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A CFO’s Role in Climate Change Mitigation

CFOs and climate change: what’s the connection? Other than perhaps taking public transportation to work, what else can a CFO do more than any other average person? The answer is quite a lot.

There are 4 main reasons why climate change is important for CFOs and how it plays a role in their job description:

  1. A CFO is in a position of leadership and has a lot of influence on the company’s policies.

  2. Climate change adds another layer of volatility and uncertainty to the already shaky market.

  3. Changing laws and regulations are another reason why climate change influences CFOs and their jobs, as governments are trying to adapt with new taxes and regulations.

  4. Many investors and stakeholders are attempting to hold companies to a certain standard of emissions and mitigation efforts, or a future commitment to one.

Expanding on the challenges and what can be done:

1. A CFO is in a position of leadership and has a lot of influence on the company’s policies.

Climate change is everyone's issue to deal with, and being in a leadership role gives a CFO more responsibility than the average person. Whether it’s pushing for higher standards due to ideological reasons or in order to give the company a better name, the CFO has the ability to provide the leadership and data to make it happen.

What effect does this have on the CFO?

CFOs can be the bridge between executives and the finance team in many different ways. Implementing policies and forward thinking takes on the leadership side, and a common problem is the company executives having too much on their plate. Environmental standards may seem like a non-urgent issue if laws haven’t been passed yet, but the CFO needs to be the reminder that these issues are imminent for budgeting, forecasting, and the overall long term vision of the company.

2. Climate change adds another layer of volatility and uncertainty to the already shaky market.

In 2019, in the US alone, there were 14 separate climate occurrences which caused more than $1 billion of damage. This has implications for all businesses, as these types of natural disasters have a domino effect on the supply chain depending on which areas and industries were affected. CDP Global reported in 2020 that some of the world’s biggest companies have valued their business' climate risks at almost $1 trillion, with around $500 billion of costs rated as “likely”, to “almost certain”.

As an effect of climate change, mass migrations are a very real factor as well. While it might not apply to every organization, a global disaster followed by mass migration has the very real ripple effect that can be felt across every industry. These risk assessments are no longer pushed to the back burner of what-if scenarios, but rather companies are treating these scenarios as an important aspect of forecasting.

What effect does this have on the CFO?

  • This particularly affects budgeting and forecasting, and makes financial planning that much more difficult. Natural weather changes are sporadic, last for a vast range of time, and are known to affect areas that used to be considered non-risk factors. The February, 2021 Texas Freeze affected many manufacturing industries, and different types of chemical plants in particular. Industries such as car manufacturers, construction materials, and plastic factories were missing key elements of their product and the ripple effect of country wide shortages was felt for months afterwards.

  • Mass migration might not apply to every sector, but those who deal in everyday goods and services or similar roles, will definitely need to keep the challenges of mass migrations in mind when thinking about climate change.

  • While financial teams can’t predict every individual scenario, preparing for shortages is an aspect of forecasting that simply can’t be ignored. Forecasting models and what-if scenarios work better in rolling forecasts, but even a yearly budget model needs to implement this. The best answer to this additional workload is adopting FP&A solutions that automate previous data and make it easier to forecast and create complete “what-if” scenarios. It’s a CFO’s job to drive home the importance and action plan for these scenarios.

3. Changing laws and regulations are another reason why climate change influences CFOs and their jobs, as governments are trying to adapt with new taxes and regulations.

The worldwide goal of net zero carbon emissions by 2050 will change the way many businesses operate, and have repercussions on company taxes as well. Fines for not complying, losing licenses for not implementing the regulations, and higher taxes to cover the expense of the carbon revolution are all very real business factors that will occur sooner rather than later. A large percentage of the $1 trillion dollar value that businesses expect to spend on climate factors will simply go to keeping up with the times. Higher operating costs linked to legal and policy changes can rack up quite a bill, as many companies are forced to do a complete overhaul on the way they operate.

What effect does this have on the CFO?

  • To begin with, CFOs need to be aware and make sure that the company is knowledgeable. A big concern is that redirecting funds for policy changes might put a stop to other investments or areas that the organization wanted to use the funds for. Therefore, making sure that everyone is aware that this is a real possibility far ahead of time is the first step.

  • Secondly, implementing the effects of climate change regulation into the long term plan will help the company be as prepared as possible for the future. Depending on the focus of the company, these regulations will have an effect on how the organization operates at some point in the future. For some, it might be imminent, while for others it may be 5 or 10 years down the road, but one thing is certain: Based on the 2050 net zero carbon emissions goal, every organization will have to make financial changes one way or another.

  • Lastly, is the way CFOs actually prepare financial reports. Climate change repercussions are no longer just a matter of forecasting and budgeting privately for the company, rather there is immense pressure from governments and NGOs alike to disclose financial information that pertains to climate change. The Task Force on Climate-related Financial Disclosures (TCFD), and the Sustainability Accounting Standards Board (SASB) have developed platforms for climate related disclosures and sustainability accounting standards that have a high probability of being used by public organizations, and later on being integrated into private ones as well. Value Balancing Alliance, which is backed by the OECD, is developing a global standard for evaluing environmental factors of corporate value chains. The widespread support from private and public organizations makes it highly probable that these platforms will form the basis of forthcoming regulations of corporate accounting in regards to climate change issues.

4. Many investors and stakeholders are attempting to hold companies to a certain standard of emissions and mitigation, or a commitment to one.

Not only do CFOs need to be aware of regulations required by law, but companies need to recognize the influence of private standards as well. Many investment firms and shareholders want to see the data on what the organization is doing in regards to climate change before they start investing in it. Whether it be due to forward thinking (if the company has no long term plan then they might fall behind the regulations later on), ideological reasons, or standards that they committed to, many investment companies need to see a concrete financial plan of action.

As an example, Larry Fink, the CEO of Black Rock, the world’s largest investment firm, wrote a letter to his regional CEOs declaring that "climate change has become a defining factor in companies’ "long-term prospects" and promised “to place sustainability at the center of our investment approach". Other shareholders are coming together to vote against board members who are falling behind in environmental standards in order to put pressure on them to change.

But it doesn’t end there. Even regular citizens now have access to many companies' environmental data thanks to pressure from NGOs. A significant number of consumers take this into consideration before purchasing a product.

What effect does this have on the CFO?

  • From an investment standpoint, finance leaders cannot afford to stay up to speed on regulations only from their respective countries. Investors and shareholders are now taking an ideological and numbers approach, in which finances have become more complicated than the old school definition of “whether the law is simply being obeyed or not”. This makes it more difficult for CFOs as they need to learn global standards, in addition to local ones, as well as doing their homework on what investment firms expect. This needs to be done far in advance of the company approaching them.

  • The pressure is not felt evenly throughout the world, as North America lags pretty far behind Europe in terms of investors demanding certain standards. 52% of European CFOs reported moderate pressure from investors and shareholders, while only 37% of North American CFOs said the same. In regards to citizen pressure, the difference is even bigger, as 67% of CFOs in Europe felt pressure for standards from customers, compared to 43% in North America.

  • Although CFOs in North America may have slightly less of an issue with this than their European counterparts, experts believe that the gap will shrink sooner rather than later. With many companies manufacturing, selling, or providing services in different countries, the CFO can’t afford to go with lower climate standards than the strictest country that is served, at least not without financial consequences. “The company is only as strong as its weakest link”, and in this case the weakest link is the country with the highest environmental standards. In addition, environmental standards are becoming more and more standardized globally as countries, NGOs, and international businesses join forces from across the world.

  • Lastly, it’s simply more professional to have a climate change mitigation plan when approaching investors. It shows professionality, thoroughness, and long term thinking, and will only benefit the company’s image, even if an investor doesn’t yet have a specific rubric. It’s a shame to have a successful business platform not get the support it needs, based on “minor” factors such as emissions or environmental commitment standards.


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