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Finance: accelerating the move to Net Zero

The build up to COP26 is focusing the minds of business leaders on their path to Net Zero. In this episode, host Rowena Morris is joined by Rob Smith, Finance Transformation Lead, and Claire Reid, Regional Leader for Scotland and Head of Technology, Data and Analytics for Risk. Together they explore the transformational role Finance teams can play, not only in accelerating the path to credible action on Net Zero emissions, but in using data to enable better business decisions that build trust alongside lasting success.

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Rowena Morris, Rob Smith and Claire Reid

Rowena Morris:

Hello everyone and welcome to this episode of our Business in Focus podcast. I am Rowena Morris, a director at PwC, and I am your host for this episode. COP26 is bringing together world leaders to debate the needed action on climate change and net zero. It's also where they will be expected to show how they're delivering on the promises made in 2015 with the Paris Agreement.

Turning policy into meaningful action at the needed pace is also a challenge felt by organisations. Today, we are going to be looking at the role your finance team can play. Now, when we say this, this isn't just about reporting or data, we're going to be exploring how finance can really take a lead, informing on the impact of decisions, as well as helping manage the transition to net zero in a way that increases collaboration, builds trust, as well as really creating lasting success. So how to manage this? Helping shed some light on the way forward are my guests Rob Smith and Claire Reid. Rob is our finance transformation leader for the UK and across Europe, Africa and the Middle East. Claire is our regional leader for Scotland as well as our head of data, technology and analytics. Let's kick things off with a quick introduction from you both, and Rob I'll start with you.

Rob Smith:

Hi, thanks Rowena, hello everyone. My name is Rob Smith and I am a finance transformation partner based in the UK. For the last 10 years or so, I've been concentrating on running finance transformation programmes in banking and capital markets.

Claire Reid:

Hi everyone, I am Claire Reid. I am the regional leader for Scotland and a partner in risk. I help my clients manage their various risks and the complexities across their transformation programmes. One of the reasons I am really excited to be here is because of COP26 and the focus in business to be taking a lead around the net zero transition. Previous COPs have focused on government and largely policymakers, but this one is set to be different. It's great to see the rapid focus that this is having for business to be really taking action.

Rowena:

It's great to have you both with us here today, and as Claire was saying net zero isn't new to our listeners, but taking action is really easier said than done. So, Claire with COP26 taking place not a million miles away from you, it's very close to you in fact, how is this really helping to focus minds?

Claire:

Certainly a question I am being asked quite a lot at the moment, because it is literally taking place on my doorstep here in Glasgow, but it's a great moment in time for us in the UK. It's taking place on UK soil and you can really feel the energy that it's creating. Many new conversations with our clients, with local government, and indeed a broader set of new stakeholders as well, and it does come at a critical time when we need to see action. It isn't just about talking about the commitments, but we need to see real action taking place.

What's really different now is it needs a full ecosystem behind it to deliver the change required. That will require collaboration across the broader stakeholder groups, such as governments, the private sector, corporates and policymakers. It's not just about planning, it's about having the right strategies and plans in place, but also the right investment behind the plans to really see those commitments being delivered. This, of course, can only be achieved when we understand the risks as well associated with the changes needed to meet the net zero commitments. Now more than ever, business leaders are faced with ensuring it's not just what they say, but what they do is going to get measured and reported on.

Rowena:

Speaking on the focus that COP26 is bringing to business, it doesn't take too long to come around to the role of reporting, which is then a nice segway into the role of finance. Rob, why does finance, in particular, need to be at the heart of the net zero approach?

Rob:

Well, there is broadly speaking, two reasons finance is at the heart of net zero and driving net zero through organisations. The first one is reporting disclosures, and that's both statutory regulatory type reporting disclosures, but as well as management reporting. Management reporting then drives the second reason finance is at the heart of net zero, which is around finance’s role in the performance management framework of the organisation and the decision making framework that goes alongside that through the finance business partners. We are going to talk around how finance is doing both of those two things, reporting disclosures and decision making frameworks as we go through, Rowena.

Rowena:

Clearly this focus on data, on reporting and evidence is core to a broader trust agenda. Claire, how in your view is finance’s role so well suited to build trust more broadly?

Claire:

It's a great question, Rowena. The finance leaders, finance organisations are so well placed to be fulfilling this role. It goes without saying that finance leaders today, they live and breathe accurate, reliable data, it’s their license to operate in an organisation. The same is true when it comes to climate, greenhouse gas, emission reporting, that same level of trust in the accuracy needs to be placed here. Finance leaders have that credibility today to ensure that they can fulfil that role going forward and bring in these new areas of reporting into the scope that they are so well known for today.

Rowena:

Let's get into some of the detail of what this actually looks like, and some of the challenges that may stand in the way, and maybe Rob if you could kick us off?

Rob:

Yeah sure, as I said before, there are broadly two areas, there's reporting disclosures, and then there's performance management frameworks and the decision making process of the enterprise of the organisation. Firstly, on the reporting disclosures, the main one we are talking around at the moment is a TCFD, which is the task force on climate-related financial disclosures, it's a bit of a mouthful. When we think about TCFD, it is worthwhile speaking about what it is, when it's coming in, and how we are going to disclose that information on it. In terms of what it is, well, it's not just disclosures. Its title is somewhat misleading to a certain extent, because there are the standard disclosures around things like carbon footprint and activities we have in there as well; but actually, it also talks around risks and opportunities, and scenarios and frameworks related to those risks and opportunities. That's not just the risks of what the organisation does, but its risks to the organisation from ESG, net zero agenda in more general. Actually, it's a much broader framework than some of the typical disclosures we've seen in the past are around net zero and ESG. In terms of when, well actually TCFD, if you're in the UK and a premium listed company, that's already applicable to you, from 2021 that was applicable. From 2022, all listed companies will have to report TCFD, and from 2025 everyone will have to report on TCFD. It's either here or it's coming imminently, and we'll talk around the next steps and getting ready for that in a minute.

The second part of reporting disclosures is more around management reporting. The management reporting side then goes into actually the performance management framework and decision making process that organisations go through. Actually, I have to admit, I find this the most interesting and strategic element of finance’s role on things like net zero, because it's how finance helps drive decisions with that net zero lens, which of course, then helps us actually to achieve our common net zero targets. The first thing we're going to do in finance is work out how to align the strategy, which is things like net zero commitments, to the metrics we have within our performance management framework and tie those to the objectives we have. That's both the corporate objectives, things like divisional objectives, territory objectives, etc., but also, personal objectives of the senior people within each organisation. That's going to help drive those outcomes.

What we're going to do as finance is help embed those metrics into decision making processes. For example, understanding what the carbon impacts of activities and decisions we need to make, when we understand those, we can actually make better decisions and actually drive the outcomes that we want. This is a very natural part of the conversation for finance. We are used to doing this, because we always, through decision making processes and the finance business partners, understand what impacts decisions are going to have on capital, on liquidity, on the cash flow and on P&L. In reality net zero is just one more of those impacts that we bring into that decision making process to drive better decisions and better capital allocation within the business. That's the real key for us, as to how we make this happen, Rowena.

Claire:

Rob, if you don't mind, if I just jump in there, just adding to what you said there. 2022 for some organisations or indeed 2025 is not very far away, and the cost of inaction could be significant for many businesses. If you look at many businesses I talk to today, there's still a perception that the cost of doing the right thing can often be greater then not doing anything. But I’d say that's a huge misconception, that the cost of doing nothing can be significant for a business, be that around how a business accesses new markets, how they win against competitors, how they gain trust with customers and indeed suppliers too, and even internally within an organisation retaining top talent. I absolutely agree that the finance, business partners have a really key role to play here in supporting the organisation with this change.

Rowena:

Claire, what's the role of data in all of this, because you've touched on so many topics there between the both of you, it'd be really helpful to get that summary.

Claire:

It's interesting reflecting on what Rob said around the performance management system and the metrics, because all of that comes from data. If you don't have access to the data, then we can't measure against the metrics and report. Making sure we understand what the data model is, is critically important, because there are new data elements that have never been sourced before. Indeed, some of that may be manual, much of that may be on disparate systems that may not be connected up with some of the core finance systems. It will require some business process change and ways of working change, but critically important to get right, and that role of finance in doing that is clearly at the heart of this, and their role in making sure those data sources are identified and brought in to the reporting framework. As Rob said, this isn't new to finance, business finance organisations have done this many times over in the past. I would say, should remain confident that they have a critically important role, but have the capabilities to do so, but it will require, for some businesses, quite a lot of change to make sure those new data models are appropriately reported on.

Rowena:

Rob, lots of areas to get across and all of that change that Claire has just talked about, what would you say are the real practical next steps that you would really advise finance teams to consider?

Rob:

Yeah, this is a natural evolution of what finance does, but just because it's a natural evolution, it doesn't mean there's not quite a lot to do to get ready for it. Particularly on the reporting disclosure side, understanding as Claire talked around some of those TCFD data model elements, as well as the reporting framework and some of the scenarios that need to be reported, that's a critical first step. Then if you think about the performance management framework side of it, one of the things that actually I think finance should do straightaway is make sure the clarity of vision of our role as finance is known to all. What we often see is actually the CFO, and the CFO minus one, they're really well aligned to the vision, but actually beneath that in the organisation, in the finance organisation, there is less alignment. What that means is, it doesn't happen as fast as it should do. Actually, sometimes some key elements get blocked, as it gets into that middle of the organisation. Real clarity of the vision to all is helpful. Alongside that, there is also a learning and development training for finance business partners in things like net zero fundamentals. They are going to be the cutting edge of driving net zero into the decision making process of the organisation, so skilling up those finance business partners with those fundamentals is really important.

Then the final things that would be helpful in terms of preparation, is understanding the drivers of the carbon footprint within your organisation, and also understanding your customer need on the reporting side. The different divisions, business units, territories, etc., of the organisation, understanding what reporting will actually help drive the right outcomes in those organisational structures. Again, that's very much a no regrets move to get started with if you haven't done already. It is a natural evolution, but there's plenty to be done out there, Rowena.

Rowena:

That’s a great summary and some really good practical advice and next steps to close on. Thanks very much both for a really great conversation. For everyone listening, you can find out more about the role that we see the finance function playing in regards to net zero and ESG more broadly as part of our beyond change campaign. If you go to our website at pwc.co.uk/beyondchange, and you will be able to find out more materials. Please subscribe to Business in Focus to keep up to date with all of our latest episodes and until next time, thanks very much everyone.

Participants

  • Rowena Morris
  • Rob Smith
  • Claire Reid
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