Stakeholders, employees, and corporate leaders increasingly call on companies to meaningfully engage in the transition to a zero-carbon economy; businesses can no longer afford to maintain siloed sustainability programs. If they are to achieve their sustainability goals, companies must work across all their functional areas to design realistic and actionable plans. As companies shift to this more integrated approach to sustainability, finance leaders play a central role in determining their companies’ levels of success.
Companies that embrace climate action will undoubtedly face new opportunities, unfamiliar technologies, and innovative business models. Given their traditional role of providing the type of risk and reward analysis that informs corporate decision-making, finance teams are uniquely positioned to evaluate these new potential sources of value. But to do so effectively, they must be fully integrated into — and feel a sense of accountability for — the company’s sustainability transformation.
The following three stages highlight the ways finance departments can drive their businesses’ sustainability transformation journeys, whatever the current level of their company’s sustainability commitments.
Stage One: Testing the Waters
A majority of executives and investment professionals agreeing that environmental, social, and governance (ESG) programs enhance shareholder value. And corporate leaders have embraced the high-level benefits of sustainability programs. But in many cases, this basic understanding translates into ad hoc actions, like releasing annual ESG data, rather than committing to specific and quantifiable sustainability targets.
Finance leaders can help spur companies to develop sustainability goals by articulating the financial benefits of sustainability projects and establishing criteria for funding the company’s ESG investments that account for their full range of benefits.
Sustainability goal-setting can begin incrementally, focusing on discrete strategies that demonstrate early wins. A typical example of such an initiative is implementing light em emitting diode (LED) programs across a company’s facilities. In this case, the upfront costs are minimal, and the installation is not complicated. And yet, small efforts like this can produce significant reductions in energy usage that translate to immediate cost savings and a rapid return on investment.
Still, these sorts of one-off projects would have a more significant impact if they were part of a broader set of corporate sustainability targets.
Stage Two: Raising the Ambition
While the first scenario applies to companies in the early stages of their sustainability transformation, other companies have established aggressive and quantifiable goals. Nearly one-quarter (23%) of companies have made a public commitment to be carbon neutral by 2030.
To ensure these goals are financially viable and can be realistically achieved, CFOs must be engaged in early-stage planning processes. That is especially important when a company is contemplating the purchase of on- and off-site renewable energy from project developers. The up-front capital costs of the projects are often financed through a power purchase agreement (PPA), which will likely be unfamiliar to many companies.
There are several threshold issues for the CFO to consider when evaluating the PPA structure for the first time, including asset ownership, which is typically held by the developer; contract length, which is typically 12-plus years; tariff structure, which means locking in a fixed price of energy for the duration of the contract; and accounting treatment, which can potentially be off-balance–sheet. While navigating this unchartered territory will no doubt be time-consuming for the CFO, the efforts will pay repeated dividends as the company seeks to sign additional PPAs to meet its growing renewable energy commitments.
When a company commits to long-term sustainability goals, it also motivates the CFO to begin investigating sustainable finance options like green loans or sustainability-linked bonds. This effort can expand the company’s banking and investor network, laying the foundation to finance a broader range of decarbonization measures in the future.