A new perspective on enterprise value: CFOs building an ethical business

After a period of immense unpredictability, businesses are building back better. By focusing on their purpose – their reason for being in business beyond the bottom line – as well as profit, leading enterprises are creating value for all stakeholders, including customers, employees, regulators, their communities, and the environment. And CFOs play an essential role in making that purpose felt across their organization and ecosystem.

In Genpact's CFOs Empowering Enterprises in the Age of Instinct report – which introduces three macrotrends shaping the future of societies, business, and the finance function – we see that leading CFOs and finance teams are making the business case for ethical action, measuring performance against new metrics, and using their skills with data and insight to create more ethics-driven organizations.

Regulators are accelerating this drive. Greater levels of scrutiny require tighter collaboration between risk and finance and increased reporting rigor, enabling businesses to go beyond these emerging requirements. In doing so, CFOs and finance teams are helping their businesses take decisive steps toward becoming instinctive enterprises that are able to harness data, technology, experience, and judgment to stay ahead of the competition, get closer to their customers, and thrive as ethics-focused enterprises.

Finance teams have always played a vital role in guiding their organizations through disruption. But the challenges unleashed in 2020 – the pandemic key among them – saw many finance teams taking a more prominent role in leading (rather than simply guiding) businesses through these crises.

CFOs and finance will remain strategic partners moving forward. Indeed, 82% of CEOs believe the role of the CFO will become more important over the next three to five years, according to the Association of Chartered Certified Accountants and the Institute of Management Accountants. But instead of managing disruption, the challenge for today's CFO is how to also harness growth.

With environmental sustainability and social justice movements continuing to dominate conversations, and regulators clamping down on issues like corruption, introducing more ethical business practices is integral to growth.

From their position looking across the organization, CFOs can guide sustainability and social justice conversations by articulating the many ways that more ethical practices create value for their companies, financially and beyond.

Take diversity, equity, and inclusion. Substantial research has shown the advantages diversity brings to an organization, with the World Economic Forum highlighting increased profitability and creativity, stronger governance, and better problem-solving. Diverse backgrounds bring diverse perspectives, experiences, and ideas that create resilience and differentiation.

The case for a strong environmental, social, and governance (ESG) proposition is equally compelling. Recent meta-analysis from the NYU Stern Center for Sustainable Business across more than 1,000 research papers found a positive relationship between ESG and corporate financial performance in 58% of the studies surveyed and in 59% of studies on investment performance.

As well as improving top-line growth, research from McKinsey & Company highlights how addressing ESG issues can reduce rising operating expenses, drive consumer loyalty, and reduce regulatory interventions. And instilling a sense of purpose across the business also boosts employee productivity.

Unilever's Sustainable Living Plan, for example, demonstrates this impact in action. The company's sustainable living brands have consistently outperformed the average growth rate of Unilever products. And through its eco-efficiency program, Unilever has avoided over $1.4 billion in costs since 2008. The company is now the number-one employer of choice among fast-moving-consumer-goods firms for graduate students in 54 countries.

With more than $20 trillion set to flow into ESG funds over the next two decades, according to Bank of America, stronger ESG propositions are becoming important to investors too. And the same goes for the viability of emerging sustainable finance options. Global container logistics company Maersk, for example, has secured a sustainability-linked revolving credit facility of $5 billion, based on its ability to meet its target of reducing CO2 emissions per cargo moved by 60% by 2030.

The business case for ethical action is clearly compelling, and with potential regulation on the horizon set to require new levels of ESG compliance, enshrining ethics within the core of an enterprise is no longer optional. Fortunately, greater collaboration and reporting rigor enable leading companies to get ahead of potential regulation and appeal to investors who view businesses that perform well on ESG as less risky in the long term.

Historically, there has been a lack of clarity around what qualifies as ESG data. But finance teams are beginning to remedy this challenge by working more closely with risk teams. This collaboration is emerging from a need to connect financial and nonfinancial information and create links between ethical action and performance.

For instance, risk teams – which have been reporting on ESG for some time – can identify suppliers that do not meet their sustainability criteria and either help them make changes or find alternatives. CFOs can use this nonfinancial information to receive better market valuations or for sustainable finance options such as green loans or sustainability-linked bonds.

Risk teams must also be prepared for a new level of scrutiny and compliance requirements as new regulations take effect. The European Commission has proposed introducing 'limited assurance' requirements for sustainability to bring reporting on a par with financial reporting, while in the US, the House of Representatives recently passed legislation that requires disclosure of ESG metrics and dictates specific reporting expectations for climate risks.

Leading companies are already on the case. For instance, we're already seeing greater rigor applied to ESG reporting – something that was once difficult to quantify and compare including carbon accounting. The Big Four accounting firms have agreed to a set of standard metrics with the World Economic Forum so that finance functions can better inform investors and realign capitalism for the benefit of broader society.

Finance teams can establish the right level of governance to report on these new areas each month. Underpinning this transformation is finance's evolving role as the enterprise data guardian. CFOs can work with other business leaders to help them track the optimal set of metrics, from environmental sustainability to diversity and the customer experience. By appropriately defining, measuring, and embedding these metrics, finance can enable transformational behavior change – from financing sustainability initiatives to encouraging the use of renewable energy – within an enterprise but externally too.

Companies won't create an ethics-driven organization through a singular corporate initiative, but by applying an ethical lens to every choice it makes. By introducing new performance metrics, reallocating investments, and working more closely with teams across the business (and in risk, in particular), CFOs and finance can create lasting accountability and encourage a groundswell of ethical action that transforms the enterprise.

What's even more impactful is how large organizations can transform entire ecosystems while reducing third-party risk. Risk teams, for instance, can take regulation further and create mandatory requirements for all partners – from suppliers to distributors and even customers – to enshrine sustainability, diversity, and ethics within their own businesses, offering training to any who may have gaps.

Combined with codes of conduct and consistent supplier auditing, companies can push entire ecosystems to embrace ethics-driven practices, creating a network effect that benefits the entire planet. Online retailer Zalando is one organization leading the charge on this front, with its do.MORE sustainability strategy that makes sustainability assessments mandatory for the company's 3,500 brand and private-label partners.

As part of this push, Zalando will also gather supplier data, identify trends, and explore how to develop solutions to drive meaningful and lasting improvement in collaboration with its partner brands. This analysis can help finance teams and companies drive customer adoption of sustainable products and approaches and demonstrates that they can even charge a premium for them.

Such network effects demonstrate the unmatched impact that CFOs, finance teams, and their partners across the business can have when it comes to building an ethical business and value for all stakeholders. Future-focused finance functions are already on this journey, with many more set to follow.