Good morning.
In the U.S., public companies can expect the Securities and Exchange Commission's climate change disclosure final rule this fall. And calls for climate risk management are increasing globally. Many companies have committed to greenhouse gas emission reduction goals of net zero by 2050 or before.
So, how can CFOs take a leadership role in their company's low-carbon transition?
A new report from the UN Global Compact and the Climate Bonds Initiative provides some insight. It’s based on interviews with more than 30 CFOs representing global companies with a combined market capitalization of $930 billion, such as Anheuser-Busch InBev, AstraZeneca, Schneider Electric, Verizon, Workiva, and Cemex.
"CFOs play a key role in integrating sustainability into the overall business strategy, ensuring that those sustainability efforts are both financially and operationally viable," Joshua Dickinson, SVP and CFO at Schneider Electric North America, tells me.
Scope 3 is the next frontier
The report surveyed CFOs at different levels of their sustainability journeys. Here are three key observations:
—CFOs in more carbon-intensive sectors were generally more confident when talking decarbonization strategies. For example, companies in the cement industries had an advanced approach to integrating carbon emissions in their overall strategy, such as the use of an internal carbon price.
—The less directly carbon-intensive industries (in terms of scope 1 and 2 emissions) often had the challenge of dealing with scope 3 emissions in their supply chain. This was the case in the financial services, oil and gas, and agriculture sectors where scope 3 often represents over 90% of the emissions, the research found. (Scope 3 emissions aren’t produced directly from the reporting company but from the activities of its value chain.)
Scope 3 emissions and the consideration of nature are regarded as the next frontier, according to the report. But just 22% of firms that have issued sustainability-linked bonds (SLBs) included scope 3 emissions in their targets, Climate Bonds found.
An example of a company using SLBs: At Autostrade Per L’Italia, (ASPI) the chief sustainability officer reports directly to the CFO, the report explains. In 2023, ASPI priced a $816 million SLB maturing in 2031. The coupon repayments were tied to environmental KPIs (these include for example scope 1, 2, and 3 upstream emissions), providing a natural incentive for the CFO to ensure that the targets would be achieved by the business.
—Leadership was very important in setting and implementing ambitious net-zero targets. In 60% of cases that impulse stemmed from the leadership of the CEO or CFO.
But regardless of who is spearheading the transition internally, “the CFO will lead its execution, validate the feasibility, create the financing plan, construct the narrative, raise the capital, and supervise the reporting on the plan and its progress," according to the report.
Recommendations from CFOs interviewed by the Climate Bonds Initiative:
— Start the decarbonization journey early to gain a competitive edge—operational expertise, clarity over supply chain risks and opportunities, and technological and product mix innovation.
—Make a business case around a decarbonization plan. Short, medium, and long-term scenarios that highlight both the cost of action and inaction need to be presented.
—Get internal and external stakeholder buy-in. CFOs should leverage their high-profile platform as a key decision-maker in resource allocation. They can use investor calls to present low-carbon strategies, especially in capital-intensive businesses, according to Climate Bonds.
“Given the new scope of responsibilities attributed to the CFO, it would be fair to say that this role should be renamed chief value officer," Laura Palmeiro, sustainable finance director at Danone, said in the report.
Sheryl Estrada
sheryl.estrada@fortune.com
