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Why CFOs Must Lead Company Efforts to Achieve Net Zero
Sustainable finance
3 min read
CEOs must partner with CFOs to drive climate action throughout their organisations. CFOs will have a unique role in recognising and managing significant financial implications of their climate strategies.

It is increasingly well understood that CEOs need to lead on climate in order to drive real change throughout their organization. There is no substitute for leadership at the top. What is less appreciated, however, is that putting a net zero strategy into action depends more and more on another individual in the C-suite: the CFO. 

The need for CFOs to lead on climate reflects a critical reality. Climate change, and efforts by companies to decarbonize, will fundamentally remake balance sheets. Today, many companies have an unrecognized carbon liability. How significant is that liability? For all companies around the world combined, it could total as much as 5% of the global economy according to estimates by BCG senior advisor Robert Eccles and others. At the same time, there are significant opportunities to adopt new climate-related business models or build new markets—activities that will require investments on the asset side of the balance sheet. 

To manage both issues, CFOs can lead, embedding climate and carbon into decision-making and processes including those related to capital expenditures and mergers and acquisitions (M&A). In addition, CFOs can use their role in measurement and reporting to create the connection between their company’s financial performance and its climate impacts. In doing so, they can help build the narrative around how the company’s climate actions create value for shareholders. 

Without their leadership, it will be difficult for companies to accelerate their progress toward net zero. 

How Climate Transforms the Balance Sheet

CFOs must get their arms around the size of their company’s climate-related liability, using projections of both company emissions and the price of carbon. For instance, the price per ton of carbon in the EU Emissions Trading System (ETS) was close to €100 earlier this year and BCG expects it to hit more than €200 before the end of the decade. Even if a business is not yet subject to a carbon levy, it should expect that more countries will use some mechanism—whether an ETS or taxes—to put a price on carbon over next 5–10 years. 

The changes in the asset side of the balance sheet, meanwhile, will stem largely from new climate-related business opportunities. Climate action is creating a myriad of new products and services. Whether it is electric vehicles (EVs) in the auto sector, alternative proteins in consumer packaged goods (CPGs), or green steel in the industrial sector, first movers are seizing the lead in fast-growing new markets. And those that move too cautiously are coming under significant pressure. Case in point: Hedge fund Engine No. 1 successfully pushed for three new directors to be installed on the Exxon Mobile board after arguing that the oil and gas company was not moving quickly enough to implement a low-carbon business strategy. 

To manage the balance sheet changes, forward-looking CFOs are integrating climate into their company’s financial decision-making, including business planning, capital expenditure decision-making, M&A, and product development. For example, the business cases for actions to reduce a company’s carbon liability, such as investment in new equipment to reduce emissions from its operations, should reflect the future price of carbon. Meanwhile, the business case for investments in new business models or markets should reflect the potential revenues from those opportunities. Additionally, business cases for all investments should factor in second-order impacts such as lower financing costs for a company and reduced employee churn as a result of a company’s overall enhanced climate record.

Tracking Results and Bringing Investors On Board

The finance function defines how progress and success get measured operationally, including for external reporting and calculation of incentive compensation. In this way, CFOs help their organization understand the link between their company’s actions and financial and climate outcomes.

This measurement and reporting responsibility also provides the foundation for a company’s investment narrative. Global sustainable investment hit $35 trillion in 2020, up 15% in just two years—evidence that the appetite among investors for companies with a proven climate strategy is expanding rapidly. But investors are looking for evidence of value creation—not altruism.

CFOs need to craft a clear narrative about how their company’s climate strategy creates competitive advantage and value. This can include entry into fast-growing markets, securing access to necessary, yet scarce resources (such as lithium), or increased customer loyalty. In addition, they should think through the composition of the current investor base and whether their company’s evolving profile will require a shift in that makeup. For example, investors with a clear ESG or climate investment mandate, or impact-oriented private equity funds, may be well positioned to invest in and support companies focused on shareholder-value-oriented net zero transformations.

As we move from net zero promises to action, companies need to recognize and manage the significant financial implications of their climate strategies. CFOs will be the linchpin to that effort, managing their company’s carbon liability as well as investments in new green assets—and creating value for shareholders in the process. 

Jesper Nielsen
Managing Director & Senior Partner, BCG
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