From Greenwashing to Game-Changing: The Transformative Role of Finance

Vincent Manier, Chief Financial Officer at ENGIE Insight

Not long ago, many businesses – and especially the finance industry – did not feel concerned by the fight against climate change, nor part of the solution. Today, there’s a growing consensus that financial and environmental performance go hand-in-hand and we’re seeing corporate initiatives to promote sustainable behaviors and a commitment to carbon emission reductions. This consensus exists at macro-economic level (Better Growth, Better Climate) as well as corporate-level (Better Business, Better World).

As CFO of ENGIE Insight, a leader in energy and sustainability, I am privileged to witness many of our clients taking action and gaining a competitive advantage by proactively addressing climate change challenges.  Many of these corporate actions are directly driven by the finance community but what are the major evolutions and underlying trends?

A New Green Corporate Finance Ecosystem

As I wrote in my previous blog, “Climate Action: How is Finance Leading the Charge?”, the finance industry is transforming to support the necessary energy transition and address the environmental concerns of our societies. The chart below illustrates the new finance “ecosystem” and its main influential forces, which are coming from the public sector (e.g., regulators, policy-makers, international bodies) as well as the private sector (banks, shareholders, corporations, etc.)

A New Green Corporate Finance Ecosystem

Understanding this new ecosystem is paramount to corporate financial leaders. It impacts access to capital, drives new reporting requirements or taxes, re-defines risk-return profiles of businesses, or even alters corporate governance and organizations to better manage and mitigate environmental risks.

The Green Finance Wave

Green finance and climate finance often sound like fancy expressions reserved for politicians or regulators, but are quite enigmatic to the corporate world. The G20 Green Finance Study Group (GFSG, created under the China’s presidency of the G20 in 2016) described green finance as, “financing of investments that provide environmental benefits in the broader context of environmentally sustainable development”, whereas climate finance, mainly used under the UN Framework Convention on Climate Change (UNFCCC), focuses more on public financing, in particular the resources transfer from developed to developing countries.

Beyond the terminology, corporate finance leaders must perceive behind these initiatives opportunities in terms of cheaper and innovative financing products (e.g., green bonds, green bank loans, green infrastructure funds, thematic funds, index products, etc.) as well as the potential regulations to re-direct funds from fossil fuel assets and favor the low-carbon economy.

Reporting Requirements and Taxes

Today, depending on the countries and sectors, corporations are using diverse reporting standards and frameworks for communicating their climate-related risks but lack common methodologies. Under the leadership of the Financial Stability Board (FSB), the TCFD (Taskforce for Climate-Related Financial Disclosures) initiative aims to improve consistency and transparency through harmonization of these frameworks. If the TCFD proposal is approved by the G20 in July 2017, there will be major implications for corporations.

On top of more disclosures, an increasing number of public and private organizations, coalitions and think-tanks are lobbying for imposing a cost on pollution, or CO2 emissions, on corporations. In broader economic terms, it is called internalizing externalities, i.e., re-allocating the social costs of pollution to the parties generating them. This is the sine qua non condition for sustainable business models.

Risks and Opportunities

Once businesses analyze their exposure to climate related risks, they must commit to mitigating them and constantly monitor progress against set targets and scenarios. It’s undeniable that climate-related risks will become more scrutinized by insurers, lenders or investors; therefore, corporations can turn risk into an opportunity to better manage their energy and sustainability costs. “What gets measured gets better managed” is an old adage that finance leaders must also apply to energy costs, which, according to the U.S. Department of Energy, is usually the third cost center of businesses. Furthermore, advances in technologies (IoT, data capture, machine-learning, Big Data, etc.), coupled with new business models (e.g., energy performance contracts, predictive maintenance and live monitoring of assets), will uncover untapped savings opportunities, that could either fund new projects or simply improve the bottom line.

Changes in Corporate Governance and Organizations

Finally, this new finance ecosystem is driving significant focus on risks management and governance. One example among many is credit rating companies, like Standard & Poor and Moody’s. Into their overall credit risk assessment, they now fully integrate climate risks, including management and governance of environmental and social risks and internal controls. As underlined by a report by S&P on environmental and climate risks, “To date, a relatively small proportion of overall corporate rating actions have resulted directly from environmental and climate risks, but their number is increasing.”

Today, CFOs and their finance teams must evolve to better integrate all the components of this new energy and sustainability revolution. A few examples include:

  • Training on new financing tools and risk-allocation mechanisms
  • Understanding the sustainability reporting frameworks
  • Taking ownership of sensitivity and scenario analysis on carbon emissions
  • Re-designing ERP and AP systems to capture more data and better process and verify information
  • Constantly measuring, reporting and communicating achievements vs. commitments

Today’s finance leaders simply cannot ignore the global push toward mitigating climate change. Instead, they are expected to take a leadership role in turning climate-related risks into financial rewards for their organization. While I have briefly touched on several different topics, we will dive into the details in the future posts of this finance series, so stay tuned and feel free to share your feedback!

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