CFOs must accelerate the net zero transition

CFOs and other business leaders in the UK have been asked to accelerate plans to publish their organisations’ net-zero transition plans this year, to support improved financial decision-making and capital allocation across the real economy.

“Momentum is building on transition plans but this will only be sustained by firm action, a will to change and our ability to think beyond our own businesses,” said Amanda Blanc, Group CEO of Aviva and Co-Chair of the Transition Plan Taskforce.

The transition to net zero has become a central goal for businesses and governments alike. With the formation of the Transition Plan Taskforce in 2021, progress has been made on the path to a more sustainable future.

The task force’s mission is to develop and implement transition plans to reduce greenhouse gas emissions and ensure a sustainable future. The task force is currently in the process of developing a system of incentives and disincentives to encourage businesses to invest in the transition to net zero.

A climate transition plan is a time-bound action plan that outlines how a company will achieve its strategy to align its assets, operations, and entire business model with the latest and most ambitious climate science recommendations. They are vital for companies to remain on track and demonstrate to capital markets and consumers how they will reach net-zero.

Taking a stand

Blanc’s recent comments were made at an event held in London on February 27, where the TPT said there was a need for a “significant increase in the quality and quantity of private sector transition plans”.

In an analysis recently prepared by CDP, of those organisations that have disclosed a transition plan, only 0.4% had a credible plan. More than 4000 (out of 18,600) companies last year disclosed they had a climate transition plan, but only 81 demonstrated disclosed against all 21 key indicators that denote a credible climate transition plan.

“The need for companies to develop a credible climate transition plan is not an additional element but an essential part of any future planning,” says Amir Sokolowski, Global Director, Climate at CDP.

“Tracking corporate disclosure against transition-related indicators is essential to ensure companies are kept accountable to the targets and plans they set.”

In the past, Blanc stated CFOs need to take a proactive approach to the transition to net zero and should have a clear understanding of their company’s carbon footprint.

She also noted that financial leaders need to be able to identify opportunities to invest in low-carbon solutions, such as renewable energy, and should be able to assess the financial risks and rewards associated with the transition to net zero.

Given CFOs are responsible for monitoring the financial performance of their companies, and for making sure that their companies are investing in the right projects and investments, they should be aware of the implications of their decisions on the environment.

This includes understanding the impact of their decisions on the climate, air quality, and biodiversity. CFOs should therefore be able to identify opportunities to reduce their company’s carbon footprint and to invest in renewable energy sources.

Barriers to developing a net zero transition plan

There are several barriers to developing a net zero transition plan. One of the biggest is the lack of information and data around the transition to net zero. Additionally, many companies do not have the resources or the expertise to develop and implement a transition plan.

A recent study by the World Resources Institute (WRI) found that many companies lack the data and technical capabilities needed to accurately assess the costs and benefits of transitioning to net zero emissions.

Without reliable, up-to-date data, CFOs face an uphill battle in developing successful sustainability plans. Gathering the data and information needed to understand the impact of their decisions can be difficult and time-consuming. Moreover, the data available often lacks detail and granularity, making it difficult to get a complete picture of the costs and benefits of investments in the transition to net zero.

However, there are a few solutions to this problem. Companies can partner with data scientists and analytics professionals to accurately interpret the data they have, while also developing relationships with reliable data providers to ensure they have access to the most up-to-date information.

Additionally, recent research from the Carbon Trust found companies were looking to benchmarking and peer learning opportunities to gain a better understanding of how their peers are leveraging data to drive sustainability plans.

The importance of capital allocation for net zero transition

Capital allocation is an important part of the transition to net zero. It is essential for businesses to allocate their capital properly to make sure that their investments in the transition to net zero are effective and efficient.

Given CFOs are responsible for ensuring that the company’s capital resources are used efficiently and effectively, they will play a vital role towards sustainable allocation.

This may include evaluating investments in renewable energy or energy efficiency, assessing the risks and returns associated with these investments, and determining the best strategies for allocating capital to these initiatives.

Additionally, CFOs should conduct due diligence to ensure that investments are in line with transition objectives, such as conducting human and environmental impact assessments before committing to a particular investment.

Microsoft and Amazon have invested in renewable energy projects, such as wind, solar, and hydropower, to reduce their carbon emissions. Additionally, some companies have committed to divestment from industries associated with high carbon emissions, such as fossil fuels, and have instead chosen to invest in more sustainable sources of energy.

Other businesses have adopted sustainable practices, such as green supply chain management, to reduce their environmental impact. Furthermore, many businesses have also begun to implement ESG standards, such as ISO 14001, to ensure their investments are aligned with their sustainability objectives.

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