Net-zero transition planning is critical for organisations to understand consequences of action and inaction, and ensure long-term resilience. But, while regulatory and market stakeholders increasingly need credible transition plans, genuine progress in embedding these into financial plans has been limited.

As part of London Climate Action Week, Accounting for Sustainability (A4S) in collaboration with ICAEW hosted an event on ‘the role of finance in transition planning’. The key message was that there is no standardised approach to achieving net-zero goals. Critically, though, the event highlighted the need for collaboration at all levels and among all parties.

Connecting finance and sustainability

Aligning financial planning and transition planning is critical to deliver on climate ambitions, strengthen long-term resilience and maintain market confidence. The risks of underestimating the costs of transition, delaying action and misallocating resources are real.

Finance teams, traditionally focused on near-term growth, must now integrate decarbonisation and climate risks into capital allocation, appraisals and governance.

Although there remains political and regulatory uncertainty, the direction of travel is clear. By integrating transition planning into strategic and financial planning, organisations will ensure a solid foundation for strong reporting.

Monet Mooney, a Policy Adviser for the International Transition Plan Network, said: “Climate change isn’t going away, companies are already grappling with physical climate risk that are only going to intensify. There are huge market opportunities through economic transformation. Although the political context may be uncertain, which adds policy risk, a level of uncertainty is inevitable in any transformation.”

To achieve this organisations must ensure connectivity between the front end and back end of financial statements. Adopting an iterative process will help to fully integrate sustainability key performance indicators (KPIs) into broader financial planning cycles.

Richard Spencer, Director of Sustainability, ICAEW, said: “By aligning the front end and back end finance teams bring credibility and rigour to transition plans. The front and back should always be connected. Introducing any economic event including climate change doesn’t change that.”

International logistics firm DHL is building its transition planning through annual planning and budgeting that align its sustainability KPIs with the same timelines as financial planning. This ensures resource allocation and budgeting are directly linked to achieving sustainability goals.

The company also integrated its divisional plans, embedding ESG KPIs, along with associated opex and capex needs. Active board involvement was also critical to this process. Monthly forecasting of key sustainability KPIs alongside financial data guaranteed full transparency.

“The annual report is the ability of the business to tell its stories to the provider of capital, so it is important that it is done in a connected way as markets need decision-useful information,” Spencer said. “Business should be more sophisticated about this, how is sustainability information connected to financial information so that decisions can be made, not only for external markets but also useful internally. All that needs to be done in a way that’s trustworthy, reliable and decision useful.”

Early involvement eases process

Involving finance teams early in transition planning eases the process. Defining who is responsible for a company’s decarbonisation strategy and disclosures, as well as defining the role of finance and accounting helps to clarify control lines.

The A4S CFO Leadership Network formed the A4S Net Zero Taskforce “to close a gap” in available guidance, which helps teams assess the costs of their climate plans, identify funding needs early and prioritize action and integrate planning across teams.

Helen Slinger, Executive Director at A4S, said: “Climate ambition is grounded in financial reality about what a company can afford and at what time. By bringing in finance teams this adds an additional layer of accountability, understanding governance and controls, rigour of data. Raising capital, investment planning, performance tracking adds a layer of accountability and credibility, as well as a better understanding of the trade-offs.”

Gap analysis

Another case study from Sainsbury’s modelled the emission impact of its five-year business plan to help pinpoint the most material areas to focus on. This involved applying the same financial assumptions used in its business planning to its emission forecasting.

This process guided the supermarket in its understanding of and ability to articulate the expected trajectory of its emissions, provided a clearer view of the challenge in achieving its net-zero goals

Meanwhile at Ahold Delhaize, the Dutch-Belgian multinational retail and wholesale holding company, wanted to understand the costs of net zero action over the next decade. With so much uncertainty due to long-term time horizons, it used lots of assumptions and estimates.

Ahold said it was critical to keep a record of all its assumptions and estimates used to revisit them regularly as time progresses and the uncertainty gap closes. Another key reason for following this approach was so that the finance team could raise any material issues with stakeholders. All its assumptions will need to be tracked and measured regularly.

Prioritising action

A4S’s Slinger advised anyone on the net zero journey to structure their teams to ensure sustainability is working closely with risk, procurement, operations and finance to ensure all goals are deliverable. She also recommended putting a governance body in place to look across the organisation to understand “the moving parts of transition planning and levers to make it deliverable”.

Limiting one’s focus to short-term financial returns is also unadvisable. Slinger said organisations needed to be considering opex and capex across the life of an asset or investment as there may be carbon and financial savings built into that over its lifetime. “If we’re making this decision now, would this still be the right decision in five or 10 years’ time?” she questioned.