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PTHow Sustainability Directors and CFOs can partner to develop a plan on climate change
Effective planning to address the climate agenda increasingly depends on a solid partnership between sustainability directors and chief financial officers (CFOs). This alignment ensures that the technical aspects of sustainability are properly understood by the CFO, who will contribute a pragmatic approach to the organization’s resource use and optimization strategies.
With the release of the new IFRS S1 and S2 standards and the obligation of publicly traded companies listed on the New York Stock Exchange to publish their ESG reports as early as January 2024, several adaptations will be necessary, even for companies that have been doing their sustainability reporting for years.
This issue will even affect foreign companies that have ADRs on the American exchange. In other countries, it will be necessary to wait for local regulations, which will probably come in 2025.
IFRS S1 presents the general requirements for publishing financial information related to sustainability, for which one of the main points of attention is materiality, in the accounting sense of the term. IFRS S2 refers to the publication of financial information related to climate change, for which the main bottleneck for most companies is likely to be the estimation of the impact of physical and transition risks to climate change.
WayCarbon’s experience in consulting and software implementation over the past 16 years has shown that this inter-departmental collaboration can be achieved through the following actions:
Direct communication
Maintaining open and regular channels of communication between the sustainability director and the CFO is critical to this process. Discussions should be encouraged on issues related to climate change, including target-setting, mitigation projects, risks, opportunities, and the financial implications for the business. This communication needs to be two-way, allowing for the exchange of ideas and perspectives, and facilitating an understanding of management methodologies and tools, such as carbon pricing and their applicability to decision making.
Shared understanding
Ensure that both the sustainability director and the CFO share a common understanding of the organization’s sustainability goals, the challenges of climate change, and the opportunities. This includes the understanding that net zero targets are based on science and a shared global responsibility to which the company must contribute effectively, including in terms of financial resource management.
Within this integrated view, it is also good practice to map the financial impact of climate-related risks – for example, the exposure of assets to physical risks – and to identify opportunities – for example, where taxes in certain regions of the world benefit products made in other locations with a cleaner energy matrix. Understanding shared roles and responsibilities ensures that sustainability initiatives are integrated into the business strategy, covering not only operations but also the entire value chain – from suppliers to end consumers.
Alignment of data and metrics
Collaborate on the development of consistent data collection methodologies and metrics that capture both sustainability and financial performance. This enables progress against sustainability goals to be measured and communicated, and the financial impact of sustainability initiatives to be assessed. Climas, WayCarbon’s ESG and GHG management platform, facilitates the collaboration process by providing information on dashboards, organizing collaborative workflows and providing specific functionalities to manage tasks for continuous improvement. In turn, MOVE, WayCarbon’s climate risk platform, allows the estimation of climate risk impact, an essential topic for IFRS reporting. These tools enable the CFO and sustainability director to communicate and share knowledge, and their teams to collaborate effectively in monitoring socio-environmental indicators.
Financial analysis
Involve the CFO in financial analysis related to climate change and sustainability through the use of appropriate tools. These include the use of Marginal Abatement Cost Curves (MACC) to prioritize investments in projects that reduce greenhouse gas emissions, the use of a climate risk matrix to assess the financial impact of physical and transition risks, and internal carbon pricing to be used alongside traditional financial metrics in the investment decision-making process. The expertise of CFOs is valuable in ensuring that sustainability initiatives are aligned with financial objectives.
Reporting and disclosure of information
Governments around the world are implementing policies and regulations to address climate change, including carbon pricing mechanisms, emission reduction targets and reporting requirements. Compliance with these regulations can have financial implications for companies. CFOs need to be aware of the evolving regulatory landscape and ensure that their company’s activities comply with these requirements to avoid sanctions and reputational damages. A joint approach between the sustainability director and the CFO in developing sustainability reports and disclosures that integrate financial and non-financial information contributes greatly to transparency and accountability towards different stakeholders. In this sense, Climas contributes to efficiency in collecting, consolidating and securing ESG and GHG data, ensuring consistency between the different reports and allowing analysts and specialists to focus on more strategic tasks.
Monitoring and continuous improvement
Regularly review and assess progress against the organization’s climate change plan. The sustainability director and CFO can work together to assess the effectiveness of mitigation projects, identify areas for improvement and make necessary adjustments. Climate change has become a major concern for consumers, employees and other stakeholders, so companies that implement projects in line with scientific and technological recommendations are usually rewarded with improvements in their reputation and brand value. On the other hand, companies that ignore climate change or are associated with inappropriate practices can suffer reputational damage and lose market value. CFOs need to recognize the importance of sustainability and climate action to protect and continually enhance the company’s brand value, which, in the case of publicly-held companies, is reflected in the share price.
In summary, sustainability directors add value to CFOs by aligning sustainability initiatives with the organization’s strategic objectives, managing ESG risks, identifying cost-saving and efficiency opportunities, ensuring rigorous reporting and disclosure, interacting with stakeholders and supporting capital allocation decisions. Their experience helps CFOs integrate sustainability considerations into financial planning and decision-making, driving sustainable growth and improving the company’s long-term financial performance.
Technology tools will play a central role in ensuring the security and reliability required for reporting to IFRS requirements. In this sense, MOVE provides the climate risk analysis necessary to support the responses to IFRS S2. Climas, in the other hand, is the central tool for consolidating all ESG and GHG quantitative and qualitative data, evidence, scenarios, plans, targets, and reports. Collaboration between the sustainability director and the CFO is facilitated by Climas, allowing them to align perspectives, make informed decisions, and jointly lead the organization towards its financial and sustainability goals.
In summary, WayCarbon is the company capable of providing the knowledge and tools for the integrated fulfillment of ESG and climate change demands.
