Steve Treagust, Global Director for Finance at IFS
At January’s World Economic Forum climate change was top of the corporate agenda, as were environmental and ethical reporting and the need to build sustainability into Governance and decision making. The impact of these urgent new priorities on the role of CFOs and Finance teams will be great, and so will the opportunities.
Environment and ethics to be major factors in reporting
The next five years will see environment and ethics move from being ‘separate’ issues confined to one or two sides of an Annual Report to their becoming core components of a company’s strategy.The integration of environment and ethics into financial reporting will become the rule not the exception as climate change regulation gathers strength. Finance teams could be routinely expected to collect and analyse data on, for example, the sustainability of resources used in production (water, energy or materials), or the job satisfaction of employees related to turnover. Finance teams will be expected to play a far broader and more central strategic role.
Finance: Strategic shift from short-term to long-term analyses
If you consider the skill sets that Finance people have it makes sense. Finance after all works with data – as the data expands so does Finance’s role in collecting, analysing and using it.Simple output data can now easily be collected and calculated automatically, so Finance is shifting from looking back, collecting and calculating data, to looking forwards, analysing it and deciding what it means to the company’s long-term strategy.In the US and Europe we are as likely to meet a CFO with a MBA background now as one with a background in Accountancy. I see Finance customers increasingly being expected to play crucial roles in HR and IT as well as environmental and ethical strategy. In ten years’ time back-office financial staff (if the terms still even exists) could well spend as much time using scenario planning and forecasting tools as calculating Profit& Loss accounts.
Risk scenarios and forecasting tools: The big picture
In the last eight years the banking industry has urgently realized that it needs to up its game. Recently the UK’s banking industry ran a full set of scenarios to test the fundamental structure of their business: Are our outputs secure? Would we cover these scenarios? Have we got the right level of reserves, and risk? Having split off their more high-risk investment arms from traditional banking, the industry now runs annual complex, emergency scenarios to help them establish strategy.
In the next 10 years other industries too will embrace risk scenario and forecasting tools. A narrow focus on P&L balance sheets will not be enough. Corporate finance departments will need to start considering complex algorithms around ‘what if scenarios’ way beyond “what if my costs go up 10%?”With today’s available data such a question is now a relatively simple output, calculated easily. In a global market analysing and understanding macro data and the impact on your company of macro-scale market economies delivers a competitive edge. Companies that integrate technologies that enable this early on will be the big winners.
Ethics and long-term thinking more important than ever
The recent Volkswagen (VW) scandal around cheating software on carbon emissions has changed the automotive industry for good,and maybe broader corporate practise too. It revealed the real costs of poor, short-term, unethical decision making: not only the two thirds wiped off VW’s market share directly after the event, the need to carve out a fund to compensate impacted customers but also the multi million dollars in legal fees accruing in the US, the still incalculable costs to the VW brand and the transformative realization that in today’s social media age such crises simply cannot be “contained”.Long-term, ethical investments, and investing in the software and technology to carry them out, has perhaps never seemed so urgent.
The scandal has also made many re-evaluate the role of Finance and the CFO. It reminds us of the long-term investment perspective Finance teams need to master, how much ethical responsibility they have and how much they need to be at the heart of environmental reporting. For many companies the big picture now begins with Finance. Is there a new maturity and long-termism in our attitudes to how software can help us achieve these goals? I believe there is. But for all Finance teams, the clock is ticking.