At our recent corporate Chief Sustainability Officer roundtable event, we explored three key areas where progress is central to a company’s ability to become more sustainable.
As the world considers how it can build back better and greener following the coronavirus pandemic, sustainability increasingly finds itself at the top of the corporate agenda. But becoming more sustainable – by addressing environmental, social or governance (ESG) risks – is a journey, and it can be difficult to know where to start and what to prioritise.
We recently hosted a roundtable discussion where corporate Chief Sustainability Officers (CSOs) from leading UK-based firms shared perspectives on how to overcome barriers to implementing a winning ESG strategy. Here are three key areas they think every company needs to consider as they develop their approach to sustainability. monitoring and reporting.
Developing the investment case for sustainability initiatives
Despite greater focus on ESG risk, some companies have been reticent to invest in sustainability initiatives. But this is often because a compelling investment case needs to be made. The CSOs who participated with the roundtable discussion agreed that, rather than concentrating on standard financial return metrics for sustainability initiatives, companies first need to focus on the risks and potential consequences of not committing to them.
Many explained that among the boards of their companies there is considerable recognition of the benefits to their firms’ reputation of taking part in sustainability initiatives – and the adverse reputational impacts of not doing so. As well as appealing to the firms’ client base, a clear focus on sustainability also has an impact on their ability to attract other critical resources, including talent and financing.
But there are other compelling reasons for companies to adopt a sustainable approach. Not least, doing so has been shown to help companies mitigate regulatory and legal risks, reduce operational costs (energy and real estate), improve productivity and benefit from a greater likelihood of being included in benchmark investment indices.
They also agreed that traditional corporate financial performance metrics and systems are more difficult to apply to ESG investments than other initiatives. This means that to be really successful at becoming more sustainable, companies must commit to overhauling how the performance of sustainability initiatives are assessed. Here, too, there are clear benefits. In many cases, mitigating ESG risks like climate change has altered the approach firms take to financial modelling and capex decisions, making them more cross-functional and holistic by bringing important business functions (including Treasury and Finance) and CSOs into closer alignment.
Implementing non-financial reporting
Setting clear sustainability objectives is essential for any company looking to mitigate ESG risks, and evidencing progress on achieving them is becoming more important for a wide range of stakeholders – customers, investors, and increasingly, regulators.
Corporate sustainability reporting requirements will continue to mature over the coming years – and the trend clearly shows they are becoming more stringent. In Europe, where the Sustainable Finance Disclosure Regulation (SFDR) came into force in March this year, companies will be required to explain, for instance, which of their activities are dark green (which have an intended sustainability target, like reduction of CO2 emissions) and light green (which take into account environmental or social characteristics in their investment and execution).
But many CSOs acknowledged that climate risk management reporting can be complex to implement. Global frameworks such as those provided by the Task Force on Climate-related Financial Disclosures (TCFD) are useful in this respect, as is industry-specific guidance. That said, companies need to resist the urge to follow standardised industry reporting guidelines to the letter – and instead tailor reporting to ensure they tell their individual sustainability story.
To be successful, firms need to provide evidence that they understand the material issues they face and actively develop responsible business strategies that are aligned with their corporate purpose. But it’s also important for companies to remember that sustainability reporting needs to be produced with the needs of each stakeholder in mind. It can therefore be useful for corporate sustainability reporting teams to set up stakeholder panels to keep up to date on changing information needs.
Decarbonising the whole value chain
Companies don’t act in isolation in today’s interconnected world, so when it comes to their sustainability risks like climate change, they need to consider all of the links in the value chain in which they operate. Many of the CSOs who participated with the discussion were all too aware that their firms won’t be able to make strong progress on sustainability in general, or climate change specifically, without taking their supply chain with them on the journey.
For many, the key challenge is understanding the carbon footprint of their supply chain and how they can influence it. This includes Scope 3 emissions – those emissions resulting from activities by assets not owned or controlled by the organisation reporting on them. Helpful data sources are few and still evolving, but they do exist; emissions data from the Carbon Disclosure Projects (CDP), for instance, can help companies get to grips with the environmental footprints of their suppliers.
To be successful, it’s vital that companies set targets and benchmarks for their suppliers to help them understand and gain visibility on their practices. From there, they are in a strong position to engage with these suppliers – and persuade them to reduce their footprints if necessary. All of this involves a shift from a cost-only mindset to one that considers both cost and resilience to ESG risks.
Participants recognised that firms are unable to do all this in isolation. There needs to be collaboration and close partnership with other businesses to ensure a faster transition to a more sustainable, low-carbon world. A number of sustainability networks offer advice to help companies make their supply chains more sustainable: these include BSR’s “Supply Chain Leadership Ladder” and AIM-PROGRESS.
Companies can also successfully decarbonise by focusing on projects where an ecosystem of partners and support structures align. Vehicle fleet electrification is a notable example: vehicle manufacturers are armed with the right technologies to help companies make targeted emissions reductions; government policy increasingly supports fleet electrification through tax incentives and similar mechanisms; and a growing number of banks offer innovative financing structures to make fleet electrification economically attractive.
That said, financial markets also have a key role to play in supporting and facilitating the transition. Many CSOs work directly with their companies’ treasury teams to ensure that their financing activities accurately reflect their broader ESG strategies. A growing suite of financial products – like sustainability-linked bonds, or ESG-linked supply chain finance products – have evolved to help businesses improve that alignment and reinforce the investment case for sustainability.