.svg)
The pressure on companies to adopt a low-carbon model is intensifying and now comes from all their stakeholders: customers, employees, investors, regulators, partners, and more. Driven to act and make commitments, an increasing number of companies are setting and communicating environmental goals that the climate emergency demands be ambitious.
However, according to a study conducted by Accenture and published at the end of 2022, 93% of companies that have committed to a greenhouse gas (GHG) emissions reduction target are currently behind on meeting their commitments.
The vast majority of companies must therefore drastically accelerate their reduction of greenhouse gas emissions and, to do so, develop the capacity to establish and deploy credible decarbonization plans.
While the major steps are well-known (conducting a carbon footprint assessment, calculating a trajectory, defining and monitoring a reduction action plan, etc.), very few companies today are actually deploying their climate action plans on the ground and significantly reducing their GHG emissions.
A study conducted in early 2023 on Companies reporting their climate data to the CDP indicated that only 5% currently have a realistic decarbonization plan to meet the Paris Agreement goals of limiting warming to 1.5°C.
While there are many reasons for this failure, one stands out above the rest: The lack of reliable financial data to complement carbon data.
Out of the 21 CDP criteria for evaluating climate transition plans, financial planning is the area where the fewest companies were able to respond, with only 3% of respondents.
The Tennaxia carbon management platform includes a financial module and a set of features that allow its users to model and track the financial impact of their decarbonization actions over time.
Here are 5 reasons why we align with the CDP’s vision that the ability to financially plan an action plan is a key element of its credibility, and why we felt it was absolutely necessary to offer a comprehensive financial module in Tennaxia ESG to our clients.
1. Any decarbonization action will only materialize if it is funded
It’s no secret: the environmental transition costs money. An emission reduction action plan, no matter how relevant it may be from a carbon perspective, is nothing without funding. It will remain virtual, while greenhouse gas emissions will remain all too real. No concrete carbon emission reduction action, no modification of a value chain, and no deep operational change has ever come to fruition without prior financial validation.
Hence the need to clearly link carbon data and monetary data for informed decision-making and real action. This is to provide decision-makers who hold the budgets with tangible data and analyses that compare decarbonization, funding, and business impact.
While an initial financial model can be created at the corporate level, precise refinement can only be done locally, for example by experts or by obtaining quotes from local service providers.
Having a tool that allows local teams to update financial models independently while maintaining the link to carbon data is now essential for managing an ambitious global climate strategy.
2. Today, decarbonization budgets are in the hands of every department… except for the one typically in charge of decarbonization: CSR.
One of the first things to keep in mind is that the CSR department almost never initiates decarbonization actions itself. It generally steers the company’s environmental strategy but lacks the capacity to implement it alone. Reducing carbon emissions cannot be done from headquarters. It happens on the ground, by modifying processes, tools, supply chains, product design, and more. It must mobilize the entire organization, both financially and operationally.
It is the people in operations, procurement, or the supply chain who will truly launch these projects and draw from their budgets to bring them to life. Yet, while decarbonization is generally a priority for CSR teams today, this is not necessarily the case for the CXOs who hold the decision-making power over the budgets required to achieve it.
The first question any CXO will inevitably ask when presented with an action plan calculated in CO2 impact is: “How much does it cost?”
Teams in charge of climate strategy must therefore come to the table with financial data in hand to simply speak a common language with other business functions.
This also creates another challenge: the need to be able to run alternative scenarios in real-time with business teams: "What is the cost and impact if I replace 20% of my company vehicle fleet with electric models? 50%? 80%? Is it more cost-effective in this country given the price of fuel? etc…"
These are questions that must be answered almost instantly to have a productive discussion with them. This is precisely what the Tennaxia financial module enables by offering a live visualization of the long-term impact of varying specific business KPIs.
3. Having a clear financial view of carbon emission reduction actions allows for much faster implementation.
Financial data is essential for engaging in collaborative discussions with business units, as they hold the budgets associated with these actions and because Every economic player today manages their operations using financial KPIs.
By being able to provide a clear and credible financial model (Capex, Opex, savings, funding opportunities, etc.) for the actions taken, CSR enables operational teams to plan concretely and, consequently, implement actions much more quickly.
The most effective operational governance process with business units is generally as follows:
- Sit down at the table with the business teams.
- Review the decarbonization actions proposed by the CSR department together.
- Agree with the operational staff on realistic ambitions and timelines for each action.
- Visualize the final impact and costs.
- Repeat the simulation until a satisfactory cost/impact compromise is reached for all parties.
To be effective, an action plan must be properly scheduled and deployed. This means establishing a budget and deadlines, defining responsibilities, and finally, reconciling expectations with reality. This requires a multi-disciplinary effort that will only materialize if financial obstacles are effectively removed.
4. Involving finance teams in the company's climate transition allows for larger budgets to be allocated to it.
Beyond the operational teams, it is particularly important to also engage the Finance and Strategy teams in the decarbonization effort. to validate the budgets to be allocated, and also because they generally have the capacity to mobilize larger funds.
We will not go into detail here, but there is also a fundamental issue regarding corporate governance on the climate transition and the need to deeply integrate climate strategy with business strategy.
However, when addressing these stakeholders, it is not a matter of vaguely estimating the costs of action plans. Finance and Strategy teams expect CAPEX and OPEX figures that vary based on different parameters that must be optimized locally, a cash flow forecast, depreciation, recurring CAPEX, etc., and, of course, dynamic Marginal Abatement Cost curves.
All these tools will allow them to run simulations and identify the most efficient scenario from a “Carbon ROI” perspective: how many euros spent for how many tCO2e reduced.
Furthermore, more and more companies are integrating one or more carbon prices into their decision-making processes, particularly a “shadow” price that assigns an economic value to the carbon footprint of the company’s investment or purchasing decisions. Detailed financial modeling of the decarbonization plan allows for the effective and rational use of the company’s internal carbon price, and the unlocking of larger budgets.
5. Some decarbonization opportunities are also hidden financial opportunities.
Many decarbonization actions can be financially attractive for the company, even in the short term, which would make them obvious strategic priorities for the business. This is particularly true in a context of sharp price increases.
By demonstrating the short-term return on investment through an internal business case, it will be possible to get positive-ROI actions approved and deployed extremely quickly, then focus on more complex or costly initiatives.
To identify cost-saving actions, the MACC curve (mentioned in the paragraph above) benchmarking against the internal carbon price will be particularly useful and appreciated.
Conclusion
By providing a clear vision to the operational teams responsible for the successful execution of the company's climate strategy, a financial perspective on action plans is essential. It helps engage business teams, accelerate the decision-making process, involve finance departments and executive management, unlock larger budgets, and sometimes even reduce costs.
However, effective financial modeling must be reliable, accurate, and, above all, dynamic so that every stakeholder involved can run their own impact and cost simulations to make informed action and investment decisions.
If you would like to accelerate your decarbonization by adding a financial component, please feel free to check out our fact sheet on our financial module or contact us directly!