Climate Change and the Finance Team

CIMA’s survey, Accounting for climate change, has found that 80% of respondents think that the finance function should be involved in climate-change initiatives.

 
Primary drivers for implementing climate change initiatives
The survey showed compliance and conformance to be significant drivers for climate change initiatives, with just 29% saying that competitive advantage or performance alone was the primary driver (although regionally, the percentage ranged from 14% for Australian respondents to 64% for Chinese ones).
 
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 But in many cases, it’s not as simple as drawing such clear distinctions.
 
‘Carbon is raw material and energy and they both cost money,’ explains Chris Harrop, Marshalls. ‘We all need to be saving as much money in the current economic downturn as possible. More people are actively seeking environmentally and socially beneficial products, so consumers are pushing, too. And both government and key stakeholders are pushing us to reduce carbon footprints, improve ethical sourcing, responsible sourcing and improve biodiversity. So, we either get with it or it will hit us in four or five years and the costs of implementing then will be far, far higher.’
 
CIMA has found that companies are at vastly different stages in their sustainability journey, often driven by the historic degree of regulation of their business, stakeholder and consumer pressure, innovation, and sometimes the personal ideologies of their CEOs. The range of motivations and benefits often depends on the sophistication of an organisation’s approach.
 
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The degree of adoption for some sectors may have been influenced by the early recognition of the likely value creation opportunities or value at risk, which arecalculations made by management accountants. Clearly, the opportunities to exploit their skills in sectors thatare only now facing up to the risks, costs and benefits of climate change action are huge.
 
Barriers to change 
CIMA is keen to understand why finance professionals aren’t more involved in climate change management in many organisations and why more organisations aren’t taking concrete steps to manage, mitigate and adapt to climate change. Worryingly, only 29% of respondents to our survey agree that climate change poses a significant risk to their organisation.
 
‘There is not enough being done to raise the profile of this within the business,’ said one respondent. ‘We have started to bring our thoughts on to climate change, but only for new business not for current operations,’ said another. A third summed up one of the biggest barriers to action: ‘Other priorities push such issues to the back seat.’
 
For the finance team, this creates a two-layer problem. First, will the organisation and its people commit to a rounded and forward thinking view of climate change? And second, will they see the value in applying management accounting skills?
 
On the latter question, there is cause for optimism. A key barrier to taking climate change seriously is the need for discipline and robustness around the measurement of the problem, something that the finance function can bring to the issue.
 
And although on a global basis, finance teams are least likely to have a formal role in climate change policy implementation (30% in our survey), in some countries finance professionals are more deeply embedded.
 
So while in the UK, it’s 44% and in Ireland, just 23%, in China finance functions are more likely to have a formal role in implementation, according to our survey.
 
We discovered several further key barriers to both acceptance of the need for action and of the role management accountants can play.
 
FOR THE ORGANISATION 
Hearts and minds
Too few employees consider the subject worthy of attention. ‘Senior managers are very supportive of a strong sustainability agenda. [But] middle and junior managers want to focus on their day job and see it as a side issue,’ said one respondent. ‘We are compliant with all environmental laws… but with no financial benefits to the organisation, unless there are legal reasons for making any adjustments or improvements there is no reason to improve,’ commented another.
 
Understanding the issue
‘Our biggest problems are identifying a globally recognised reporting framework, getting the correct measurements in place for the key contributors; the relative impact factors for each source of emission; and a place to disclose our results publicly,’ said one respondent to the CIMA survey. In one FTSE 250 company, capital investment is dedicated to growing the top line. The finance team told us that cost-saving opportunities didn’t get the same prioritisation. That means projects with a return on investment (ROI) of 40% could have been overlooked because they didn’t boost revenue.
 
‘The main problem is cost’
A common barrier is the belief that these initiatives are too expensive: 60% of respondents believe that adapting to the impacts of climate change will raise costs. ‘If we increase our costs to accommodate climate change issues…the customer simply moves business,’ said one respondent. ‘Efficiency, economy and value for money drive decision making,’ said another. ‘This will be the benchmark against which sustainability will be assessed.’
 
Current economic climate
And in the wake of a global credit crunch and recession, it’s hard to find the right balance between short-term expectations of customers and investors, and the actions needed to assure long-term continuity and success. While a quarter of respondents said there had been no change in focus, 28% are scaling down sustainability projects and a further 8% feel they will get no approvals for new projects.
 
Management accountants instinctively see long-term benefits, but are aware of short-term priorities. Said one: ‘We should be proactive in tackling this issue.In the long-term it should lead to a lower cost base, which is beneficial to all businesses. But in the current economic climate, the sole focus of my company is to stay in business.’
 
Lack of external pressure
Perceived high costs and need to focus on short-term returns means that without commercial pressure to address climate change, it’s hard to justify. ‘Most of my clients place little importance on climate change initiatives; their only concern is the bottom-line cost to themselves. I’d find it hard to generate business and be competitive if I placed too much importance on this issue,’ said one survey respondent.
 
FOR THE FINANCE TEAM
Lack of time
Members of the finance team are trained to think short-term. Climate change is a long-term issue. The main reason (given by 42% of respondents) for finance teams not giving more than ad hoc support to climate change initiatives is that they do not have sufficient time to get involved. ‘We have no spare resource availability, even if we were contacted,’ said one finance professional. Another added: ‘This is often seen as an add-on to an already full role, rather than being part of someone’s job profile.’
 
Lack of specialist knowledge or skills
The second most populated reason (cited by 38%) was that finance does not have the specialist knowledge and skills to support decision making around climate change. For example, while just 18% of sustainability specialists didn’t know how carbon pricing might affect decision making, it is higher among finance respondents (nearly half).
 
Short-termism
Among sustainability professionals, there was a sense that finance people are too bound up with budgets and targets to adapt to long-term sustainability planning. ‘One of the reasons finance are not so involved is they are trained to think short-term. Climate change is a long-term issue and mitigating it, and adapting to it, is a marathon not a sprint.They’re [finance] just not accustomed to the big picture,the long-term thinking that embedding sustainability really requires,’ said the Head of Group Sustainability for one FT 500 company. Although most accountants might argue with that hypothesis, 37% of respondents to CIMA’s survey broadly agree.
 
At odds with the role of finance
A third of respondents felt that involvement with climate-change initiatives does not fit with the finance role. ‘We can’t set a budget for environmental protection,’ said one respondent. ‘That is not on my boss’s agenda.’ Of course, there is a more nuanced way of approaching this barrier, articulated by another respondent: ‘There is a place for the finance function in assisting with measurement and reporting, but I would not want the finance function to lead this initiative, as it will be seen by the rest of the company as purely cost driven. Communicating the relevant messages on climate change in an effective way, both internally and externally, is a job for the communications and marketing specialists in our organisation.’
 
About the Author
Irene Teng is Regional Director based in CIMA’s Kuala Lumpur office.
She leads CIMA's strategy across ASEAN and Australasia, including student growth and related alliances and partnerships.
 

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