Carbon compliance accountability lies with CFOs: McKinsey

Their accounting frameworks experience allows them to do climate disclosure regimes effectively.

Across industries, CFOs are responsible for ensuring effective compliance, accurate reporting, and the realisation of an organisation’s strategic objectives, including carbon management, according to a McKinsey report. 

Tracking and reporting carbon emissions is crucial for many companies, with legal obligations and regulatory requirements in regions like Europe mandating emissions disclosures and stringent assurances similar to those required for financial reporting. Failure to comply can carry financial and reputational repercussions globally. 

However, McKinsey noted that effective carbon management varies by market, with different regulations and levels of assurance required. For example, the status of US climate disclosure regulations remains unsettled, and the value proposition for carbon management is not universally clear. 

Investing in specific processes and tools may also waste resources if not well aligned with company needs, and forecasting price premiums demands disciplined analysis, it added. 

Carbon management is context-dependent, with McKinsey emphasising that CFOs must align carbon management initiatives with their company’s strategic and compliance needs whilst also addressing stakeholder expectations. 

International customers increasingly seek transparency into product carbon footprints, driving demand for robust carbon reporting. Businesses with effective carbon management can offer greater transparency and identify opportunities for differentiated green product offerings. 

A compelling business case for carbon management strengthens under regulations with global impact, such as the European Union’s Carbon Border Adjustment Mechanism. McKinsey suggested CFOs use carbon reporting to reduce decarbonisation costs by identifying critical emissions drivers and enforcing consistent metrics across their organisations. 

Investing in more detailed and accurate data helps inform supplier discussions, it added. Leading value chain players often require supplier emissions disclosures, and consistent data enables progress toward emissions targets. 

Many investors expect detailed carbon data to evaluate a company's value under various carbon pricing scenarios, with effective carbon accounting enabling such analyses. McKinsey highlighted that carbon compliance extends beyond emissions reporting to include carbon taxes, trading frameworks, and voluntary mitigation costs like carbon credits. 

Companies lacking detailed emissions data may rely on generalised industry averages, which fail to capture specific operational nuances or sector advancements as this approach is less cost-effective. For accurate Scope 3 estimates, rigorous value chain accounting is essential, reducing the cost of voluntary carbon credit portfolios aligned with Science-Based Targets. 

McKinsey noted that many companies handle carbon accounting in rudimentary ways, often driven by regulations rather than strategic initiatives. Sustainability teams typically lead these efforts, but integrating carbon management with finance functions can enhance decision-making. 

A finance-led approach synchronises carbon and financial accounting, creating a CO2 ledger that mirrors financial accounts, it said. 

Finance teams can produce business-relevant key performance indicators on carbon budgets and targets, helping other departments make informed decisions. McKinsey said effective CFOs turn data into actionable insights, ensuring consistency across their organisations and evaluating appropriate enterprise resource planning (ERP) systems for comprehensive carbon data management. 

CFOs' experience with accounting frameworks positions them to meet emerging climate disclosure regimes effectively. Establishing yearly emissions targets, determining compensation strategies, and budgeting for decarbonisation interventions are examples of finance-driven carbon management practices. 

To enhance impact, McKinsey suggested CFOs should integrate robust ERP systems to handle carbon data flow. Effective systems must support primary data exchange from the supply chain and provide product-level carbon accounting, relevant to sourcing, design, and pricing. 

McKinsey added that such solutions should also offer decarbonisation analytics and market intelligence for compliance and cost reduction. 

Shifting to carbon management may be challenging for CFOs accustomed to economic performance maximisation, and McKinsey suggested defining carbon accounting aspirations, assessing mandatory disclosures, and identifying strategic use cases for carbon data to preserve or create value. CFOs should map carbon accounting's fit within existing systems, identify gaps, and select appropriate solutions and partners for implementation. 

Carbon management sits at the intersection of strategy, compliance, finance, and technology. As regulations tighten, customer demands grow, and new tools emerge, McKinsey said effective CFOs will guide their organisations to meet reporting requirements and create value through integrated carbon management.