The importance of ESG investing and how to measure it

Mars CFO Claus Aagaard and Salesforce CFO Emeritus Advisor Mark Hawkins joined Yahoo Finance to discuss environmental social and governance investing and how to measure it.

Video transcript

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- The number of S&P 500 companies citing climate as a risk in their 10K filings quadrupled last year, pointing to a heightened awareness of the financial risks stemming from the crisis. The CDC estimates $4 trillion worth of assets will be at risk from climate change by 2030. And that has thrust CFOs in a critical role to assess these risks on climate liabilities.

We spoke to Mar's CFO Claus Aagaard and Salesforce president and CFO Emiritus Mark Hawkins, both members of the 4S CFO leadership network, and started the conversation by talking about the growing risks to major firms.

CLAUS AAGAARD: It's great that so many companies actually have started to make these statements in their 10K filings. It's really recognized the big issue that that we are facing. It's clear that climate, greenhouse gas emissions is one of the big financial risks that we are all facing in our financials as we look ahead. But also social risks are a big factor. We know that across the world we have not the equality of opportunity that we are so much striving for. And that's clearly also a big risk as we look ahead.

- Mark, as you look to those risks, it does feel that there are two key headwinds that a lot of companies are looking at in the context of sustainability and climate. One is the impact from extreme climate on supply chains, the mounting costs, and the cleanups involved. But also you've got impending regulations, and a lot of companies trying to get ahead of that. How do you weigh the two over at Salesforce?

MARK HAWKINS: Sure, first of all, thank you for the opportunity to speak on this topic. It's a topic that's near and dear to me. The thing I think about is for a modern corporation, as we look to the future, we really all need to have sustainable business models. We have to have businesses that can thrive not just in the short term, but very much into the long term.

And my feeling is that with a modern corporation, you really need to embrace things that will help us be more sustainable. And so whether it's doing a black water project to be more sensible about water resources, whether it's being dedicated to green buildings to make sure that your buildings are sustainable, whether it is committing to 100% renewable energy or zero greenhouse gas emissions, we feel like that's taking the full picture into consideration. And when you do that as a corporation, there's a lot of benefits to it.

It's a benefit to our shareholders. Because as you pointed out at the beginning, the amount of assets under management where they care about things of this nature is rising dramatically. But there's more than that. There's also looking at our employees. They care about it.

They want to have a sustainable company that they can be proud of. There's more than that. Our customers care about it and are asking us to make sure that we're taking care of it. Our community is wanting us to be responsible. So we really feel that this is very integrated.

It is very much part of stakeholder management, stakeholder capitalism, and taking a broader lens on what's important. But I would say all those constituencies are sending us the same signal, which is sustainability is important to a modern corporation. That's how we think of it.

- How do you calculate the risk element of this?

MARK HAWKINS: Well, I think that's a great question. I think the risk-- we have to stand back and look at the risk from a lot of different standpoints. One to your point, the risk of supply chain. One to the point that there can be impaired assets depending on what happens with climate change. One can be customers who don't want to do business with companies that are not committed to sustainability.

So you can take a look at the top line considerations. One could be just companies want and have the kind of Sterling reputation that they're pillars in society and they're contributing to the community. And we feel that that's a good investment. And it's a wise investment from that standpoint because that's an important factor to consider. And that's what I would say.

- Well, we have these discussions in the US. Obviously there are sweeping rules that have taken hold over in Europe that requires firms to disclose the impact of their investments on climate or social governance issues. Claus, when you speak to members of this group, what is compliance meant from an operational standpoint? Because oftentimes we think about these issues as additional costs.

CLAUS AAGAARD: We really are integrating this ESG agenda into the core strategy thinking in the company, the resource allocation, and the execution because we really believe that actually it does make a really good business sense in the long term. In the end, a company will only sustain its long term value creation, its long term future if its consumers want its products or services and folks want to come work there. And in order to do so, you really got to progress on a number of these things. Otherwise, I think you will basically be losing out in the long run. So we're very focused on that. And therefore, I think driving resource allocation to these topics that Mark just talked through, through the strategy process, through the annual operating process in companies are really important.

- Mark, you've heard the criticism on this, though, which is that maybe great that companies like Salesforce are moving aggressively on this. But there is no standardized definition for ESG, which allows companies who may not be as devoted to the issue to basically skirt it. How important is it you think for the SECC and for regulators to step in and specify the guidelines for what sustainability is, for what net 0 is to make a meaningful impact?

MARK HAWKINS: Well, I think you raise a great question around how critical it is to have common and standard metrics. And here's my view. And this is just my view, which is business is one of the greatest platforms for change. Business can move fast.

Business can mobilize. Business can unleash incredible entrepreneurialism on topics when the mindset is there. And we know something's important.

CLAUS AAGAARD: Can I just maybe add to that for a second? I totally agree with everything you said, Mark. It is the moment now. And yes, there is an Alphabet soup and whatever else it's called out there.

But I think we all know what progress looks like. And I think that's why we are so passionately engaging the financial community or trying to through the A4S network. We think finance and CFOs can play a critical role. We've got hundreds of years of experience finessing how we measure things from a financial standpoint. And so we really believe that that this network can corral a huge network of people to make meaningful progress.

- What do you see as a role of CFOs in tackling this specific issue?

MARK HAWKINS: I see-- first of all, I absolutely endorse the comment that you summarized. I believe that I've had the pleasure of working on technology for 40 years and be a public CFO for 15 years. And to watch the changing expectations, the rising expectations of a CFO is so much broader. The opportunity to impact your business in a strategic way, in an operational way, in a financial way and to really be there shoulder to shoulder with the C Suite to really help shepherd the company is really the opportunity for what I would call a modern CFO today.

I think in particular in the area of sustainability, I think when you come to a CFO, you expect rigor. You expect validation. You expect substance and important decisions that are going to drive the future. And that's what I think we can bring. That's what Claus brings. That's what all of our friends bring that are in A4S that have passion around being a leader that's going to be on the right side of history.