Net zero transition planning: why CFOs should get involved
EY-Parthenon Partner Jamie Aitkenhead explains why companies’ decarbonisation strategies will never be credible until they are based on rigorous financial planning.
While most large UK companies have published net zero targets, it would be more accurate to call them ‘ambitions’, given the lack of detail as to what decarbonisation measures they will take and, crucially, how these measures will be costed.
Nearly 18 months after the UK Government pledged at COP26 that UK-listed businesses would be required to publish decarbonisation plans by 2023, many look far from concrete. Only 5% of FTSE 100 companies have so far disclosed transition plans that would be deemed ‘credible’ or sufficiently detailed under draft guidance issued by the UK Transition Plan Taskforce (TPT). The same research reveals that just 11% have published materials addressing the ‘Implementation Strategy’ element of the TPT framework, which covers financial planning.
There is a suspicion that many corporates previously believed a significant portion of their emissions could be offset in the carbon market. However, this could well be challenged by regulators and other stakeholders, given that carbon offsetting is managed by a host of different, unregulated bodies. Just 5% of companies buying voluntary credits would meet the tough new standards on their proper use. Moreover, the cost of carbon credits has risen in recent years, making offsetting less financially attractive.
There is thus a pressing need for companies to formulate decarbonisation strategies that are credible, costed and prioritised. So where do you start?
The story so far
Since April 2022, around 1,300 large UK companies have been required to make disclosures in their annual report using the Task Force on Climate-related Disclosures (TCFD) framework, which includes metrics and targets to assess and manage relevant climate-related risks and opportunities. Most now report confidently on their Scope 1 and 2 emissions, although for many, Scope 3 emissions remain difficult to calculate.
However, TCFD reporting doesn’t require the same level of detail as the TPT framework. While it requires companies to publish their net zero transition plan, the TPT framework builds on that requirement and offers companies a “gold standard” for what that plan should look like. There are several reasons why companies should consider adopting this gold standard, including growing scrutiny from shareholders and regulators, the increased attention that is likely to be paid to decarbonisation plans at board level and the chance to future-proof their business in case the TPT framework becomes mandatory.
A coordinated approach
A sensible first step is to ensure you have reliable baseline emissions data. Next, you need to collate the details of all ongoing decarbonisation activities (which may be a complicated exercise, given multiple project owners and inconsistent emissions reduction calculations and costings). This will give you a clear picture of where the organisation started and where it is likely to move to in terms of emissions in the next three to five years.
Once this exercise is completed, there is an opportunity to centrally coordinate the company’s decarbonisation activities. This is likely to involve assessing the emissions baseline, the current pathway to net zero and future stated targets and, from there, either developing or aggregating a list of interventions to meet these targets, with a clear view of the ROI for each intervention.
Focus on financial planning
This is where a strong financial plan is essential, as it will affect the company’s access to external funding, in terms of both accessing sustainability-related grants and attracting interest from investors with a focus on sustainable investment. Teams at EY have delivered these types of projects to ensure that decarbonisation budget competes against other uses of capital – capex, dividends, buy-backs, etc. – in a way that takes account of all stakeholders.
This coordinated approach, based on rigorous financial planning, should be a high priority and is likely to require the establishment of a central decarbonisation hub to see the organisation’s current decarbonisation activities through to completion and then set it up for success in delivering the next phase. This will involve developing a fully costed strategy for achieving the company’s net zero targets in the long-term, as well as monitoring all its decarbonisation activities, their project status and the cost (including overruns). The PMO – which may well be overseen by the CFO – should also be tasked with developing a partnering strategy with solutions providers and sharing best practice across the organisation.
One issue companies may face is a shortage of people with the right skills and knowledge. Recent EY research revealed that 35% of sustainability leaders say that difficulty hiring talent with climate change skills is a barrier to net zero. This is a specialised field, requiring people who understand the different options for installing and investing in green power generation technology, for example, or the range of grants and incentives that are available for decarbonisation initiatives. Sustainability reporting is also becoming a discipline in its own right.
But if you can successfully staff and organise the decarbonisation hub, it will ideally become a centre of excellence in decarbonisation project delivery for the business as whole, helping to embed it into the organisation’s wider budgeting, financial planning and long-term strategy – and making your net zero targets more achievable. By doing this in a measured and disciplined way, it will, over time, earn the right for the organisation to take ownership of the topic of decarbonisation and use it as a driver of future value.
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