The finance team’s role in net zeroby
Julia Penny identifies the risks and opportunities of pursuing a net zero strategy (or of failing to do so) and sets out the finance team’s role in driving the company’s strategy.
In June 2019 the UK parliament passed legislation to require the government to reduce the UK’s net emissions of greenhouse gases (GHG) by 100% relative to 1990 levels by 2050. This will make the UK a net zero emitter. Net zero means that although it is recognised that emissions will be produced, these can be offset by, for example, natural carbon sinks such as oceans and forests.
There are six major GHGs which are generally reported on in terms of their CO2 equivalence:
- carbon dioxide (CO2)
- nitrous oxide,
- perfluorocarbons and
- sulphur hexafluoride.*
UK emissions currently stand at 57% of their 1990 levels, though global emissions have increased over that period. If the UK is to achieve its ambitions action will be required by companies as well as the state and individuals.
Often it is the finance team which is in the best position to drive this change, through measurement, targets and integration of sustainability concepts within the strategic decision making of the organisation.
One key tool to use in driving that change is the use of Science Based Targets. The science based targets initiative (SBTi) seeks to provide a conceptual foundation for setting and assessing corporate net-zero targets.
Why is net zero important?
The A4S (Accounting for Sustainability) guidance for finance teams (non-banking) sets out five reasons that mean achieving net zero is important for all organisations.
- Governments are moving towards legally binding net zero targets which will have a significant impact on the corporate sector (the UK government already has these)
- Providers of capital want to understand your climate-related risks and long-term viability of your business model
- There are significant commercial opportunities from leading the transition to net zero (or costs in failing to do so)
- Employees increasingly move to organisations that can demonstrate their sustainable business credentials
- Customers and consumers increasingly seek environmentally and socially acceptable alternatives to traditional products and services.
How to start
Net zero is all about risk. If we fail to achieve it globally, we risk rising sea levels, more extreme weather or tide events and the loss of biodiversity. The WWF film, made by Netflix, Our Planet: Our Business brings this latter point to life, or you can consider the UK Climate Projections Headline Findings.
Ultimately if a business ignores the move to net zero its business model will cease to exist. In the most extreme example for instance, a business which runs coal fired power stations, will find that these are decommissioned. A business that supplies petrol or diesel, will find that the amounts it is able to supply are severely reduced, with cars and trucks moving to electric power.
But each business will have its own carbon emissions and sustainability issues, which need to be considered and addressed. Step one is therefore to engage with the board and executive management and identify the risks and opportunities of pursuing a net zero strategy (or of failing to do so).
If the net zero strategy is to be successful it needs to be integrated into the decision making at your organisation. Step two is therefore to gather data to measure your progress against your net zero pathway. Science based targets will allow you to report to the board on the progress made. Finally your business may need to invest in new infrastructure and new ways of doing things. If investment is required, then fundraising may be needed but the finance industry is ready and waiting to consider projects that help achieve net zero.
If you are a larger organisation, you may well look to hire a consultant to measure your current emissions and report them to the board and investors under the headings of type 1, 2 and 3 emissions (see the earlier article that explained these).
- Type 1 – direct GHG emissions that occur from sources owned or controlled by the organisation (eg fuel combustion in the entity’s vehicles)
- Type 2 – indirect GHG emissions that occur from the purchase of electricity, steam, heat or cooling
- Type 3 – all other indirect GHG emissions, where they stem from sources that the organisation does not own or control. This would include business travel, transportation and distribution, employee commuting, purchased goods and services, disposal of the company’s products at end-of-life for example. [JP2]
The government has issued guidance for environmental reporting and although you may not be required to disclose your emissions, the framework may still be helpful in determining how to measure your emissions. You may also consider using an Environmental Management System such as ISO 14001 or BS 8555 (aimed at SMEs). The government also provides conversion tables to allow you to calculate the CO2 equivalents of the various emission producing activities undertaken.
The conversion tables provide spreadsheets to help you calculate your emissions, as you can see from the small extract below:
If we look at a simple example, using the condensed set of data, you will see there are conversion factors to convert, for example, litres of petrol to tonnes of CO2e (carbon dioxide equivalents).
Using the average biofuel blend, which would be appropriate if you were just buying petrol from a range of forecourts, you might calculate that you used 2,160 litres per annum (say by filling up four times a month with 45 litres). The conversion factor is 2.19352, so emissions from the fuel equal 2,160 x 2.19352 = 4,742 tonnes of CO2e. Or you can calculate emissions using the miles travelled.
For instance, if you travel 13,000 in a petrol sports car you multiply the miles by the conversion factor of .39052 to get emissions of 5,076 CO2e. Both these are examples of Scope 1 emissions.
Similar exercises can be undertaken for the use of electricity, which would be Scope 2 emissions and Scope 3 emissions such as from air travel, hotel stays, the use of water or materials or leased vehicles which are not on the company’s balance sheet, among others.
As you can see, you can build up a picture of the company’s overall emissions and use this to highlight areas where you can make most impact on your emissions.
Your organisation will need to go on a journey to reach net zero. So to summarise here are the key steps to take, although there is plenty of more detailed guidance in A4S resources already mentioned.
- Conduct a SWOT analysis – identify the risks and opportunities of climate change for your organisation, including the availability and costs of resources, attractiveness of your products/services and any physical risks, such as rising sea levels.
- Measure your emissions and set target reductions using science-based initiatives, ideally linking these to executive remuneration.
- Reduce your emissions – identify where you can best reduce your emissions and where you may need to consider offsets, at least in the short-term, in your journey to net zero. For instance, holding more meetings virtually may reduce commuting or business travel.
Each business will have different risks and opportunities, but if you look at your current emissions, this will give you a good starting point for identifying where reductions can be made.
A number of chartered accountancy bodies are encouraging their members to join the race to net zero with the 1000 Chartered Accountants campaign and this might help focus attention on what needs to be achieved at an organisation level.
So, on your marks, get set and go – the race to net zero is on.
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Julia Penny is the principal of JS Penny Ltd which provides technical and training consulting on anti-money laundering procedures, auditing and financial reporting. Julia is a member of ICAEW Board and Council, chair of the ICAEW Ethics Advisory Committee and past chair of the ICAEW...