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 organization’s decarbonization 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 organizations 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 decarbonization 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.
• Organizations with financial executives playing a larger role in decarbonization 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 organizations’ 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 organization’s decarbonization strategy. Does it matter? Absolutely. Only when financial executives are in a position to make decisions can they actively fuel their organization’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.

Organizations 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 decarbonization strategy and adopting progressive ESG reporting guidelines.

Funding successful decarbonization 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-focused and conventional organizations 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-focused organizations—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-focused organizations, on the other hand, are increasingly monetizing 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.

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 decarbonization strategy and how Deloitte can help you achieve its goals, reach out today. Let’s set up a conversation.