This blog was written by Anthesis CEO, Stuart McLachlan and is part 5 of a series of insights on this years’ Conference of the Parties 28 (COP28) in the United Arab Emirates.
Chief Financial Officers are increasingly critical change agents in unlocking and channelling the capital that’s needed to deliver the transition to sustainability. But that role is not an easy one as CFOs find themselves caught between the competing interests of the short and long term.
In Dubai, it was fascinating to talk to a CFO of a high emissions company about the challenges they face in mobilising the investment and financial markets needed to decarbonise their business. They are under enormous pressure to retreat from their decarbonisation commitments, to raise their valuation to that of a high emitter doubling down in fossil fuel. The short-term bump in the price of oil means this progressive company is not performing as well as high emitters. The company has now become a takeover target, ironically from a business whose medium to long term strategy is essentially likely to be one of terminal decline.
This is one of many examples of how financial markets and short termism act against the transition. CFOs in most businesses are navigating these pressures to a greater or lesser extent. In another conversation we were discussing the certainty of a four metre sea rise in a particular region, with the inevitable consequence that one of the largest cities in the world will be flooded and inaccessible. And yet the affected assets are only being impaired in value to 23% – even though they will be unusable. It is falling to CFOs to translate the science into meaningful assessments of financial impact.
At the Glasgow COP in 2021 the IFRS (International Financial Reporting Standards) – basically the accounting standards that every company uses – announced the establishment of ISSB (International Sustainability Standards Board) with a mission to deliver a global baseline of sustainability-related financial disclosure standards for capital markets. In the last couple of months IFRS has announced the incorporation of the ISSB’s sustainability-related financial disclosures into the requirements of IFRS. IFRS will take over the TCFD’s role in monitoring progress on companies’ climate-related disclosures. There’s also growing harmonisation of ISSB, SBTi and CDP as they incorporate each others’ methodologies as well as fulfilling many requirements under GRI. At the same time, global financial reporting standard-setters are aligning with sustainability disclosure frameworks, with new regulatory requirements for ESG and climate disclosure. All of this alignment is very welcome, but for most businesses it will ultimately yield a hefty integrated reporting requirement on the desk of the CFO.
As businesses enter this new phase of transparency about financial and non-financial performance and the relationship between them, it’s vital that CFOs are empowered to report on climate related-risks and the drivers of sustainable performance, to work with investors and educate them of the perils of short termism, and have the skills to hold all of this in tension while unlocking the capital to fuel the transition and to create business value. This empowerment is now a core task for Anthesis and others helping leaders who are driving change.