What every finance head should know after the Global Climate Action Summit

Last week, all eyes were on a landmark climate change conference in San Francisco. The Global Climate Action Summit (GCAS) saw CEOs, investors, politicians, celebrities and activists join together to step up global action on climate change. At the same time, the Principles for Responsible Investment Annual conference – PRI in Person – was also held. But why should CFOs care about these events and what can they do?

Why should CFOs care about climate?

Climate change is arguably the most significant long-term business issue we face today, yet also perhaps the most misunderstood. The summer 2018 heatwaves that swept across the world from Algeria to the Arctic hit home the impact that more extreme weather can have on infrastructure, supply chains, people and sales.

With extreme weather events like this becoming more frequent and intense as the world warms up, becoming climate change savvy makes economic sense. It also helps cut costs. Indeed, suppliers reporting to CDP have seen collective savings of around US$14 billion from emission reduction activities, showing that cutting emissions doesn’t have to cost the earth.

Crucially, more and more investors are requesting this information from the companies in which they invest. At CDP, we have seen investor support for our environmental disclosure request grow close to 20 fold from 35 investors in 2002, to over 650 investors this year.

GCAS and the PRI in Person covered many of the climate risks and opportunities relevant to business and investment. For those looking for a starting point on managing climate in their business, these three topics from the summit are worth considering: disclosure, updated accounting practices and science-based targetts.

The starting point in any climate change strategy is to calculate the numbers that sit behind your company’s relationship to the changing global environment. Disclosing data about a company’s impact on climate change, deforestation and water is a fundamental first step in demonstrating a corporate commitment to acting on climate and the environment. Tools such as CDP’s disclosure framework are there to help with this.

After disclosing, CFOs tend to find that their new knowledge of how their business intersects with the environment leads to the identification risk, new business opportunities and other financial benefits. In 2017, 87% of companies reporting on deforestation through CDP identified business opportunities from sustainable forest-risk commodities, such as new market opportunities and increased shareholder value.

In the period from June to September 2018, a challenge from GCAS co-chair California Governor Jerry Brown resulted in over 1,200 new companies from more than 60 countries disclosing their data on climate and environment through CDP. They include Spanish gas company CRINGAS S.L., the Postal Savings Bank of China and US based Dominion Energy, the seventh largest publicly traded utility in the world.

2-Update internal accounting practices

Once companies have recognised the value inherent in integrating climate impact and risks into their business strategy, they usually find the need to include them in accounting practices too.

Putting a numerical value on environmental resources is an evolving practice and something many businesses are now doing. Indeed, our data showed an eight-fold leap in the number of companies factoring an internal carbon price into their business plans last year compared to four years earlier. Internal carbon pricing is valuable as a risk assessment and it serves as a useful proxy for good governance for investors, primarily because it demonstrates that a company has its house in order when it comes to climate risk management.

This isn’t just limited to carbon, with many household names such as Diageo, Colgate Palmolive and Nestle now establishing internal values on water to account for the social and environmental costs and benefits.

3-Introduce science-based targets

Aligning business strategies with the climate science required to hold global temperature rises well below 2°C will mean achieving peak greenhouse gas emissions by 2020. This was a significant focus of GCAS and should be central to any CFO’s climate action plan.

Nearly 500 companies in 38 countries around the world have already committed to set a ‘Science-based target’; AkzoNobel, Daimler, Enel, Honda, Kellogg Company, McDonald’s and Sumitomo Chemical, to name just a handful.

They realise the huge business benefits of making sure their climate strategies have a positive environmental impact as well as staying one step ahead of their peers in the climate stakes. The advantages of doing this keep expanding as shareholders and consumers become more conscious of climate-related risks and issues.

Become a climate leader

GCAS saw 400 investors with $32 trillion in assets step up action on climate change, with 120 investors stating their aim to further pursue low carbon and climate resilient portfolios. For example, Candriam used GCAS as a platform to announce that it would exclude companies with more than 10% exposure to thermal coal from its funds by the end of year.

Shareholders are of course absolutely crucial to most companies and investors everywhere are becoming increasingly keen on holding climate-leading businesses. A business that has disclosed its climate and environmental impact, considered the environment in terms of its accounting practices and introduced science-based targets is well on the way to joining this fast expanding group.

The Global Climate Action Summit showed that transformational changes are happening globally across all sectors and those who choose to lead on climate are seeing strong business benefits. Climate considerations should now be a core part of every CFOs day-to-day job as they start to impact the bottom line as much as they affect our global ecology.

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