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Green finance and advanced technology - a strategic imperative for CFOs

Matthias Heiden Profile picture for user Matthias Heiden December 11, 2023
Summary:
Green finance is much more than a fiscal tool or a compliance box-tick. Supported by AI, it can deliver business value at the same time as driving sustainability, argues Matthias Heiden, CFO at IFS.

Trees growing on stacks of coins © มนูญพันธ์ ปั้นทอง via Canva.com
(© มนูญพันธ์ ปั้นทอง via Canva.com)

Green finance is a pivotal element in contemporary business strategy. It brings environmental considerations into financial decision-making processes, spanning investing, lending, borrowing, and reporting. Recent research highlights that sustainability is becoming a strategic priority for CFOs. This broadens the notion of green finance into a competitive tool to boost environmentally sustainable practices as well as investments, with the goal of generating positive financial returns, enhancing long-term resilience, and boosting competitiveness.

While the integration of green finance initiatives makes clear fiscal sense, they can become even more impactful when combined with the implementation of advanced technologies like AI. Together, these emerging tools areindispensable allies in an era marked by increasing environmental awareness.

As climate change intensifies and regulatory bodies become more serious about enforcing eco-friendly standards, businesses must adapt or risk falling behind. By adopting green finance and leveraging AI, they can unlock immense potential to enhance efficiency, accuracy, improve access to capital, increase long-term resilience and competitiveness. In short, this powerful combination can help businesses meet evolving expectations and drive tangible results, all while contributing to a more sustainable future. But how should CFOs respond?

More than compliance — how forward-thinking CFOs address green finance

Green finance is now an essential part of modern business strategy, and it is essential to view it as more than just a compliance exercise. This is critical in a world that demands both financial prudence and ecological stewardship.

Rather than treating it as a compulsory exercise, organizations should use green finance as a strategic tool that upholds values and helps organizations achieve their ESG goals. By proactively incorporating green finance into their financial strategies, businesses can ensure sustained success and make a positive impact on the world around them.

CFOs wear three hats integrating Green Finance into their strategic and tactical toolbox:

  • As business partners, CFOs create transparency around ESG data, related initiatives etc. In doing so they create awareness which regularly is a starting point for changes in organizational behaviour.
  • As business stewards, CFOs protect the company’s assets by highlighting ESG risks and by developing mitigation strategies together with risk owners.
  • As transformation agents, CFOs play an important role in helping organizations to embrace ESG as a competitive differentiator while driving Green Finance at the same time which allows for a corresponding transformation inside the finance function.

At IFS, we are committed to delivering value and contributing positively to the environment through innovative software and responsible investments. To ensure accountability we have had a sustainability-linked loan since 2021, tying financing costs directly to our annual performance against ESG objectives, which we report and externally assure to drive accountability and quantify sustainability's impact.

Manage environmental risks and opportunities

In today's volatile landscape, businesses are faced with a multitude of challenges, ranging from environmental risks and regulatory changes to market shifts, stakeholder expectations, socio-economic change, and technological innovation. A McKinsey report found that reaching net zero by 2050 may necessitate a 60% increase in capital spending on physical assets. This includes $9.2 trillion per year in investments until 2050, with $6.5 trillion annually allocated to low-emissions assets and infrastructure.

CFOs must be able to assess the potential impacts of these factors on their organization's financial performance and reputation and develop strategies to capitalize on opportunities and mitigate risks. Also key is the creation of effective ESG reporting models that enable businesses to monitor and report on their environmental performance and progress.

To advance ESG reporting and encourage sustainable practices, it is crucial for CFOs to prioritize green financing and allocate resources toward developing solutions that mitigate environmental impacts. This entails investing in environmentally conscious initiatives, implementing energy-efficient tools, monitoring carbon emissions, and adopting sustainable supply chain management practices. Such measures not only enhance a company's financial performance but also contribute to a healthier, more sustainable future for all.

Allocate capital to eco-friendly initiatives

In order to uphold your organization's sustainability goals and achieve financial success, it is important to invest capital in eco-friendly initiatives that yield positive returns. This can involve supporting green projects such as renewable energy, energy efficiency, waste management, and sustainable transportation that reduce your organization's environmental impact and create value for stakeholders.

Additionally, optimizing financing sources and instruments such as green bonds, green loans, or sustainability-linked loans that offer favorable terms and incentives for green investments is essential. Green finance is all about integrating environmental considerations into financial decision-making processes, aligning with a commitment to delivering value while contributing positively to the environment through innovative software solutions and responsible investments.

Develop solutions that support environmental sustainability

Cultivating practices that promote environmental sustainability is crucial for organizations both inside and outside. This involves creating and utilizing tools and systems that help monitor and reduce your ecological footprint, such as energy consumption, carbon emissions, and water usage. By leveraging advanced technology and cloud software, enterprises can not only meet their ESG requirements, especially in the areas of energy efficiency, carbon emissions tracking, and sustainable supply chain management practices, but achieve goals profitably.

Recent research from IFS revealed that CFOs are keen to prioritize the adoption of AI to enhance insight-driven decision-making capabilities as part of moving to a servitized business model. They recognize that by using AI, they can obtain faster, more accurate and data-led inputs for strategic decisions that impact the bottom line.

One example of how AI can be used to drive green and cost-effective financial decisions is through Planning and Scheduling Optimization software. By leveraging AI-powered PSO and advanced predictive algorithms, businesses can make informed decisions to plan, predict, and minimize unnecessary travel for their mobile workforce. This, in turn, can contribute to reducing an enterprise’s carbon footprint.

Investing in the necessary technologies and infrastructure to collect and analyze data related to your company's green finance objectives is imperative. AI has the potential to radically improve ESG reporting. By automating manual data, AI can enable auditors to search and investigate large volumes of data, quantifying ESG information quickly and efficiently.

Implementing solutions that drive sustainability

Going further, customers achieve ESG goals profitably by measuring emissions and adopting sustainable manufacturing operations. By leveraging effective data, customers can adopt sustainable and circular manufacturing operations and support regulatory reporting. For example, HEXPOL is implementing IFS’s Cloud ERP solution to help it navigate complex supply chain challenges. By streamlining manufacturing processes and gaining better visibility of performance data, this will improve sustainability, increase operational efficiency, and track environmental impact — a growing focus in the manufacturing industry.

A recent report by Forrester revealed that enterprises that have transformed their digital operations with IFS are reaping significant benefits, amounting to $36.61 million over a period of three years. Approximately 38% of these benefits are related to sustainability, totaling $13.83 million, while others include decreased capital, improved uptime, and quicker time-to-value from their investment.

Adopting sustainable practices can yield benefits beyond process streamlining and cost reduction, such as driving revenue growth through new opportunities, retaining talented employees, attracting new investments, complying with regulations, and fostering innovation.

Sustainable stewardship

Forward-thinking CFOs are essential partners in promoting sustainable financial strategies within their organizations. They must carefully evaluate and manage environmental risks, invest in eco-friendly initiatives, and implement green finance practices to optimize costs. Embracing sustainability as a central component of financial planning is not only necessary for compliance with regulations and reporting standards, but it also promotes a resilient and trustworthy reputation. Effective communication with stakeholders is crucial in today's business environment, underscoring the importance of transparency and engagement in environmental efforts.

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