Driver-Based Planning: Your Path to Integrated ESG and Financial Decision-Making

Integrated Planning is Transitioning From ‘Nice to Have’ to ‘Need to Have’

More than ever before, businesses face the daunting challenge of aligning their Environmental, Social, and Governance (ESG) strategies with their financial objectives. And the reality is clear: it is no longer ‘nice to have’. It is fast becoming ‘need to have’.

And businesses that are starting to effectively integrate ESG considerations into financial planning are adopting a more forward-thinking approach.

But how?

Enter driver-based planning, a powerful tool that can help businesses harmonise financial and ESG goals.

In this article, we will explore the crucial role that driver-based planning plays in developing a more rounded approach to planning by simultaneously considering financial and ESG factors to support decision-making. And as you will see, this is an organisation-wide approach to planning, in which finance plays a key role.

Driver-Based Planning in a Nutshell

Traditional approaches to financial planning have focused on the output, namely the $ value that you see in the financial statements.

In contrast, this driver-based planning is a methodology that connects financial outcomes to the underlying business drivers and activities. It creates a red thread from financial KPI’s to their root cause or drivers, which in turn adds a whole new layer of context to the numbers that makes them feel more ‘real’.

More and more companies are adopting this approach. Some start simple. Revenue plans are driven by sales volumes and prices. Compensation costs are driven by detailed headcount plans.

And others are beginning to take more complex approaches and are integrating wider sources of data to drive the numbers. Marketing data. Inflation data. Weather data. Consensus data. Integrating these sources of information to your financial plans has never been easier.

And this approach is enabling businesses to make more connected decision making. It essentially connects finance to operational activities, which makes plans more tangible and actionable.

But Where Does ESG Come Into This?

Whilst more and more companies are adopting driver-based planning, the majority are using it to primarily connect operational and financial outcomes. And in parallel to this, regulations continue to come in to force, which are demanding more transparency and disclosure of performance by companies across a range of ESG metrics.

The challenge that many businesses have, is that these are separate reporting exercises, driven by different sources of data, and managed by separate teams.

But this is where driver-based planning steps into the ring.

Every component you sell has a cost and a carbon footprint. Every flight your employees take has a cost and a carbon footprint. And every shipment of goods you make has a cost, and yes, a carbon footprint.

Each of the above examples can be assigned with financial and ESG values. So why not model them simultaneously?

By intelligently designing your models around certain key drivers, this is becoming a real possibility.

Driver-based planning is your ticket to more integrated and rounded decision making

Never before has it been more important for companies to make decisions that factor both financial and ESG outcomes. More and more companies are positioning ESG as strategic pillars for their long term success. But achieving these long term goals is not easy, and impossible to achieve without fully understanding that there is financially viable route to get there.

So from my perspective, providing decision makers with plans that present both the financial and ESG impact is increasingly critical. And crucially, these plans need to be aligned with both the long term strategy of the business as well as what is operationally viable in the shorter-term. It’s a complex, but important puzzle to solve!

Why Should Finance Have a Seat at the Table?

What is hopefully becoming clear, is that this type of planning approach is organisation-wide. For it to work effectively, you need to have collaboration between departments in the business. Siloed planning for finance, operations and ESG creates walls to effective decision making. If those walls exist, they need to be knocked down. Finance needs to be invited to this party.

And ultimately, for the business to succeed in achieving ESG strategies the long-run, it needs to be financially sustainable. So finance play a key role in supporting the execution of ESG strategies in almost every business.

And beyond the focus on the pure numbers, let’s not ignore the additional strengths that finance bring to the party. In many companies, some of the most knowledgeable and skilled modelling and data staff sit within finance. Effective Financial Planning & Analysis (FP&A) teams have a view across the whole organisation that many others outside of the Boardroom do not. They can be a huge support to those around the entire organisation.

And this is playing out in more and more companies. The Financial Times recently reported that a growing number of large companies are shipping financial teams in to support with ever-increasing ESG reporting efforts as a result of this expertise and experience. So the journey is already under way for some!

Integrated Driver-Based Planning Should Drive Activity in the Boardroom

We are discussing here how driver-based planning can drive integrated decision-making that captures both finance and ESG considerations. These have an impact on a strategic level. So this capability is something that can really equip Management Teams to make effective and rounded decision making.

If you read company results announcements, it feels like many companies are presenting plans about their financial success as well as their success in various ESG initiatives. And maybe some are doing this effectively. But I wonder how many can truly say they understand the impact of their key decisions on both a financial and sustainability perspective?

Scenario Planning is a Key Enabler to Effective Integrated Decision Making

Building your numbers is one thing. But how you work with them and apply them in decision making is another.

And a forecast ultimately is an estimate made at a point in time. Things change quickly. But just because plans might not play out in reality, doesn’t mean they aren’t important.

But you need to use your forecasts to drive effective decision-making. And this is where scenario planning comes into play. Companies that leverage effective scenario planning are giving themselves a significant advantage to weather these times of uncertainty.

‘What is the impact on the bottom line and our carbon footprint if we switch from plastic packaging to paper packaging?’
‘What is the impact on the bottom line and our carbon footprint if we start shipping goods to our warehouses by electric vs carbon-fuelled methods of transportation?’
‘What is the long-term impact to our revenue if we aren’t seen to be adopting environmentally friendly packaging?’
And importantly – ‘How do these all align to our long term financial and ESG goals?’

If your forecasts have been built effectively with the right drivers, your ability to answer these types of questions is completely transformed. No more scrambling around to ‘make numbers work’. Your are enabling connected and integrated decision making on a strategic level. Pretty exciting stuff if you ask me!

Don’t Forget…Technology is Your Friend

There’s no doubt that the prospect of doing this is a little daunting. And doing it in legacy tools is likely even more daunting, other than maybe to the few true experts out there.

And this approach to planning is a fantastic example of Connected Planning in action. Tools out there are designed to handle this effectively, and truly arm businesses with the capabilities to bring this to life. And the exciting part is, that the technology only gets better and better, so the hurdles to adoption should only get less and less.

Concluding Thoughts

Done well, driver-based planning can truly empower organizations to align their financial and ESG goals, driving more integrated and sustainable decision making that increase the chance of executing on long-term strategies.

Businesses that do this successfully can more proactively manage ESG risks and opportunities within the constraints of a financially viable plan that spans short term and into the longer term.

But crucially, it is important to remember that this is a collaborative process, in which finance teams, especially FP&A, play a crucial role. However, without partnership of those in operations and ESG focused roles, this cannot succeed effectively.

If I was to leave one final thought, it would be to not underestimate the value of just getting started. Whilst integrated driver-based planning might seem daunting, taking baby steps can start to make it feel tangible.

And then when it feels more tangible, it starts to feel more achievable.

And then when it feels more achievable, who knows what could be possible!

For further information, including best practice tips, download our ESG best practice guide here

By Iain Main

Iain has been working at Bedford since 2021, and partners with customers around Europe to help them get the most out of Anaplan by utilising it in new ways across their organisations. He has also implemented Anaplan with a number of customers.

Prior to joining Bedford, Iain worked in various roles across finance in both large multinationals as well as start-ups and is passionate about the role that finance teams can play in driving organisational performance.