By Vincent Manier, CFO, ENGIE Impact
Once considered an added bonus, sustainability has become the new business imperative. This new priority has already altered the way companies conduct business. From marketing campaigns that rely on the value proposition of sustainable products, as we’ve seen Adidas execute, to HR leveraging sustainability as the new employee engagement tool, and finance departments (yes finance, you too) committing to sustainable financial practices, sustainable business operations now affect every aspect of a company. And while businesses are a key driver, governments and cities also play a crucial role in setting the new sustainability standard. We see this new trend of these institutions across the globe setting strict frameworks and guidelines for sustainable investment and finance, like for example the European Commission with its action plan on sustainable finance.
This transformation is not contained to just the corporate finance departments. The financial industry as a whole is rapidly learning that adaptation and acceleration are necessary to operate in this new world that’s centered on the sustainability transformation.
Recently disclosed by the Grantham Research Institute, almost a quarter of the world’s highest-emitting, publicly listed company failed to report CO2 emissions and half don’t factor climate crisis into decision-making. In the UK, companies that are UK incorporated and whose equity share capital is officially listed on the main market of the London Stock Exchange are required to disclose their greenhouse gas emissions. Whilst not mandatory for every business, The Taskforce for Climate-related Financial Disclosure, backed by the Bank of England, has stated that such reporting is essential for investors to make properly informed decisions about their portfolios.
Since the first green bond was released in 2008, the World Bank has raised more than $13 billion (the equivalent of £10.3bn/€11.5bn) through almost 150 green bonds in 20 currencies. In response to this growth, lenders, credit agencies, regulators, shareholders and investors have also increased their participation in and reliance on green finance practices.
This shift in the financial industry as a whole presents a massive opportunity for corporate finance departments to spearhead new sustainable strategies and capitalise on the multi-level benefits that green finance practices offer.
A Team Effort
Let’s break down how green finance and sustainability affects every position in corporate finance departments.
- Chief Financial Officer – The Trendsetter: While Chief Financial Officers (CFOs) were traditionally siloed into stewardship roles, their input is necessary to the success of green finance initiatives. As the main financial advisor to the CEO, investors and shareholders, CFOs can create and present strategies that will positively impact their companies’ bottom lines, while also making a positive impact on the environment.
- Financial Planner or FP&A – The Guide:As the person who’s in charge of forecasting their company’s profit, loss and operating performance, this role not only has a unique influence over the company’s strategic plans and investments but also constantly has to reconcile the strategic objectives with the planning and performance management processes. For example, moving from Key Financial Indicators (KFI) to Key Performance Indicators (KPI) in the company’s dashboards and transforming the management dialogue about performance are essential to walk the talk.
- Controller– The Discloser: Each year, the expectation for companies to disclose environmental, social and corporate governance (ESG) results grows. To prepare for this shift, controllers should integrate climate change risks into their financial reports, as this will help simplify the ESG reporting process when the company participates. Controllers should ensure that they are already disclosing material risks in their financial reports, as the SEC is requiring corporations to include sustainability-related “material” risks in their financial filings.
- Treasurer – The Pacesetter: Responsible for managing a company’s cash flow and investments, the treasurer sets the expectations for leveraging green finance in its funding strategy. Integrating ESG criteria into their investment portfolio strategies or their employees’ pension funds will also become quickly mainstream.
- Risk Manager – The Researcher:Risk managers must understand the implications of sustainability across the organisation, from reputational risks to physical risks posed by extreme weather, to strategic risk as companies evaluate their business models or product designs. This role can initiate an environmental scenario analysis to better understand how the business can be impacted by emissions reductions, energy efficiency, subsidies or other incentives implemented to facilitate a low carbon economy. But must evolve past the environmental risks to highlight the implications of sustainability which extend far beyond your facilities.
Data’s Key Role
Each department must take advantage of existing assets to turn the strategy into results. Data from account payables hold a wealth of information about energy and resource waste and, if finance departments analyse the data properly, they can identify operational inefficiencies that can be adjusted to both increase savings and facility efficiency.
To truly gain an understanding of facility resource usage, financial departments must have a set strategy on how to pull insight and act upon the information available from account payables. Whether this is an internal process, or one done through a third party, departments must have the resources to identify wasteful and costly practices through data analysis.
The Future of Green Finance
As the financial ecosystem continues to evolve, it’s inevitable: Investors and internal management will soon expect finance departments to integrate certain sustainable practices into their larger strategies. While the finance team’s role may not be as public as other departments, it is crucial to the continued success and growth of the business. Forward thinking finance teams are the ones thriving in this modern environment, and those who wait for government sustainability standards will potentially see a decline in brand reputation and financial investment.
An organisation who’s thinking ahead is L’Oréal, the world’s largest cosmetics company, who has successfully established sustainable solutions as part of its global sustainability commitment, Sharing Beauty With All, which has been transforming the company to make a positive impact on society and the environment. L’Oréal Brazil uses clean wind energy in all its units in Brazil, acquired from ENGIE’s Trairi wind farm. This solution avoids the emissions of 7,000 tons of greenhouse gases, the equivalent of planting 43,000 trees. Meanwhile, L’Oréal China together with ENGIE have designed a comprehensive de-carbonization solution package to meet precise needs in a context of complex and constantly evolving local regulations.
With this in mind, it is time that we, as finance professionals, re-invent ourselves to take a leading role in this sustainability transformation. Let’s stop only reporting on energy costs and start reporting on carbon impact. Let’s divert from only implementing efficiency improvements related to automation and paper reduction and start looking at our facility portfolio with a holistic mindset. By leading the charge and developing sustainable finance strategies, we will inspire our entire companies to prioritise operations that will minimise our impact on the environment.