Cutting costs and climate risk

Financial directors are in a crucial position when it comes to climate change. They have a key role to play in mitigating future financial risks stemming from shifting consumer preferences, regulatory change and the physical impacts of climate change.

This year we saw that 215 of the biggest global companies are reporting US$1 trillion at risk from climate impacts, according to CDP data.

However, financial directors are under intense pressure to keep costs low in the short-term and many are concerned that reducing exposure to these risks will require significant investment. The good news is that a win-win situation is out there for savvy financial directors looking to keep short-term costs down while also improving business resilience.

Low-hanging fruits in the supply chain

Based on CDP data from thousands of companies we know the average corporate supply chain produces over five times more emissions than the company’s own direct operations – suggesting a rich area for low-hanging fruit.

But better supply chain management is crucial for reducing climate risk – which is felt not only in the boardrooms of listed corporations but all along the value chain. CDP’s latest report Changing the Chain uncovered over US$900 billion of potential financial impacts from climate change reported by some 7,000 suppliers. These firms were reporting at the request of their customers – 125 major purchasers including the likes of Walmart, L’Oréal and Samsung Electronics that work with CDP.

They are demanding this data because they know corporates can be impacted by environmental risk downstream in their global supply chains, with potential impacts including increased costs, disruption to delivery or reputational damage.

The good news is that tackling this risk also yields opportunity. We found that emission-saving activities – such as energy efficiency measures and clean energy – are associated with substantial financial savings, with US$20.2 billion saved by climate-conscious suppliers in 2019.

Along with the fact that engagement with suppliers can also lead to better longer-term relationships, this highlights the increasingly strong business case for companies to take action on climate change.

One of the most impactful ways to cut carbon emissions is to switch to renewable energy and incentivise your suppliers to do the same – which is now price competitive in many markets worldwide. Our report finds that one gigaton of emissions savings can be unlocked by those 7,000 suppliers increasing their proportion of renewable power by 20 percentage points – from 11% to 31% on average.

100% renewable is 100% achievable

Many leading companies are joining RE100, a global corporate leadership initiative bringing together influential businesses committed to 100% renewable electricity, led by The Climate Group in Partnership with CDP.

As reported at COP25, the membership has grown by over a third in the past year, now encompassing over 200 companies. The business case is compelling. The latest RE100 report shows adopting an ambitious renewable electricity strategy is seen as a way to manage long-term risk and increase resilience to regulation and price volatility. One in two responding members are already experiencing cost savings and an additional 10% of respondents are anticipating them.

Finally, financial directors who are serious about protecting against climate risk should look towards the Science-Based Targets Initiative. It was announced last week at COP25 that 177 companies – including Tesco and International Airlines Group – have committed to setting emissions targets across their operations aligned with a 1.5°C future.

These businesses are benefiting from improved brand reputation, customer loyalty and competitive advantages in recruitment and retention. Most crucially for financial directors, a separate 2018 YouGov survey found almost a third of companies committed to science-based targets are already seeing bottom-line savings thanks to their ambitious commitment.

A win–win is out there for savvy FDs

Climate change presents real risks for business and the world, and a small but growing number of companies are responding in line with what the science demands. Those companies that ignore the risks are putting themselves in a poor position for the economic transition to a low-carbon economy. Conversely, now is the time to move if you wish your company to thrive in the future.

As COP25 showed, by setting ambitious climate targets and working with suppliers to implement them across your whole value chain, companies can make a significant positive impact on both corporate emissions and financial performance. There are significant win-wins on offer for savvy financial directors.

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