Mike Scott talks to Melanie Kreis of Deutsche Post DHL in the first of a series of interviews with chief financial officers about their role in the transition to net zero
While sustainability and finance have traditionally been separate issues for businesses, the number of companies setting net-zero commitments has meant the two are increasingly converging.
Melanie Kreis, chief financial officer at Deutsche Post DHL, the German logistics group, says sustainability is an increasingly important part of her role.
“This is not debated any more at DPDHL,” she says. “We have been reporting our carbon footprint through our financial system for more than a decade.
“Given the size of the organisation, if we want to have a decent quality of data across all divisions and countries, the financial system is the obvious choice to do that.”
We have given ourselves a very ambitious environmental target by committing to SBTs to reduce absolute CO2 emissions within a decade
As a global logistics company, DPDHL has a significant emissions footprint, so the number of electric delivery vehicles it uses, for example, is a key performance indicator (KPI) for its environmental performance.
“We have given ourselves a very ambitious environmental target by committing to Science Based Targets to reduce absolute CO2 emissions within a decade. We’re a growing business and active in areas where there is no green alternative, so it is quite a challenging target,” she adds. “And it doesn’t come for free. Between now and 2030, we will spend approximately €7bn in decarbonisation activities, which is another reason it’s so important the finance department is involved.”
Given that its operating result will be more than €7bn this year, “even if EBIT (earnings before interest and taxes) were just to stay at this level for the current decade - which is not what we expect - we would only invest about 10% of our operating income into sustainability over the next 10 years", she says. "This is still a high number, but a manageable order of magnitude. If you are serious about decarbonisation, it’s better to come up with a clear indication of how much it is going to cost. When we came out with this figure, the market reacted positively.”
The company “has taken its decisions and based its assumptions on having to fund this ourselves,” Kreis says. “We have, for example, not assumed that the costs for sustainable alternatives will be significantly reduced thanks to government subsidies; nor are we relying on the ability to pass the costs onto the consumer.”
All business case applications must have an ESG component to them and must present a “next greener alternative” to show how much difference it would make if the company spent more money for a more environmentally friendly option. “If a unit wants to buy new vehicles, it has to explain how many of them are electric and how many conventional – and if the number of conventional vehicles is significant, it has to explain why.
“The whole dialogue is very educational. Finance is traditionally good at structuring issues into a very clear format,” she explains.
The company’s biggest environmental impact is from the aircraft that it operates or on which it buys capacity, but this is an area where climate friendly solutions are currently in short supply.
Parts of this journey are in uncharted territory for all of us, and SAF is one of those
“Some parts of this journey are in uncharted territory for all of us, and SAF (sustainable aviation fuel) is one of those – how much to buy, what is a reasonable pricing mechanism, how to account for it – all of this is new for us.”
As one of the world’s largest employers, with more than 570,000 employees around the world, social issues are also important because “the motivation and dedication of our people is crucial to our success”, Kreis says.
Diversity is also an important focus, given the company’s size and global reach, with a particular concentration on the share of women in management positions.
When it comes to governance, “we operate in 220 countries and territories. Building the trust of all stakeholders is paramount, so good governance is a decisive factor for us,” she adds.
It can be difficult to quantify social and governance issues, but even if using non-quantitative measures, hard quantitative key performance indicators are important, she stresses.
That does not always mean translating everything into euros, though. The company’s KPI for emissions is tonnes of CO2, for example. “At this point, we don’t think it would add transparency. It’s better for people to get a feel for CO2 emissions. We don’t have an internal carbon price, either, at this point in time. We have talked to many people and have not yet seen any examples where it has significantly contributed to steering decisions.”
Kreis says that while virtually all its KPIs are checked by an external auditor and included in the annual report, it can still be difficult for external investors to compare the sustainability performance of different companies because of the different formats they use, and initiatives they take part in.
From a CFO perspective, I would love to have a single standard. At the moment, it’s a jungle
With only half of companies surveyed by the Task Force on Climate-related Financial Disclosures (TCFDs) applying globally agreed climate-related disclosure standards in their reporting, there is growing consensus about the need for standardised, transparent data to support capital allocation decisions.
In response, the International Financial Reporting Standards Foundation (IFRS) is set to create an International Sustainability Standards Board (ISSB), with an announcement due to be made at COP26.
“From a CFO perspective, I would love to have a single standard. I am a big fan of the IFRS look at a sustainability standard,” said Kreis. “At the moment, it’s a jungle. I really hope that in the next few years, we get much more clarity on non-financial reporting. We are seeing the first encouraging signs of a certain amount of convergence and alignment, but it’s obvious there is still a very long way to go.”
The EU taxonomy approaches the issue from a different direction, by requiring companies to report on sustainability issues alongside activities, she adds. “Am I optimistic that the complexity will disappear? No. But maybe it will be reduced to just two or three frameworks. I have not given up hope on that.”
Although there is a growing number of sustainability-focused financial instruments on the market now, DPDHL has not availed itself of any yet. In part, this is because much of its expenditure is on replacing older, dirtier aircraft in its aviation fleet with cleaner alternatives, where green bonds are not an option because they’ll still use fossil-based jet fuel.
Even when SAF does become available, “a lot of our spending on decarbonisation is opex rather than capex. For aircraft, there is no new, low-carbon technology expected until 2035, so if we want to be greener, it’s about the fuel we put in our planes.”
It is issues such as this that demonstrate the benefit of the CFO being involved in the sustainability discussion, Kreis says. “CFO involvement is a sign that a company is taking this seriously – the financial perspective brings a lot of benefits to the discussion and helps the company to move in the right direction. We have a unique opportunity that arises from addressing this huge challenge.
“Having a credible ESG agenda, and showing progress on sustainability, is crucial to the future success of the company. Finance teams can add substantial value and help the companies they work for to create a competitive advantage.”
Melanie Kreis is a member of the Accounting for Sustainability CFO leadership network, which was launched in 2013 by His Royal Highness the Prince of Wales and has chapters in Europe, Canada and the U.S. She will be speaking at Reuters Events Sustainable Finance & Reporting Europe on 25-26 November, a virtual event that will bring together more than 2000 sustainability professionals, policy makers, and finance executives to discuss the transition to a sustainable, climate-friendly economy. You can register to attend here
Deutsche Post DHL Science Based Targets CO2 emissions electric vechicles sustainable aviation fuel SAF TCFD IFRS