ARTWORK: Thomas Jackson, Kool-Aid no. 1, Muir Beach, California, 2018. Courtesy of Ellen Miller Gallery.
If your chief financial officer is the last person you would think of to take charge on climate change, think again. Today, smart organizations are shifting their sustainability responsibilities toward the finance function.
There are several reasons for this change. First is the basic math, which falls largely within a CFO’s purview. Mitigating and adapting to climate change will require close to $1 trillion in investments per year through 2030 for the economy as a whole, and is also expected to put at risk between $4.2 trillion and $43 trillion of tradable stock exchange assets by the end of the century, depending on the level of planetary warming. (The latter number is for a world that has warmed by 6 degrees Celsius.)
Second, cutting greenhouse gas (GHG) emissions leads to cost savings. If you cut emissions, you cut energy, which is a massive organizational cost — something CFOs pay close attention to. Third, because investors are pushing to make climate-safe investments, they want climate risks to be integrated within corporate financial disclosures. Finally, the business opportunities for climate change solutions are blooming. According to Chartered Professional Accountants of Canada, “As creators, enablers, preservers and reporters of sustainable value, accountants can make their organizations’ adaptation efforts more effective.” Taken together, these shifts are leading finance teams to include what were formerly called “nonfinancials” in their daily jobs.
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CFO leadership on climate change is starting to pay off. For example, Adnams, a British brewery, recently saw an increase in the base cost of beer because hot summers were affecting barley production. To solve the problem, the CFO was able to offset these higher costs by looking at energy and water savings. The CFO of Mars, Claus Aagaard, has talked about how the company’s sustainability plan allowed it to capitalize on cost savings within two years.
Through our research, our corporate experience at Danone, and our work with the UN Global Compact, we have determined four key ways in which sustainability is being centralized in the finance function — ways every corporate leader should be aware of.
Financial Tools Are Becoming More Green
Increasingly, we’ve seen finance teams greening more of their tools. What does this look like? Companies such as SSE or the Coca-Cola Hellenic Bottling Company, for example, have implemented “green CAPEX [capital expenditure]” systems. These structures, which involve small changes in investment decisions (like including an internal price on carbon emissions or loosening the payback period for investment decisions), have allowed climate change–friendly investments to take place on a larger scale.
Even more significant, Microsoft now has an internal carbon market co-designed by the finance and sustainability teams. Thanks to a carbon fee paid by subsidiaries based on the level of their GHG emissions — incentivizing them to cut their emissions — Microsoft has a carbon fund that fuels climate change–related investments, allowing more significant and global investments to be made. On January 16, 2020, Microsoft made a historic announcement, backed by its CFO, to become carbon negative by 2030 and remove their historical carbon emissions by 2050.
In fact, more than 600 organizations say they now use carbon pricing, for a number of different reasons, among them to inform procurement and R&D decisions, help suppliers transition to a low-carbon world, pay bonuses, or help with long-term investments. In another change, Danone has started rewarding strong group performance by connecting incentives to climate change performance based on annual CDP scores.
Finally, following the integration of climate change within management control systems, corporations have started to measure GHG emissions like they measure their financials. Oracle has used what it calls “environmental accounting and reporting” to capture and transform GHG emissions from the company’s portfolio of 600 buildings across more than 70 countries. This has led to significant cost savings, because accurate data is being collected quickly. Even the small French company Saveurs et Vie, which produces food baskets for the elderly, has asked its enterprise resource planning system provider to allow it to automate carbon footprinting.
Finance Teams, Collaborations, and Roles Are Evolving
Changes in finance and accounting departments are increasingly visible within not only the tools but also the teams. Ørsted, a wind-power company based in Denmark, has a full-time environmental, social, and governance (ESG) accounting team made up of four employees. The UK-based energy provider SSE has a full-time sustainability accountant in-house. Since 2013, Unilever has had a finance director for sustainability, who is in charge of developing an understanding of sustainability in finance, integrating sustainability into finance reporting, and developing best practices.
These company-specific examples are giving way to larger collaborations, too. The CFO Leadership Network, created in 2010 by Accounting for Sustainability in the UK, recently developed two Canadian and U.S. charters.
Some are rethinking the traditional CFO role altogether. In 2018, the Institute of Management Accountants published the first study on the emergence of sustainability CFOs (coauthored by one of us, Delphine), demonstrating the need for specific hybridized competencies between finance and sustainability to answer today’s challenges. This research uncovered new competencies these leaders need to have, including developing natural capital profit and loss accounts, identifying the cost of key externalities, and understanding the value created through intangibles. Going further, Mervyn King (who is credited with the birth of “integrated reporting” in South Africa) developed the concept of a chief value officer in a 2016 book. And in North America, Manulife brought on a sustainability accounting director as a new kind of role.
Rules and Regulations Are Changing Rapidly
Your CFO will also need to adapt to shifting financial accounting rules that address climate change–related risks and opportunities. The biggest changes stem from December 2015, when the Financial Stability Board, an international body that monitors and makes recommendations about the global financial system, established the Task Force on Climate-related Financial Disclosures (TCFD) “to develop a set of voluntary, consistent disclosure recommendations for use by companies in providing information to investors, lenders and insurance underwriters about their climate-related financial risks.” The new TCFD recommendations were released in June 2017 and included the suggestion that climate-related financial disclosures be made within mainstream annual financial filings and under governance processes similar to those for public disclosures.
What does this mean in practice? For one, all disclosures, including climate-related risks, climate metrics, and targets, should be reviewed by a company’s CFO, audit committee, or both. Companies also should face the future risks of their business models through scenario analysis.
In November 2019, the International Accounting Standards Board (IASB), whose mission is to develop accounting standards for financial markets around the world, published the report “IFRS Standards and Climate-Related Disclosures,” which recommended that companies address material environmental and societal issues and, more specifically, issues driven by investor pressure to disclose climate-related risks. (This was especially significant because the IASB usually does not mention climate change in accounting standards or briefings.) We expect recommendations like those from the TCFD and the IASB to continue.
The Financial Markets Increasingly Require a Focus on Climate
The financial markets are driving CFOs to look seriously at climate change. For example, the investor initiative Climate Action 100+, representing more than 370 investors with over $35 trillion in assets collectively, is urging 100 systemically important emitters to curb emissions, improve governance, and strengthen climate-related financial disclosures. Other initiatives, such as the climate benchmarks published by the European Union or the UN’s Net Zero Asset Owner Alliance, are shifting the investment world into climate-ready financing. And in his annual letter to CEOs, BlackRock’s Larry Fink emphasized that “the evidence on climate risk is compelling investors to reassess core assumptions about modern finance.” Ultimately, Fink concluded that “climate risk is investment risk” and is alerting clients that BlackRock is centering its investment approach around sustainability.
Another reason for CFOs to take climate seriously comes from investors’ appetite for green bonds — bonds that enable capital raising and investment for new and existing projects with environmental benefits. In 2019, new issuances on the green bond market reached around $250 billion overall, channeling more and more investments toward fighting climate change. Within this market, certified climate bonds, which are verified according to the type of physical asset or infrastructure they fund, allow companies to precisely align themselves with the 2015 Paris Agreement because they are consistent with its warming limit of 2 degrees Celsius. In addition to enabling the financing of environmental projects, these instruments may even represent an advantage in terms of cost of capital, since external financing can, in some cases, become indexed on ESG performance.
When Peter Bakker from the World Business Council for Sustainable Development said in 2012 that “accountants would save the planet,” he was not far from the truth. Today, accountants are increasingly prioritizing climate change inside their organizations and beyond. Your CFO should be the next leader to follow.The Big Idea
About the authors: Laura Palmeiro is the senior adviser to the United Nations Global Compact. She has extensive experience in finance, controlling, and sustainability at PwC and Danone. She holds an MBA from IAE Argentina. Delphine Gibassier is an associate professor of accounting for sustainable development at Audencia Business School, with 18 years of experience in financial and nonfinancial accounting. She holds a PhD from HEC Paris.
