FOLLOW

FOLLOW

SHARE

Smart CFOs Not Risking Mother Nature’s Wrath

This article discusses the importance of sustainability for CFOs

20Apr

What would your CFO do if Mother Nature showed up with a bill for everything she does for your business? What would happen to your bottom line if she called in sick or went on strike, as she appears to be doing in California with water? Even worse: what if Mother Nature sent lawyers to sue your business for the harm it is causing to her?

Sound academic? Think again.

More and more analysts, investors and activists are crunching numbers around these questions. So too are some of the world’s biggest companies like Dow Chemical and accounting firms like KPMG.

The emerging financial picture isn’t pretty.

It turns out that Mother Nature’s natural systems annually produce about $33-$72 trillion worth of “free” goods and services that businesses and society depend to fuel the global economy: purified drinking water, breathable air, supply chain commodities, fertile soil, food stocks and protection from extreme weather, to name a few.

Because markets generally don’t price these goods and services, most businesses don’t account for them in financial forecasts, risk assessments, or on balance sheets.

This is starting to change, as a rising number of troublesome events like California’s water crisis have spurred a global movement to assess the financial value of healthy natural ecosystems to businesses—and to monetize the damage their companies cause to those systems.

In other words: to translate the value of Mother Nature into a language that business and economic decision makers can understand.

The UN estimates that mismanagement of natural assets – water contamination, soil erosion, deforestation and overfishing – is already costing companies around $7 trillion every year, or about 10% of global gross domestic product today. Under business as usual, this could balloon to $28 trillion by 2050. Those numbers don’t even include impacts of adapting to disruptive weather events and rising sea levels due to climate change.

KPMG and Trucost in 2012 estimated that if companies had to pay their true environmental bills, they would lose 41 cents for every $1 in earnings.

The challenges are only escalating. The World Economic Forum’s 2015 list of Top 10 Risks to the global economy (in terms of impact) included three related to environmental damage: “Water Crises,” “Failure of Climate Change Adaptation,” and “Biodiversity Loss and Ecosystem Collapse.”

What does all this mean for business and CFOs?

Quite simply, it means a rising tide of potential exposures threatening to increase on-balance sheet risks down the road, including: price volatility around energy and commodity prices; impact from more stringent regulations; supply chain disruptions or lack of access to key product development inputs; damage to reputation, brand, stock value, or license to operate; and future exposures and losses related to stranded assets.

A new report from Corporate Eco Forum and World Environment Center,Sustainability and the CFO:Challenges, Opportunities and Next Practices,” highlights how several farsighted CFOs are responding to these trends and changing the way they work as a result.

The report explores why and how the CFO and other senior corporate finance executives should care about “sustainability”—a term with many definitions but which is quite simply about protecting and strengthening foundations for long-term success.

“A sustainability lens presents a new way of looking at forecasts and risks,” says UPS CFO Kurt Kuehn, who recently spoke on sustainability at CFO Rising East. Embedding sustainability thinking into the finance function is also helping Kuehn and his CFO peers at global companies like Unilever, Walt Disney, and Ecolab to deal with short-term pressures to cut costs, unlock new opportunities for greater capital productivity, and strengthen the foundations for business innovation and growth.

Today’s farsighted CFOs see the potential for sustainability-related challenges to fundamentally alter the economic, environmental and social landscape within which business is being conducted. As Unilever CEO Paul Polman recently put it, companies that can get out ahead of these trends will thrive, whereas those that don’t "will be dinosaurs–outdated, outmoded and out-of-business.”

Download the new CEF/WEC Report: “Sustainability and the CFO:Challenges, Opportunities and Next Practices (PDF)

P.J. Simmons is chair of the Corporate Eco Forum and co-author of The Green to Gold Business Playbook.

The Corporate Performance Management summit will take place in San Diego on June 17-18.

Comments

comments powered byDisqus
Cfolarge1

Read next:

How The Modern CFO Drives FP&A Through The Organization

i