounting that will follow.

The next step is to identify any related changes in operational or management practices, but without thinking about the financial impact yet. Recognising existing initiatives as sustainable may bring to light organic changes that have occurred over time. A ROSI study of the automotive sector identified 240 changed practices, including the waste management strategy of reducing volatile organic compound (VOC) emissions by recycling paint and solvents.

The third part of the process is to determine the resulting non-monetary benefits by looking at how the changes contribute to factors that drive or mediate corporate financial performance: innovation, operational efficiency, sales and marketing, customer loyalty, risk management, employee relations, supplier relations, media coverage and stakeholder engagement. For example, better waste, energy, and water management generally improve operational efficiency.

Now the task of quantifying the benefits by collecting and using sustainability performance data can begin. It is often possible to compare a new practice with an established benchmark. For example, to measure the value of recycling solvents in the auto industry, a team collected data on kilograms of solvent reclaimed and recycled, the unit cost of virgin solvent, the unit cost of reclaiming and recycling solvents, and the cost of water-based substitute solvents—information that was readily available but had never previously been collected for analysis.

The last step is to total the financial value created (or lost) by each of the practices to identify which strategies generate the most value and where you might want to focus resources. Using data collected from an auto company, the efficiency gains from improving filtration systems and implementing solvent reuse and substitution to reduce VOC emissions were calculated at $90 million in total. This figure comprised the year-over-year reduction in the volume of solvents used multiplied by the average cost of virgin solvent, and the savings from re-using rather than buying solvent and replacing traditional solvents with more sustainable water-based solvents. Their relative unit costs were compared and the difference multiplied by the quantity of substitutes used. There are also intangible benefits such as avoiding fines, reduced health and safety costs, as well as the total return on investment from these new VOC practices.

Visit the NYU Stern Center website for more information about ROSI resources and tools.

The takeaways

Tracking the savings and benefits of existing sustainability initiatives links sustainability to financial performance, the domain of CFOs. Then using the quantifying methods to show that proposed sustainability activities will meet the company’s required ROI on a project will bring the CFO fully onboard. Good management of any type can improve financial performance, however good management of sustainability risks and opportunities is one of the most powerful ways to do so.