Navigating the intersection of finance and sustainability: Mauro Cozzi Q&A

Since the introduction of the Corporate Sustainability Reporting Directive in January 2023, the dialogue surrounding corporate sustainability has been thrust sharply into the limelight, revealing not just its environmental implications but its profound impact on financial strategy and decision-making.

In a world where regulatory landscapes are swiftly evolving and sustainability is no longer optional, The CFO sat down with Mauro Cozzi, CEO of Emitwise, to understand the intricate web of sustainability, finance, and future-proofing corporate strategy.

How would you define sustainability from the point of view of a corporate finance function?

Sustainability, from the perspective of a corporate finance function, particularly the CFO office, can be viewed through two distinct lenses: compliance and performance management.

On the compliance side, sustainability pertains to adhering to statutory reporting requirements, akin to those associated with financial reporting. With emerging regulations like CSRD, CFOs are increasingly required to approach sustainability similarly to how they approach GAAP accounting, ensuring stringent and accurate reporting of metrics, such as environmental impact, in alignment with regulatory standards.

Conversely, from a performance and operational management standpoint, sustainability is akin to managing other key performance indicators (KPIs), such as sales targets or supply chain management, which ultimately impact the balance sheet. For instance, managing the organisation’s carbon footprint becomes another vital KPI for the CFO to oversee. In essence, sustainability becomes an additional numerical factor on their balance sheet that requires diligent management.

How does incorporating sustainability into financial planning help in identifying and mitigating long-term risks, especially in sectors most vulnerable to climate change?

Incorporating sustainability into financial planning is pivotal for identifying and mitigating long-term risks, especially in sectors susceptible to climate change, and this can be observed from both a long-term and short-term perspective.

In the long-term view, astute CFOs, recognising the imperative to achieve net-zero as an organisation, understand that there is an inherent price per ton of carbon that must be addressed to reach this goal. This can be achieved either through investing in internal decarbonisation efforts or purchasing carbon credits, with the price per ton of carbon ranging between 10 and 100 pounds. For a company emitting 30 million tons of carbon annually, this translates to a potential financial liability of, for instance, 300 million pounds per year. While this liability may not be formally tracked, perceptive C-suite executives are informally monitoring it and contemplating budget allocations towards it.

In the short-term perspective, the focus shifts to achieving the highest Return on Investment (ROI) for sustainability initiatives. This can involve positioning green products in a manner that doesn’t necessarily charge a premium but garners more business due to competitive advantages, especially in sectors like public tenders where greener operations score additional points. A case in point is Axis, a customer that has won bids owing to their sustainability credentials. Moreover, there are notable public case studies, such as Unilever, which attributed one-third of their revenue growth to sustainability initiatives, and Walmart, which realised savings on logistics and transport costs, framed as sustainability benefits, that also positively impacted the bottom line.

Do you think some of those initiatives are then just purely tackling the issue on the surface?

While it’s evident that some initiatives might appear to merely scratch the surface of sustainability issues, it’s crucial to acknowledge that numerous organisations are indeed engaging in substantial, ground-level work towards sustainability. Companies like Pepsi, Nestle, and Agile are notable examples where tangible efforts and investments are being made towards genuine sustainability initiatives.

However, it’s also realistic to acknowledge that companies do need to employ marketing strategies related to their sustainability efforts, which sometimes might come across as surface-level initiatives. An illustrative example is Lego’s initiative to use recycled plastic bottle caps, which, while a commendable marketing statement, had to be re-evaluated upon further scrutiny.

In a broader context, while the global economy might still be in the initial stages of sustainability transformation, there are companies genuinely engaged in the hard work towards real change. The encouraging aspect for global sustainability is that, due to regulations like CSR in Europe, all businesses will now be mandated to engage in substantial sustainability efforts. These regulations enforce a level of transparency and data-driven planning, ensuring that companies will need to move beyond mere surface-level initiatives and engage in deeper, more impactful sustainability actions in the coming years.

With increasing global regulations around sustainability and ESG reporting, how can CFOs ensure their companies are not only compliant but also ahead of the curve?

CFOs must pivot from merely ensuring transparency and sophistication in reporting – which was previously considered advanced due to impending regulations – to actively demonstrating tangible reductions in carbon emissions. The focus now shifts to implementing initiatives that verifiably work in reducing a company’s carbon footprint.

An illustrative point is the perspective from a chief sustainability officer of a Fortune 200 company, which underscores the realisation that emerging European regulations essentially translate to a cross-border carbon tax. Products in Europe will inherently become more expensive due to the added layer of sustainability resourcing. While there’s an option to purchase cheaper products internationally, it will be counterbalanced by a tax, thereby necessitating a budget allocation towards greener products to avoid financial loss and maintain competitive offerings.

In essence, CFOs must navigate through the current regulatory landscape by not only adhering to compliance but also by substantively cutting carbon through verifiable initiatives. This proactive approach not only aligns with regulatory adherence but also positions the company as a leader in tangible sustainability efforts, thereby staying ahead of the curve.

How can CFOs measure the return on investment (ROI) when it comes to sustainability initiatives, especially when some benefits, like brand reputation or long-term resilience, might be intangible?

Measuring the ROI on sustainability initiatives, particularly when dealing with intangible benefits like brand reputation or long-term resilience, can be approached by adopting strategies that have proven successful in other functional areas. For instance, middle managers and sustainability and operations often borrow the playbook from long-term supply chain resilience work, where ROI might initially be obscure and long-term. One effective strategy involves isolating a segment that can demonstrate short-term ROI to validate the broader, long-term initiative.

An example from our customers involves leveraging a significant client account to justify the investment in a sustainability initiative. By identifying a lighthouse client that indicates the trajectory of the industry, companies can illustrate the tangible short-term and long-term benefits of their sustainability investments. It’s imperative that CFOs and the C-suite think medium to long-term (approximately 5 to 20 years) to not only build a compelling business case but also to safeguard the company from potential risks in the medium term by ensuring that sustainability initiatives are genuinely impactful and provide tangible and intangible returns.

In what areas do you see the most significant cost-saving opportunities when companies integrate sustainability into their financial strategies?

Carbon reductions, which are fundamentally about resource efficiencies and utilising optimal materials, present significant cost-saving opportunities when integrating sustainability into financial strategies. A classic example is Walmart’s initiative of reducing shipping pallet sizes by a few centimetres, enabling more product stacking per truck and consequently reducing the overall trucking needs and emissions per shipped product unit.

Every company typically has a substantial list of such efficiency initiatives that could be implemented. However, the prevailing question has always been about prioritising these initiatives amidst other pressing needs, such as accelerating product shipment or other operational demands. The current macroeconomic context, which emphasises cost-cutting, aligns well with sustainability objectives, thereby creating a compelling dual business case. This dual focus not only addresses immediate cost-cutting priorities but also caters to meeting sustainability targets, which are becoming increasingly pivotal for shareholders and customers alike.

Achieving this, especially in a scenario where collaboration across sustainability, finance, operations, and supply chain teams is challenging, requires identifying and rallying around initiatives that concurrently address both cost-cutting and sustainability objectives, thereby harmonising stakeholder efforts across the organisation. This approach not only ensures adherence to sustainability targets but also fortifies the company’s financial and operational resilience by judiciously managing resources and costs.

How can CFOs effectively communicate the financial benefits of sustainability to stakeholders, including investors, employees, and customers, to gain their buy-in?

Effectively communicating the financial benefits of sustainability involves ensuring that the right data is being tracked at the highest level, thereby enabling individual managers, such as procurement managers, to make informed decisions while maintaining operational freedom. Drawing inspiration from successful strategies employed by large businesses, like the playbook from Mark Engel, former chief supply chain officer at Unilever, can be invaluable.

In the context of managing complex supply chains amidst disruptions and changes, it boils down to integrating sustainability metrics into standard operational queries. For instance, when initiating a bid process to purchase from a supplier, traditionally, questions revolve around shipment timing, price, and quality. Moving forward, an additional question regarding sustainability, such as whether the supplier has a science-based target and their progress towards it, will become imperative.

Ensuring alignment between the CFO and CBO that every supplier needs to report this sustainability information sets the stage for other operational building blocks to fall into place. Drawing a parallel with financial management, where every team has a budget and target, the same principle applies to sustainability targets. The best companies are already implementing sustainable procurement policies that mandate suppliers to have a sustainability target and conduct annual checks to ensure they are on track to meet them.

In essence, by integrating sustainability queries into standard operational practices and ensuring that sustainability targets are aligned with procurement policies, CFOs can effectively communicate and demonstrate the financial and operational benefits of sustainability to various stakeholders, thereby securing their buy-in.

How do you hold your suppliers to account? 

Holding suppliers accountable, especially beyond mere marketing statements, can be approached in various ways, and different companies might employ different strategies based on their purchasing power and operational model. Some companies might leverage a “stick” approach, mandating certain sustainability practices and refusing to purchase unless those criteria are met. Others might opt for a “carrot” approach, where they incentivise suppliers by offering longer contracts or preferential payment terms if they implement specific sustainability strategies.

Notable companies like Unilever, IKEA, and CBRE exemplify best practices by not only setting expectations for their suppliers but also investing significantly in helping them meet those expectations. They provide resources to assist their suppliers in establishing and achieving sustainability targets, which is indicative of recognising the intrinsic link between their suppliers’ sustainability practices and their own future success.

It’s also crucial to communicate to suppliers that the shift towards sustainability is not merely a trend but a forthcoming standard due to evolving regulations. Thus, while in the short term, adopting sustainability practices might offer a competitive edge and differentiation in the market, in the long run, it will become a fundamental cost of doing business. Engaging suppliers through platforms and webinars, as we do with 10,000 suppliers of our customers, helps to convey this message and ensure that they are not only aware of the impending regulatory changes but are also equipped and motivated to adapt accordingly. This ensures that accountability is not just enforced but is also facilitated, creating a collaborative pathway towards collective sustainability goals.

How can scenario planning around sustainability challenges, such as resource scarcity or regulatory changes, help CFOs make more informed financial decisions?

Scenario planning around sustainability challenges, particularly at a high level, is imperative for CFOs to make informed financial decisions. Engaging in these exercises is non-negotiable to comprehend and internalise the trajectory and implications of sustainability challenges like achieving net-zero carbon emissions. For instance, if a company emits 150 million tonnes of carbon, understanding the pathway to achieving net-zero by a certain year, such as 2040, and ensuring that every board member grasps its significance is crucial.

However, while high-level scenario planning is essential to understand the broader picture and set a general direction, a slightly controversial perspective is that detailed scenario modelling, at this stage, might be less beneficial due to the current quality of data and the potential for models to undergo significant changes in the coming years. Engaging in overly detailed scenario modelling could potentially be a diversion for leaders, causing them to delve into the minutiae before establishing a clear, top-line direction.

In essence, CFOs can leverage high-level scenario planning to gain a comprehensive understanding of the sustainability challenges and set a general direction for the company. This approach ensures that the leadership is aligned with the overarching sustainability goals without getting entangled in potentially premature detailed modelling, thereby facilitating more informed and strategic financial decision-making.

What role do data analytics and technology play in integrating sustainability into financial planning, and how can CFOs leverage these tools for better decision-making?

With environmental data needing to be tagged according to specific standards, such as XBRL, akin to financial data, utilising a digital system to manage this is not just beneficial but essential.

Choosing the right system becomes a critical decision, and while there might be inherent biases towards certain tools or providers, it’s crucial that companies and solution providers are thoroughly challenged on aspects like transparency around methodology and auditability. Given that sustainability hasn’t been fully regulated yet, some solutions might have bypassed rigorous validation or proper methodologies in the past. This poses a significant concern for CFOs, especially considering the potential repercussions of reporting inaccurate numbers in financial reports.

Therefore, while tools and technology are a must-have for integrating sustainability into financial planning, CFOs need to ensure that the chosen tool is not only fit for purpose but also trustworthy and transparent. It’s vital that they can delve into how the system works, understand its methodology, and ensure that their teams can analyse and validate the processes involved. This ensures that the integration of sustainability into financial planning is not only compliant and accurate but also strategically aligned with the company’s broader sustainability and financial objectives.

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