INSIGHT by Janine Guillot | CEO, The SASB Foundation | Sustainability Accounting Standards Board | sasb.org
| With wildfires burning in California and record temperatures seen this year in locations ranging from the Middle East to the Arctic Circle, it is timely that the European Union has increased its climate change ambitions.
European Commission President Ursula von der Leyen recently announced that the bloc will cut greenhouse gas (GHG) emissions by 55 percent from 1990 levels by 2030 as part of its European Green Deal programme, up from its previous goal of a 40 percent cut. Europe now has the technology, the expertise, and the financial firepower it needs to make it happen, with a €1.8 trillion EU budget and recovery fund, President von der Leyen said.
The revised target will further reinforce Europe’s climate and energy leadership, and this could act as a catalyst for global action on GHG emission reduction targets.
GHG emissions reduction targets are a crucial tool in the effort to smoothly transition the global economy toward a lower-carbon future, because they give businesses a clear idea of what is expected of them and highlight the areas where new or stricter regulations are likely to affect their operations. As such, the Commission’s revised 2030 targets for reducing GHG emissions serve as a fundamental step in helping companies plan pathways towards meeting Europe’s 2050 net-zero ambition.
In turn, raising the bar highlights how important it is for companies to develop strategies that recognize where their business models uniquely position them to make a meaningful contribution toward achieving the targets. Naturally, measuring their own direct and indirect emissions is the first step to reducing them. Doing this helps businesses establish a baseline for their aspirations and monitor the effectiveness of mitigation strategies. Meanwhile, it helps investors and lenders understand how the systemic, climate-related risk across their portfolio is distributed among exposure to emitters (Scope 1 emissions), energy users (Scope 2), and companies with significant supply chain or use-phase impacts (Scope 3).
| Actionable information moves the needle
So, emissions disclosure is valuable in its own right, but it is not doing its job unless it leads to a meaningful reduction in emissions over time. It is relatively easy for a company to measure and reduce its own direct (Scope 1) emissions, but it is less straightforward when it comes to the indirect emissions in a firm’s value chain. In these cases, additional information about the levers a company can pull to reduce indirect emissions can be the difference between ambition and action.
When managing risk, companies understandably focus their efforts where they have the most control or influence. According to CDP data, just seven industries account for 85 percent of direct emissions. For these emitters, the risk and the appropriate response are relatively clear. But different industries have very different emissions profiles, so the climate-related impacts they face — along with their underlying drivers of emissions and the strategies needed to mitigate them — vary dramatically across different sectors. To manage their risks — and, in the process, meaningfully reduce emissions in their value chain — companies in these industries may need to turn their attention to energy management, product design and lifecycle management, supply chain management, or materials sourcing considerations.
For example, most of the climate impacts of food and beverage companies occur in their supply chains. Meanwhile, for the automotive sector, most emissions come in the use phase, when their vehicles are being driven around.
Importantly, an auto company cannot control how — or how much— its products are used, but that doesn’t mean its hands are tied. What it can do is make its vehicles inherently more fuel efficient. In other words, it can focus on product-design decisions that improve the fuel economy of its engines, reduce the weight of its fleet, expand its portfolio of zero-emission alternatives, or even help educate motorists on how to drive more efficiently.
This approach offers a “win-win” solution: It helps car companies adapt to changing regulations and shifting consumer preferences, and as a by-product it also puts a significant dent in Scope 3 emissions during downstream product use.
This is exactly what the unique, industry-specific approach of the Sustainability Accounting Standards Board (SASB) provides. We’ve identified the key strategic and operational decisions that companies across every sector can make to influence emissions throughout the value chain. In 22 industries which are the heaviest emitters, this involves taking steps to reduce direct emissions. In 35 industries that are energy intensive, this involves energy management strategies to influence upstream emissions. In many other industries, the SASB Standards include measures related to product design, lifecycle management, supply chain management, and materials sourcing that drive upstream and downstream emissions.
| Mobilizing capital markets is key to success
For any industry to enable progress towards 2030 or 2050 targets will require tracking and accountability, and SASB’s 77 industry-specific standards help companies measure, manage, and report on the climate-related risks and opportunities most relevant to their business operations and business strategies.
This is important, because these issues extend beyond GHG emissions, just as the EU’s new emissions target does not exist in isolation. The new target will have several knock-on effects, including revisions to the renewables, energy efficiency, and energy taxation markets, while Refinitiv Carbon Research says that carbon prices in the EU Emissions Trading Scheme will rise 55 percent as a result of the change. SASB’s research team explored how our approach to climate risk accounts for these and other important interconnections in a recent webinar as part of Climate Week NYC.
The key point is that the systemic financial risk posed by climate change requires a systems-level solution—otherwise, the risk is simply transferred around until it threatens the stability of the entire global economy. A holistic approach that embeds climate risk in the strategic and operational decisions that businesses make every day can help connect all the relevant moving parts and meet the dual challenges of scale and speed needed to transition the global economy to a lower-carbon future.
SASB Standards help companies identify the levers they can use to optimize their business activities in the context of a changing climate. Our industry-specific approach gives investors the targeted information they need to engage effectively with companies based on the specific risks and opportunities their sectors face, including engaging on how companies are adapting their business strategies, product mix, and operations to manage or mitigate those risks.
Ambitious emissions reduction targets are absolutely essential. Meeting them will require coordinated, collective effort. A key to unlocking that future is helping each of us understand where we’re best positioned to contribute. Indeed, to address climate change at the scale and speed required, we need to mobilize capital markets to allocate financial capital toward companies that are most effectively managing their transition to a lower-carbon economy. This starts with giving market participants actionable intelligence that can support the type of business decisions that reduce emissions as a natural extension of managing financial risk and return.
Janine Guillot is CEO of the SASB Foundation.
| All opinions expressed are those of the author. investESG.eu is an independent and neutral platform dedicated to generating debate around ESG investing topics.