Your Company’s Next Leader on Climate Is…the CFO
January 28, 2020
ARTWORK: Thomas Jackson, Kool-Aid no. 1, Muir Beach, California, 2018. Courtesy of Ellen Miller Gallery.
If your chief financial officer is the last person you would think of to take charge on climate change, think again. Today, smart organizations are shifting their sustainability responsibilities toward the finance function.
There are several reasons for this change. First is the basic math, which falls largely within a CFO’s purview. Mitigating and adapting to climate change will require close to $1 trillion in investments per year through 2030 for the economy as a whole, and is also expected to put at risk between $4.2 trillion and $43 trillion of tradable stock exchange assets by the end of the century, depending on the level of planetary warming. (The latter number is for a world that has warmed by 6 degrees Celsius.)
Second, cutting greenhouse gas (GHG) emissions leads to cost savings. If you cut emissions, you cut energy, which is a massive organizational cost — something CFOs pay close attention to. Third, because investors are pushing to make climate-safe investments, they want climate risks to be integrated within corporate financial disclosures. Finally, the business opportunities for climate change solutions are blooming. According to Chartered Professional Accountants of Canada, “As creators, enablers, preservers and reporters of sustainable value, accountants can make their organizations’ adaptation efforts more effective.” Taken together, these shifts are leading finance teams to include what were formerly called “nonfinancials” in their daily jobs.
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CFO leadership on climate change is starting to pay off. For example, Adnams, a British brewery, recently saw an increase in the base cost of beer because hot summers were affecting barley production. To solve the problem, the CFO was able to offset these higher costs by looking at energy and water savings. The CFO of Mars, Claus Aagaard, has talked about how the company’s sustainability plan allowed it to capitalize on cost savings within two years.
Through our research, our corporate experience at Danone, and our work with the UN Global Compact, we have determined four key ways in which sustainability is being centralized in the finance function — ways every corporate leader should be aware of.
Financial Tools Are Becoming More Green
Increasingly, we’ve seen finance teams greening more of their tools. What does this look like? Companies such as SSE or the Coca-Cola Hellenic Bottling Company, for example, have implemented “green CAPEX [capital expenditure]” systems. These structures, which involve small changes in investment decisions (like including an internal price on carbon emissions or loosening the payback period for investment decisions), have allowed climate change–friendly investments to take place on a larger scale.
Even more significant, Microsoft now has an internal carbon market co-designed by the finance and sustainability teams. Thanks to a carbon fee paid by subsidiaries based on the level of their GHG emissions — incentivizing them to cut their emissions — Microsoft has a carbon fund that fuels climate change–related investments, allowing more significant and global investments to be made. On January 16, 2020, Microsoft made a historic announcement, backed by its CFO, to become carbon negative by 2030 and remove their historical carbon emissions by 2050.
In fact, more than 600 organizations say they now use carbon pricing, for a number of different reasons, among them to inform procurement and R&D decisions, help suppliers transition to a low-carbon world, pay bonuses, or help with long-term investments. In another change, Danone has started rewarding strong group performance by connecting incentives to climate change performance based on annual CDP scores.
Finally, following the integration of climate change within management control systems, corporations have started to measure GHG emissions like they measure their financials. Oracle has used what it calls “environmental accounting and reporting” to capture and transform GHG emissions from the company’s portfolio of 600 buildings across more than 70 countries. This has led to significant cost savings, because accurate data is being collected quickly. Even the small French company Saveurs et Vie, which produces food baskets for the elderly, has asked its enterprise resource planning system provider to allow it to automate carbon footprinting.
Finance Teams, Collaborations, and Roles Are Evolving
Changes in finance and accounting departments are increasingly visible within not only the tools but also the teams. Ørsted, a wind-power company based in Denmark, has a full-time environmental, social, and governance (ESG) accounting team made up of four employees. The UK-based energy provider SSE has a full-time sustainability accountant in-house. Since 2013, Unilever has had a finance director for sustainability, who is in charge of developing an understanding of sustainability in finance, integrating sustainability into finance reporting, and developing best practices.
These company-specific examples are giving way to larger collaborations, too. The CFO Leadership Network, created in 2010 by Accounting for Sustainability in the UK, recently developed two Canadian and U.S. charters.
Some are rethinking the traditional CFO role altogether. In 2018, the Institute of Management Accountants published the first study on the emergence of sustainability CFOs (coauthored by one of us, Delphine), demonstrating the need for specific hybridized competencies between finance and sustainability to answer today’s challenges. This research uncovered new competencies these leaders need to have, including developing natural capital profit and loss accounts, identifying the cost of key externalities, and understanding the value created through intangibles. Going further, Mervyn King (who is credited with the birth of “integrated reporting” in South Africa) developed the concept of a chief value officer in a 2016 book. And in North America, Manulife brought on a sustainability accounting director as a new kind of role.
Rules and Regulations Are Changing Rapidly
Your CFO will also need to adapt to shifting financial accounting rules that address climate change–related risks and opportunities. The biggest changes stem from December 2015, when the Financial Stability Board, an international body that monitors and makes recommendations about the global financial system, established the Task Force on Climate-related Financial Disclosures (TCFD) “to develop a set of voluntary, consistent disclosure recommendations for use by companies in providing information to investors, lenders and insurance underwriters about their climate-related financial risks.” The new TCFD recommendations were released in June 2017 and included the suggestion that climate-related financial disclosures be made within mainstream annual financial filings and under governance processes similar to those for public disclosures.
What does this mean in practice? For one, all disclosures, including climate-related risks, climate metrics, and targets, should be reviewed by a company’s CFO, audit committee, or both. Companies also should face the future risks of their business models through scenario analysis.
In November 2019, the International Accounting Standards Board (IASB), whose mission is to develop accounting standards for financial markets around the world, published the report “IFRS Standards and Climate-Related Disclosures,” which recommended that companies address material environmental and societal issues and, more specifically, issues driven by investor pressure to disclose climate-related risks. (This was especially significant because the IASB usually does not mention climate change in accounting standards or briefings.) We expect recommendations like those from the TCFD and the IASB to continue.
The Financial Markets Increasingly Require a Focus on Climate
The financial markets are driving CFOs to look seriously at climate change. For example, the investor initiative Climate Action 100+, representing more than 370 investors with over $35 trillion in assets collectively, is urging 100 systemically important emitters to curb emissions, improve governance, and strengthen climate-related financial disclosures. Other initiatives, such as the climate benchmarks published by the European Union or the UN’s Net Zero Asset Owner Alliance, are shifting the investment world into climate-ready financing. And in his annual letter to CEOs, BlackRock’s Larry Fink emphasized that “the evidence on climate risk is compelling investors to reassess core assumptions about modern finance.” Ultimately, Fink concluded that “climate risk is investment risk” and is alerting clients that BlackRock is centering its investment approach around sustainability.
Another reason for CFOs to take climate seriously comes from investors’ appetite for green bonds — bonds that enable capital raising and investment for new and existing projects with environmental benefits. In 2019, new issuances on the green bond market reached around $250 billion overall, channeling more and more investments toward fighting climate change. Within this market, certified climate bonds, which are verified according to the type of physical asset or infrastructure they fund, allow companies to precisely align themselves with the 2015 Paris Agreement because they are consistent with its warming limit of 2 degrees Celsius. In addition to enabling the financing of environmental projects, these instruments may even represent an advantage in terms of cost of capital, since external financing can, in some cases, become indexed on ESG performance.
When Peter Bakker from the World Business Council for Sustainable Development said in 2012 that “accountants would save the planet,” he was not far from the truth. Today, accountants are increasingly prioritizing climate change inside their organizations and beyond. Your CFO should be the next leader to follow.The Big Idea
About the authors: Laura Palmeiro is the senior adviser to the United Nations Global Compact. She has extensive experience in finance, controlling, and sustainability at PwC and Danone. She holds an MBA from IAE Argentina. Delphine Gibassier is an associate professor of accounting for sustainable development at Audencia Business School, with 18 years of experience in financial and nonfinancial accounting. She holds a PhD from HEC Paris.
A Less-Costly Way to Invest in Real Estate
The market is off to a strong start here in 2020, but let’s not forget that stocks are just one piece of a balanced, holistic portfolio.
Another foundational pillar to long-term wealth creation — and great income — is real estate.
But as you’re about to read “real estate” doesn’t have to mean putting down a huge chunk of money to invest in a rental home or apartment. It turns out, there’s an easier, less-costly way to start generating cash flows.
For these details, in today’s Digest, we’re turning things over to InvestorPlace’s income specialist, Neil George, editor of Profitable Investing. Whether through high-yielding dividend-stocks, bonds, REITs, MLPs, or more obscure investment vehicles, Neil is a master of finding his subscribers big income.
So, today, let’s see what idea he has for us.
Enjoy.
Jeff Remsburg
Parking Cashflows From the Oldest Means of Income Investing
By Neil George
I have just had my book, Income for Life, published! Today, I’d like to share one of the 65 chapters of income-generating ideas that absolutely anyone can start using on day one.
One of the book’s themes involves one of the oldest means of generating income. To give you a hint, it’s one of the most desired Christmas gifts of the Peanuts character Lucy van Pelt in the 1965 film, A Charlie Brown Christmas.
Lucy tells Charlie Brown what she really wants for Christmas … Real Estate!
Real estate is no new investment. According to the Pew Research Center’s analysis of U.S. Census Bureau data, 37% of Americans rent out their homes. While real estate is a common way to make residual income, it comes with a laundry list of responsibilities.
But one of the easier and more lucrative means of generating rental income on a dollar-per-square-foot basis, rather than renting out your house or apartment, is found in leased parking places.
I remember that when I first lived in Manhattan, on the East Side between First and Second Avenues, my monthly parking was substantially more than the lease on my car.
More and more savvy real estate owners are waking up to capitalizing on leasing parking places and, in doing so, parking space investments are becoming more popular.
They are both low-maintenance and easy to occupy. The average landlord of a residential property must process tenant applications.
This includes background checks, proof of employment, credit score checks and past rental references.
And this process doesn’t include the general and specific maintenance and security of the residential properties.
If you’re looking for an out-of-the-box way to rent out real estate, parking spots are one of the simplest strategies.
Parking Spots vs. Residential Properties
Before buying every parking spot in sight, let’s first take a look at some of the advantages parking spaces have over residential rentals.
Easy Entry Points
Where I currently reside in the Washington metropolitan area, parking spots can be purchased for anywhere from $10,000 to $50,000.
While a parking space is typically not available to be financed, that’s a low bar to generate relatively easy income. Many folks have that in savings or can partner with others for a group investment.
High-Grade Returns
For prime residential real estate in Washington, DC, like an $800,000 condo, rent would have to be sky-high just for a landlord to make a decent profit.
A landlord would have to charge $5,000 just to cover home association fees and to generate a $3,000 profit. (That’s a 4.5% annual return on your investment.)
On the other hand, monthly parking rates average around $300 in DC. A $20,000 parking space (with a $300 monthly fee) yields an annual return of 18%.
Low-Maintenance Management
Unlike residential rentals, landlords and property managers have much fewer responsibilities with parking lot rentals. Landlords handle general maintenance and repairs (emergencies included).
If there’s a leaky faucet or a broken pipe, the landlord is the first one getting a call. Matters like parking lots are non-factors.
Also, residential landlords have to take care of mortgage, taxes, homeowner association (HOA) fees, accounting and legal fees.
No Rent Control
The last words a residential landlord wants to hear are “rent control,” which poses the risk that a landlord might collect below-market-value rent.
The chances of rent control affecting a parking space are slim to none. This means less restrictions for parking space owners.
And with more municipalities and even states moving to impose rent controls –parking space properties may well become even more valuable.
Less Personal
When renting out a property to an individual, especially one with a family, evictions can become a nightmare.
Not only do you have to be concerned with getting into the property, you also have to worry about getting tenants (and their belongings) removed.
If parking spot tenants don’t fulfill their end of the agreement, their cars can simply be towed. Squatter laws will never be an issue.
Now that we’ve covered the what and why, the next up is the “where.” Here are the top five cities where parking space landlords can get the biggest bang for their buck.
The Top Five Cities to Rent Out Parking Spaces
No. 1: San Francisco
Famous for many things, including the Golden Gate Bridge, San Francisco has become a major attraction.
Not only does the Golden Gate Bridge attract 10 million people each year, San Francisco has the fourth highest cost of living in North America.
This means a landlord can up the rate on his parking fees.
No. 2: Washington, DC
The capital of the United States is filled with attractions that allure people from all over the globe. Washington’s cost of living is the seventh highest in North America.
It’s a place where culture, history and politics meet along with a vastly improving culinary scene with a quick ascent in the number of Michelin-Starred restaurants.
No. 3: Los Angeles
It’s a place of glamour, fame and fortune.
Another of my former homes, Los Angeles is the home to many celebrities and aspiring stars, making it prime real estate for renting out parking spaces for expensive events and in expensive neighborhoods.
No. 4: Miami
Miami is a melting pot of its own because of the great tourist attractions and the attractive lifestyle it fosters!
Being a place where yachts and exotic cars roam wildly, it’s ideal for renting out a parking spot.
No. 5: Seattle
Seattle is booming for both leisure and business. Nearly 40 million people came to visit Seattle in 2017.
For 2016 and 2017, the rapidly growing city added a combined 33,803 tech jobs (outpacing Silicon Valley).
To keep up with the expanding businesses, employees and residents alike will have a high demand for parking.
Killing Two Birds With One Stone
If you already have multiple rental properties in major cities around the U.S., you can take advantage of your current parking spaces.
In some areas, parking spaces may not be for sale. However, you might have a condominium with two parking spaces included.
If you save one parking space for your renter, you can rent out the other parking space.
This is an effective way to maximize your current assets. The best part is, this strategy will not cost you any additional fees to get started.
This method is particularly useful if your investment properties are located near major tourist attractions, overpopulated areas or business clusters.
A word of caution: Some HOAs have bylaws that prohibit subletting of any kind. Be sure to stay abreast of such rules and regulations.
Get a Piece of the Action
For those looking to put their spare parking spaces on the market ASAP, here are a few websites and mobile apps to consider.
SpotHero: In the information age, mobile apps have made doing business that much easier. SpotHero allows individuals to post their current parking spaces and rent them for hourly, daily and monthly fees.
ParkingPanda: Acquired by SpotHero in April 2017, Parking Panda tag-teams parking from a different angle. It focuses on business-to-business for event parking. If you’re already the owner of a parking lot, here’s another opportunity.
CurbFlip: Here’s another “do it yourself” option for those looking to rent out their parking spots. This app even allows you to rent out your driveway. This might be a complete game changer if you live in a townhouse or single-family home.
Pavemint: Pavemint allows parking spot owners to rent out their spaces without lifting a finger. The app does it all, and the cash goes right into your PayPal or bank account.
Craigslist: Everything is on Craigslist. You can post your parking spaces on this popular third-party platform.
For those looking for prime real estate (parking included), consult a nearby real estate agent. Their services are free. Real estate agents are only paid a commission through the seller’s proceeds.
Your next investment with ample and rising income streams is just a click or call away.
Now, generating cash from your existing parking space or new ones might not seem like my usual ideas for income, but it is just one of the 65 income stream ideas — from investing to side hustles that anyone can easily achieve — that I’ve written about in my new book, Income for Life.
If you’re looking for better returns in the market or just want to make some extra cash, I highly encourage you to check out Income for Life. It includes nearly 400 pages of income-producing investment strategies for all economic conditions as well as additional income-generating “side hustles” that anyone can use successfully.
Sincerely,
Neil George,Editor, Income Investor’s Digest & Profitable InvestingAuthor, Income for Life
Women Shattered the ESG Glass Ceiling, Now the Men Want In
(Bloomberg) -- It was the usual setup for panelists at a finance conference talking about making smart investments. They were all the same gender.
CONSTELLATION BRANDS, INC.
In this case, all women. That probably wasn’t surprising, considering the event was hosted by the United Nations-backed Principles for Responsible Investment. Still, Karine Hirn, founding partner at East Capital in Hong Kong, watched in admiration. She celebrated on Twitter: “Climate finance is at last opening up perspectives for great talent within the otherwise very unbalanced world of finance.”
Men rule that world, except for one key field: the fast-growing arena of what’s known by the shorthand ESG. There’s big money pouring in, and there are big names promoting the idea of applying environmental, social and governance standards to the business of making money.
Which means, of course, that the men may try to muscle in.
“The ESG person was once seen as a junior. Now their expertise is considered essential,” said Rebecca Chesworth, senior ETF strategist at State Street Global Advisors, where she’s on a team developing investment strategies to promote environmental and social goals. “And so now many more men are paying attention.”
For decades a finance backwater, responsible investing—variously also called sustainable or values based or ethical—is having its moment. Fund bosses are under pressure from shareholders, clients, employees and activists to use their resources to fight climate change or address a raft of other issues, such as workplace diversity or LGBTQ rights or corporate governance on compensation.
The behemoth BlackRock Inc. announced its shift last week, when founder Larry Fink said it would redirect the roughly $7 trillion of assets the firm manages toward environmental sustainability and devoted his annual letter to sounding the warning on climate change, saying the evidence of the risk is “compelling investors to reassess core assumptions.” Because of it, Fink said, “I believe we are on the edge of a fundamental reshaping of finance.”
That would catapult to new heights the profiles of ESG teams at banks, money-management firms and public companies, the rare area in finance where the gender imbalance in top jobs isn’t hugely lopsided in men’s favor.
“As sustainable finance roles rise in prominence, so do the many women that occupy them,” said Jane Ambachtsheer, global head of sustainability at BNP Paribas Asset Management in Paris. “It’s a bit of a fast track to get women into more influential positions as more people realize connecting finance with the real economy is a critical issue.”
Hard data are limited, but according to what’s available, and interviews with more than 30 ESG executives, women are unusually well represented in decision-making roles, including top spots. They lead ESG units at firms including JPMorgan Asset Management, Invesco and Fidelity Investments.
“ESG was not always popular or glamorous,” said Bonnie Wongtrakool, a portfolio manager and global head of ESG investments at Western Asset Management in Pasadena, California. “If you have an important but thankless task, you give it to a female, because you know they will get it done.”
Assets managed using a broad definition of the ESG approach are growing. They were at $23 trillion at the start of 2016, up 73 percent increase from four years earlier, according to the Global Sustainable Investment Alliance, whose members are financial companies, including Bloomberg News parent Bloomberg LP. Now they’re over $30 trillion.
“ESG has become a central discipline,” said Emily Chew, global head of ESG research and integration at Manulife Investment Management in Boston, Early on, “it was marginal and was not seen as attractive to young men wanting to build their careers.” Now, “there’s a war on talent that favors people who have been involved in ESG for years, including many mid-career and senior women.”
Over the past five years, 44% of the top ESG jobs that recruiter Acre Resources helped fill went to women. That’s a stark difference from the industry in general. Women on average made up 17% of senior managers and investment advisers and managers in the U.K. last year, according to the Financial Conduct Authority, and their share of those roles had barely changed since 2005. In the U.S., McKinsey & Co. data show that women are in 22% of similar positions at asset managers and investment banks.
A survey by Responsible Investor and the Sustainable Finance Network found that the ranks of men and women in the business of sustainable financing “to be almost equal”—though, tellingly, another finding was that men are twice as likely to be in roles commanding more than $197,000 annually.
Where women are vastly outnumbered is in the dedicated investment or financial product roles, with just 19% of those filled by women, according to Acre Resources. And last year, data compiled by Bloomberg show, all but one of the top-10 best performing sustainable funds as ranked by Morningstar Inc. were run by men. The exception had three managers, two male, one female.
The numbers could get worse, said Ian Povey-Hall, principal consultant for sustainable and impact investing at Acre Resources. “There could be a temptation for senior management to withdraw their support from the women that have been key to the development of those franchises in the wilderness years when appointing senior investment roles, reverting back to more jobs for the boys.”
At State Street, Rakhi Kumar, head of ESG investments and asset stewardship, said she’s seen waves of applications from men. “The gender dynamics will look very different 10 years from now.”
Wall Street, often criticized for its lack of gender diversity the closer jobs get to the C-suite, has an incentive to work to prevent that from happening, even if just for the sake of public relations. John Goldstein, head of Goldman’s sustainable finance group, said the talent and experience of the women in the business is too valuable for them to be shunted aside. “I would instead look for women in the space to ascend to more senior, broad based roles.”
Recently, two announcements captured attention. The New York State Common Retirement Fund hired a man as its first director of sustainable investments and Man Group Plc, the world’s largest publicly traded hedge fund firm, tapped Robert Furdak for the new role of chief investment officer for ESG.
But two others also stood out. JPMorgan Chase & Co. put a woman in charge of a new group that intends to meet United Nations sustainability goals in providing more financing and advice for development in emerging markets, while BofA hired Karen Fang for the new role of head of sustainable finance.
“This is still an emerging field,” said Lindsay Patrick, head of sustainable finance at Royal Bank of Canada’s capital markets unit in Toronto, “so there is more room and opportunity for gender equity.”
To contact the author of this story: Alastair Marsh in London at amarsh25@bloomberg.net
To contact the editor responsible for this story: Anne Reifenberg at areifenberg@bloomberg.net
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