First, the dimension of regulatory and compliance, especially those that impose financially relevant constrains on current business models and operations. These include, for example, a 1.5 °C alignment under the Science Based Targets initiative,8 the alignment with EU Taxonomy9 classification of sustainable businesses, industry-specific regulations such as the European Battery Regulation10 or the Circular Economy Action Plan,11 the forthcoming Corporate Sustainability Due Diligence Directive12 (CSDDD) and Carbon Border Adjustment Mechanism13 (CBAM), but capital market ESG ratings might be considered relevant as well.
Second, the perspective of current and future business risks and opportunities arising from operating in a global marketplace driven by sustainability and crossing global natural resource boundaries. These include physical risks from climate change, transformative risks from business models that become obsolete, opportunities from new emerging profit pools in or on the way to a net-zero environment, supply chain risks from emerging markets, and rising fossil fuel energy costs from CO2 prices.
Thereby identified topics are to be considered important to the CFO and corporate finance functions if they impact business strategy, mitigate transformative or physical risks, are aspects of upcoming legislations, or have a direct impact on the company's profit or cost base.
Being resilient within the sustainability transformation quickly becomes a corporate advantage worth aiming for
The fact that carbon emissions will be a driver of corporate financial performance in the coming years may seem plausible today, but it was not so just a few years ago. Similar conclusions must be drawn for other ESG issues that have gained dramatic momentum in recent years. Already today, water consumption and scarcity or loss of biodiversity are real threats to industries and therefore need to be considered. The same is true for supply of raw materials and recycled materials, as availability will become even more limited. Thus, future price increases caused by today's pollution and consumption must be taken into account — and CFOs are well-advised to include considerations in the financial agenda.
So why shouldn’t it be done? It may seem complex and unpredictable at first glance, but if you look back at early climate predictions, one finds the deviation from today’s reality is rather small.14 Similar conclusions should be drawn when it comes to other planetary limitations15 for a globalized economy. Linking financial decisions to the price of sustainability is not a limitation towards certain business models but rather an empowerment of CFOs and their board members to make decisions in favor of the future of their company.