Bridging Finance and Sustainability: HEINEKEN’S Blueprint

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Kathryn McLeod [00:00:00]:
Make friends with finance, you know, so reach out to them and potentially try and identify if there are one or two people, ideally of a reasonable level of seniority, who are actually interested in the agenda, then they can be your champions within the function. I think that's definitely true. Understanding the governance cycle, as I said before, so both in terms of budgeting and forecasting, as we talked about, but also the month end cycle and what is the monthly management reporting. Are there any sustainability KPIs in there already? Should there be? Perhaps. And then taking time to spend time with the finance team and upskill them a bit and really emphasise the important role that finance can play.

Saif Hameed [00:00:57]:
I'm super excited to be joined by Kathryn McLeod from Heineken, who's head of ESG reporting. There are a number of reasons why I think this is going to be a really exciting episode. In particular because Katherine is right there in the middle of the finance and ESG Venn diagram. Sustainability teams are usually in the position of having to have budgets signed off from Finance, have their interventions approved by Finance and have this kind of ongoing exchange between them and finance to make sure finance is on board. There are many sustainability strategies that have died a lonely death because they've been killed by CFOs at the same time. I think we can all agree that finance has had to ramp up on ESG and sustainability over the last few years in particular because many organisations have recognised that sustainability reporting follows a very similar trajectory and journey to financial reporting in many ways. Just to kick us off, Katherine, your background is unique, it's impressive, bridging finance and sustainability. And in a company that is as exciting and as forward leaning as Heineken, could you tell us a little bit about how your experience and the unique flavour of the Heineken company have shaped your approach to your role and your priorities?

Kathryn McLeod [00:02:17]:
Thanks for that introduction and thank you very much for having me today. Yeah. I've been with Heineken for about 16 years and I've been finance business partner for a number of different areas of the business. I did a long period in supply chain. I also worked in commercial roles and I did a year with our pub company. And I've always been very passionate about sustainability and our sustainability agenda. And in 2020, Heineken supported me to do, to sort of take six months back, six months step back from my day job and to do the Cambridge Sustainability Management course and also to work closely with the sustainability team at the time. Understand a bit more about our reporting and I also did a deep dive into our carbon footprint to sort of try and get under the skin a bit more of those numbers.

Kathryn McLeod [00:03:13]:
I started my current role, which is head of ESG reporting, as you said, in January last year. So about 12 months ago, the role was created because of three specific bits of sustainability reporting that we were going to be required to comply with. So CSRD Corporate Sustainability Reporting Directive, which is European legislation that Heineken has to comply with. And although that was being coordinated globally and it'll be reported in our Heineken NV Annual Report, they felt that there was a need for there to be some local coordination by finance to make sure that the functions who were owning the different KPIs really understood the importance, make sure we deployed controls as well around those new KPIs. So there was an ask to make sure that there was sort of dedicated finance resource to support that rollout under the Companies act. We also, in our UK strategy accounts, had to do climate risk reporting for the first time last year. And finally, packaging legislation is a big one for a company like Heineken. So extended producer responsibility is the sort of umbrella term which, you know, really the onus of that legislation is to put the responsibility for packaging that you put onto the market onto the producer.

Kathryn McLeod [00:04:34]:
So, so there were three big chunky topics and therefore we felt there was a need to have a dedicated sort of finance resource within the uk. So that was what was the background to my role.

Saif Hameed [00:04:45]:
I'd love to dive a little deeper into improving collaboration between the two functions or the two teams. And maybe I'd like to start with internal setup around the governance structures, the operating models, how you enable effective collaboration and particularly in data gathering and collection and reporting. But if you're able to touch on maybe just also budget setting and just how you manage the, how you're involved in that collaboration interface and how you see effectiveness in governance terms when it comes to having interaction between sustainability and ESG and finance. Like, could you give us a bit of, a bit of perspective there?

Kathryn McLeod [00:05:26]:
Of course. I mean, I think we know sustainability is a very broad topic and can be pretty complex at times, so it does require a lot of cross functional collaboration. Brew A Better World is Heineken's sustainability strategy and it has three pillars, environmental, social and responsibility. And underneath those three pillars there's nine global ambitions. And we've created a sort of framework or a governance model now that tries to set out how we should organise ourselves to allow us to make progress towards those ambitions. So the strategy is governed and orchestrated. We would Say by corporate affairs, so by our head of sustainability roles within the individual markets and by a central corporate affairs team. And the functions are primarily responsible for delivery.

Kathryn McLeod [00:06:22]:
So if we think about supply chain as a function, you know, they would be responsible for and they would lead on delivery of reduction of scope one and two emissions. You know, for example, finance within that structure sits as an enabler because, you know, as you said, like we play a really key role in signing off business cases and signing off budgets. And you actually need to have finance actively involved. And I think particularly with csrd, the role that finance has started playing in relation to the reporting around sustainability has definitely grown. You know, it's really important. Everyone's playing to their strengths, you're working towards a common goal, but having a framework and setting out who needs to do what is really helpful so that you've got those roles and responsibilities that are clear. I think in terms of budgets, I mean, I would say it's really important for sustainability teams to understand the finance governance cycle is what we would call it. So when is the budget done? Does the company just do an annual budget, is it a longer term budget, things like that.

Kathryn McLeod [00:07:26]:
And how often is it reforecast during the year? So we actually do an updated forecast every month. So understanding those things helps sustainability professionals know when to ask for money, know when they should be thinking longer term, when they need to be thinking a bit more tactically maybe.

Saif Hameed [00:07:44]:
Just also following on from that, Kathryn, one thing that we've heard works well is when sustainability teams are able to identify existing budget pools and ways in which those budget pools could be leveraged also for sustainability. So maybe there's for example a budget pool around optimising logistics or optimising packaging and you can actually say, well, hey, we can hit some sustainability KPIs with this as well. If it's just directed in a certain way. That seems to be a nice hack, that layout. Does that jive with your experience?

Kathryn McLeod [00:08:16]:
Yeah, I mean, I think again, the operating model that I talked about gives a bit of a guidance there. And as you say, it's important for sustainability teams to be clear on what should fit in their budget compared to what's actually the responsibility of other functions within the organisation. So for us, supply chain are the owners of net zero in scope one and two. So if that required capital investment, if it requires any P and L investment, that would all sit in the supply chain budget and would be part of the supply chain of strategy and they would very much own that. And the sort of orchestration role from corporate affairs would almost just be looking at the roadmaps, checking how that compares. Do we seem like we're on track and that sort of thing. But very much it's owned by supply chain to drive that. But I think again, it's a good example of why it's good to have finance engaged and involved in the sustainability agenda because, you know, most parts of the business will have a finance business partner of sorts and they naturally sit in the meetings where the decisions are made.

Kathryn McLeod [00:09:22]:
And if you can bring some of that wider team on board and upskill them a little bit when it comes to sustainability, that can just help with making sure the decision making is a bit more rounded and maybe questions and opportunities can be identified where there is a win win, whereas a small internal sustainability team, they can't be in every meeting and where every business decision is being made. So make of your finance team there, I would say.

Saif Hameed [00:09:48]:
And Kathryn, you mentioned that the supply chain team, for example, leans in on the Net zero strategy and implementation and we obviously see this repeated in many organisations. From a data perspective, I'm seeing two models play out. One is the model which says actually sustainability data is going to be owned by the sustainability team and many teams in many organisations have the sustainability function fully responsible for gathering that data, getting it together in one place, ensuring it's calculated, delivered output delivered, et cetera. Some other organisations are actually having finance lean on owning that and consolidating it with other CSRD data sets which might be social and otherwise. And obviously there are hybrids in between. I'd love your take on maybe this is not necessarily a Heineken internal view, but more just generally in the industry, what would you bet on? Would you bet on a hybrid or. Or one or the other being the dominant mode in a few years time?

Kathryn McLeod [00:10:47]:
Yeah, I think you end up probably in a hybrid. Certainly how we've approached it, when I think about csrd, is finance starting to leaning in a bit and starting to play a coordination role is absolutely not meant to take away the data ownership responsibility from the functions. So we have a tool that all of our production sites report data into every month and that's existed for a long time already. They know those KPIs, they're operational KPIs and it's all the things you would expect about maybe packaging, material losses and volumes and how much water they've used and all of these things. And we have been reporting those KPIs for a long time, but they're not just reported by the sites but they're also discussed in site meetings and action taken to try and improve those. So I definitely don't think finance should be stepping in and sort of saying, you know, actually we'll take all of that reporting because we're just not close enough to it and it should be owned by the function. So from an, from a UK perspective, you know, our role's been about just, you know, really making sure the data quality is right, doing some sort of sense cheques, really emphasising the importance of reporting on time and full data, you know, things like that. So trying to take steps to improve the data quality and make sure the right controls are in place, but not taking ownership away from the function.

Kathryn McLeod [00:12:10]:
Where I think finance will play a much bigger role is when it comes to taking all of those outputs from all of the sites around the world and then actually turning that into what gets disclosed in our annual report. And that's where finance will very much lead on that part. I think a hybrid can work. But yeah, this will be our first year of doing such extensive sustainability reporting for sure.

Saif Hameed [00:12:38]:
And Kathryn, this sort of collaboration heavy area brings us nicely to my next question, which is going to be around building strong partnerships and relationships internally between sustainability and finance. I'd love to get your almost your cheat sheet for sustainability teams in terms of what they should be doing to develop allies within finance, to share priorities, to coordinate on timing. What is the best way for a sustainability team to create that close knit collaboration that you seem to have with your sustainability counterparts?

Kathryn McLeod [00:13:15]:
I think I said this when I was at an Altruistiq event last year, but make friends with finance, reach out to them and potentially try and identify if there are one or two people, ideally of a reasonable level of seniority, who are actually interested in the agenda, then they can be your champions within the function. I think that's definitely true. Understanding the governance cycle, as I said before, so both in terms of budgeting and forecasting, as we talked about, but also the month end cycle and what is the monthly management reporting? Are there any sustainability KPIs in there already? Should there be? Perhaps. And then taking time to spend time with the finance team and upskill them a bit and really emphasise the important role that finance can play. Personally, I think it's really exciting that the finance role evolves a bit and this idea of a triple bottom line or we have in Heineken what we call the green diamond. So we used to have a triangle and we added an extra bit which was around sustainability and responsibility in addition to profitability growth and capital efficiency, you're more traditional metrics, but this idea of rounded decision making and more rounded view of business performance, and we talk about profitable and balanced growth, you know, Heineken is a growth company, but that growth needs to be balanced. And I think finance can play a huge role in that. And therefore, you know, the sustainability teams can lean into that and help to kind of inspire.

Kathryn McLeod [00:14:49]:
Because the other thing I always say is it's not. You don't need to become a sustainability expert sometimes it's just about asking the question, you know, so. So that there's a consideration there and there's some discussion. It's not that you need to have all the answers or know all the answers, it's just, you know, you're already there, you're already the business partner for that area. And if, you know, we're talking about a logistics tender, you know, it's not too much of a stretch to think, well, you know, have we asked this company about, or the companies about what their sustainability strategy is? Are we exploring any alternative fuels, things like that? Finance are in the room when those conversations are happening.

Saif Hameed [00:15:23]:
So I think, as with a lot of functions, I think a large share of sustainability is about first principles, what makes sense, what is logical. And let's go from there. When we talk about skill building, I'd love to dive a little into just your experience with upskilling finance teams on sustainability. And you mentioned, for example, the Cambridge Business Sustainability Management course. We know a lot of people who've been to that course and, and really appreciated it. In fact, I actually find that in the uk, maybe one in three of the sustainability leaders I know has been to one of those Cambridge courses, which is staggering and just a huge reflection of what they've managed to achieve in a new area in just a few years. But I'd love to get a sense of, like, you know, was that the main thing that you looked to upskill on sustainability? Are there other courses, other tools, approaches that would be helpful for finance teams?

Kathryn McLeod [00:16:19]:
I certainly got a lot out of the Business Sustainability Management course. I mean, it was eight weeks, very intense, but it gave me a really good grounding. I also still have a network, quite an extensive network, as a result of doing that course, which, again, I find really useful to, you know, bounce ideas off or ask questions or just, you know, use that group as a source of knowledge and inspiration. To be honest, in terms of, personally, some of the other resources I've used, I mean, the Ellen MacArthur foundation on Circularity, they have got a Lot of really great resources and I think I did an eight week course that they ran as well that was, that was completely free, all about different principles of the circular economy. And accounting for sustainability is also a really good resource for, specifically for finance people who are interested in sustainability. And it's got lots of great guidance on, you know, how to do a business case for sustainability investments and lots of other advice. Internally at Heineken we have some specific internally created Brew A Better World modules. The first one's a sort of general introduction to sustainability, but there's a finance specific one which is great and has an introduction from our cfo and that's really good because he also makes the point about this role that finance can play in driving sustainability and that, you know, some of, some of the hurdle rates we might think about for investments, we might need to think differently about it when it comes to sustainability because there are other benefits of these investments that are sometimes harder to, to quantify.

Kathryn McLeod [00:17:53]:
So that's, that's a really good basic module that people can do. Myself and my analyst in the team I work in now, we've done quite a lot this year or this year 2024, around upskilling the finance team. So we did a sort of weekly word of the week because there's a lot of jargon in sustainability and we just thought, you know, actually just one, you know, something to read. It's less than five minutes each week and actually for us it's given us the opportunity to. Sometimes we've come across terms that we don't know so well. So it gave us the opportunity to sort of dig in and learn a little bit. So we've done that all the year. I published a couple of newsletters internally just to explain a bit more about we're doing.

Kathryn McLeod [00:18:34]:
We've presented to the whole function a couple of times, but also sometimes it works better even in smaller groups because then if you're just with one team, you can make it more relevant to them and you get more of a discussion and an engagement. And we've also done a bit around personal sustainability because some people feel like, well, in, in my job I can't make a difference or, you know, it's not so relevant for me, but actually I do care about it. So then the question is, well, what can I do personally? So we've tried to do a little bit around, you know, if that's what you're interested in. Here's some, here's some thoughts and ideas sort of thing. So, yeah, quite a varied agenda but We've had some good feedback and one of our scores in our internal climate survey is around. Do you think Heineken is a responsible and sustainable company? And within finance, that score has moved forward quite a lot this year. So I think we've certainly brought it up on people's radar in terms of what Heineken's doing and hopefully also the role that finance can play.

Saif Hameed [00:19:31]:
What a wealth of resource. Katherine, thank you so much. I would love for us to have some of that in the show notes as well, so maybe Izzy can link up with you on any stuff that we should put there, because there's so much for other teams to pull from. I think I would love to move back to the budget topic, which is always a fun. Not so much a fun one, but always an important one for our listeners. And so if we move into all things budgets, let's start with budget setup. What should sustainability professionals be looking at when they're thinking about creating and securing and maximising the impact of the budget that they're setting up? We touched on this a little earlier in the episode, but I'd love to just come back to that and see what the tips and tricks are.

Kathryn McLeod [00:20:18]:
Yeah, I mean, I think so. Assuming they're really clear on the timescales that are being worked to and when the sort of annual budget and things is being done, then I think some of the things that they would need to think about are, is the money that they're asking for or the budget that they're setting, is it fully aligned to the strategy you shouldn't be putting in initiatives that nobody will have heard of or are recognised? Because that's the sort of thing that when it comes to reviewing the budget, if it's not already been quite well socialised and people are thinking, yep, yep, that's definitely something that's on my radar. It's an important thing to do. Then that's the sort of thing that might get cut when the budget's being reviewed. I think in house, teams are typically small, so I think you need to be quite ruthless about thinking, okay, what are we going to spend our time on? Where can we best use external support? Again, being really mindful that things like consultancy costs are quite often a line that finance would go to and sort of, oh, really, do we need those? Consultancy always feels very luxurious, so I think being able to defend and explain how you've made those decisions between what you're going to do in house and what you really do need that external support on, and also sometimes saying, no to things. So being able to prioritise and you know, it's a big agenda and people get excited about it and sometimes you'll be asked to spend a lot of time on something that maybe doesn't add the value. You would hope so. You know, really thinking about your own time as something which is not just available for free, I think is quite important.

Kathryn McLeod [00:21:50]:
And lean into your finance team, you know, use them to help you to estimate costs if you need it because that also just helps to educate them on, on the types of things that you're spending money on and the wider what the sustainability agenda is. The other thing I would say always when it comes to finance is we don't like surprises. Try and be known for. If you say you're going to spend money, then spend it, don't ask for more because otherwise if you keep asking for more and then not spending it, then you won't get it in future years. But just show that you're in control of the money that you have been allocated. I think is really important.

Saif Hameed [00:22:24]:
You know, Kathryn, at the complete other end of the spectrum towards irresponsibility, I started my career working in the government of Pakistan and they had a slight caricature of what you're describing where every department wanted to spend its budget by the end of the year so that they don't go back and have to get a reduced budget. So everyone would buy cars basically. So at the end of the year everyone would refresh all the employee vehicles with whatever budget was left, which was just a bit ludicrous. But on to surprises. I think the big surprise that everyone can agree is somewhat unwanted is last minute budget cuts. But at the same time budget cuts happen. We're in a volatile environment. Who knows what this year and next year is going to look like economically, globally.

Saif Hameed [00:23:16]:
I think we all need to be prepared to be agile when budget cuts come our way. So how should sustainability professionals approach cuts or mid year financial reviews when their projects are going to be impacted? What would you suggest they do to be agile in this environment?

Kathryn McLeod [00:23:34]:
So the first thing I would say is don't take it personally. If the business results are not where you'd hoped they would be, then all areas will be being asked for cuts. Certainly that's my experience. It shouldn't be the case that we've got a problem. Oh, actually we'll just cut the whole sustainability budget. So don't take it back to this point about making sure you're really in control of your costs. So if you know the business is a January to December financial year and you've spread your costs evenly over the four quarters, it's likely to be maybe round about the half year as you say that you might be getting into conversations about cuts. So be aware of that when you plan your budget and sort of will actually, if I had half my budget cut, make sure the things that are in the first half of the year are the things you really want to get over the line because if you've already spent the money, you can't have it cut.

Kathryn McLeod [00:24:29]:
Also, I guess be really mindful about and try and be on top of what commitments you've made when you're asked. It's also useful if you can be clear on well, this is money that's definitely committed. We can't back out of this. Compared to things which, okay, this is a choice, I'd really hope to do it in quarter four this year, but actually if it ends up being quarter one the following year, then that's okay sort of thing. So that would be some thoughts around that.

Saif Hameed [00:24:57]:
Super helpful. And Kathryn, I was going to ask you about building business cases and financial tools, resources and metrics that you found useful when helping your sustainability colleagues to build business cases for sustainability initiatives. I'd love to maybe just weave into that a flavour of how do you again be agile for when cuts are going to happen? How do you make sure that you can protect things where the ROI isn't immediately visible but you know needs to happen? Like what works from a business case development perspective?

Kathryn McLeod [00:25:32]:
I guess our starting point is the sort of fairly standard finance approach to business cases. So we would forecast what we think the cash flows are and then we'd calculate the net present value and payback of the project. We include a cost of carbon for sustainability projects. For most of our big production sites, that's a real cost of carbon because we're part of the UK Emissions Trading scheme. But sometimes that's a notional cost of carbon, but that helps to make clear the carbon benefit. But often those prices are actually not high enough to still make the business case what you would hope it to be. I think that I mentioned before this idea of understanding why your hurdle rate, if you're used to having a three or four year payback, you might be looking at a sustainability investment and the payback might be eight or 10 years and therefore actually the narrative that you so the ability to write down in clear language what are the reasons that you haven't been able to financialize but that still make this the right thing to do and it might be about what other options have you explored? And actually this might not seem like a great option, but it's the least of, you know, it's the best of the options that you had available. And these are the other things you explored and actually those were worse.

Kathryn McLeod [00:26:53]:
So I think being able to explain that and then just pulling in the fact that there's a lot of pressure on meeting the sustainability targets from customers, from consumers. So anything you can do to bring that to life, anything you can see that your competitors are doing, you know, we operate in a really competitive market and it's important to be sort of certainly not getting left behind when it comes to sustainability. So, yeah, there's the financial business case, but there's also the storytelling around it, I think is really, really important. The bit that's always hard is we tend to make an assumption if we think about a heat pump investment, we'll work out how much the heat pump costs, we'll work out what that will do to our energy costs going forward. But the comparison is almost a do nothing. And it's as if there's no downside not making this investment to decarbonize. And that's just because it's hard to quantify the do nothing. It's hard to sort of Quantify over the 15 year horizon what might be the downsides of specifically us not doing the investment.

Kathryn McLeod [00:27:58]:
You know, the impacts of climate change are going to be worse, but that's difficult.

Saif Hameed [00:28:03]:
But I think we've covered a lot of exciting ground in this episode so far. I wanted to bring us back to our sort of favourite closing question, which is our audience is typically sustainability professionals working in very similar businesses to yours, usually consumer packaged goods, food and beverage is a big area. We have some apparel and personal care as well. Could you maybe share some thoughts on what is the single most important piece of advice that you'd give to some of our listeners? Whether they're, let's say, a sustainability professional looking to collaborate with finance, or whether they're someone with similar responsibilities to. You would love to get just a few words of advice.

Kathryn McLeod [00:28:47]:
Thanks. I think in terms of sustainability teams collaborating with finance, I'd go back to what I said earlier. So make friends with the finance team, ideally find a couple of people who are passionate and use them as your way into the function. Highlight to them what an important role they can play and then help to upskill them so that they can play that role for you. That would definitely be my advice there. And in terms of someone with similar responsibilities to me, I think, you know, keep asking lots of questions. Be curious. It's changing fast, particularly sustainability reporting.

Kathryn McLeod [00:29:23]:
You know that this year will be another year when we find out what happens with sustainability standards, the international standards, and whether they'll be adopted in the uk. And what that means is constantly evolving agenda. So be curious and keep looking externally as well. Don't become inwardly focused and get too bogged down in the data because it's really important to sort of network and get out and listen to podcasts and go to events and sort of hear what others are doing and learn from and be inspired by them.

Saif Hameed [00:29:56]:
Katherine, thank you so much. What a wonderful deep dive into the sort of world of collaboration between finance and sustainability. I loved touching on, I think two big themes here, really. One around how do you set up that collaboration for success? We've talked about facilitating collaboration, finding friends, being agile in how you work together. We've talked about what we think the future of data gathering and reporting is going to look like and the hybrid scenarios that that might lead to. We've touched a bit around budgets, how to set them, how to think through them, how to be agile when they need to be cut, and obviously closed with some great advice for other professionals in this space. Really enjoyed having you with us on the show, Katherine. Would love to have you back at some point in the next couple of years and we can see how all this plays out.

Saif Hameed [00:30:46]:
But so far, thank you on behalf of me and all our listeners, thank you very much.

Kathryn McLeod [00:30:51]:
I really enjoyed it.

Saif Hameed [00:30:53]:
Thank you.

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