Environmental Risk is REAL

This month The World Economic Forum published its Global Risks Report for 2020 which has presented us with some fascinating yet potentially surprising insights – as some critical risks are no doubt manifesting at a rapid rate, it’s the first time in the Global Risk Report’s history that all the top five risk are related to the environment.  This surely cannot be ignored!

The Top 5 Risks highlighted in the report were:

  1. Extreme weather events – from bushfires in Australia and floods in India, extreme weather destroys homes and businesses, damages infrastructure, threatens human life and has a huge impact on wildlife, with huge numbers of mammals, birds, reptiles, insects and other species killed.
  2. Failure of climate change mitigation and adaption – we are all threatened by our changing climate, and although the world has started to respond to the climate crisis, we are not doing enough yet to adapt to stop the effects of climate change, or adapt to our changing world.
  3. Climate change and massive biodiversity loss – humanity has already caused the loss of 83% of all wild mammals and half of plants, and insects have declined by 40% in recent decades, one study estimates, and humans need a variety of species to thrive. Biodiversity pollinates crops, cleans water and provides medicine. Planting trees, protecting the ocean and reducing pollution are key to restoring ecosystems.
  4. Major natural disasters – such as earthquakes, tsunamis, volcanic eruptions and even geomagnetic storms.
  5. Human made environmental damage and disasters – this includes environmental crimes like oil spills and radioactive contamination.

The global economy is no doubt facing an increased risk of stagnation, whilst climate change is striking harder and more rapidly than expected, and fragmented cyberspace threatens the full potential of next-generation technologies. The challenges before us demand immediate collective action, but fractures within the global community appear to only be widening. Stakeholders need to act quickly and with purpose within an unsettled global landscape.

Impact of the Industrial Sector

The industrial sector as a whole is among the sectors that emit the most greenhouse gases and carbon dioxide globally – whilst this includes sub sector industries such as manufacturing, food processing, oil and gas, utilities, and construction (iron, steel, and cement production are some specific examples), these sectors together produced 21 percent of all carbon dioxide emissions in 2014.

Almost all countries now acknowledge the issue of climate change, however even after signing the Paris Agreement in 2016, many are still finding it difficult to cut back on their carbon emissions – for example Germany, considered to be a leader in climate change policies, remains strongly dependent on coal, one of the dirtiest sources of energy and a major contributor to carbon emissions.

But, in order to understand the connection of our impacts to climate change and why countries are having difficulty reducing their greenhouse gas emissions, the carbon emissions intensive industries must be analysed.

In recent years, with the emphasis more on environmental protection, the global energy landscape is now changing – the proportion of traditional energy is gradually decreasing, and renewable energy and its associated technologies are developing at a rapid rate. In this context, the energy sectors, and in particular the oil and gas industry, is still in the early stages of the low-carbon emission energy transition, and perhaps has the faces the greatest industry challenge in achieving a better carbon footprint.

We know that there is no easy path to reducing an organisation’s carbon footprint. There is certainly no one-size-fits-all approach to success. But over the years, there have been some solid best practices that have surfaced.

So what is a CFOs role in reducing Carbon Footprint in the Industrial sectors?

One of the common themes that keeps surfacing with our clients is how much CFOs are counted on to be pillars and champions of their organisation’s carbon reduction and overall sustainability strategies. There is a lot is involved when it comes to a CFO being that champion, especially in a landscape that seems to be continuously evolving.

Here we highlight three ways finance leaders can take advantage of the demand for more sustainable business operations whilst navigating any regulatory changes.

Data and Analytics

As finance professionals, there is a requirement to rely on numbers to guide recommendations – and the same principle applies to putting energy numbers to work. Just like organisations today have quarterly financial reports and billing statements that indicate their financial performance, they also have data that reveals their energy performance.

This data is found in utility bills, and, increasingly, in reports from connected sensors and operating systems about equipment energy usage and performance from the plant floor to the corporate office.

Utility bills can reveal fluctuations in electricity consumption, and connected machine or Internet of Things (IoT) data can reveal symptoms of a larger problem, such as alerts indicating that a warehouse door is continuously left ajar, causing the AC to expend extra energy to cool the facility.

Without the hard utility data, managers would be blindly implementing energy saving measures that might align with a company’s financial and sustainability goals, but have minimal impact.

Either on their own or as a pair, utility and IoT data can be the backbone for first assessing current energy usage and environmental impact, and then instituting company-wide goals to reduce carbon emissions.

Business Partnering

Building a company energy-saving plan requires change and cooperation across many departments, including finance.  As CFOs, there is a unique role to play here. Not only is there a need to manage the financial risks of implementing energy-saving measures, but also need to communicate those risks and rewards to internal stakeholders – starting with the board of directors.

CFOs play a critical role in a carbon-reduction campaign, particularly for global organisations, where there may not be a system in place for financial leaders to be briefed on every business action that would affect carbon emissions goals.

A business development team, for example, might look to build a new facility to house a growing research team. That’s great news for the company as a whole, but unless there’s a line of communication from the business development team to the finance team, the financial benefits of adding energy-saving measure to the new facility might not be realised until it’s too late.

Communicating through effective business partnering gives the CFO an opportunity to work energy-saving and energy monitoring measures into any major business plan.

Regulatory Changes

Employees and customers are demanding more sustainable business operations, forcing financial and business leaders to align their goals to see how they can adjust in a financially sustainable way.

As financial leaders, efforts must support carbon-cutting goals, but they must also recognise that you aren’t policy or energy experts. A few groups have recognised this need, and are sharing information to help businesses navigate policy changes. One of these groups, the Task Force on Climate-Related Disclosures (TCFD), focuses on disclosing climate-related risks to businesses.

Summary

By putting data to work, building new lines of communication through effective business partnering and paying attention to regulatory changes, we move closer to having the tools we need to influence the financial and environmental health of our organisations.

If you would like to confidentially discuss how Norman Broadbent Group could help you overcome your business or people challenges, please contact, Marcus Blackburn, on 07483 015 595 or via marcus.blackburn@normanbroadbentsolutions.com