A guide to navigating the evolving climate landscape for CFOs

Ricky Cheng

Ricky Cheng FCPA, Director, Head of Risk Advisory, BDO, and member of the Institute’s Sustainability Committee, on how chief financial officers should take the lead in helping organizations transition to a low-carbon business model

With the increasing emphasis on climate change among stakeholders today and the emerging climate-related disclosure requirements, chief financial officers (CFOs) need to recognize the importance and impact of climate change on business sustainability, as well as the challenges this may bring to their role.

Don’t underestimate the impact of climate

Climate risks, whether they are physical (e.g. rising sea levels, extreme weather, wildfires, changing precipitation patterns) or transitional (e.g. changing policy, laws, market preferences and technology), may affect business operations in a multitude of ways. Examples include disruption to productivity and supply chains, damage to assets and production facilities, and more investment in research and development (R&D). While organizations are identifying climate-related risks and opportunities, and formulating strategies for enabling a more resilient business model in response to climate change, CFOs should factor in the potential financial impact of the risks mentioned above into their financial planning; for example, by allowing for capital to be deployed for mitigation and adaptation, raising funds for R&D, changes in the valuation of stranded assets, and changes in revenue generated by existing products and services caused by changing market preferences.

Implement processes for meeting global standards

The consultation on the International Sustainability Standards Board proposed exposure drafts of IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures was closed on 29 July, and the new standards are expected to be announced in early 2023. Organizations will need to report on all relevant sustainability topics (in addition to climate) within a consistent global framework and focus on how these topics impact on enterprise value. The reporting will also be connected to financial statements. Therefore, CFOs will need to ensure that the necessary processes and controls are in place for providing consistent sustainability information at the same time as financial information.

Be mindful not to communicate misleading climate ambitions

Today, investors and even rating agencies are eager to understand how well a company performs in the environmental, social and governance (ESG) space, especially in relation to their climate change risk management, their commitment to protecting the environment, and whether or not they are walking the talk. Having said that, more and more companies are making pledges to achieve net zero carbon emissions by a certain date or committing themselves to carbon neutrality to demonstrate their commitment to tackling global warming. Some companies are exaggerating their carbon reduction achievements, while others aren’t keeping track of their progress towards net zero at all. Given that CFOs have full access to their organization’s financial and operating data, they can take the lead by establishing a transparent management information system for capturing and reporting sustainability-related information, using a dashboard for tracking performance and validating disclosure.

Finance the transition

Following COP26 in 2021, many global financial institutions have signed net zero pledges issued by international organizations, such as the Glasgow Financial Alliance for Net Zero, to accelerate the decarbonization of the economy. These financial institutions have huge investments in (or business with) global listed companies that are looking for funding to finance their transition to a low-carbon business model. The CFOs of these companies will need to convince the banks that they have devised and implemented action plans for achieving net zero on greenhouse gas emissions. Otherwise, they may have limited access to capital.

Lead the transition

CFOs are in a key position to lead the transition. Leveraging their knowledge and experience in financial reporting, CFOs are familiar with the processes and methods – either manual or automated – of collecting relevant information from various stakeholders across the organization for non-financial reporting. The finance team will have many of the skills required to set, measure and report on climate metrics and targets, risk management, cost optimization and evaluating opportunities, among other things. Besides, through budgetary control and monitoring measures, CFOs can monitor the performance of business units to determine if their progress is moving the organization towards its climate-related strategic targets or whether action plans need to be formulated to close the gaps. CFOs can also enhance the positive impact on enterprise value by assuming the following roles:

  1. Capacity building – CFOs should equip themselves with knowledge related to climate change, mega trends, the practices of industry peers, carbon regulations, climate financing, and so on.
  2. Linking climate metrics with performance management – By integrating climate metrics into the performance management of business units, CFOs can provide the board with reassurance on the organization’s alignment with climate goals.
  3. Securing external recognition – A well-established management information system will enable CFOs to better communicate the required information to rating agencies and achieve a good ESG score.
  4. Thinking beyond the short-term – CFOs should assist the board to recognize the potential financial impacts and ensure that climate strategies continue over different time horizons to ensure climate resilience over the long-term.
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