10 May 2023
CFOs and finance specialists must recognize their critical role in setting their company on a clear path to net zero.
The pressure for corporations, financial institutions and investors to decarbonize their operations and portfolios is on the rise. And it’s not hard to see why. With extreme temperatures, unprecedented biodiversity loss, and irreversible ice melt, the need for climate action is urgent.
Fortunately, more and more companies are recognizing the benefits of decarbonization. At the end of 2021, over 2,200 companies – a third of the global economy’s market capitalization – were working with the Science-based Targets initiative (SBTi), a global standard for corporate net-zero target setting in line with limiting global warming to 1.5°C.
But moving from commitments to action requires a concerted effort across all levels of a company, from executives to department heads and teams. That includes CFOs and finance specialists, who must recognize their critical role in setting their company on a clear path to net zero. Lia Nicholson, Head of Sustainability, Terrascope, provides three key reasons why the future-ready CFO must also be a decarbonization leader.
Regulations Are Imminent – And Meeting Them Doesn’t Happen Overnight
With the increasing regulatory focus on reducing greenhouse gas emissions, decarbonization is slated to become a crucial aspect of financial planning and strategy. When it comes to regulations, it’s no longer a matter of ‘if’ but ‘when’.
Large economies such as the US and UK are rapidly moving towards making disclosure of GHG emissions and climate transition plans mandatory, while impending ESG disclosure laws in the EU are slated to shape international supply chains in Asia. Stakeholders in Asia Pacific are also starting to follow suit.
Meeting these climate disclosure regulations is not an overnight process. Instead, it requires a deep and sustained commitment to emissions data collection, analysis, and reporting. Finance professionals must start now to ensure compliance with these regulations when they become official and avoid financial penalties.
Carbon Will Impact Your Bottom Line
While a decarbonization roadmap may be “nice to have” for now, accounting in tons of carbon dioxide equivalent will become a key component of a company’s Profit & Loss statement. As of today, 47 countries have carbon pricing initiatives, with the EU expanding its reach globally through a carbon tax adjustment at its border. The trend is catching up in Asia too: China’s emissions trading scheme – already the world’s largest carbon market, and three times bigger than the European Union’s — is expected to grow by 70 percent in the near future. Meanwhile, Singapore has a progressive carbon tax that will increase fivefold in 2024, from SGD 5 to 25 per ton.
Carbon pricing initiatives can have a significant impact on a company’s bottom line, increasing the cost of energy and transportation – which can affect supply chains, production processes, and ultimately, profits. By pushing their companies to gain a clear and actionable understanding of their carbon footprint now, CFOs and finance specialists can proactively develop strategies to reduce and manage the financial impact of these initiatives.
Decarbonization Will Boost Your Financial Sustainability
As a finance professional, understanding the link between your company’s approach to carbon emissions and its financial sustainability is crucial. Companies that prioritize decarbonization and demonstrate strong ESG performance are more likely to attract competitive capital in the long-term, enhance their reputation, and improve their overall value. Conversely, those failing to do so are likely to experience capital that factors in high transition risk, ultimately harming their financial sustainability.
For example, AXA IM, the asset management arm of French multinational insurance company AXA, has developed a “three strikes and you’re out” escalation approach for portfolio companies. If the latter do not show substantial progress towards net zero emissions within three years, AXA plans to divest from them by 2025. This move will enable AXA to reallocate capital from so-called climate laggards to generate green revenue from climate transition leaders.
Financial institutions are using climate disclosures to drive decision-making – and where companies don’t disclose, ratings agencies fill the data gaps. Similarly, consumers are increasingly demanding that companies demonstrate their commitment to sustainability, backed up by verifiable evidence.
How Technology Can Help You Get Ahead
Recognizing the importance of emissions reductions in future-proofing your business is a crucial first step. But setting ambitious decarbonization and net zero targets is just the beginning. How can finance professionals help their companies make tangible progress towards achieving these goals?
Many businesses struggle to translate their disclosures into practical steps toward decarbonization. According to the EY Global Climate Risk Barometer, less than a third (29%) of companies worldwide surveyed report on the impact of climate change in their financial statements. This lack of underlying emissions and financial data presents a significant challenge.
The good news is that the market is adapting to this challenge. A new generation of decarbonization SaaS technology is emerging that makes it possible to measure carbon emissions across the entire value chain, even for large multinational companies with complex global supply chains. With the ability to iteratively process and manage large volumes of data, such technology is uniquely positioned to make decarbonization data actionable.
A prime example of this is Terrascope, which leverages data science and machine learning to provide companies with a comprehensive and dynamic overview of their carbon footprint, emissions hotspots, and the steps necessary to achieve a 1.5°C pathway. Such technology enables company leaders and teams – including CFOs and finance specialists – to gain a deep understanding of their company’s carbon emissions and their role in helping to reduce them. By collaborating with Terrascope, teams at multinational corporations have been able to harness emissions data and analytics to make informed procurement decisions, build operational resilience, and optimise supply chains.
Future-Proofing Your Business With Decarbonization and Technology
In conclusion, decarbonization isn’t just about ensuring a more livable future for all, it’s also about future-proofing your business. The future-ready CFO understands the urgency of decarbonization, uses their leadership position to drive change, and harnesses technology to drive progress.
Achieving net zero is a complex journey which involves reducing data uncertainty and reducing emissions. Technology offers a solution to both challenges. By integrating carbon data and insights into their company’s annual planning and corporate strategies, finance professionals can transform regulatory burdens and stakeholder demands into a catalyst for innovation, financial resilience, and green growth.
