Energy transition is well underway as the world shifts to a net-zero development pathway. Market disruption seems to be happening overnight but it is the result of a concerted policy, investment and strategic effort. The same thing is happening behind the scenes in the wider economy: is your company ready for the net-zero industrial transition?
Tim Mohin is a global sustainability leader, having started out in the field when it was called environmental management, working for Intel
There has been much talk of disruption of markets through the advent of digitisation and that is clearly taking place, accelerated by the impact of COVID-19 and the sudden shift to remote working. The collapse in the price of renewable technologies combined with concern about climate is fundamentally transforming the global energy markets. As the economics of renewables have shifted, we can see how increased efficiencies, new industrial processes, new materials and designs can impact across sectors.
Another shift is taking place behind the scenes as well, and that is driving the industrial shift. That is the transition in investor expectation about how companies engage with, and report on, climate risk. This move towards mandatory disclosure of risk is one of the megatrends driving today’s markets and corporate operations, and as this has converged with the drive for globally accepted standards – driven by investor demand for ESG information – it has gained mainstream momentum.
A challenge remains though, that much reporting is based on ‘materiality’ and the company gets to decide what that is. While there has been significant growth in ESG and sustainability reporting, with around 90% of the S&P 500 releasing sustainability reports in 2019, the question remains as to what it is they are actually reporting. Lack of enforceable standards and a wide range of metrics has meant that there is no real comparability, between industries or even companies in the same industry.
One of the difficulties is that for many companies, reporting on climate and the environment is kept in the CSR department. As Mohin says, “the data is often generated by juniors and published maybe six months after the fact, which is not good enough to drive change. That requires an enterprise level disclosure of data.”
Mohin says what drew him to Persefoni was that its service enables such disclosure – a carbon footprint management platform using AI to give companies a detailed picture of their organizational carbon footprint, while automating sustainability reporting. What it does is take the 750 pages of the GHG Protocols (scope 1, 2 and 3) and combine it with enterprise level operational data, from Oracle
Mohin points out that the time to take action is now, saying “2021 couldn’t be more set up for what’s coming.” The EU is revising its non-financial reporting standard (NFRS) in 2021, which will impact the world’s largest trading block, while president-elect Biden has signposted a not only a return to the climate change Paris Agreement but also a commitment to a net-zero economy by 2050. At the same time the IFRS consultation is out for review and the EU’s NFRS refers to that – the idea being to create a common accounting language. When global standards are created for reporting investors can compare companies and industries alike, and that’s when knowing your risks and how to mitigate them is critical. More than that, it can help you identify new markets and new opportunities that could transform industries – Unilever’s €1 billion investment in new low carbon materials is evidence of that.
The UK has already moved forward on introducing mandatory climate risk reporting, following on from the recommendations by the Task-Force on Climate-Related Financial Disclosures (TCFD), and while it will take until 2025, some UK companies will be affected by as early as this year. In emerging markets, there is an opportunity to leapfrog the slow evolution of other markets, as they leapt from a lack of telephony to mobile networks, seemingly overnight. Capital markets in Sri Lanka, Kuala Lumpur, Hong Kong and Singapore have listing requirements for climate disclosure, while Taiwan had specific ESG mandates which it correlated with performance, showing the greater the correlation the better the performance.
One thing that is slowing change is the confusion around whether companies are reporting to Science-based Targets according to the UNFCCC, reporting their sustainability actions in line with the Sustainable Development Goals, following environmental, social and governance (ESG) guidelines that can differ from region to region. Mohin admits that, “the confusion is off the hook” but this is something that happens as new approaches evolved. He says, “what this is about is enlisting the power of capitalism in the service of sustainable development.” Climate and other ESG issues are driving and defining the future strategic direction of many companies and, he adds, “it’s the alignment of sustainability and capitalism that’s so exciting.”
He says, “What we’ve learned from energy transition is that ultimately it all boils down to a carbon tax, however that might play out. Change is driven by the economics.” Until and unless we get that driver, companies will be able to argue that it is not their role but with tax, regulation, international standards and voluntary CSR all pointing in the same direction, he says “Smart companies are looking for solutions, and that’s where Persefoni comes in.”
Mohin argues that the TCFD is about an actuarial approach, while the SDGs were designed as targets and methodologies for countries, not companies. He argues that complex problems require complex solutions but finding those solutions for a greener economy requires a deeper understanding of how the system operates. He argues that the future is about applying the core competencies of a company to efficiencies as the world becomes carbon constrained, that the message is “what can we do to deliver value!”
There is little enterprise data available to investors in terms of individual company footprinting today. Many still estimate footprint based on industry averages, but as investors demand increasing depth of information from companies to support decision making and portfolio analysis, more line data will be demanded and become available. And when the multinationals move, the supply chain follows. Most companies would be able to calculate their scope 1 (emissions release on site or from vehicles) and 2 emissions (indirect emissions from electricity, purchased and used), while scope 3 is more complex because its about emissions that are as a result or consequence of your actions. In the end scope 3 is somebody’s else’s scope 1 and 2 and its that connection that is going to force change in strategy and operations.
As Mohin puts it, “When you collectivise financial power by demanding information you can achieve significant change.” While currently Persefoni provides estimated data, that draws a line in the sand – this is the most basic data available and should be improved. For a client like global investment firm TPG this provides an immediate overview of carbon activity as a baseline, which can be built upon to provide real-time data.
As Mohin says understanding carbon is the first step towards sustainability, adding “The first one is climate, the next is social – diversity and inclusiveness- everything relating to human capital and safety.” The process is to align capital to sustainable business practices, where carbon is the first through the loop and other elements will follow.
The challenge is that CSR is not a strong voice in the C-suite, which has meant much of its reporting has been on the side-lines of operational decision-making. If companies are going to address the fundamental industrial and economic shifts on the horizon that has to change. With globally converging standards and a push towards legislative action on climate risk reporting, the future of disclosure seems clear. The only question now is what your company is going to do about it.