A CEO recently posed this question to me during a trip to Sydney, highlighting a core dilemma CFOs face when making climate-related investment decisions. This interaction underscored how crucial perspective is, particularly concerning carbon emissions reporting, as CFOs navigate their dual responsibilities to environmental stewardship and shareholder value.
While not all CFOs currently face a strict legal mandate to report Scope 3 emissions, many are feeling pressure due to expanding ISSB-associated regulations, such as Australia's AASB S1 & AASB S2 and California's SB 253 & SB 261. This evolving regulatory landscape (shifting toward increased disclosure) can sometimes feel at odds with the daily news cycle, particularly given ongoing political debates in the U.S.
A key point has been around Scope 3 emissions, of which management has never been more urgent. Scope 3 emissions—indirect emissions occurring across an organization’s value chain—often comprise most of a company's overall carbon footprint, sometimes as much as 90% of emissions. Effectively measuring and managing these emissions can yield significant strategic advantages, mitigate risks, and enhance stakeholder trust.
And yet, two realities remain clear:
Firstly, the physical impacts of climate change will inevitably worsen, maintaining public focus on corporate sustainability actions. As an example, by January 2025, over 7,000 companies had established validated Science-Based Targets—reflecting growth of over two-thirds compared to the end of 2023. This indicates companies desire to avoid "greenwashing" : demonstrating genuine, measurable action on climate while also growing the business’ financial performance.
Secondly, CFOs, acting as fiduciaries to shareholders, must clearly link their sustainability investments to tangible shareholder value. According to a recent BCG study, only 40% of companies effectively communicated the business rationale behind sustainability investments to shareholders by 2024 — up slightly from 37% in 2019, highlighting ongoing challenges in this area.
To address these complexities effectively, CFOs should focus on three strategic areas:
Companies should avoid assessing their emissions in isolation. Establishing competitive benchmarks allows organizations to understand their relative performance and mitigate potential PR risks. An insightful parallel is the recent experience of Australian companies needing to disclose gender pay gaps. Despite having years to prepare for gender pay gap figures’ disclosure, some companies seemed inadequately prepared to contextualize their data vs that of their peers, resulting in what seem like PR faux pas.
To address this challenge and give leaders better context regarding their emissions footprint, Terrascope recently helped an international pharmaceutical leader develop "emissions per dollar" benchmarks, enabling proactive management and clear communication well before any disclosure requirement.
CFOs should evaluate carbon management initiatives by considering both their environmental impact and ROI. In line with research by Kearney, initiatives targeting reusable materials, reduced energy consumption, and waste reduction — primarily within Scopes 1 and 2—often provide the quickest positive financial returns. Terrascope’s "marginal abatement cost curve" functionality has guided clients like Greenfields in pinpointing optimal short-term emission reduction strategies, such as refrigerant replacements. From a top line perspective, data behind customer’s willingness to pay “green premiums” show mixed results. Research from Bain suggests value can in fact be created, but only by targeting specific customer segments with category-relevant claims.
Within Scope 3, we have observed global leaders leveraging first-mover advantages through substantial "insetting" investments. These investments often secure cost-effective decarbonization within their supply chains. While initially opaque, these actions significantly enhance long-term supply chain resilience and continuity. For example, our partner, Indigo Ag reports that regenerative agricultural practices in the U.S. cotton supply chain could reduce cotton emissions by 40%, simultaneously improving crop resistance to extreme weather conditions. (See my recent discussion with Hamish Reid from our partner, Pollination Group, for additional insights into constructing robust business cases for Scope 3 decarbonization.)
Conducting comprehensive Scope 3 analyses frequently reveals valuable new insights beyond carbon emissions alone. For example, a recent pharmaceutical client leveraged newly acquired packaging data from their Scope 3 measurement exercise to identify risks (in the form of potential taxes, fines, and required supply chain changes) associated with upcoming packaging regulatory shifts in Australia, Singapore, and the Philippines. A packaging industry CEO explained to me how his company previously ran into tens of millions of dollars in unexpected costs due to a mandatory manufacturing shift to attached bottle caps in Europe – suggesting how efforts invested to predict these sustainability-related risks can pay off in the end.
Managing the tension between effective carbon management and fiduciary responsibility is challenging but achievable. CFOs equipped with strategic benchmarks, clear investment frameworks, and actionable Scope 3 data can transform carbon management from a compliance requirement into a driver of long-term shareholder value and environmental resilience.