The pressure on companies to adopt a low-carbon model is increasing, and now comes from all their stakeholders: customers, employees, investors, regulators, partners, and so on. Under pressure to act and make commitments, more and more companies are setting and communicating ambitious environmental targets in the face of the climate emergency.
However, according to a study by Accenture published at the end of 2022, 93% of companies that have committed to a greenhouse gas (GHG) emissions reduction target are currently behind schedule in meeting their commitments.
The vast majority of companies therefore need to drastically accelerate their reduction of greenhouse gas emissions and, to do so, put themselves in a position to draw up and deploy credible decarbonization plans.
While the main stages are well known (carrying out a carbon assessment, calculating a trajectory, defining and monitoring a reduction action plan, etc.), very few companies are actually deploying their climate action plan in the field and significantly reducing their GHG emissions.
A study carried out in early 2023 on companies reporting their climate data to CDP indicated that only 5% of them today have a realistic decarbonization plan to achieve the Paris agreements aimed at limiting warming to 1.5°C.
While there are many reasons for this failure, one predominates over the others: the lack of reliable financial data to complement the carbon data.
Of the 21 CDP criteria for assessing climate transition plans, financial planning was the one on which the fewest companies were able to respond, with only 3% of respondents.
Traace's carbon management platform includes a financial module and a range of functions enabling users to model and monitor the financial impact of their decarbonization actions over time.
Here are 5 reasons why we align ourselves with the CDP's vision of the ability to financially plan an action plan as a key element of its credibility, and why we felt it absolutely necessary to offer our customers a complete financial module in Traace.
1. Any decarbonization action will only be effective if it is financed.
It's no secret that environmental transition costs money. An action plan to reduce emissions, however relevant it may be on the carbon front, is nothing without funding. It will remain virtual, while greenhouse gas emissions will remain real. No concrete action to reduce carbon emissions, no modification of a value chain and no profound operational change has ever seen the light of day without prior financial validation.
Hence the need to clearly link carbon data and monetary data for informed decision-making and real action. The aim is to provide decision-makers with tangible data and analyses that compare decarbonization, financing and business impact.
While an initial financial model can be produced centrally, it can only be fine-tuned locally, by experts or by obtaining quotes from local service providers, for example.
A tool that enables local teams to update financial models independently, while maintaining the link with carbon data, is now essential to the overall management of an ambitious climate strategy.
2. The budgets allocated to decarbonization are now in the hands of all departments... except the one usually in charge of decarbonization, CSR.
One of the first things to bear in mind is that the CSR department almost never initiates decarbonization actions itself. It generally steers the company's environmental strategy, but does not have the capacity to implement it alone. Reducing carbon emissions cannot be done from the head office. It will be achieved on the ground, by modifying processes, tools, supply chains, product design and so on. It will need to mobilize the entire organization, both financially and in terms of human resources.
It's the people in Operations, Purchasing or Supply Chain who will really get the ball rolling and dip into their budgets to make it happen. And while decarbonization is generally one of the priorities of CSR teams today, this is not necessarily the case for the CXOs with decision-making power over the budgets needed to achieve it.
The first question any CXO is bound to ask of an action plan calculated in CO2 impact: "How much does it cost?"
The teams in charge of climate strategy must therefore come to the table with financial elements in hand, so that they can simply speak a common language with the company's other business lines.
This also creates another difficulty: the need to be able to carry out alternative scenarios directly with the business teams: "What cost and what impact would it have if I replaced 20% of my company car fleet with electric models? 50%? 80% ? Is it more interesting in this country given the price of petrol? etc...".
These are questions that need to be answered in real time if you are to have a productive discussion with them. This is precisely what Traace's financial module enables, offering a live visualization of the long-term impact of variations in specific business KPIs.
3. Having a clear financial vision of carbon reduction actions means you can take action much more quickly.
Financial information is essential for engaging in joint discussions with the business units, as the latter are responsible for the budgets associated with the actions, and all economic players today base their actions on financial KPIs.
By providing a clear and credible financial model (Capex, Opex, Savings, Financing opportunities, etc.) of the actions undertaken, CSR will enable operational teams to project themselves in concrete terms, and therefore to take action much more quickly.
The most effective operational governance process with the business lines is a priori as follows:
- Sitting around the table with business teams.
- Explore together the decarbonization actions envisaged by CSR.
- Agree with operational staff on realistic ambitions and timelines for each action.
- Visualize final impact and costs.
- Repeat the simulation until a satisfactory cost/impact compromise is reached for each party.
To be effective, an action plan must be planned and deployed. This means establishing a budget, setting deadlines, defining responsibilities, and finally confronting expectations with reality. This requires a multi-skilled effort that will only materialize if financial obstacles are effectively overcome.
4. Involving finance teams in the company's climate transition means that larger budgets can be allocated.
In addition to the operational teams, it is particularly important to involve the Finance and Strategy teams in the decarbonization effort, in order to validate the budgets to be allocated, and also because they generally have the capacity to mobilize larger funds.
We won't go into detail here, but there's also a fundamental issue here concerning corporate governance in the climate transition, and the need to link climate strategy and corporate strategy in depth.
When you talk to these people, it's not a matter of vaguely estimating the costs of action plans. Finance and Strategy teams expect CAPEX and OPEX figures that vary according to various parameters that need to be optimized locally, a forecast of cash flow, depreciation, recurring CAPEX, etc....and, of course, dynamic Marginal Abatement Cost curves.
All these tools will enable them to run simulations and identify the most efficient scenario from a "Carbon ROI" point of view: how many euros spent for how many tCO2e reduced.
What's more, more and more companies are integrating one or more carbon prices into their decision-making process, and in particular a "master" price that assigns an economic value to the carbon footprint of the company's investment or purchasing decisions. Precise financial modeling of the decarbonization plan enables efficient and rational use of the carbon price set by the company, and the release of larger budgets.
5. Some decarbonization opportunities are also financial opportunities that go unnoticed.
Many decarbonization actions can be financially attractive for the company, even in the short term, making them obvious strategic priorities for the company. This is particularly true in a context of sharply rising prices.
By demonstrating the return on investment in the short term through an internal business case, it will be possible to have ROI-positive actions approved and deployed extremely quickly, and then concentrate on more complex or costly actions.
To identify savings-generating actions, the MACC Curve (mentioned in the paragraph above) set against the internal price of carbon, will be particularly useful and appreciated.
Conclusion
By giving a clear vision to operational teams, who are responsible for the proper execution of the company's climate strategy, the financial vision of action plans is essential. It helps to get business teams on board, speed up the decision-making process, involve finance teams and senior management, release larger budgets and sometimes even reduce costs.
Useful financial modeling, however, needs to be reliable, accurate and above all dynamic, so that each player involved can carry out their own impact and cost simulations, and make the right action and investment decisions.
If you would like to accelerate your decarbonization process by adding a financial component, please consult our information sheet on our financial module or contact us directly!
