In March, I moderated a panel of experts to explore how financial institutions and companies are approaching their net zero transition planning, key priorities and trade-offs, and how chief financial officers, finance and treasury functions can support them. Eight key takeaways emerged for the accounting profession.
Ongoing engagement with governments is critical to achieve sustainability objectives and ensure private sector and political alignment on achieving net zero and decarbonization. National policy, frameworks and incentives provide companies with a clearer roadmap to setting and meeting their own long-term climate and sustainability goals. A “just transition” is a strong focus in many parts of the world to ensure that no-one is left behind in efforts to achieve a net zero economy and sustainable development. This involves maximizing the socioeconomic benefits of decarbonization while minimizing negative impacts, for example, in relation to economic development where people and communities are dependent on high-emitting sectors.
Clarity on the roles and responsibilities of the board and its subcommittees is important to ensure effective oversight of sustainability and environmental, social and governance (ESG) issues. An integrated mindset at the board level requires coordination of and connectivity between the board and other board committee agendas including the audit committee, the nomination and remuneration committee, and sustainability committee. But ultimate accountability still rests with the board for establishing and achieving sustainability goals and selecting net zero consistent pathways while taking into consideration the needs of, and impacts on, key stakeholders including customers, suppliers, employees and society.
Understanding the risk and future cost of inaction versus the benefits and cost today of taking action to achieve net zero and sustainability ambitions helps to clarify the business case and drive business commitment. Financing a low carbon and sustainable future will become increasingly more costly as externalities such as carbon become more expensive. Finance and accounting professionals can advise on the opportunities that exist in many countries where governments and financial institutions are providing financing for investments in decarbonization and sustainability initiatives.
Finance and accounting professionals have an important role in ensuring the relevant data is available for decision making and that sustainability priorities are incorporated into business processes through budgeting and forecasting, capital allocation, performance assessments and scorecards. On the reporting side, their ability to conduct materiality and reporting assessments and build trust in data and reporting processes is key. New roles such as the ESG controller are being created to help companies prepare for new requirements for sustainability-related disclosure and assurance.
A key focus is on securing the data and insights needed to evaluate decisions. For companies, this includes greenhouse gas emissions arising in their value chains, which for many can constitute most of their footprint, and working with suppliers and customers to find solutions that reduce scope 3 emissions to help meet climate goals. Finance functions are therefore increasingly focused on data collection, traceability, measurement and modeling, and verification. This involves creating effective finance business partnerships to measure and report on what has already occurred, as well as using technology and digital tools to enhance real-time information flows and forward-looking projections to make decisions on how to mitigate and adapt to sustainability risks and opportunities.
Large companies are well-placed to support small-medium sized organizations in their supply chains by providing financing to enable them to decarbonize and achieve sustainability targets, particularly for scope 3 emissions reductions.
The International Sustainability Standards Board standards will be effective for annual reporting periods beginning 1 January 2024. Enhancing the comparability of disclosures would ideally require a standardized reporting format as well as methodology to help companies consistently report key pieces of information about their business and sustainability performance in a connected way. A standardized reporting format or template would also be beneficial to finance teams in their efforts to automate and standardize internal and external reporting processes to adhere to mandatory sustainability-related disclosure and assurance requirements.
Finance and accounting professionals need to understand transition pathways and solutions, and how they enable transition planning in their organization. Accountants must be given opportunities to learn the language of climate change and sustainability from scope 1-3 emissions, transition and physical risks and sustainable-linked financing. Relevant sustainability education and training opportunities will enable them to identify climate and sustainability risks and solutions, and embed ESG into strategy, risk management, financing and internal and external reporting processes.
This article originally appeared on the IFAC Knowledge Gateway. Copyright © 2023 by the International Federation of Accountants (IFAC). All rights reserved. Used with permission of IFAC.