In recent months, regulators around the world have started to include carbon disclosure requirements in company’s annual financial reporting frameworks.
Regulation seems to be one of the only effective ways to force the engagement of companies on Net Zero goals. Including carbon disclosure in annual financial reporting has made the CFO more involved in the carbon account aspect of the business. Every data point that goes into the annual report is the responsibility of the CFO - and that now includes carbon.
We see this change as highly positive and a critical step in the right direction to inject pace into what can only be described currently as a lethargic activity.
The CFO brings two things to the table which will help drive progress in the path to Net Zero.
The first is they will want to ensure the data is accurate before it is included and this will trigger a robust review of the data and greater transparency in the commentary that will be included in the data. What the company knows as fact will be clearly stated, as will their assumptions and working theories. For readers of the report, this should improve perspective and understanding of where the company is on their journey toward Net Zero.
The second thing the CFO brings to the table is much more impactful, and that is the ability to challenge the organisation on decisions it is making. The CFO is perfectly placed to be the agitator that is missing in all of these environmental discussions currently. They are increasingly seen as a strategic advisor to the CEO and the Boards of Directors and their opinions carry a lot of weight.
The future impact of Net Zero is very clear, whatever carbon is still being produced by 2050 will need netting out using carbon mitigating actions such as carbon credits.
It is these costs of carbon credits that the CFO is going to be very interested in and the question that they will always have in the back of their minds is are we buying too many credits and is the carbon we are producing avoidable, or controllable at a lower cost.
If a company is going to be dependant on carbon credits to achieve Net Zero, and lets face it, most companies will require some element of mitigation as achieving true carbon neutrality is going to be incredibly difficult, they expose themselves to ongoing cost risks.
The types of credit and their associated transparency is a whole different topic that we will cover separately but the cost of true carbon mitigating actions is going to be affected by the equilibrium of demand. Should this demand spike (lower availability or higher pure demand) then the cost is going increase.
Whilst most of the drivers of demand are outside of the CFO’s control, what they can control is ensuring the company is dependant on the lowest level possible of carbon credits whilst still delivering on their profitability and other financial targets. To be effective they have to be involved in the early stages of Net Zero design and to challenge decision made to ensure the outcome is the most rounded outcome possible.
It is likely that the CFO is going to push back on taking on another task. They will feel that their agenda is full already and they will see Net Zero as possibly one of the most complicated activities in modern corporate history - and they would be right - migrating to Net Zero is possibly the biggest challenge any corporate has faced so far.
That said, direction is easier to control before it is set and given the information will appear in the financial statements, the CFO must be involved.
The easiest way of integrating this is the CFO takes ownership of the existing sustainability teams and its resources. This may not be a popular change, especially within the existing sustainability teams - and why? largely because reporting into the CFO will give a lot more structure and will start to inject pace and focus into focussed deliverables.
As previously seen in other areas of company strategy, shadow accounting should be an effective tool the CFO can impose across all departments within the organisation.
For Net Zero, the target should be a ‘Carbon Tax’ that in the first instance simulates the potential profitability impact that purchasing carbon credits could have on a department. This is not something that can be implemented until the current carbon impact can be modelled and baselined.
The first phase of implementation could be to implement a certain level of tax if the department doesn’t hit carbon reduction targets. As we get closer to 2030 and eventually 2050, these taxes can represent true cost of carbon mitigant actions.
It is only when these costs start hitting other departments key performance indicators that systemic changes start to embed themselves in everyday thinking.
Once this has happened, change becomes much easier as everyone is motivated around the same set of core objectives.