The move toward mandatory sustainable finance

The pressure to make sustainability a part of financial management practices (especially for CFOs) is growing at a rapid pace. Countries, regulators, investors, and markets across the globe are putting more emphasis on sustainability in an attempt to contribute toward achieving net zero carbon emissions. Investors, in particular, are increasingly interested in accessing sustainability information about companies to help with their investment decision-making.

One example of this trend is the European Union (EU)’s political commitment to be net zero by 2050. To accomplish this, the European Green Deal Investment Plan has allocated at least 1 trillion euros toward sustainability investments over the next decade. This move toward net zero will have a huge impact on the EU’s entire economic system, including the management practices of its businesses. Already the EU has imposed sustainability disclosure obligations on manufacturers of financial products and financial advisers, and more sustainability obligations are certain to follow.

With this growing worldwide interest in sustainability, sustainability in business (financial and economic decision-making) will soon no longer be a matter of personal choice; it will become mandatory. A company’s “greenness” will become a key factor in how investors and the market overall view and do business with the company.

For example, in the not too distant future, a car manufacturer might face market penalties for producing so-called “gas guzzlers.” The market may determine that such vehicles are risky or unattractive assets due to their carbon footprint. As a result, borrowing to pay for one might become more expensive than borrowing to pay for a hybrid vehicle.

Increasingly, lending and investing decisions will involve sustainability criteria to some degree. Every company that provides a product or service will be required to measure, monitor, and report on its sustainability efforts on a periodic basis. We may even likely see the imposition of “green” scores on companies, with lower scores resulting in penalties such higher interest rates for loans.

How you can prepare for sustainability reporting

Key questions in this move toward financial sustainability centre on data. How do you know if your company’s sustainability data is accurate? How can you accurately collect, manage and share sustainability data?

These are not easy questions to answer due to current challenges. First, sustainability reporting is new, and so there is a lack of standardized reporting frameworks and practices. Second, collecting sustainability data is time- and resource-intensive. Third, there is a lack of transparency and comparability across peer groups.

Overall, sustainability reporting is much more complex than traditional financial reporting. It is far more difficult, for example, to measure CO2 emissions than to measure economic activity based on bank statements. To effectively report on sustainability, measurement sensors, data collection processes and related software need to be developed. All of this amounts to an extensive infrastructure project.

What can help to overcome these challenges? This is where technology comes into play. Leaders across industries are beginning to invest in emerging technology solutions for sustainability data production and management. CGI, in fact, is working in this space to help drive the development of innovative solutions.

Last year, for example, we collaborated with Aalto University to explore and develop preliminary models for collecting and processing sustainability data within the EU as it moves toward mandatory sustainability reporting. This research effort led to new concepts for an EU-wide sustainability data hub, along with a reporting framework for collecting sustainability data from small to medium-size enterprises, which account for 99% of the businesses within the EU.

While boards of directors are keen to respond to the sustainable finance trend, shareholders are less so due to the costs involved and/or the anticipated impact on share price and dividends. Responding successfully will require finding ways to bring costs down and build trust in terms of what really is required and when.

Looking ahead

At CGI, we believe sustainability will become a mandatory investment for organizations across the globe and across all sectors. While the EU is at the forefront, what we see happening in the EU today with sustainability will likely spread to other markets and geographic regions. For example, sustainability already is picking up speed in the U.S.

CGI is working with organizations worldwide to deliver business recommendations that address sustainability issues. We also are helping clients address climate change across the industries we serve by developing technology solutions that minimize carbon emissions. In addition, we are on our own journey, making a commitment to net-zero carbon emissions by 2030.

We welcome the opportunity to take this journey with other organizations looking to invest in and promote sustainability. To learn about our work in the EU and elsewhere, feel free to contact me.