Sustainability Decisions for a Net Zero World
The SDGs are a framework on which to "build back better". Most, corporate sustainability reports, however, map SDG's in a non-specific way to their ESG activities; choosing to mention the SDG's they support. At one level, it is understandable because the SDG's are vast and are global and country-level indicators. However, if you need to make an impact, choosing a goalpost is imperative.
Should improved sustainability performance and CEO compensation be linked?
For the longest time, corporate sustainability targets have been great PR, but minimal action ensued. One of the big reasons for this was that the sustainability targets were solely the sustainability department's domain and didn't span across all operations. This is now changing.
Boards that believe in the operationalisation of ESG, incentives and executive pay need to be the catalyst. Including incentives based on ESG is a strong signal and can trigger the cultural change that embeds sustainability into the organisation.
When it comes to ESG, Shareholders want more..
Companies are announcing targets for net-zero carbon emissions across their entire product and customer base.
The reasons for this are clear, simple targets, and intent statements are not enough. Investors are aware that the climate crisis is here now and unless cutting emissions is done quickly, climate risks will rise exponentially. A 2050 horizon is one that is way too far.
Action for the 2030 timeline is what is urgently needed. Secondly, reducing emissions needs business model transformation and deeper insights into second-order effects—the people you buy from and the people you supply to also need to be considered. To restore the climate and have a safe future, we need to maximise mitigation, adaptation and removals. The financial system is the glue that holds everything together and for it to stand up and be counted, it needs to go beyond intent and first-order effects.
Luxury's newfound love of ESG, a flash in the pan or a long term trend?
The fashion industry is responsible for 10 % of annual global carbon emissions, more than all international flights and maritime shipping combined. The fashion industry is under colossal consumer and regulatory pressure to clean up the negative impacts of fashion. The clean up won't happen by good intentions alone; it needs a considerable infusion of funds for new, less harmful technologies and a reworking of processes. The movement towards this has already started with leading fashion brands investing in this sustainability led transformation.
The road to sustainability in the fashion sector is long and arduous. The funds that are being raised are a mere fraction of what is actually needed given the size and scope of the fashion sector. 2021 is likely to see fashion recovering from the aftermath of the pandemic, but more than ever, the focus on a green recovery is expected to be paramount.
Who cares about Brand Purpose?
The pandemic has impacted most sectors' corporate profitability, worsened social inequality and overall highlighted the urgency of tackling climate change. Corporate speak today is littered with well-meaning words designed to motivate employees and highlight to customers that the corporation exists for more than just profit. While most corporations' mission and vision define what they wished to achieve in the long term, the brand purpose has been attributed to various corporate brands within a single corporations portfolio. Brand purpose has also become a way of aligning to various social initiatives and advertising this.
A significant purpose should manifest itself in everything a brand does: from product development to customer experience, to how it should conduct its marketing. While the profit motive takes primacy for most in the immediate future, the organisation's licence to exist will take precedence in the long game. Working towards the common good has to be the defining metaphor of our times. For this, we don’t just need big words but action that build trust, transparency and believability at scale.
Words matter, but actions define who you are!
Natural capital investments and the opportunity to engage the USD 120 trillion investment management industry
A growing number of private sector investors are factoring environmental concerns into their investment decisions. This is likely to grow even further.
The focus has primarily been on the greenhouse gas emissions in the past, but now natural assets such as water, soil, air and living organisms are in focus. Some examples are:
- Using carbon credits to generate revenue streams for forests
- Bonds for Preventing deforestation
- Debt-for-nature conversion to protect oceans
- Protecting coastal assets through insurance
- Investing in sustainable sectors
- Water funds for Freshwater protection
- Sustainability targets linked loans
- Impact funds
- Innovative solutions such as creating the market to trade in stormwater credits to prevent urban flooding
Measuring the S in ESG
Child labour, diversity in the workplace, health and safety of employees – all these and more are part of the “Social” parameters that ESG seeks to cover.
It has been proved again and again that transgressions in the social arena are penalised heavily by the markets. Studies have accurately shown that high social standards can reduce a company‘s systematic risk.
Measuring business impacts on nature
About $44 trillion of economic value generation – more than half the world’s GDP – is moderately or highly dependent on nature and its services. Land transformation for agricultural commodities production is a key driver of impacts on nature. However, changing land use transforms the ecosystem and impacts biodiversity.
Even though biodiversity and impact on nature are context-dependent (region, resources, types), regeneration of natural resources and prevention of biodiversity loss must be factored into business value chains.
A simple way of looking at things could be to measure
- The land area needed
- The species of plants, animals and insects lost when the land is transformed
- How the lost species will impact things locally and their impact on global systems
The top 5 implications of net-zero
In 2020, net-zero pledges fell thick and fast from policymakers and businesses alike. In 2021, those ambitious words need to be turned into concrete actions. What are the implications of this Net-zero transition:
- While factories will shift to renewable energy, so will offices and stores.
- The shift away from plastic will mean that new bio-degradable materials will hold sway.
- At the same time, reverse supply chains that enable reuse and recycling of bottles, packaging and containers will emerge stronger. Post-consumer waste will be the responsibility of the company. While EPR is currently enabled by legislation in some countries including India, consumer awareness is currently limited. This is likely to change
- For consumers, environmentally friendly lifestyles will become the new theme. This will emerge in almost every category – packaged food, fruit and vegetables, drinks, cosmetics, home care, personal care
- Necessitated by the cost of managing reverse supply chains and inspired by consumer demands products will be radically redesigned – natural, local, environmentally friendly themes will be prominent.
Creating net-zero portfolios
It has been assumed that there are only three ways for decarbonising your portfolio:
- Divestment from high-carbon industries, such as oil, mining
- Working with companies to adopt carbon mitigation plans
- Offsetting emissions
But, funds can do far more than all this when making new investments. A coalition of 70 funds representing assets of $16tn have designed a "net-zero" framework to remove carbon emissions across their portfolios by 2050. The framework provides a comprehensive set of recommended actions, metrics, and methodologies to enable both asset owners and managers to become "net-zero investors." The framework identifies five core components of a net-zero investment strategy:
- Governance and strategy
- Objectives and targets
- Sstrategic asset allocation
- Asset class alignment
- Policy advocacy
- Market engagement.
It covers four asset classes:
- Sovereign bonds
- Listed equities
- Corporate fixed income
- Real estate
The accelerating role of the Chief Sustainability Officer
As companies join the dots between environmental and social well-being and business resilience, the Chief Sustainability Officer's role is changing.
- Higher Standards - Expectations from the sustainability team have increased as companies now demand higher health, safety and sustainability standards.
- Strategy + Risk – Sustainability is increasingly expected to be part of core strategy and risk mitigation, and the CSO is now expected to be aligned to both strategy and risk teams.
- ESG Reporting –The CSO's work now matters even more to the CEO and CFO with increased ESG reporting. Further, there is increasing pressure from the financial world to link economic and business performance with sustainability targets to calculate executive pay.
191 million green jobs in a nature-positive food, land and ocean use system and opportunities worth $3565 billion
The global food, land and ocean use system represents up to 40% of employment. Five main areas in this system are in a state of transition. New skills and new opportunities in these areas will contribute to new jobs.
- Protecting the environment and ecosystem restoration
- New agriculture enabled by precision tech and bio-based inputs
- Cleaning up oceans and managing fisheries in new regenerative ways
- Sustainable management of forests
- Transparent and sustainable supply chains
Power, Transport and Finance need just three key pivots to create the impetus for a 1.5-degree world
Electricity generation and transportation collectively account for 40% of global emissions. Financing the transition in these two key sectors would need
- Moving capital out of high-carbon activities by through mandatory climate risk disclosure
- Taking climate considerations into financial decision making
- Incentivising green finance instruments
The two sectors would need to pivot in the following ways:
Energy pivots need to include
- Increasing energy efficiency in buildings, homes and cities
- Using renewable energy sources (solar and wind)
- Substituting fossil fuel-generated with renewables
Transport pivots need to include
- Scaling up Electric Vehicles
- Expanding and scaling battery storage solutions
- Helping the transport sector generate and use green energy
Reskilling the Board on Risk, Reputation and Responsibility
Boards usually have governance expertise on accounting matters. After India's CSR legislation that required board oversight, some of them had started focusing on CSR as well. However, ESG is not CSR. It is about corporate strategy and management oversight of core business in the context of environmental, social and governance standards. With ESG standards gaining momentum across institutional investors, it is now expected that ESG should be a part of the board agenda. Boards need to be trained on the following:
- The difference between ESG, CSR, Sustainability and Brand promise
- What are the company/sector's core issues and how this will change in the next ten years.
- Global risks, country risks and corporate risks.
- Reputational challenges that can emerge from business as usual.
- The opportunities for change.
- Global momentum on ESG and expectations.
- The challenges of measuring environmental and social risk.
Learning and Collaboration for a zero-carbon future
Carbon scores of companies are a result of
- How you make things
- How you source raw materials
- How you ship out finished products
Learning and Collaboration for a zero-carbon future
Even if "how you make things" is standardised, "how you source" and "how you ship" have a significant impact on your carbon emissions, which is why knowledge sharing is so important. While companies make radical changes, there could be others who are only doing things differently—making small changes to achieve a significant impact.
A. Peer learning and knowledge sharing play an essential role in raising standards for a Net-zero world. Reducing carbon is therefore not a one-time effort, it's a journey in which erstwhile competitors can become collaborators.
B. Cross-sector partnerships also emerge where skills and learnings in one are applied to the other.
Shipping, aviation, trucking, chemicals, steel, aluminium, and cement—need a breakthrough in cleantech to accelerate their path to net-zero. But more than that, they need a different investment horizon.
These sectors constitute about 30% of emissions but eliminating emissions in these sectors is difficult without using new technology solutions. The path to net-zero is deep-rooted and complex, transformative changes that enable this need science, real-world tools and scale to make the transformative impact we seek.
Net-zero announcements signal transformative changes in transportation
Some key impacts are likely to be
- Green supply chains – the big brands' choices will impact global automotive supply chains and unleash second and third-order effects in products, materials and parts.
- Brand purpose – with their products being inherently sustainable, brands will use this to drive trust and distinctiveness in consumer communication
- Digital innovation – driven by AI, cloud and IoT will make automobiles more intelligent and also move the ability to cater to customer demands
- Strategic partnerships – will emerge to navigate the new paradigms of sustainability, digital innovation and sustainable markets.
Environmental Profit and Loss (EP&L)
The EP&L measures carbon emissions, water consumption, air and water pollution, land use, and waste production along the entire supply chain, thereby making the various environmental impacts of the group’s activities visible, quantifiable, and comparable. These impacts are then converted into monetary values to quantify the use of natural resources. The EP&L to guide its sustainability strategy, improve its processes and supply sources, choose the best-adapted technologies and innovate new solutions.
There are three steps to an EP&L:
- Quantifying the environmental footprint. The six impact areas group across 62 indicators that cover different emissions and resource use types.
- Estimating the likely environmental changes that result from these emissions or resource use are estimated based on the local environmental context.
- Valuing the change in well-being. The consequences of these environmental changes for people's well-being are then valued in monetary terms.
5 Step Climate Emergency Skills Action Plan
The structure of the labour markets and skills demand will undoubtedly be affected by climate action. To meet the stringent climate action targets that India has committed to, we need much more than good intentions; we need skilled people in several areas.
- Enabling the Energy Transition – People for offshore wind, electricity optimisation, hydrogen and carbon capture and storage.
- Transforming construction - Creating energy-efficient buildings and modifying existing facilities. Sustainable methods of construction and installation of low energy cooling systems.
- New Manufacturing - The drive towards net-zero coincides with longer-term structural manufacturing changes. Zero-waste, high efficiency and zero-emissions technology will transform manufacturing. This will need new skills and new processes.
- Decarbonising transport - With significant opportunity for technical innovation, design of low carbon transport products and an international market for knowledge and expertise, the automotive sector is looking at tumultuous change and a new breed of fast changing, adaptable, and highly skilled workers.
- Low carbon and regenerative farming - Engineers, food scientists/technologists are needed for low resource, regenerative, precision farming. This change is reflected in demand for higher-level agri and food business and commercial management skills.
How do you govern for sustainability?
Net-zero, ESG targets look good and define the roadmap for change, but good governance makes things happen. Because of the far-reaching impact of sustainability decisions, governance structures for sustainability need to pan across several functional areas and not just the sustainability department.
- Head of Sustainability could report into the CEO and the Board
- The sustainability department should be supported by a cross-functional team to review strategy performance and define priorities.
- Sustainability managers and teams in brands, retail markets and suppliers should drive the implementation across the company.
- Each central function and brand is measured against a set of sustainability KPIs, in the same way, performance against sales figures and customer satisfaction is measured.