A CFO's Role in Driving Sustainability

Sustainability is no longer just about doing good - it has become an imperative for organizational success. With climate change accelerating, companies that fail to embed sustainability into their operations face major regulatory, reputational, and market risks.

As the stewards of organizational strategy and allocators of capital, CFOs have a crucial role to play in driving sustainability. As a start, these are some of the key questions that CFOs are asked during earnings calls nowadays:

• How are climate-related regulations impacting the economy?
• To what extent do ESG implications factor into decisions on greenfield investments or M&A?
• What is the company's strategy and timeline for achieving carbon neutrality?
• Will investing in sustainability have a positive impact on company valuation and stock price?
• What questions are investors, analysts, and banks asking about the company's climate and ESG strategies?

To answer those and more, it’s vital to have a clear understanding of the CFO’s role. So, what is the CFO's role in driving sustainability? Based off COP 21, here’s a 3-part overview of the key actions you can consider:

First, analyze your company’s environmental footprint across operations, supply chain and products. You must identify emission hotspots and reduction opportunities to inform target-setting. For example, you can conduct a greenhouse gas inventory so as to track and report it internally.

Second, incorporate sustainability into capital planning and investment decisions. You have to evaluate investments not just for profitability, but also for positive environmental impact. Prioritize projects that align with ESG goals. For instance, developing a mechanism to assess the sustainability impact of major capital expenditures and making sustainability a factor in decision-making. To do this, you can utilize the myriad of frameworks and standards there are to report on ESG.

Third, understand that companies which are ESG compliant are outperforming other companies which are not focused on ESG by up to 5%. Therefore, it will be in your interest to proactively engage stakeholders like investors, banks and regulators on your sustainability strategy and performance through ESG disclosures. This builds trust and transparency. In the long run, championing sustainability also attracts talent and partners. 

With that in mind, let’s dive deeper into more specific roles you can play to drive sustainability.

1. Compliance

First and foremost, CFOs play a critical role in ensuring compliance with the various climate-related regulations and laws implemented by different governments. For example, Singapore has mandated TCFD (Task Force on Climate-related Financial Disclosures) reporting for companies in certain sectors, including agriculture.

Under TCFD, companies must report on four pillars: governance, strategy, risk management, and metrics & targets. 

1. For governance, companies must explain the board's oversight of climate-related risks and opportunities.

2. For strategy, companies must outline how they are addressing climate-related risks and opportunities over the short, medium, and long-term, and how climate change impacts their business strategy and financial planning.

3. For risk management, companies must detail their processes for identifying, assessing, and managing climate-related risks.

4. Finally, for metrics & targets, companies must disclose greenhouse gas emissions and set emissions reduction targets. Emissions are categorized as Scope 1 (direct), Scope 2 (indirect from purchased energy), and Scope 3 (supply chain). In the case of Singapore, it requires disclosure and targets for Scope 1 and 2 emissions, and has already implemented carbon taxes.

For these four TCFD pillars, for instance, companies can start with qualitative write-ups in the first year. However, in the second year, they need to transition from qualitative to more quantitative reporting. For example, for the management role pillar, in year one a company can explain the management's responsibilities related to climate risks and opportunities.

But in year two, they should link management incentives to sustainability goals. By year three, companies should disclose management incentives related to climate issues in their annual report so that the market understands if management is being effective.

Similarly, for metrics and targets, a company can describe its overall emissions baseline initially. But by year two, it should conduct simulations showing how its business could be impacted under different climate scenarios and set related KPIs. By year three, companies need to report these quantitative metrics and targets in their annual reports and financial results.

Overall, while qualitative write-ups are acceptable initially, within a few years, companies need to be able to enhance their disclosures by including more quantitative details.

2. Carbon Accounting

The second critical role for CFOs is carbon accounting. As companies are required to measure and disclose their greenhouse gas emissions, finance must take the lead in quantifying emissions and getting them assured. This involves setting an emissions baseline by calculating the company's total emissions and splitting them into Scope 1, 2 and 3. While the company can self-report these emissions figures, you will also need independent validation to ensure accuracy and credibility. To do that, you can work with auditors or ratings agencies to get the company's greenhouse gas submissions externally verified. 

By taking responsibility for carbon accounting and driving assurance of emissions data, finance functions can enable their company to comply with disclosure requirements and provide trustworthy emissions metrics to stakeholders. Robust carbon accounting and assurance through finance is becoming an imperative as emissions reporting obligations increase worldwide.

3. Physical and Transition Risks Modeling

The third role for CFOs is conducting physical risk modeling as part of climate risk management. It is important to take a science-based approach by utilizing data, such as assessing the exposure of key company locations and facilities to adverse weather impacts like flooding or drought, which pose physical risks. Tools like S&P Global can model the potential business impact at each site through 2050. For locations facing material risk, finance can work with other teams to implement mitigation measures as well.

In addition to physical risks from weather, there are transition risks as governments impose taxes or regulations to meet emissions reduction targets. For example, Singapore has already implemented carbon taxes, and plans to increase them by 2026. If countries fall short of their net zero commitments, imposing carbon taxes on emitters is likely. As such, these companies need to prepare accordingly, or risk being uncompetitive.

As mentioned, CFOs also play a critical role in modeling transition risks. This can involve scenario analyses of profitability under different warming scenarios, and estimating future carbon taxes based on emissions pathways. Finance can then work with the respective business units on strategies to reduce supply chain emissions and guide greener investments.

Internally, finance can also implement shadow carbon pricing to prepare for future taxes. This involves notionally charging business units based on their emissions which will encourage reductions. Moreover, finance can assess climate-adjusted profitability, incentivizing low-carbon transition. Overall, finance can enable the business to manage climate risks through modeling, scenario planning, carbon pricing, and steering strategy and investments towards decarbonization.

4. Decarbonisation Planning

Speaking of decarbonisation, CFOs can collaborate with sustainability, ESG, business, and M&A teams to develop a decarbonization roadmap for the company. This involves analyzing the key drivers of emissions from energy use, land use, fertilizers, and other sources. Then, finance can work with business units to create a plan to reduce emissions and achieve net zero targets.

If some emissions remain even after reductions, carbon offsets through afforestation, reforestation or other nature-based solutions can help close the gap. As a last resort, carbon credits can be purchased to fully neutralize residual emissions. Ultimately, each company needs to create its own customized decarbonization strategy.

For any new investments or acquisitions, finance should ensure that there is an ESG due diligence checklist covering energy, water, waste and emissions. This prevents locking in high-emission assets. Finance can also work with banks providing sustainable financing at lower interest rates for companies that meet certain ESG criteria. By setting aggressive targets with banks upfront and then reporting on performance, finance can enable access to cheaper capital for sustainability investments.

5. Financial Reporting 

Lastly, CFOs also play a role in further climate-related compliance and reporting under accounting standards like IFRS. For assets at risk from physical climate impacts like drought or flooding, finance may need to conduct impairment assessments if their value declines. For credit exposures facing climate risks, expected credit losses may need to be recognized under IFRS 9.

CFOs can also take the lead on ESG reporting, such as under the SGX framework covering 15 material areas and 27 KPIs. Working with sustainability and business teams, finance can then drive comprehensive ESG disclosures.

Overall, climate change creates many opportunities for CFOs to step up across finance's four key roles - controls, performance management, strategy, and value creation. By spearheading compliance, accounting, risk management, decarbonization planning, sustainable finance, and ESG reporting, finance functions will be central to organizations successfully navigating the transition to a low-carbon economy. As a result, each finance professional can become a sustainability-driven finance professional.

1 Research Climate Regulations in Your Jurisdictions To Prepare Compliance Processes

CFOs play a critical role in ensuring compliance with climate regulations through robust disclosures like TCFD reporting. This involves both qualitative and quantitative emissions data, targets, and assurance.

2 Use Data and Tools To Assess Multifaceted Risks

CFOs should utilize tools like carbon accounting, physical and transition risk modeling to deeply understand and manage climate impacts. This data illuminates hidden risks and opportunities.

3 Build a Decarbonization Roadmap

CFOs must develop science-based decarbonization strategies, institute ESG checks for investments, and secure green financing. This enables the transition to net zero emissions