When Michael O’Leary is ready to pay a premium for sustainable jet fuel to help save the planet, you know the business world has changed.
The chief executive of low-cost airline Ryanair last week pledged to power 12.5 per cent of the carrier’s flights with green fuel — currently two to four times more costly than the standard fuel — by 2030 in a bid to cut carbon emissions. It was a sharp U-turn on his previous position that Ryanair would shift from traditional fuel only if prices were equivalent.
Not everyone captures attention like the outspoken O’Leary. But others are quietly doing even more in a sign of how mainstream climate issues have become for companies. Just days before the Ryanair boss’s change of heart, the Spanish infrastructure and renewables company, Acciona, unveiled a new five-year sustainability plan.
Acciona has long focused on sustainability. In 2009, the board set up a “sustainability committee” and the company has been net-zero carbon emitting since 2016.
But buried in the details of its new plan, Acciona revealed it had moved sustainability from the marketing department, handing responsibility for environmental, social and governance targets to the finance director. It may not be an outright first. But certainly the decision is so rare that those who advocate integration of financial and sustainability reporting struggle to think of another company that has done the same.
Jessica Fries, executive chair of Accounting for Sustainability, a charity founded 17 years ago to make sustainability a core discipline of finance departments, describes it as “a really powerful signal”.
Acciona was not alone in leaving sustainability with marketing, Fries says. But, as policy makers set aggressive environmental targets and regulators move to demand disclosure, ESG issues are being seen as material factors in the financial well-being of a business.
CDP, a not-for-profit group that runs a sustainability disclosure system used by close to 6,000 businesses worldwide, has estimated that the financial risk from climate change to the world’s 500 biggest companies comes to just under $1tn, based on survey answers. But climate-related opportunities outweighed the risk at $2.1tn.
With such sums at stake, some investors are demanding as much rigour in measuring performance on ESG criteria as they do for returns on investment or profitability.
They are also demanding that oversight of sustainability should sit at board level rather than being farmed out to managers with little executive power.
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Legal & General Investment Management asks that all of its portfolio companies have at least one board director focused on sustainability or they risk a protest vote.
According to José Angel Tejero, Acciona’s chief finance officer who has taken over the sustainability team, the decision to merge the roles was in part to address this growing demand from investors.
But it was also born from the recognition that the opportunities to gain a competitive edge with sustainable initiatives are growing; not just in new products and services, but in debt finance that pegs interest rates to whether a company meets or misses ESG targets.
For many companies, ensuring the new ESG lending conditions are realistic, and can be measured and met, is a new discipline — especially when the world is divided over standards for sustainability reporting.
Which is why it makes sense for Acciona and others to integrate sustainability with finance. After all, it is the finance department that manages risk, sets budgets and distils the information that guides investment decisions. Mervyn King, a South African who is chair emeritus of the International Integrated Reporting Council, argues that the CFO is the “true change maker” of a company.
Not all companies will choose to hand oversight to the finance director. But their boards will have to assume greater responsibility to reassure the investment community that there is top-level accountability. Worryingly, PwC’s last annual corporate directors survey found that more than half the board members questioned admitted that ESG was not regularly addressed at meetings, while close to 60 per cent did not believe disclosure should be a priority.
These are no longer sustainable attitudes. Unless company boards demonstrate willingness to be directly accountable for oversight of sustainability, investors may question their commitment to change.