The net zero transition is core to being a responsible business and should incorporate circular economy strategies, leverage cross-sector partnerships, center justice and inclusion into plans, and demonstrate progress through the ESGs to ensure the transition benefits business and society. This is the fourth article of our Corporate Pathways to Net Zero series, produced by Pyxera Global.
Companies should disclose their plans to transition to net zero and use the ESGs: Environmental, Social and Governance framework to report out on progress being made on their zero commitments. Companies can use the framework to report on various metrics that fall under each ESG category. For example:
- Under the environmental pillar: There are ratings to explain how a company is doing on emissions and environmental outcomes as well as opportunities to include the company’s stance on climate action and net zero.
- Under the social pillar: There are ratings to report on the company’s social impact, relationship with its employees and communities, and diversity of its employees.
- Under the governance pillar: There are ratings for diversity on the board and management committees.
The image to the right shows how Valero, an energy company, lists certain metrics they report on under each ESG pillar.
Sustainability reports are one common channel that companies are using to show their progress on the ESGs. Already 90 percent of S&P 500 companies publish ESG reports. For example, Lenovo’s sustainability report details the company’s ESG progress to date and plans for the future. These are just a few of the standards that companies are using to track their progress:
- The Science Based Targets initiative (SBTi) helps companies set science-based targets which provide a clearly defined path to reduce emissions in line with the Paris Agreement goals;
- The Carbon Disclosure Project runs a global disclosure system for companies to manage their environmental impacts;
- The Task Force on Climate-related Financial Disclosures seeks to improve and increase reporting of climate-related financial information;
- The World Economic Forum’s Stakeholder Capitalism Metrics is mainstreaming reporting on ESG indicators;
- The World Business Council for Sustainable Development released the Circular Transition Indicators; and
- The Ellen MacArthur Foundation launched the Circulytics tool to measure a company’s circularity and material flows.
Increasingly publicly traded companies are being expected to make certain ESG and climate-related disclosures. There have been a growing number of federal guidance, laws and, or regulations over the years. In addition to these requirements, ESG reporting has grown in importance for investors, customers, and employees as the channel for people to understand a company’s performance and determine whether it aligns with their values. A Deloitte Insights 2020 Global Marketing Trends Report found that purpose-driven companies had 40 percent higher levels of workforce retention than their competitors, 80 percent of consumers would be willing to pay more if brands raised prices to be more environmentally and socially responsible or to pay higher wages to its employees and 20 percent of people make decisions about brands based on how the company treats the environment.
While ESG scores are valuable in providing transparent information on companies’ net zero progress, the various rating methodologies and metrics used to report on ESGs can be problematic. Some companies use metrics provided by rating providers while others use corporate reporting frameworks. This can leave room for discretion in measurement, specifically by rating providers, and yield different results across providers. As an OECD report on ESG Investing: Environmental Pillar Scoring and Reporting found in an assessment of providers, “high-ESG portfolios may not necessarily be aligned with strong environmental performance or low-carbon activities.” A lack of comparability between environmental pillar ratings makes it challenging for stakeholders to interpret the information and compare ESGs across companies. Furthermore, it can hinder the effectiveness of the framework to distinguish how the company’s business practices are affecting the environment.
A lack of comparability between environmental pillar ratings makes it challenging for stakeholders to interpret the information and compare ESGs across companies.
Despite these shortcomings, initiatives are currently underway to address this issue of comparability of ESGs. Most recently, the World Economic Forum presented the Stakeholder Capitalism Metrics, which is an effort to bring greater comparability and consistency to reporting of ESG disclosures. Adopting comparable metrics will be key to transparency in ESG reporting as it will build trust amongst companies’ stakeholders in their net zero journey and build more resilient and sustainable businesses.
Businesses’ Decisive Global Action Against Climate Change is Possible
While progress is being made in terms of companies making net zero commitments and reducing their greenhouse gas emissions, there is still significant progress to be made. Many companies are still not disclosing their emissions or even have targets to reduce their emissions.
The global response to the COVID-19 pandemic has illustrated that the level of decisive global action required to transition to net zero and tackle climate change is possible. The world came together to develop a vaccine in under a year, the fastest production time in history with the previous record time set at four years. Furthermore, while lockdown restrictions also caused by the pandemic are not sustainable and resulted in human and economic suffering, the reduction in global activity temporarily lowered emissions by nearly 9 percent.
The world came together to develop a vaccine in under a year, the fastest production time in history with the previous record time set at four years.
The challenges of climate change are surmountable, yet it will take decisive global action on net zero to effectively reduce greenhouse gas emissions. Net zero offers companies tremendous financial opportunities including access to new capital and markets. However, a handful of companies meeting greenhouse gas targets will not be enough to achieve systemic transformation, rather success will take all companies, their stakeholders, communities, government, and civil society working together in tandem.
While the net zero transition will not be easy and look different for each company, companies should take into consideration the existing best practices as outlined in this series and make a concerted effort to ensure their company is helping to build a better, more sustainable, and inclusive system. Companies will need to incorporate circular economy strategies into their transition plans to ensure that business models are transformed sustainably. Companies will also need to ensure that the transition reaches and benefits all communities and avoids exacerbating existing inequities because when communities thrive, business thrives. Centering justice and inclusion in transition plans will take an intentional effort to listen to the communities that companies operate in and impact and determine solutions together that will address opportunities and risks of the transition. Finally, companies will need to present their progress in a transparent way through ESG reporting to demonstrate that their transition to net zero is effective.
If companies can make the net zero transition by incorporating these essential considerations, then we may just be able to reverse the damage done by our current system. A new system can create new pathways to growth and capital for businesses and opportunities for communities to thrive while protecting our planet today, and for generations to come.
A new system can create new pathways to growth and capital for businesses and opportunities for communities to thrive while protecting our planet today, and for generations to come.