The Finance Department: A Pillar of Corporate Environmental Transition

How have CFOs become central to corporate environmental transition policies? The growing importance of non-financial reporting has profoundly transformed the role of finance departments, placing them at the forefront of managing ESG issues within companies. This evolution, which has taken place over the years, is now accelerating with the implementation of the CSRD, which is far more comprehensive and demanding than its predecessors.

Rodolphe Denieau
Chief Operation Officer
Publication : 
06.12.2023
Table of Contents
Example H2
Request a demo

Over the past few years, the role of finance departments (CFOs) has undergone significant transformation. Climate-related considerations are no longer limited to mere external issues; they are now intrinsically linked to corporate development strategies. This evolution, whether driven by proactive initiatives or new regulatory requirements, has placed CFOs on the front line.

Indeed, climate change generates substantial costs, and the environmental transition also represents a major financial challenge. Their responsibility is therefore crucial in accounting for these transformations to ensure the long-term viability of companies.

Initially tasked with orchestrating the implementation of the Non-Financial Performance Statement (DPEF), the French version of the European NFRD, they must now comply with the much more demanding CSRD framework.

These changes also involve collaborating with new stakeholders who previously seemed far removed from the traditional concerns of a company's finance department.

‍

CSR: The new role of the CFO?

At first glance, ESG topics seem far from the traditional scope of the finance department. However, according to a 2022 study conducted by Harris Insight for Anaplan and Deloitte, 85% of business leaders consider ESG criteria to be primarily a concern for the CFO. 

CSR topics are no longer, and can no longer be, just a slide used to close out the company's annual report presentation to employees and/or investors right before the year-end cocktail party.

Today, it is a key dimension of corporate strategy, demanded by stakeholders and, first and foremost, by investors.

Les principaux acteurs poussant les entreprises à tenir compte des contraintes de durabilité
Key drivers pushing companies to consider sustainability constraints (Source: Horváth survey of 200 CFOs, 2022)

Sometimes viewed as a mere communication tool, CSR has become an essential element of corporate financing. The importance of non-financial reporting in the decision-making process of banks and investors is growing rapidly. Profitability alone is no longer enough. The market is becoming increasingly demanding and wants to understand how companies perceive and anticipate the effects of climate change in terms of risks and opportunities.

A 2022 study conducted by Horváth among European CFOs indicates that 93% of them believe that companies that do not address sustainability issues today will suffer a competitive disadvantage in the medium term.

This shift is further accelerated by new, more stringent regulations in this area:

  • The CSRD will significantly expand the content of non-financial reports, 
  • The green taxonomy will compel companies to assess the sustainability level of their activities
  • The SFDR will require financial market participants to provide greater transparency regarding the sustainability of the assets in their portfolios.

All these topics will directly or indirectly affect finance departments, which will need to tackle them head-on to properly fulfill their responsibilities.

Overall, finance departments have clearly grasped the evolution their roles will undergo, and many see it as an opportunity. While they currently identify more as ESG data reporters, a majority see their function taking on a much more operational role in these areas in the future.

Rôle de la DAF sur les sujet de développement durable
Role of the CFO in sustainability topics (in percentages) (Source: Horváth survey of 200 CFOs, 2022)

‍

A dual-leadership governance model.

CFOs will not face these new challenges alone. A new governance model is emerging within companies, bringing together two departments that previously worked in silos: Finance and CSR.

New requirements related to climate change and evolving regulations aimed at transforming the economy have broken down the barriers that may have existed between these two departments.

The goal now is to combine financial and non-financial reporting and fully integrate environmental accounting into traditional accounting. Non-financial reporting, once the exclusive domain of CSR departments, must now incorporate advanced financial modeling and analyses of impact and financial materiality (the well-known double materiality). Today, the division of roles in producing these reports, particularly for green taxonomy and CSRD, remains unclear.

A 2023 study conducted by BCG and DFCG among French CSOs and CFOs shows that while 67% of them identify environmental accounting as a priority for the current year, they still do not agree on which team should be responsible for the associated reports. The study highlights that 70% of CFOs want sustainability metrics to be handled by the company's existing management control team, whereas 76% of CSOs prefer them to be handled by a dedicated team that would, however, incorporate management control expertise.

In our view, both departments should be brought under a single banner to co-construct the company's structural transformation projects, model the costs associated with this transformation, and anticipate those linked to the consequences of climate change on the company's operations. Each project will thus be evaluated not only through the lens of profitability but also through that of its carbon impact.

This partnership has also become essential when seeking corporate financing. It is no longer rare to see the CSR department accompany the finance department in the search for new investors. This tandem is also what will enable the issuance of green bonds or the implementation of an internal carbon price, which could influence future investment decisions or procurement policies.

The growing role of the audit committee

Within Boards of Directors, another player has seen its scope of responsibility grow significantly: the Audit Committee.

Its relationship with the CFO is set to evolve given the growing importance of ESG topics and the complexity of non-financial reporting. Traditionally confined to accounting oversight roles, they are now evolving in parallel with CFOs and in conjunction with CSR committees on environmental and social issues. The implementation of the CSRD will accelerate this dynamic because, like CFOs, they will be much more involved in these subjects by 2025, the year the first reports are published.

To support the CFO in this transition and be able to properly audit new reporting formats, they must imperatively expand their skill set. This involves integrating specialists in ESG data and non-financial reporting into these committees.

Today, they are still minimally involved and suffer from a real deficiency in this area. As EY highlighted in its 2022 Governance Panorama, among SBF 120 companies, only 24% of Audit Committees currently address CSR topics. Furthermore, only 12% of them include at least one member trained in climate issues.

‍

The CSRD, a primary challenge for finance departments

The CSRD, which comes into effect on January 1, 2024, will considerably accelerate the changes that finance departments have been facing since the recognition of the essential role of companies in the environmental transition and the implementation of non-financial reporting.

Previously subject to few requirements, the CFO's involvement in this area could be minor. The new reporting rules imposed by the CSRD will require much stronger involvement from finance teams and the consideration of ESG indicators in their financial forecasts and models over the medium and long term.

Furthermore, it will no longer be just a matter of taking stock of ESG indicators at a given moment, but of creating an environmental transition plan for 2030 and 2050, aligned with the goals of the 2015 Paris Agreement. This transition plan, which will be updated annually, must integrate the company's strategy and will inevitably have financial repercussions, whether they materialize as risks or opportunities.

Beyond the financial impact of the transition policy, each section of the report must also include an estimate of the costs generated by climate changes on the company's activities and the investments made to anticipate their consequences.

According to a study conducted by BCG and DFCG, a large majority of major French companies have already begun carbon accounting processes (95% for scopes 1 and 2, 70% for scope 3) or environmental impact measurement (80% for waste, 50% for water, and 30% for biodiversity). They must now integrate the financial variable. All these elements fall directly within the CFO's scope and will therefore require upskilling on subjects previously handled exclusively by CSR departments.

Part des grandes entreprises ayant entamé une démarche de comptabilité carbone
Share of large companies (revenue > €500 million) that have begun a carbon accounting process (Source: BCG/DFCG Survey - April 2023)
Part des grandes entreprises reportant sur certaines données environnementales
Share of large companies (revenue > €500 million) reporting on certain environmental data (Source: BCG/DFCG Survey - April 2023)

Solutions to guide CFOs

The main difficulty for finance departments will be to evaluate and model the financial impact of the transformations their company will have to face in the short and medium term.

It will be a matter of finding a judicious balance between this transition plan, which is particularly demanding given the goals of the Paris Agreement, and the costs generated by it, while also taking into account the potential cost of climate inaction for the company.

The financial module integrated into Tennaxia provides a clear view of a project's impact on the company's GHG emissions while estimating the cost of the initiative, the OpEx and CapEx flows required, and the estimated payback period.

This tool allows the CFO to navigate a catalog of projects (such as changing suppliers, raw materials, or energy sources) proposed by their CSR team. By managing the metrics, they can identify solutions to meet the company's overall decarbonization goals while anticipating and/or minimizing financial impact. A matrix view makes it easy to identify actions with high carbon and financial impact at a glance.

Based on the previous year's results, the tool will allow for year-over-year tracking of whether objectives are being met, enabling fine-tuned adjustments to actions as needed.

Conclusion

The CFO has always played, and will continue to play, a central role in business. However, the profession is currently facing the greatest challenge in its history. Incorporating sustainable development indicators into corporate accounting is becoming—or has already become—a fundamental aspect of the role.

Pressure to adopt these changes is coming from both external and internal sources, and it is highly likely that job descriptions will evolve accordingly. Depending on the size and environmental maturity of the company, CFOs may or may not be supported by CSR teams, but they will, at a minimum, need to be aware of these issues and be capable of addressing, if not leading, them.

Securing funding, estimating costs related to climate change, and shaping corporate investment policy are all areas that will require in-depth knowledge of ESG topics. All these elements will gradually transform the profession, shifting it toward the new roles we are beginning to see emerge, such as the Sustainability CFO or Chief Sustainable Finance Officer.

‍

Sources: