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Decarbonisation in energy and manufacturing

Insights from our survey of financial executives

Many financial executives view decarbonisation as a costly undertaking rather than an investment. How can energy and manufacturing organisations help shift their financial executives to embrace the steps needed to usher society towards a net-zero future? Explore our decarbonisation strategy report and learn how going green can create economic value as well as sustainability.

Finance leaders give their take on decarbonization

Sustainability efforts involve trillions of dollars in spend, not to mention the interest of stakeholders, customers and the communities they affect. With so much at risk, we set out to probe the role financial executives play in influencing and executing their organisation’s decarbonisation investment strategies (D-strategy). To do it, we surveyed close to 140 executives in the US energy and manufacturing industries. Here’s are some of the biggest takeaways we discovered:

  • 73% of surveyed financial executives stated that their organisations have a D-strategy, but fewer than half of them have played a role in their development.
  • Only 17% of surveyed financial executives see money spent on decarbonisation as a profitable investment.
  • The lack of clear and consistent environment, social and governance (ESG) reporting guidelines was cited as the biggest impediment to D-strategies for more than 50% of executives surveyed.
  • Organisations with financial executives playing a larger role in decarbonisation strategy and a higher proportional investment in green initiatives have found a new cash flow equation to fund their D-strategies, while their less engaged counterparts still follow a traditional cash flow allocation.

The investment challenges inherent in transitioning to a new low-carbon economy provide a unique opportunity for financial executives to lead in one of the world’s biggest business and financial transformations. ESG metrics are becoming as important as earnings per share, meaning that the perspective and role of the CFO’s office should stay one step ahead in this evolving environment.

Meeting the challenge of a net-zero future

With an emissions share of more than 75% and a cumulative debt of $2 trillion, the energy and manufacturing industries are reaching an inflection point. Change will have to come quickly and strategically if the United States is to achieve net-zero emissions by 2050. Reaching this goal will also require about $4 trillion in annual clean energy investment by 2030, meaning financial executives need to get on board.

Financial executives certainly have a key role to play in enabling their organisations’ D-strategy; however, not all of them are currently at the table. Fewer than half of the financial executives we surveyed have a decision-making role in developing and enabling their organisation’s decarbonisation strategy. Does it matter? Absolutely. Only when financial executives are in a position to make decisions can they actively fuel their organisation’s D-strategy and power its commitment to change.

Plus, without clear and consistent ESG reporting guidelines, financial executives are only committing to bare-minimum investments. Added uncertainty surrounding green economics is also doing its part to limit forward movement. Right now, green initiatives may be less profitable, but financial executives must change their lens to include “social benefits” as part of their new value equation.

Organisations should elevate the role of financial executives to lead the new low-carbon future. They should see senior financial executives as a strategist and catalyst for enabling their decarbonisation strategy and adopting progressive ESG reporting guidelines.

Funding successful decarbonisation strategies

How can financial executives more effectively plan to fund their D-strategies, and will it require them to break away from traditional approaches to cash flow allocation?

Survey respondents of future-focussed and conventional organisations alike indicated that government action is important in resolving challenges and creating a new playing field. But there are interesting differences in expectations between the two groups.

Future-focussed organisations—ones with involved financial executives—anticipate broader changes that go beyond their own company’s bottom line. They’re ready to explore a new cash flow equation, while their counterparts are still following the traditional approach. For conventional CFOs, tapping ESG funds and issuing green bonds and tax credits (8%) are still not seen as primary funding channels because they are viewed more as a valuation play, especially ESG funds. Future-focussed organisations, on the other hand, are increasingly monetising these routes.

Reaching three cross-sector desired states

There’s no one-size-fits-all solution to the challenges outlined above. There is also the stressed financial health of oil companies, evolving regulatory landscape for power and utilities, and hard-to-abate sectors in manufacturing adding new levels of intricacies for financial executives to consider. Learn more about how to address these nuanced challenges by clicking below.

Financial executives of oil, gas, and chemicals (OG&C) corporations should break away from managing oil price cycles and develop a purpose-driven strategy to create sustainable value.

The current issue:

  • Managing commodity price cycles amid falling interest of stakeholders

Progress made:

  • Capital allocation for green is growing: 52% of OG&C respondents plan to spend more than 10% of their future cash flows on green.
  • OG&C is not behind in decarbonisation: 78% of OG&C respondents state that their organisation has a low-carbon strategy.

Challenges faced:

  • Strong oil prices may create a rift: 46% respondents state that they would accelerate transition, while 40% plan to sustain or grow hydrocarbons.
  • Giving away hydrocarbon’s high cash flows isn’t easy: 36% of OG&C respondents highlight hydrocarbon cash flow and returns as their biggest trade-offs.
  • Money spent on decarbonisation has yet to become a profitable investment proposition: 82% of OG&C respondents highlight decarbonisation as a cost.

Actions to take:

  • Break the strategy conundrum: Uncertainty in decision-making is accepted, but a confused hydrocarbon or green energy strategy is not.
  • Give a new mandate to digital: Not only optimise operations but also safeguard the environment and health of employees.
  • Adopt and report progressive ESG metrics, benchmarks and standards, irrespective of the selected pathway.

Adopting a portfolio mindset that allows their organisation to benefit from green synergies will go a long way in aligning multiple stakeholder expectations for power and utilities companies.

The current issue:

  • Gathering new clean energy assets amid an evolving policy landscape.

Progress made:

  • The D-strategies and commitments of power and utilities (P&U) financial executives is apparent: About 73% of P&U financial executives plan to spend more than 10% of their future cash flows on decarbonisation, indicating high green allocations, assisting executives in managing evolving compliance and regulatory mandates.
  • P&U financial executives are determined to play a decisive role in realizing decarbonisation gains: About 85% are either in decision-making or consultative roles.

Challenges faced:

  • Timely rate-base expansion and justification for decarbonisation investments remain their primary challenge: About 30% to 40% of P&U financial executives highlight ROI as their top challenge.
  • Evolving regulatory, policy and market landscape is complicating their long-term planning: About 40% of P&U financial executives highlight them as a limiting factor.

Actions to take:

  • Rate-design reforms that include moving away from volumetric cost recovery to targeted performance-based ratemaking (PBR) related to carbon.
  • Updating utility planning methodology from a deterministic approach to a probabilistic one.

Manufacturers are gradually accelerating their sustainability efforts, but the diverse nature of their business can make it difficult for them to focus their efforts.

The current issue:

  • Long-lived asset base with high retrofit and upgrade cost.

Progress made:

  • Capital allocation for green remains low, as it is seen as a cost: 58% of financial executives plan to spend less than 10% of their future cash flows on green. 86% see decarbonisation as a cost rather than an investment.
  • There remain ongoing challenges to decarbonise the toughest manufacturing sectors: Fewer than 25% have a net-zero goal, with 33% yet to announce their decarbonisation strategy.

Challenges faced:

  • Fossil fuel dependency in logistics and processes, design restrictions, integrated processes and costly rebuilds limit sustainability goals of manufacturers.
  • Competitive manufacturing practices of less carbon-efficient producers and a lack of readiness from supply chain partners are limiting decarbonisation progress: More than 33% have highlighted them as a limiting factor in their strategy.
  • ESG-related reporting, risk and financial challenges: More than 20% have mentioned hard-to-abate business processes, with intensive heat requirements cited as their limiting factor.

Actions to take:

  • Modification of product designs and production processes to deliver the highest possible ROI on sustainability. 33% of respondents state that developing a greener product family and driving sustainability commitments from suppliers can help maximise their ROI.
  • A greater focus on MRO and sourcing materials and energy from green vendors is key to decarbonise hard-to-abate business processes. Close to half of our respondents agreed that a focus on MRO and green sourcing will help in achieving decarbonisation goals.

The evergreen winning math

To create value and thrive in the clean energy future will require a strong, committed, and participative green proposition that leverages the elevated role of finance leaders. If you’d like to talk more about your company’s decarbonisation strategy and how Deloitte can help you achieve its goals, reach out today. Let’s set up a conversation.

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