Finance for a sustainable future
Less carbon, more value
Carbon mitigation, targeting, and reporting are still part of the decarbonization calculus—but no longer the only focus. New methodologies and markets can create avenues to turn an organization’s carbon commitments into sources of value.
How can finance lead the way?
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Decarbonization (or carbon mitigation) is the removal of greenhouse gas (GHG) emissions, including carbon dioxide, from human activity, usually accomplished by changing processes that generate or use energy.
As a physical factor in addressing the global environment, decarbonization sits comfortably among other familiar imperatives: don’t litter, don’t pollute, don’t destroy. Traditionally, we accept the moral and social value of these principles even if there’s a cost to carrying them out.
What if it didn’t have to be that way?
How finance can
drive carbon monetization
Today’s CFO is not only an operator, but also a steward and catalyst for evolution. Their past role in
approving funding for sustainability work elsewhere in the organization is changing—now finance is
where that work can live. And the critical levers are ones the function already touches.
Physical carbon reduction.
Operational changes to take carbon out of the business might involve restructuring contracts, changing supply or distribution chains, or taking a fresh look at the real estate portfolio. Inputs, outputs, and benefits—home turf for the finance operation. Remember, a company’s carbon footprint involves more than the offsets. It can also include insets that prevent some emissions from happening in the first place.
Identifying and realizing tangible value.
What role can carbon offsets play? Piecemeal transactions may provide value, but a large-scale carbon monetization strategy requires
looking across the enterprise. What changes are consistent with overall strategy? What working groups, such as a sustainability command
center, can define and carry out decarbonization measures? What contract structures can deliver the value made possible? Carbon doesn’t
“trade” the way other commodities do; it may behave more like a repo, without standard definitions of basis risk.
Finance can also help identify and develop value sources adjacent to existing operations. For example, a company that operates a fleet may
switch to electric vehicles, then build a new business offering around its power generation and recharging infrastructure.
Measurement and reporting.
Setting carbon goals and tracking progress against them remains a must-do, especially with new global and US reporting standards in effect
and the potential requirement to report Scope 3 emissions from external value-chain partners.
But the metrics of decarbonization also contribute to the carbon monetization “plus side”. Realizing value through tradeoffs and credits is
intrinsically quantitative and may require new tools. The same applies to how companies express carbon progress to consumers clearly and
credibly—and to charting the “green premium” in revenue that companies can realize.
To turn theory into practice,
set the tone
Reducing carbon isn’t a new idea. Nor is chasing enterprise value. As organizations reach a point at which everyone internalizes that this is really happening, finance has command of the critical specifics to set that tone.
Establish a sustainability command center
The in-house capabilities that can drive carbon monetization may be scattered across the organization, reporting to different places. As part of a sustainability command center, finance can bring together core capabilities across the organization—to lead the charge on developing goals, proofs of concept, and the drivers that can effect and accelerate change.
Net Zero
58%
58 percent of surveyed Fortune 500 CEOs said they plan to achieve net zero for their organizations by 2050.5
The opportunity for finance
Getting to net zero will require a series of decisions that Finance can support with their deep understanding of the business’s value drivers, including potential cost-savings from renewable energy sourcing to growth opportunities through new products.
Scan the landscape
What are the current and pending regulatory controls? What markets exist to trade in carbon-related value, and where are they headed? Finance can help make sure the organization has a clear picture of the external playing field.
Reporting
> 1,800
There are more than 1,800 climate laws and policies worldwide; the Paris Agreement has 197 signatories.6
The opportunity for finance
Finance can play a key role in helping organizations navigate the tangle, no matter the organization's geographic footprint—from avoiding potential costly compliance penalties to understanding incentives that can help fuel sustainability initiatives.
Provide leadership
Finance can interface with operations teams to identify and activate decarbonization process changes. It can set up the governance, technologies, processes, and team structures to put those plans into action. And the CFO can play a large role in signaling that this is a practical shift, not a theoretical one. When finance takes the reins, it’s real.
Ethical Investing
71%
71% of surveyed executives are feeling pressure to act on climate change by shareholders & investors.9
The opportunity for finance
Information—from financial statements to public disclosures—can have major impact on investors and external stakeholders. Finance plays a central role in providing the data and analysis that demonstrates that an organization is putting their capital to truly good use and build market confidence in their sustainability journey.
Critical first steps
Where to start? A finance organization can make fundamental early moves that set the stage for progress.
Recognize the categories of risk decarbonization can help address. Physical risk includes the potential for tangible effects of climate change, such as a flooded factory. Transition risk involves regulatory, market, and other forces imposed from outside. And technology risk accompanies any new tools an organization adds as it matures.
Establish an emissions baseline and set decarbonization targets so you have a basis to track and report future improvements.
Inspect your utility and lease footprint to help determine what commitments you currently operate under and how they contribute to the organization’s carbon picture.
Establish a zoom-out/zoom-in framework that focuses on different time horizons, so the organization can plan and reach goals in an ordered way.
Scan the external market. Other organizations are working toward the same goals, and their experience can teach you what is working, what isn’t, and what may have promise once it has time to gain traction.
Develop a pathway to align climate project priorities into capital planning.
Develop workforce skills, not only in finance but across the enterprise.
Survive, drive, thrive
One way to prioritize your path to carbon monetization is degrees of urgency: what you must do, what you can
benefit most by doing, and everything in between.
Some core requirements surrounding decarbonization are clear, current, and mandatory. Those are the moves
you need to make to survive. Less urgent but more promising are the approaches that can set you on the path
to monetization—to drive toward making carbon a source of value. Finally, an organization should reach for
aspirational strategies that allow it not merely to keep up but to thrive in doing so.
Survive
The finance organization can meet the baseline to survive by ensuring that you comply with current regulations, through accurate internal and external reporting completed in a timely manner. At this level, your priority should be the most pressing or highest value decarbonization opportunities. Become knowledgeable about renewable energy tax credits to make sure money is not being left on the table. Begin to engage stakeholders across the organization more broadly, looking for ways to integrate decarbonization opportunities into other in-flight projects and programs. The goal is to build momentum and generate quick gains to offset the perceived “pain” of transformation.
Drive
Finance has the power to drive results by helping the organization understand what initiatives have greater importance and by devising and measuring progress. Instead of focusing on granular pluses and minuses, look more broadly across the enterprise to see the big picture. Directly address the challenges and opportunities of a program that’s going to span multiple horizons and require sustainable funding and ongoing executive support. Look outside the organization at industry stakeholders. In many industries, making meaningful progress on the organization’s monetization journey requires partnering with other companies or organizations in their industry.
Thrive
Finance can thrive by instituting new processes and talent that move the organization steadily toward its sustainability goals and opportunities, even amidst sustained disruption. In this phase, Finance helps the organization transform its business by monetizing decarbonization. Thriving means thinking big—embrace an innovation mindset, think long term, turn internally focused opportunities into external ones, and think beyond immediate stakeholders to your broader community and to nontraditional stakeholders. By helping lead the charge to monetize and productize your organization’s decarbonization efforts, you can justify charging a “green premium” and make decarbonizing an essential part of your organization’s brand.
The role of
data
If decarbonization is an industry-wide effort, that means its implications aren’t confined to a niche sustainability function. Tax considerations, financial reporting, regulatory compliance, workforce hiring and training, investor relations, asset optimization, energy use, real estate, and other factors all affect or are touched by decarbonization. And what ties it all together is data.
The role of technology
Technology can play a pivotal role in helping organizations manage decarbonization. It can simply help standardize and scale processes and automate ESG reporting. As an organization moves further along the path, technology solutions can go from helping establish a comprehensive, end-to-end net zero strategy right through to identifying opportunities for competitive advantage and carbon claims that can command premium pricing. All while managing volumes of complex data.
The regulatory landscape
Regulatory regimes impose standards, but they also provide a context in which value chain partners, competitors, and consumers are all motivated by the same large-scale objectives. When everyone wants to achieve the same things and some are better at it than others, that’s a market.
Corporate Sustainability Reporting Directive (CSRD)
A European Union requirement for large and publicly listed companies to publish regular reports on their social and environmental risks, and the impact of their activities on people and the environment. This includes disclosing their decarbonization commitment—or why they don’t have one.
Securities and Exchange Commission (SEC)— proposed climate rules
Proposed set of US rules likely to require companies to include climate-related disclosures in their registration statements and periodic reports. GHG emissions are among the required categories.
Task Force on Climate-related Financial Disclosures (TCFD)
Recently created arm of the Financial Stability Board is developing recommendations on the types of information companies should be required to disclose so climate action is transparent and carbon markets are correctly informed. Its determinations may become mandatory.
The US Inflation Reduction Act (IRA)
2022 federal legislative package that includes resources some organizations may be eligible to receive in support of decarbonization projects.
A win for the planet can be a win for your organization
Many finance teams still regard decarbonization as a place to spend money, not make it. More than two-thirds of surveyed CFOs told Deloitte’s Q2 2022 CFO Signals™ survey that they fund decarbonization strategies with internal cashflows from operational savings.
Calibrating the decarbonization commitment with a business and operational perspective can reverse that. With finance in the lead, an organization can find transformational opportunities, new business models, and other novel approaches that marry carbon reduction to value creation. Progress against carbon targets is a welcome feature in any annual report. Profit is even more welcome. As the carbon market matures, net zero no longer has to come with a net loss.
Contacts
Real Estate Transformation
Principal, Consulting
Deloitte Consulting LLP
+1.213.553.1929 | LinkedIn
Climate Change Specialist Leader,
Risk & Financial Advisory
Deloitte & Touche LLP
+1.212.653.7693
| LinkedIn
Check out the other articles in the Finance for a sustainable future series
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