Today, it is not only legal guidelines but also public attention and stakeholders’ interests on ecological sustainability which persuade companies to step up environmental action. This is as critical for suppliers of raw materials and manufacturers as it is for retailers and service providers, since they are all part of the value chain, responsible for the overall environmental impact of a product, service or industry sector.
The Paris Agreement paved the way for driving more action among businesses. With climate change, its impacts on resource scarcity and the vulnerability of ecosystems regarded as serious threats to businesses, they are now actively seeking to respond and transform.
ESG disclosures - A decision criterion for shareholders and investors
There is a huge shift in the business world towards sustainable practices. Tracking progress towards the Paris Agreement and its climate goals was among the top topics at the World Economic Forum (WEF) 2020 in Davos or the 2021 COP in Glasgow. One key factor pushing corporations to implement sustainable business practices are their investors. There has been rapid growth in the number of investors demanding companies to reduce their environmental footprint, while delivering financial results. Larry Fink of Blackrock, the world´s largest investor, re-stated in his 2022 CEO letter that climate risk is investment risk, and that Blackrock is “increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures“.
Long-term climate targets as differentiator for companies
Companies that set ambitious climate targets can build long-term business value, drive efficiency, and safeguard their future profitability in several ways:
- Innovation: Becoming a low-carbon business drives the development of new technologies and operational practices. Businesses that adopt ambitious targets will lead the innovation and transformation of tomorrow.
- Reduce regulatory uncertainty: Businesses acting now will stay a step ahead of future policies and regulations to limit carbon emissions.
- Strengthen investor confidence and credibility: Companies taking a leadership position on climate strengthen their credibility and status amongst their customers, employees, policymakers, and campaign groups. With half of global consumers believing climate change will negatively impact their lives, a proactive approach helps increase integrity, profitability, and competitiveness.
Adopting bold targets can ensure a lean, efficient, and resilient business in a world where carbon becomes increasingly expensive. This could make a material impact upon profitability. The Science Based Targets Initiative (SBTi) has developed the ideal mechanism for companies to set such targets and take a leading position. By independently approving whether targets are in line with the latest climate science, the initiative is considered the gold standard for target-setting.
Next step: Tackling net-zero
Momentum behind net-zero commitments comes as the European Commission announced its plans to cut EU greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels, part of its European Green Deal and commitment to achieve climate neutrality by 2050.
Companies play a critical role in reaching net-zero. They have a responsibility to reduce their environmental impact and to cut their emissions according to science-based pathways. More than 2,800 companies are already doing so through the SBTi, a signal of the commitment of major companies and the importance of defining common science-based strategies to transition towards a climate-neutral economy. The first companies with science-based net-zero targets have now been approved.
Steering sustainable future investments
Policies must address the unfavourable economics of immature low carbon technologies, enable companies to overcome threats to existing revenue models, and provide sufficient, long-term certainty for large transformational investments in capital intensive breakthrough technologies.
Increased public financing is required to de-risk private investment and support the development of new infrastructure. Reforms to improve transparency of climate-related data will help underpin efforts to incorporate climate risks into financial regulatory frameworks and develop transition risk modelling among financial institutions, helping to align capital allocation decisions.
Action on policies and regulation must be matched by action in the private sector. Among corporates, low-carbon investment decisions will be supported by emissions reduction commitments aligned with the EU's carbon neutrality goal, and the integration of climate into financial planning, strategic planning and corporate governance frameworks.
The information companies use to inform about their investment strategies, is in many cases, the result of disclosing to CDP. The theory of change is that disclosing quality data leads to smarter decisions and informs investors, companies, and governments of the actions they need to take. CDP’s annual disclosure process enables new insights and evidence-backed behaviour.
Disclosing on ESG practices and setting science-based targets are becoming key differentiators for businesses to demonstrate their alignment with requirements from investors and policymakers to exist in a 1.5⁰ Celsius world. Incorporating the disclosures into their business strategies, companies can show the investment community that they have a vision to build long-term business value, drive efficiency and safeguard their future profitability. Going forward, they will become the new norm.
More information on the topic is available in the DFGE SBT Whitepaper.