The Role of CFOs in Driving Circular Economy Investments
Canada has set a climate target to shut down its coal-fired power plants by 2030. Around 2018, a Canadian utility decided to cut coal power generation from its portfolio to be prepared for this changing regulation and engaged with the NYU Stern Center for Sustainable Business (CSB) to facilitate this change.
The initial discussions happened with the Chief Sustainability Officer but she also roped in the CFO in this exercise as the final budget approval had to come from him. When the CSB team demonstrated an expected reduction in the cost of debt and equity amounting to 3 million Canadian dollars annually and an expected 20-33% decline in greenhouse gas emissions and associated regulatory risks (particularly those related to forecasted carbon prices), it didn’t take long to secure internal budgets from the CFO.
This shows the importance of involving CFOs in the decision-making process regarding circular business initiatives.
Bridging the gap between CFOs and Circular Economy investments
The majority of the CFOs still see sustainability strategies as a cost rather than a source of value. This traditional perception hinders CFOs from allocating budgets to circular initiatives.
To bridge this gap, it is crucial to align circular economy metrics with financial metrics that CFOs understand, such as EBIT and ROI. Presenting a compelling business case that ties non-financial metrics, such as carbon emissions reduction, to tangible monetary savings and growth is essential.
Building the business case for budgeting Circular Economy initiatives should consider the CFO’s perspective
For your CFO, cash is king. The impact of the circular economy on factors like working capital, operating cash flows, current ratios or quick ratios, and cash on hand are at top of their priority list.
If you can identify and quantify these impacts for your CFO, it would increase the likelihood of getting budgetary approvals for circular initiatives.
While presenting the circular business case to the CFO, be prepared to answer the following questions from them:
- How will it impact the cash flows?: A circular business model can have several impacts on a company’s cash flows, affecting both inflows and outflows. The specific effects will depend on the nature of the circular practices adopted by the company. A company might invest in research and development to create products with longer lifespans, recyclable materials, and efficient production methods. These upfront investments in innovation contribute to cash outflows initially but may result in long-term benefits.
- How will it change the balance sheet?: Circular business models can have an impact on a company’s assets and liabilities. These models typically prioritize resource efficiency and the utilization of recycled or refurbished materials. As a result, the valuation of inventory and raw materials on the balance sheet may be affected. Also, circular businesses often assume responsibility for the end-of-life stage of their products, which includes recycling and disposal. This can impact the liabilities recorded on the balance sheet.
- How will it change the cost of capital?: As products last longer in a circular economy, the cost of capital might be affected as investors and lenders may perceive lower risk associated with longer-lasting assets. Also, embracing a circular business model can enhance a company’s brand image, attract environmentally conscious consumers, and foster customer loyalty. A positive brand perception may lower the company’s perceived risk, potentially reducing its cost of capital.
The Canadian utility’s decision to transition away from coal resulted in tangible benefits including a key equity analyst increasing his estimate of the target stock price by 10% and an exponential rise in the company’s stock. For the rest of 2019, the stock price increased more than 50% faster than the rate of growth of the Dow Jones utility index.
Conclusion
Securing internal budgets for circular business initiatives requires collaboration between sustainability officers and CFOs. By building a robust business case that aligns circular metrics with financial priorities, businesses can demonstrate the value of circular practices. The success of the Canadian utility serves as a testament to the potential financial gains associated with responsible and sustainable business practices.
Let our seasoned experts from INDEED Innovation assist you in crafting impactful circular solutions for your business. We invite you to contact us today to learn about our cases and how we can help you transition to a more circular and profitable business model.
Larissa Scherrer de Quadros
Marketing
