Managing Carbon is Essential for CFOs says McKinsey

Carbon emissions management is becoming a critical challenge for CFOs across industries, according to a recent McKinsey & Company’s report. 

The global management consulting firm say CFOs need to align organisational carbon management strategies with customer priorities, regulatory changes and emerging tools.

McKinsey says many companies currently have inconsistent or ineffective carbon data and analyses across their operations, and in some cases, lack meaningful emissions data entirely. 

This situation presents a significant challenge for CFOs, who are responsible for effective compliance, reporting and realising core strategic objectives.

The report states: “The finance function is where carbon should meet numbers.” It says that CFOs must lead the assessment of carbon’s importance to strategy and use emissions data to improve decision-making. 

Customer Demand for Transparency in Carbon Footprints

The McKinsey report says that many essential customers across borders want to understand a product's carbon footprint. 

Businesses that use robust carbon reporting can provide their customers with greater transparency and highlight opportunities to identify new, differentiated, green-product offerings.

The report states: "Compelling business cases become even stronger under rigorous regulatory frameworks that have global effects, such as the European Union's Carbon Border Adjustment Mechanism (CBAM)."

CBAM is a climate measure that will put a carbon price on imports of certain goods from outside the EU.

McKinsey suggests CFOs should use carbon reporting to help reduce decarbonisation costs. 

It says finance leaders should focus on the most important emissions drivers and make decarbonisation efforts more cost-effective by enforcing uniform metrics within the company and improving accountability organisation-wide.

Importance of ERP Systems in Carbon Management

While well-designed processes are necessary for good carbon management, the report says companies won't achieve any significant impact without an appropriate Enterprise Resource Planning (ERP) system.

CFOs need sophisticated software solutions to handle the flow of carbon information and synthesise it to make the right decisions. 

Dominik Asam, the CFO of SAP SE, a German multinational software corporation, explains: "To enable better decisions, CFOs need consistent data and metrics that connect directly to company financial reporting. 

“Too often, businesses and functions within an organisation produce different reports, use competing standards, and generate data that lack a clear strategic purpose."

CFOs Face Trade-offs in Carbon Management Solutions

McKinsey suggests now is a crucial time to improve carbon management capabilities, given current regulatory and competitive trends.

It advocates for a more integrated approach to carbon management within the finance function.

The report recommends leveraging Enterprise Resource Planning (ERP) systems to create a carbon or CO2 ledger that aligns closely with existing financial accounts and bookkeeping practices. 

It says this integration can enable finance teams to treat carbon emissions as a critical business metric, similar to financial data, allowing for more-comprehensive and strategic decision-making processes.

However, McKinsey also acknowledges that CFOs face trade-offs when selecting carbon management solutions. 

The report says: "Since investment decisions (sustainability based or otherwise) almost always involve trade-offs, selecting a solution that provides a basic output from simple tools may indeed be the best option. 

“But for companies seeking to enable much more informed carbon-based decision making, data flows will need to be more thorough, and will likely grow even more detailed in the future."

McKinsey’s report warns against focusing solely on which tool is right for today. Instead, it recommends that CFOs ensure their organisation has a solution and provider that can meet its needs over the longer term.

It says: "As a first step, CFOs should define their company's carbon accounting aspirations: Why is carbon accounting important to this company? Is the goal to meet regulatory standards, or are there material risks in failing to meet the needs of key stakeholders or falling short of capturing clear growth opportunities?"