Why CFOs and Treasurers can be Future Sustainability Leaders

My son’s favourite movie at the moment is
‘The Lorax’
, an adaptation of the story by Dr Seuss. It’s a fabulous tale of a young man who sets out to make his fortune. He invents the thneed, ‘a thing that everybody [doesn’t really] need’, discovers the most beautiful place on earth and sets about chopping down the trees to make his thneed despite being warned against it by the Lorax, the guardian of the forest. In the end the young man ends up destroying this place of beauty in his bid for untold (and unneeded) riches and destroys his business in the process: no trees = no thneeds.

‘The Lorax’
is a classic parody of corporate greed and tells a tale of corporates driving the destruction of the planet in a blinkered pursuit of profits. It’s also a warning to companies that this behaviour threatens their own survival, as well as that of the environments they operate in.

In a planet of finite resources it’s clear that this is not a strategy that can continue forever. The legendary investor, Jeremy Grantham, co-founder and chief investment officer (CIO) at asset manager Grantham Mayo van Otterloo – who famously predicted the tech bubble in the late 1990s and the credit crisis of 2007-08 – is quoted as saying “All growth has to be sustainable and qualitative, nothing else”. He predicts a future with rising commodity prices as demand for scarce resources increases – a move away from the cheap commodity markets that have characterised the past 40 years.

A Long-term View

Canny businesses should be starting to adapt now to this new world if they want to be the market leaders of the future; indeed, if they even want to still be in business in the future. As the economist John Maynard Keynes noted in 1933 in the depths of the Great Depression: “We are capable of shutting off the sun and the stars because they do not pay a dividend.”

Natural capital accounting recognises the importance of natural assets to business and seeks to price them on company balance sheets. In the 18th and 19th centuries, when modern economic thought was born, the limiting factors were labour, capital (considered purely as financial capital) and technology. The environment was viewed as a limitless resource in the minds of the early capitalists; the likes of Adam Smith and Malthus. Now, however, due to population growth and a vast increase in consumption nature has become a limiting factor – it is a constrained resource – and we need to build considerations of this into our business decisions.

Another great enemy to sustainable thinking in business is short-termism. The reactive nature of modern stock markets locks business leaders into focusing on quarterly or annual earnings, sacrificing consideration of long term viability and growth.

By producing longer term financial analysis and business models, CFOs and finance leaders can shift the focus of their organisations from delivering short term gains to a more sustainable strategy of growth. If an investment analysis considers the return on investment over a 10 to 20 year period, rather than requiring a payback within one to three years, then the business can start to invest capital for its long term growth.

Many institutional investors will admit that they have failed to price climate change risks into their investments. Founder of private equity firm Game Change Capital, Dan Abbasi, has said he is amazed by how few people in finance think seriously about the changing environment: “It’s shocking: people who run some of the largest investment portfolios in the world are incredibly sophisticated in assessing macro risks, but climate change barely registers. They don’t know where to rank it in the stack and some have privately conceded to me that they have no idea how to play it.”

As the data around climate change builds, and its devastating effects are beginning to be felt, should the business leaders of today really be waiting for investors to figure this out before they themselves take seriously how their organisations need to adapt to the challenge? The best chief executives (CEOs) are already anticipating that governments will, sooner or later, need to begin taxing negative externalities and are looking at how this impacts their business model.

CFOs and finance directors need to lead their companies in planning for sustainability, whether that means making investments now that manage the risks of the future, or simply holding their companies to account for their impacts on society and the environment. It means protecting the resources we need to sustain our companies’ futures – not cutting down trees to make thneeds.

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