CFOs can accelerate a new era of corporate sustainability performance

Since 2019, ESG-linked funds have grown their assets under management by 29% to nearly US$1.7tn, according to Morningstar¹. Sustainable debt issuance is projected to reach US$650bn in 2021, a 32% increase from 2020, and Moody’s forecasts that sustainable bonds could account for up to 10% of total global bond issuance this year².

What’s behind this stampede into sustainable investing? Is it just a reaction to ESG funds outperforming many traditional equity benchmarks? Some investors think so and have described the phenomenon as a “bubble”; however, a large majority (72% in Europe³) see the rise of ESG as a permanent shift in the way investments are evaluated and managed.

This view recognises that long-term returns are more likely from investing in companies that innovate to address social and environmental problems, rather than investing in companies that exacerbate those problems and rely upon market failures for their profits. In this light, the momentum behind sustainable investing looks both perfectly reasonable and unstoppable.

Investors are choosing ESG funds because they are genuinely seeking to make the world a better place with their investments and/or they believe that sustainable investments will deliver better returns. Either way, it is vital that the underlying assets be genuinely ‘sustainable’.

Creating the future we want

Sustainability is best assessed in the context of the UN Sustainable Development Goals (SDGs). These ambitious global goals, agreed by all UN member states in 2015, set out profound changes that need to happen in the world to bring about ‘the future we want’. The SDGs provide a framework for holistic solutions to our most pressing challenges like ending extreme poverty and achieving the Paris Agreement targets to fight climate change, but they also address health and well-being, education, inequality, prosperity and decent work, the environment, and good governance.

Robust ESG integration strategies based on SDG impacts are identifying bona fide sustainable investment opportunities. The most successful investment managers recognise, despite the noise and sometimes unreliable data, when a company’s ESG performance might correlate with superior risk-adjusted returns. Innovation in products, services, and business models is exciting, but the impact of ESG on that risk adjustment is also critical.

A company’s net-zero carbon target probably does relatively little for its profits, but it does reflect sound management of exposure to climate risks, including, most critically, policymakers’ responses to climate risks. Traditional investment strategies were not seeing this.

ESG-led innovations in investment strategies have gone mainstream and are undoubtedly driving increased demand for sustainable investment instruments. This is changing corporate behaviour and delivering on a key promise of ESG. However, ESG is not just a demand-side story.

 Corporate CFOs as heroes

On the supply side, companies are creating new business models and financial instruments to support their increasingly ambitious strategies and targets for SDGs impact. Investor interest is an important driver of corporate sustainability, but customers, employees, and regulators are also exerting pressure. While the SDGs provide a shared understanding of sustainability, these stakeholders will still have different priorities. The need to balance the competing interests of diverse stakeholders is behind much innovation in corporate sustainability.

Corporate CFOs are arguably the heroes of this story. The stewards of trillions of dollars in corporate investments, they are uniquely positioned to reshape the future of finance and investment as a catalyst for growth, value creation, and social impact – and they are rising to the challenge.

In recognition of this, the UN Global Compact has convened a CFO Taskforce for the SDGs  to provide a platform where CFOs can interact with their peers, investors, financial institutions, and the UN to share ideas, develop new concepts and frameworks, and provide recommendations to unlock private capital and create a market to mainstream SDG investments.

The first output from the Taskforce is the CFO Principles on Integrated SDG Investments and Finance⁴, a four-part framework to leverage corporate finance and investment for sustainable development. Faced with a clear moral mission, a growing demand for transparency, and rising regulatory and public pressures, sustainable corporate finance is ripe for innovation – and these CFOs are setting the stage for a global push to direct desperately needed funds towards the realisation of the SDGs.

While the public good arising from this initiative is self-evident, it is most definitely not a philanthropic exercise. In fact, the CFO Principles reinforce and operationalise the theory of change upon which ESG investing is, at least in part, based.

Companies are required to develop a coherent SDG impact thesis, translate that thesis into strategic objectives and initiatives, then integrate their SDG strategy into a comprehensive sustainable finance approach. So armed, they can offer a pipeline of diverse sustainable investment opportunities that are backed by the company’s core strategy, credit rating, and corporate governance mechanisms.

These companies will benefit from improved access to capital through increasing investor demand for ESG investments and also potential pricing benefits associated with sustainable issuance – not to mention the inherent benefits of being more sustainable, such as reduced operating expenses, improved resilience, brand loyalty, and the ability to attract top talent, to name just a few.

The UN has calculated a seemingly unbridgeable US$2.5-3tn per year financing gap to achieve the SDGs⁵. Paradoxically, in 2017, the Business and Sustainable Development Commission’s report, Better Business, Better World, estimated that achieving the SDGs could create at least US$12tn in business opportunities⁶. The Global Commission on the Economy and Climate has gone even further claiming that action on climate change could generate a direct economic gain of US$26tn by 2030⁷.

The surge in both demand for and supply of sustainable investment instruments gives hope that this market failure may finally be corrected. More and more companies and investors are recognising that sustainability is good business and they are coming together, at last, in the ESG movement. The only thing that can stop ESG now is its total integration, so that we stop talking about ESG investing and just talk about investing.

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