In recent years, the role of finance departments has undergone significant change. Climate-related considerations are no longer simply exogenous issues. They are now an intrinsic part of corporate development strategies. This evolution, whether the result of a proactive approach or new regulatory imperatives, places CFOs in the front line.
Indeed, climate change is generating substantial costs, and the environmental transition also represents a major financial challenge. Their responsibility is therefore decisive in taking these transformations into account to ensure the long-term viability of their businesses.
Initially called upon to orchestrate the implementation of the NFRD, they will now have to comply with the much more demanding framework of the CSRD.
These changes also mean working with new contacts who previously seemed far removed from the traditional concerns of a company's finance department.
CSR, the CFO's new role?
At first glance, ESG issues seem far removed from the traditional scope of finance management. However, according to a survey conducted in 2022 by Harris Insight for Anaplan and Deloitte, 85% of business leaders consider ESG criteria to be first and foremost a concern for the CFO .
CSR topics are no longer, and can no longer be, a simple slide used to close the presentation of the company's annual balance sheet to employees and/or investors just before the end-of-year cocktail party.
Today, it is a key dimension of corporate strategy, demanded by stakeholders and, above all, investors.
Sometimes seen as a simple communication tool, CSR has become an essential element in corporate financing. The importance of extra-financial reports in the decision-making process of banks and investors is growing rapidly. Profitability alone is no longer sufficient. The market is becoming increasingly demanding, and is keen to understand how companies understand and anticipate the effects of climate change in terms of risks and opportunities.
A survey of European CFOs conducted by Horváth in 2022 shows that 93% of them believe that companies that fail to address sustainability issues today will be at a competitive disadvantage in the medium term.
This change is accentuated by new, more demanding regulations:
- The CSRD will considerably enrich the content of extra-financial reports,
- Green taxonomy will force companies to assess the sustainability of their activities
- The SFDR will oblige financial market players to be more transparent about the sustainability of the assets making up their portfolios.
All these issues will directly or indirectly concern finance departments, who will have to tackle them head-on if they are to carry out their missions properly.
On the whole, finance managers are well aware of the changes their position will undergo, and many see opportunities. While today they still see themselves more as ESG data reporters, a majority see their role taking on a much more operational role in the future.
A two-headed governance model.
These new challenges will not be met by CFOs alone. A new mode of governance is emerging within companies, bringing together two departments that used to work in silos: the CFO and the CSR department.
New demands linked to climate change and regulatory developments aimed at transforming the economy have broken down any barriers that may have existed between these two departments.
The aim is now to combine financial and extra-financial reporting, to fully integrate environmental accounting into traditional accounting. Extra-financial reporting, once the preserve of CSR departments, must now take into account advanced financial modeling and impact and financial materiality analyses (the famous double materiality). Today, the division of roles in the production of these reports, and in particular the green taxonomy and CSRD reports, remains a vague subject.
A survey of French CSOs and CFOs conducted in 2023 by BCG and DFCG shows that while 67% of them see environmental accounting as a priority for the current year, there is still no agreement on which team will be responsible for the associated reporting. The study shows that 70% of CFOs want sustainability-related metrics to be handled by the company's existing management control, while 76% of CSOs prefer them to be handled by a team dedicated to these subjects, which will nevertheless incorporate management control skills.
From our point of view, the two branches should be brought together under a single banner that will co-construct the company's structural transformation projects, model the costs linked to this transformation and anticipate those linked to the consequences of climate change on the company's activities. Each project will thus be studied not only from the point of view of its profitability, but also from that of its carbon impact.
This association has also become essential in the context of the company's search for financing. It is no longer rare to see the CSR department working alongside the finance department in the search for new investors. It is also this tandem that can steer the issue of green bonds or the establishment of an internal carbon price, likely to influence future investment decisions or purchasing policy.
The growing role of the Audit Committee
Within the Board of Directors, the responsibilities of the Audit Committee have also increased.
Given the growing importance of ESG issues and the complexity of extra-financial reporting, their relationship with the CFO is set to evolve. Usually confined to accounting control roles, they are now working alongside the CFOs and in conjunction with CSR committees on environmental and social issues. The implementation of the CSRD will accelerate this trend, since, like CFOs, they will be much more in demand on these subjects by 2025, the year in which the first reports will be published.
To support the CFO in his transition and to be able to audit the new reporting formats correctly, they will need to extend their field of expertise. This means including ESG data and extra-financial reporting specialists on these committees.
Today, they are still under-involved, and suffer from a real shortcoming in this area. As EY pointed out in its Panorama de la Gouvernance 2022, among SBF 120 companies, only 24% of Audit Committees currently deal with CSR issues. What's more, only 12% of them include at least one member trained in climate issues.
CSRD, a key challenge for finance departments
The CSRD, which comes into force on January 1, 2024, will considerably accelerate the changes faced by finance departments since the recognition of companies' essential role in the environmental transition and the introduction of extra-financial reporting.
In the past, CFOs' commitment to ESG was minor. The new reporting rules imposed by the CSRD will require much greater involvement from finance teams, and the inclusion of ESG indicators in their medium- and long-term forecasts and financial modeling.
In addition, it will no longer be just a matter of taking stock of ESG indicators at a given point in time, but of drawing up an environmental transition plan for 2030 and 2050, in line with the objectives of the 2015 Paris Agreement. This transition plan, which will be updated annually, will have to integrate the company's strategy and will inevitably have financial repercussions, whether in the form of risks or opportunities.
In addition to the financial impact of the transition policy, each section of the report must also include an estimate of the costs generated by climate change on the company's activities and the investments made to anticipate its consequences.
According to the study carried out by BCG and DFCG, a large majority of major French companies have already initiated carbon accounting (95% on scopes 1 and 2, 70% on scope 3) or environmental impact measurement (80% on waste, 50% on water and 30% on biodiversity). They must now include the financial variable. All these elements fall directly within the CFO's scope of responsibility, and will therefore require an increase in skills in areas previously dealt with exclusively by CSR departments.
Solutions to guide CFOs
The main challenge for finance departments will be to assess 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 striking a judicious balance between this transition plan, which is particularly constraining given the objectives of the Paris Agreement, and the costs generated by it, also taking into account the potential cost of climate inaction for the company.
The financial module integrated into Traace provides a clear picture of a project's impact on the company's GHG emissions, while estimating the cost of the action, the OpeX and CapEx flows to be mobilized, and the estimated payback period.
This tool enables the CFO to navigate through a catalog of projects (a change of supplier, raw material, energy source, etc.) proposed by his CSR team and, by controlling the metrics, to find the solutions that will enable him to achieve the global decarbonization objectives set by the company, while anticipating and/or minimizing the financial impact. A matrix view makes it possible to identify at a glance actions with a high carbon and financial impact.
Based on the previous year's results, the tool will enable us to monitor the achievement (or non-achievement) of objectives year after year, and fine-tune our actions accordingly.
Conclusion
The CFO has, and always will have, a central role in companies. However, this profession is facing the biggest challenge in its history. The inclusion of sustainable development indicators in the company's accounts will become, and indeed already is, an essential element of its activity.
The pressure to integrate these changes comes from outside as much as from within, and it's a safe bet that job descriptions will evolve along these lines. Depending on the size of the company and its level of environmental maturity, they may or may not be accompanied by CSR teams, but in any case they must at least be aware of these issues, and be able to deal with them, or even manage them.
The search for financing, the estimation of costs linked to climate change and the company's investment policy are all subjects that will require in-depth knowledge of ESG issues. All these factors will gradually transform the profession, leading to the emergence of the new role of Sustainability CFO or Chief Sustainable Finance Officer.
Sources :
- "Priorités 2024 des Directions Financières"PwC / DFCG study, 16/11/2023
- "CSRD: what rules and what impact on companies?"Florian Langlois, DAF Mag, 09/11/2023
- "Which governance to carry out its low-carbon transition?"Traace and EY, 12/09/2023
- "Against all expectations, the CSRD directive also serves the interests of companies"Michel Sapranides, DAF Mag, 06/06/2023
- "Environmental accounting: a priority for 2023 for 67% of CSOs and CFOs of large companies"BCG, 24/04/2023
- "Panorama de la gouvernance 2022: accelerating ESG"EY, 26/01/2023
- "Finance departments: go green or go away"Cécile Desjardins, Les Echos, 14/12/2022
- "2023 priorities for finance departments: performance management, cash management in the short term and talent management in the medium term in the top 3 priorities"PwC, 11/17/2022
- "CFOs and sustainability directors are getting closer"Thomas Feat, Option Finance, 02/25/2022
- "CFO-Study 2022 - Deep Dive - Sustainability Performance Management: Sustainability as the new maxim for CFOs"Horváth, 2022
