4 shifts redefining how finance creates sustainable value

Within the past couple of years there have been significant shifts in how enterprise value is being defined. Factors such as the rapid evolution and expansion of technology and changing ways of working have caused finance to reconsider and redefine its role. This redefinition provides new opportunities for finance professionals to create value for their businesses, especially in the area of sustainability.

With increased demand from investors and stakeholders for more transparent sustainability disclosures, along with increasing regulation and standards around sustainability reporting, businesses can no longer focus solely on profits to assure success. The rise of social and investor activism is changing how businesses create value and achieve long-term prosperity. By becoming more transparent in their sustainability reporting, businesses not only respond to investors’ social and environmental concerns, but they can also boost their reputation, build consumer confidence, and even pave the way for new innovations.

To assist in this change in focus, finance should embrace shifts in its management of time horizons, capitals, relationships, and business models.

Developing new capacities to support these shifts — including data and analytics, technology and automation, and 21st-century human skills — will help the finance function not only redefine its role, but also expand it to become an integral part of the enterprise as sustainability reporting and disclosure continue to evolve.

The four shifts required relate to:

Time horizon management — Finance needs to move beyond the traditional boundaries of short-term enterprise profitability to understand and support value creation for the medium and long term. Performance management should shift from annual cycles to medium- and long-range views. Scenarios around long-term planning and forecasting need to span significantly longer time periods.

Capitals management — Finance needs to expand beyond its capability in managing tangible financial and manufactured capitals. In its redefined role, finance must create frameworks and capability to manage intangible capitals such as social and relationship, intellectual, human, and natural. This requires new KPIs and measurement metrics that track performance and value generation of these intangible assets.

Relationship management — Beyond their traditional relationships with regulators, management accountants will need to learn to manage relationships with stakeholders such as investors and credit providers. They will also need to expand their relationship management to increasingly reach customers, distributors, suppliers, employees, communities, and governments. By developing and managing these relationships, finance can contribute to significant value creation for the enterprise.

Business model management — The finance function has traditionally focused predominantly on the dimension of costs and revenues within the business model. Management accountants must now recognise the imperative for the finance function to create value through wider engagement and partnering in the enterprise’s business model. New capability and competencies are required to participate in other dimensions of the business model that define how an enterprise creates and delivers value. Finance must connect performance with purpose and engage in the design and delivery of its customer value proposition and the culture of the enterprise and its digital platform.

Make an impact

As finance leaders, we must understand that sustainability is much more than reporting. It has implications for an organisation’s business model and how value is defined, created, delivered, and captured.

Every business model’s starting point is about how value is defined, and the definition of value is determined by its various stakeholders. Sustainability and ESG factors now fundamentally affect how stakeholders define value and, as a result, impact how an enterprise will deploy resources to create value.

Decisions around resource allocation in both the short term and the long term need to take sustainability and ESG factors, such as de-carbonisation and the use of natural resources, into account. Sustainability has significant implications for enterprise value.

Finance professionals have a unique, once-in-a-lifetime opportunity to develop this process of redefining value. And finance itself. For the sustainable world of the future.

Integrated reporting and sustainable businesses

An integrated report tells a more complete story of how an enterprise creates value over the short, medium, and long term. It creates a holistic narrative of an enterprise beyond the financials and helps the organisation to join the dots across silos, driving integrated thinking, planning, and performance.

Integrated reporting incorporates material sustainability-related information and provides meaningful insights into an organisation’s use of and impacts on tangible capital, such as financial and manufactured, as well as the intangible elements of an enterprise, such as its human, intellectual, social and relationship, and natural capital.

The sustainability disclosure standards IFRS S1 and S2 issued by the International Sustainability Standards Board build on the concepts of the Integrated Reporting Framework. When used with these standards, integrated reports provide decision-useful information to providers of capital and help improve the efficiency of capital markets through higher-quality information relating to the business model, risks and opportunities, strategy and resource allocation, and performance and prospects of an enterprise.

Adapted from: “4 shifts redefining how finance creates sustainable value”, by Ash Noah, CPA, CGMA, FCMA, vice-president and managing director– Learning, Education, and Development at AICPA & CIMA, together as the Association of International Certified Professional Accountants, published on FM magazine on 07 August 2024.