cphdialogue

The structural disconnect between ESG and finance

The institutionalisation of ESG has accelerated significantly over the past decade, particularly under frameworks shaped by the EC, including the EU Taxonomy and Corporate Sustainability Reporting Directive (CSRD). These frameworks have compelled firms to formalise sustainability strategies, often resulting in detailed roadmaps, targets, and disclosures.

However, formalisation should not be mistaken for integration.

In many organisations, sustainability functions remain organisationally and epistemologically separate from finance departments. Sustainability teams often report through communications, strategy, HR or compliance functions rather than through CFO structures. This separation creates several systemic consequences:

Parallel governance structures: Sustainability initiatives are approved through different decision-making channels than capital investments.
Metric fragmentation: Financial KPIs (e.g., EBITDA, IRR) operate independently of sustainability KPIs (e.g., emissions intensity, energy efficiency).
Temporal misalignment: Financial planning cycles (typically annual or quarterly) do not align with longer-term sustainability horizons.

In high CapEx industries such as energy, infrastructure, and real estate, this disconnect becomes particularly problematic. For example, a utility company investing billions in grid infrastructure may treat decarbonization as a regulatory requirement rather than embedding carbon pricing into its core capital allocation models. Similarly, in commercial real estate, sustainability upgrades (e.g., energy retrofits) are often handled as separate “green projects” rather than integrated into asset valuation and lifecycle cost analysis.

The result is a bifurcated organisation where sustainability is acknowledged rhetorically but marginalised operationally.

Financial materiality: The missing link

The concept of financial materiality is central to understanding why sustainability struggles to gain traction within financial systems. According to the International Sustainability Standards Board (ISSB), sustainability issues should be disclosed, and by implication, managed, when they are reasonably expected to affect enterprise value.

Yet the translation of sustainability impacts into financially material terms remains underdeveloped in practice.

Consider the example of CO₂ emissions. While most large firms can now measure and report Scope 1 and 2 emissions (and increasingly Scope 3), far fewer can answer questions such as:

What is the marginal abatement cost of reducing one ton of CO₂e?
How does carbon exposure affect asset valuation under different regulatory scenarios?
What is the financial risk associated with stranded assets in a low-carbon transition?

In high CapEx sectors like oil and gas, this gap is particularly acute. Some companies have begun incorporating internal carbon pricing into project evaluations. However, these mechanisms are not always consistently applied across portfolios, and their assumptions often remain opaque.

Similarly, in the cement industry, one of the most carbon-intensive sectors globally, firms face significant capital allocation decisions regarding low-carbon technologies (e.g., carbon capture and storage). Without robust financial models that integrate carbon costs, these investments are difficult to justify under traditional ROI thresholds.

Thus, the absence of standardised, decision-useful financial metrics for sustainability remains a core barrier to integration.

The budget argument revisited

The argument that sustainability initiatives are constrained by limited budgets is frequently invoked, but analytically weak.

From the perspective of capital allocation theory, budgets are not exogenous constraints; they are endogenous outcomes of strategic prioritisation. Organisations allocate capital to projects that meet required return thresholds, adjusted for risk. If sustainability initiatives consistently fail to secure funding, this suggests either:

They do not meet financial criteria under existing evaluation models.
The evaluation models themselves are ill-suited to capture their value.

In high CapEx industries, this dynamic is particularly visible. Consider the aviation sector, where airlines face significant pressure to decarbonize through sustainable aviation fuels (SAF) and fleet renewal. These investments are capital-intensive and often involve higher upfront costs with uncertain payback periods.

Major airlines have committed to sustainability targets, yet the adoption of SAF remains limited due to cost premiums and unclear regulatory trajectories. Without mechanisms to internalise long-term environmental benefits or external costs (e.g., carbon taxes), such investments struggle to compete with conventional alternatives.

Similarly, in the construction sector, developers may avoid low-carbon materials due to higher upfront costs, despite lifecycle savings. The issue is not the absence of capital per se, but the absence of financially robust narratives that align sustainability with value creation.

The limits of ROI thinking

While the push for financial quantification is necessary, it’s not sufficient and may even be counterproductive if applied uncritically.

Traditional financial metrics such as ROI, NPV, and IRR are designed to evaluate projects with relatively predictable cash flows and time horizons. Sustainability initiatives, by contrast, often involve:

Long-term and uncertain benefits (e.g., climate risk mitigation).
Systemic impacts (e.g., ecosystem services, social equity).
Externalities that are not captured in market prices.

For example, investments in biodiversity preservation, relevant in industries such as mining, forest industries or agriculture, may not generate direct financial returns but are critical for maintaining ecosystem stability and social license to operate.

The limitations of financial metrics are well documented in behavioral economics and ecological economics, where scholars argue that over-reliance on quantifiable metrics can lead to systematic undervaluation of non-market goods.

In the shipping industry, progressive companies are investing heavily in green methanol-powered vessels. These investments are strategically significant but involve substantial uncertainty regarding fuel availability, infrastructure, and future regulation. A narrow ROI lens would likely understate their strategic value.

Thus, while financial steering is essential, it must be complemented by broader decision frameworks that account for uncertainty, optionality, and systemic risk.

Toward integrated value creation

The path forward lies not in choosing between financial and sustainability logic, but in integrating them into a coherent framework of value creation.

This requires both technical and organisational innovation:

Internal carbon pricing: Embedding carbon costs into all major investment decisions to reflect future regulatory and market realities.
Extended time horizons: Adopting longer-term evaluation frameworks, particularly for infrastructure and asset-heavy industries.
Integrated KPIs: Linking financial performance with sustainability outcomes, including in executive compensation structures.
Digital integration: Embedding ESG data into enterprise systems (e.g., ERP, financial planning tools) to enable real-time decision-making.

In the real estate sector, leading firms are beginning to integrate sustainability into asset valuation models, recognising that energy-efficient buildings tend to command higher rents and lower vacancy rates, and that certified buildings are more marketable and tend to experience higher value appreciation over time. Similarly, infrastructure funds are increasingly pricing climate risk into investment decisions, affecting everything from asset selection to financing costs.

Different public and private stakeholders have advocated for “integrated thinking,” emphasizing the interdependencies between financial, manufactured, human, and natural capital. However, adoption remains uneven, particularly outside large, publicly listed firms.

The takeaways

The observation that sustainability often remains a “side conversation” is not merely rhetorical. It reflects a structural reality in many organisations.

If sustainability is not embedded in financial decision-making, it will continue to be treated as:

A reporting requirement.
A branding exercise.
A compliance function.

Rather than as a driver of long-term value.

However, the solution is not simply to impose financial discipline onto sustainability. It’s to evolve financial systems themselves to better capture the complexities of a transitioning economy.

In high CapEx industries, where investment decisions shape emissions trajectories for decades, the stakes are particularly high. Failure to integrate sustainability into financial steering is not just a missed opportunity, it’s a strategic risk.

Ultimately, what is not financially integrated is rarely truly strategic. And until sustainability meets that test, its transformative potential will remain constrained.