Axa Climate's Legrix de la Salle on why CFOs must be a catalyst in the climate era

On the eve of Cop28, The CFO sat down with Alice Legrix de la Salle, Head of Financial Services Consulting, Axa Climate.

The climate crisis has introduced a spectrum of risks, both physical and transitional, compelling CFOs to revisit and revamp their risk management strategies. They are not just fighting financial fires but also predicting and preparing for environmental upheavals that could impact their organisations.

Legrix de la Salle noted that the regulatory landscape is shifting beneath their feet. European regulations like The Corporate Sustainability Reporting Directive (CSRD) and EU’s Sustainable Finance Disclosures Regulation (SFDR) are not mere compliance checkboxes but pivotal tools in aligning business operations with environmental responsibilities. CFOs are finding themselves at the forefront, interpreting and implementing these regulations, transforming them from perceived burdens into strategic advantages.

Investment strategies, too, are undergoing a radical transformation. As the world gravitates towards a more sustainable future, CFOs are channelling investments into decarbonization efforts and eco-friendly practices. This shift is not just an ethical stance; it’s a strategic imperative for long-term business sustainability.

But the role of a CFO in this new era extends far beyond managing numbers and compliance, Legrix de la Salle said. They are now delving into the realm of natural capital, acknowledging that a healthy environment is fundamental to business success. This realisation is driving innovative financial strategies that factor in environmental risks, enabling CFOs to make more holistic and informed decisions.

Education and understanding of environmental issues have become indispensable tools in the CFO’s arsenal. Grasping the science behind climate change, the nuances of carbon dynamics, and the intricate dependencies of their business on nature equips them to challenge conventional strategies and foster more sustainable practices.

Collaboration across sectors must also emerge as a key strategy, Legrix de la Salle stressed. CFOs are not just engaging in internal strategic shifts but are also fostering partnerships and collaborations, understanding that sustainability is a collective goal. They are empowering their workforce, embedding environmental consciousness across the organization, and ensuring that every member contributes to the broader vision of sustainability.

As they incorporate environmental costs into their Profit and Loss statements, CFOs are not just recalculating financials but are redefining the very essence of business success. This shift towards accountability and transparency is building social capital, enhancing brand value, and securing the long-term viability of their organizations.

Read Alice Legrix de la Salle’s full interview below:

How do you foresee the climate crisis impacting the overall financial strategies of major companies in the next decade?

Climate crisis is impacting financial strategies in at least three dimensions: risk management, reporting, and investment. On risk management, that’s both physical and transition risks posed by climate change. On reporting, there’s a whole set of more and more stringent regulations like The Corporate Sustainability Reporting Directive (CSRD) and EU’s Sustainable Finance Disclosures Regulation (SFDR) that CFOs need to prepare for. There’s also market initiatives like Task Force on Climate-Related Financial Disclosures (TCFD) and the Taskforce on Nature-related Financial Disclosures (TNFD). Finally, there is the dimension of investment decisions around, for example, decarbonisation, including in the supply chain, and the reduction of our impact on nature.

 In the investment space, which is one pillar of the financial sector, I foresee the climate crisis impacting in two ways. First, many different investors and companies have made a lot of commitments to support a low-carbon economy. They made pledges on a net zero target by 2040 or 2050 and made decarbonisation plans, and now they’re switching to nature-related, biodiversity strategies.

There are a lot of talks, especially in Europe, because the regulation is pushing for that approach–for example, as evidenced in CSRD, and SFDR. But so far, there are only pledges, and action has been a bit lacking and lagging. But certainly, there are investors who have built business models that are rooted in the need for a transition to a nature-positive world. There are also impact funds that have dedicated money to either environmental and all social objectives. Evidently, this business model involves a commitment to allocate funds towards a transition to a more positive outcome. However, it’s a highly specialized niche. In France, only 15 billion euros are dedicated to impact management, which is an extremely limited amount.

Second, I believe there’s room for innovative business models in the investment realm, as well as potential for corporations to explore new approaches. Take the agri-food and ag sector, for instance, where firms are actively seeking more sustainable sourcing of raw materials. However, this movement remains largely confined to niche markets. And it’s more of a commitment rather than a tangible shift towards real action. Also, while there’s genuine engagement and commitment in Europe on the whole, we are encountering setbacks in the US with Green-hushing, where things seems to be going backwards rather than progressing.

What evolving roles and responsibilities do you see for CFOs in the context of increasing environmental concerns and sustainability issues?

Primarily, CFOs face the task of navigating new regulations, particularly in Europe, such as CSRD handling, the incentives promoting environmentally friendly practices, and also SFDR. Additionally, the implementation of the taxonomy poses a challenge that they must adeptly manage.

Some may view these regulations as a burden, but in reality, they serve as a valuable tool to assess current practices and alignment with commitments. The CFO now navigates a new landscape that goes beyond financial considerations, encompassing extra-financial aspects, often working closely with CSR departments. While some may perceive these regulations as mere reporting constraints, seeing them as impediments in day-to-day operations, others recognize them as building a compelling business case for a greener and more sustainable business model.

Forward-thinking CFOs understand that these regulations extend beyond climate considerations to encompass broader ecological aspects, including nature and adherence to planetary boundaries. As a result, they actively seek to realign elements of their business to operate within these planetary boundaries, viewing it not only as compliance but as an opportunity to contribute to a more sustainable and resilient future.

Absolutely, the extent to which CFOs embrace these responsibilities hinges on their their understanding of what is at stake, and how far we are from being net positive in our economy. But at least they are now handling not only the finance, but also the extra-financial considerations, understanding the broader impact and dependencies associated with achieving Net Zero goals. And so this marks a significant evolution in their role, to consider these two dimensions and to navigate between these two dimensions recognizing the holistic nature of sustainable business practices.

How should CFOs adapt their risk management strategies to better address the uncertainties and challenges posed by the climate crisis?

We must undergo a cultural shift, transitioning from a paradigm where nature is perceived as inherently ‘free’, climate patterns are seen as part of a natural cycle, to recognizing that natural capital is a cornerstone of business success. In essence, without a thriving natural environment, the foundation of any business is compromised. The World Economic Forum has quantified the total global economic dependency on nature at $43 trillion, emphasizing that the entire GDP is intricately linked to the health of our ecosystems. This isn’t ideological–it’s firmly grounded in science. It is crucial for CFOs to be aware of that. And not just the CFO–the whole business needs to be aware.

In what ways will the climate crisis influence investment decisions, and how should CFOs integrate sustainability into their investment strategies?

If you consider the amount of money required for the climate transition, which amounts to 5 trillion dollars—approximately 1% of the total assets under global management. So it’s a relatively modest figure, but we are failing to make any progress here because we are stuck in a system that fails to recognize the environmental benefits adequately and it lacks alignment with the timeframes of natural cycles, which contributes to a lack of impetus.But without education, the CFO may not necessarily distinguish eco-compatible businesses or business models within their activities and the ones that are not. It’s not easy to make a transition if you’re not fully aware of where your positive or negative impact lies, and so the CFO needs education.

Could you discuss any innovative financing methods or instruments that CFOs could employ to support sustainability initiatives within their organizations?

What makes an organization act is not an intention to be impact-positive, but rather the perception of new and emerging risks in their businesses. This is where it’s really important for the market and CFOs and the team around them to be able to translate these risks—whether related to climate, biodiversity, or the challenges of transitioning—into tangible financial metrics.

So what is emerging is this financial reckoning or monetisation of these risks allowing CFOs to make well-informed decisions regarding the materiality of these risks. What is changing is that they now have some tools, like models like the IPCC scenarios for

physical risks associated with climate change. These models encompass different trajectories of climate change and emissions, providing CFOs with valuable insights into potential scenarios for both transition and low-carbon pathways. These are good tools in order to be able to effectively model and anticipate how risks might impact their companies in the future, enabling organisations to take pre-emptive action in response to identified risks. So risk management is definitely a pivotal avenue that finance professionals should be actively exploring.

What additional skills and knowledge do you believe will become essential for CFOs to effectively manage financial operations in a world increasingly affected by climate change?

Absolutely, it’s imperative for CFOs to understand the science behind climate change,  moving beyond a general awareness of greenhouse gases to a nuanced understanding of which specific gases and activities are driving the crisis. This extends to comprehending the intricacies of carbon dynamics and recognizing the dependencies of their business on nature. We don’t want CFOs to become co-writers of the IPCC report, but they should be able to understand this report and the executive summary and be equipped with enough of the scientific context to be able to challenge people around them on the information and strategies presented to them.

In the Food and Ag space, for instance, if someone highlights packaging as the primary sustainability challenge, a knowledgeable CFO should be able to contextualize it within the broader scope of emissions. By recognizing that packaging might constitute only a fraction of their total Scope 3 emissions, they can discern the major impact areas that require targeted attention.

This level of understanding necessitates a grasp of scientific principles and data, including intricate concepts such as the nitrogen cycle. While it might be challenging for CFOs initially, they do need to become educated on this as soon as they can, I think.

How important is cross-sector collaboration in addressing the financial implications of the climate crisis, and what role can CFOs play in fostering these collaborations?

What we’re really talking about here is scenario planning—putting a dollar, pound or euro sign on identified, quantifiable risks. When an organization is aware of the specific risks it may face, it gains the ability to make strategic decisions, not only in terms of investing in its own capital expenditures (capex) but also in exploring opportunities that can yield long-term benefits. The rise of Corporate Venture Capital (CVC) departments is a testament to this shift, as companies actively seek and invest in innovative and environmentally friendly business models.

Absolutely, a comprehensive approach to sustainability and shifting business models requires the engagement and understanding of the entire workforce. Training the entire workforce on critical issues like planetary boundaries is crucial. When every member of the organisation understands the broader environmental context and the significance of staying within planetary boundaries, they become active contributors to the transformation.

Finally, there is accountability. Organizations can take concrete steps by incorporating the cost of their activities on nature into their Profit and Loss (P&L) statements. This involves assessing the dependencies on the environment and understanding how variations in factors like carbon prices, water prices, or other natural resources could impact profitability.

In summary, ensuring the long-term sustainability of your organization involves proactively addressing and de-risking your inherent dependence on natural resources. CFOs play a vital role by testing and implementing new accountability methodologies that quantify the environmental impact on both profitability and the overall profile of the company. This not only raises internal and external awareness but also provides valuable data for strategic decision-making. This is important work that also helps build up your social capital as a brand, of course.

While immediate crises and short-term pressures, such as Ukraine, Gaza and inflation and so on understandably drive a defensive stance, it’s essential to understand that the value of a company lies not just in immediate profits but in the sustainability of its business model over the long term. It needs to be sustainable and adaptable to stringent regulations, sustainable in the face of disruptions in sourcing and in the supply chain, and sustainable in respect to a workforce that is willing or not to work with you or in your sector.

Absolutely, it’s difficult when you are listed and you have to be very focused on short-term profitability, but we need to see the longer perspective simultaneously.

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