ESG industry view – DFGE
THE NEW NORM: ESG DISCLOSURES AND SCIENCE- BASED TARGETS
Thomas Dreier is co-founder and CEO of DFGE, a sustainability-focused consultancy
Today, it is not only legal guidelines but also public attention and stakeholders’ interests on ecological sustainability which persuade companies to step up environ- mental action. This is as critical for suppli- ers 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 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. There is a huge shift towards sustainable practices. Tracking progress towards the Paris Agreement and its climate goals was among the top topics at the World Eco- nomic Forum 2020 and COP 2021 in Glasgow. One key factor pushing corpora- tions to implement sustainable business practices are their investors. There has been rapid growth in the number of investors demanding companies reduce their environmental footprint, while delivering financial results. Larry Fink of Blackrock 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 mak- ing sufficient progress on sustainability- related disclosures”. Companies that set ambitious climate tar- gets 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 prac- tices. Businesses that adopt ambitious
targets will lead the innovation and transformation of tomorrow.
– Reduce regulatory uncertainty: Busi- nesses acting now will stay a step ahead of future policies and regula- tions to limit carbon emissions.
– Strengthen investor confidence and credibility: Companies taking a leader- ship position on climate strengthen their credibility and status amongst their customers, employees, policy- makers and campaign groups. A proac- tive 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 devel- oped the ideal mechanism for companies to set such targets and take a leading posi- tion. 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 commit- ments comes as the European Commis- sion announced its plans to cut EU green- house 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 compa- nies are already doing so through the SBTi, a signal of the commitment of major companies and the importance of defining common science-based strate- gies to transition towards a climate-neu- tral 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 tech- nologies, enable companies to overcome threats to existing revenue models and provide, 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 cli- mate-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 invest- ment decisions will be supported by emis- sions reduction commitments aligned with the EU’s carbon neutrality goal, and the integration of climate into financial planning, strategic planning and corpo- rate 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 disclos- ing 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 demon- strate their alignment with requirements from investors and policymakers to exist in a 1.5⁰C world. Incorporating the disclo- sures into their business strategies, com- panies can show the investment commu- nity
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.
This article appears on CDP’s website Issue 113 | May 2022 | portfolio institutional | 21
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