We observe Earth Day 2022 against the backdrop of growing concern over climate issues. For CFOs, a new focus on decarbonizing operations and minimizing environmental impact is a centerpiece of sustainable business management. Accountabilities that now fall within the CFO’s purview include measuring organizations’ impact on climate and contributing to strategies to reduce carbon emissions to net zero. But how?
In a recent Q&A with Claus Aagaard, CFO of iconic food production corporation Mars, I discussed how his company is integrating carbon footprint reduction goals into business strategy and how the CFO plays a vital role.
Jeff Thomson: For some organizations, funding environmental, social and governance (ESG) initiatives is seen as an expense rather than an investment, but that is changing as the true costs of climate issues are realized. How can CFOs shift organizational thinking to embrace ESG – especially carbon emissions reduction – as a vital long-term investment? How do you help shape executive leadership’s understanding of ESG through your role as Co-Chair of The Prince’s Accounting for Sustainability Project (A4S)’s CFO Leadership Council?
Claus Aagaard: For companies to achieve material impact on climate issues, it must be an integrated part of the company strategy and strategic resource allocation. I believe CFOs have a unique and critical role to play in making the link between strategy, resource allocation, decision-making and tracking the progress.
I am lucky to work for a family-owned company that ensures long-term goals are at the heart of our strategy and decision making, but there are opportunities for all CFOs and organizations.
Firstly, it is it critical to create an environment to facilitate cross-functional collaboration. In the past at Mars, climate and sustainability issues weren’t necessarily seen as a core part of the role of the finance function – it was an effort led by the sustainability team. Now, it is a foremost priority for us, and we are building a powerful partnership with our sustainability specialists. In fact, we were quick to realize that renewable and efficiency projects could drive cost savings in addition to carbon reductions. We’re now starting to see the impact as we work to drive down emissions and eliminate deforestation in our supply chain with our efforts to simplify our palm oil supply chain.
Secondly, decision across all parts of the business should be informed by its wider climate and environmental impact. At Mars, managers’ remuneration is directly tied to our reductions of greenhouse gas emissions. Carbon impact is a criterion in all our M&A and CapEx decisions across our supply chain. It is becoming business as usual, and part of our culture.
Thirdly, no business can crack climate challenges alone. Through A4S, CFOs can gather inspiration and share good practice, working across industries to solve problems and inspire action. A particular focus for the group is reporting and accounting for climate impacts. This should be a priority because it gives us better insights [and] better decisions and will spotlight any gaps requiring action. When done right, in a transparent and constituent manner, it will also allow the relevant stakeholders better information.
Thomson: Companies across industries are grappling with ways to reduce greenhouse gas emissions or reach net zero, but the pathways differ depending on the industry in question. Many companies are direct emitters, but others contribute to climate issues more by way of their supply chains. How do you as CFO help engage suppliers to ensure that Mars (itself a far-flung conglomerate with many supply chains) is striving toward net zero emissions?
Aagaard: We know that effectively delivering against net zero will require deep transformation of global supply chains to put climate action at the heart.
I was proud to work with our teams to put us in a position to announce that Mars is aiming to achieve net zero greenhouse gas (GHG) emissions across our full value chain by 2050. It’s a huge challenge and with more than three quarters of our emissions embedded in the materials that we purchase, we recognize that supporting our suppliers on a low-carbon transition will be critical in mitigating our impact on the planet.
We know many of our suppliers are still grappling with this issue and that’s why we are challenging our 20,000+ suppliers to step up and set their own commitments but are also partnering with others in our industry.
It’s the only way to really try and build a movement and it’s exactly why we helped launch the Supplier Leadership on Climate Transition initiative last April with sustainability consultancy Guidehouse, alongside industry peers at PepsiCo and McCormick.
We asked our top 200 suppliers, “Do you have a science-based target and a plan to drive reductions on your carbon footprint?” The answer is pretty sobering – just about twenty out of those top 200 said yes.
In response, we’re mobilizing and collaborating with our partners in an industry-wide movement to provide suppliers with the knowledge, resources and tools to develop their own climate plans to reduce their impact on the planet.
We’ve so far focused on helping suppliers understand the foundations of GHG reductions in their own businesses. This covers things like building a core knowledge of how to calculate their own carbon footprints and to set their own science-based targets. It’s early stages, but if we are successful, we hope to create a multiplier effect that could have a transformational impact.
Thomson: Mars has always been known for its emphasis on innovation. Recently your Global Director of Innovation discussed Mars’ focus on solving real-life consumer problems. How does finance contribute to a culture of innovation at Mars? Does innovation require different ideas about resource allocation or financial forecasting?
Aagaard: Finance at Mars has a long and storied history of partnering directly with the business to ensure new ideas are cultivated across the organization – and financed in a way that looks to the long-term health of our brands and value creation.
Firstly, and most simply, growth is fundamental to sustainable value creation and innovation is fundamental to achieving growth. Finance supports our business segments’ understanding of how they will deliver growth and create long-term value as a result.
Secondly, finance shepherds our thinking around how we look at financial models to innovate with new products, brands and business models. Innovation is, first and foremost, a resource allocation exercise. Resources, both human and capital, are neither infinite nor infinitely flexible. We want to put our resources toward those innovations that best align with our overall strategy to generate the greatest value for Mars over the long-term.
As a private company, we can afford to take a long-term perspective around innovation; the diversity of our portfolio allows us to be patient in certain areas while achieving highly accretive, quick wins in others. We don’t expect every innovation to perform identically, nor do we want them to. We want a balanced approach that allows for various types of innovation to flourish and contribute in differentiated ways to our overall portfolio strategy, whether that’s through achieving growth, margin, cash, time horizon and so on.
Innovation is critical building block to both our mid-term financial and strategic planning processes – it is woven into how we look at business performance within our planning cycles to ensure key investments are funded, and trade-offs are made accordingly. Finance drives this process within the organization to provide visibility to our mid-term financial forecasts within the enterprise.
This article has been edited and condensed.