Are businesses making the sustainability transition to net zero?

End deforestation, curb methane emissions, cut fossil fuel funding; COP26 was long on pledges, but short on any mechanisms for delivery. So although the goal of limiting global warming to 1.5C remains intact (just), both scientists and climate change activists have been critical of the lack of specific actions to ensure the target is actually reached. On the final day of the summit, governments accepted the ‘request’ to come back next year with detailed climate action plans for 2030 targets.

Businesses commit to net zero

Similarly, businesses have also been keen to make climate commitments. One in three of the largest companies in the G20 has a net zero target according to Net Zero Tracker. In the UK, almost half the FTSE100 companies have set net zero goals. Unlike governments however, companies are being asked to provide full disclosure on carbon emissions and other environmental impacts and, in the UK, to specifically show how any net-zero goals will be reached.

At the start of the COP, the UK Treasury announced that by 2023 most large UK firms and financial institutions will be required to show how they intend to reach their climate targets. This follows on from the decision in October to make it mandatory for Britain’s largest businesses to disclose their climate-related risks in line with the Taskforce on Climate-related Financial Disclosures (TCFD) recommendations. This move makes the UK the only G20 country to require TCFD-aligned reporting.

Furthermore, to guard against greenwashing, the UK Government will also set up a Transition Plan Taskforce, comprising industry leaders, academics, regulators, and civil society leaders to establish robust standards against which business plans to achieve net zero will be reviewed. The Taskforce is due to report at the end of 2022 and once standards are developed, companies will be expected to publish their transition plans from 2023.  

The need to comply with climate-related reporting requirements

In the EU, the Non-Financial Reporting Directive (NFRD) requires large organisations (approximately 11,000 of the largest financial institutions and corporates) to report both on their environmental impacts and on any environmental issues that may affect them.

More companies may soon be required to report on sustainability matters under the Corporate Sustainability Reporting Directive (CSRD), currently under negotiation in the EU. If passed, most publicly quoted companies, including listed SMEs as well as large unlisted companies (around 50,000 organisations) will be required to provide adequate, reliable information about sustainability including environment, worker and social issues, human rights, anti-bribery and corruption measures and board diversity. There will also be an obligation to audit, to provide relevant assurances and automate ESG data collection.

More challengingly, the CSRD will also introduce the concept of ‘double materiality’, meaning that companies will be expected to report on the impact of sustainability issues on their business and report on their own impact on people and the environment.

Investment pressure to deliver on sustainability

Businesses are also facing growing pressure from investors. The stock of ‘sustainability’ funds has been increasing at a rapid rate over the last decade. At COP26, the Glasgow Financial Alliance for Net Zero (GFANZ) committed a remarkable $130tn in private capital to transforming the economy to net zero. Businesses are already feeling the impact of this, with benefits on both the debt and equity side to be gained from having strong ESG credentials. Having a good ESG performance can lower the cost of capital by as much as 1.5%.

This combination of reporting requirements and investment pressure is placing a significant burden on those required to assess net-zero pledges and report on the effectiveness of any environmental roadmap. Not surprising then that several business organisations met the final COP deal with some dismay, arguing that companies are showing greater urgency to reduce emissions than nations, while also being held to higher standards of accountability.

Given this increased pressure it was perhaps surprising that the audit community was not out in force at COP, arguing for better frameworks to help measure and report effectively. The so-called ‘alphabet soup’ of sustainability frameworks adds complexity to the evaluation process. 

It is also the case that reporting on such critical matters should be subject to independent verification. Without this layer of scrutiny, the potential for greenwashing is huge. Confidence is already fragile, therefore the need to build trust through transparency and independent verification is high. Leaders from science, industry and civil society must work towards verified, material reductions in negative climate and other sustainability impacts. If the UK’s Transition Plan Taskforce can achieve that, it would be a massive step in the right direction.

Key steps to developing and implementing an effective ESG reporting framework

In the meantime, we are seeing a significant increase in the number of companies looking to develop their own ESG framework and roadmap. We work with companies to design these, advising on implementation into the business and communicating good practice and performance to investors, employees and other stakeholders.

Step 1: Designing an ESG framework and roadmap. This begins with the determination of material ESG factors to establish best practice and appropriate key performance indicators (KPIs). This involves a peer analysis as well as a detailed evaluation of the requirements of lead investors and ratings agencies. A gap analysis is also conducted to establish what is currently measured, what needs to be put in place and what can be achieved quickly. The identified material ESG factors are consolidated into a tailored ESG framework, supported by a strategic roadmap for implementing a meaningful ESG programme, including reporting.

Step 2: Implementing ESG into the business. A governance structure for the ESG programme is agreed. Detailed scoping of the implementation plan is carried out to deliver on the roadmap. This includes a comprehensive specification of KPIs, timing, resources and budget. A tailored reporting system is also designed to meet all regulatory and investor requirements.

Step 3: Communicating ESG performance. Communications programmes for all relevant audiences, in particular investors and employees, are developed. This includes plans for communicating the strategic ESG roadmap, incorporating all material ESG factors, good practice, targets, timings and improvements made. Consideration is also given to communicating ESG performance to other key stakeholders such as potential employees, regulators, partners, suppliers, customers etc.

On the environmental side specifically, our work includes: –

• setting up the frameworks for Scope 3 GHG emissions, including mapping organisational boundaries and supply chain engagement,
• providing a verified Carbon Footprint for scope 1, 2 and 3 GHG emissions, and
• mapping and analysing the supply chain for climate change risks

Our ESG work offers organisations independent verification of a their environmental, social and governance factors, providing a high-level of assurance for internal audiences such as employees or the board and for external stakeholders such as investors and regulators. Independent verification may not yet be a requirement, but among those companies looking to evidence robust ESG credentials and build greater trust with stakeholders, it’s essential.