Filling their websites with sugar-coated words and pretty photos, businesses have found it easy to peddle the line that they’re working to deliver a greener, cleaner, more eco-friendly future. Indeed, a whole industry has grown up based on sustainability-speak. But today’s vague commitments to do something tomorrow are no longer cutting it with investors and other stakeholders. They want to see more, in the shape of credible targets and meaningful data measuring progress towards these goals.
Calibration and transparency are therefore becoming increasingly important when it comes to climate accounting. So says Dexter Galvin, global director of corporations and supply chains at CDP, a charity (better known by its former name, the Carbon Disclosure Project) that runs a reporting system designed to help organisations manage their environmental impacts.
“Transparency is trust. It provides the essential foundation of accountability and verifiability,” he says. “In this way, disclosure is the antidote to greenwash. Only with clear, consistent and comparable disclosures can a company show stakeholders that it’s acting in line with its public commitments.”
Created by the UN, CDP, the World Resources Institute (WRI) and the World Wide Fund for Nature six years ago, the Science Based Targets initiative applies stringent technical benchmarks to validate corporate environmental targets in line with those of the 2015 Paris agreement on global warming.
Transparency is trust. It provides the essential foundation of accountability and verifiability
“This has introduced much-needed standardisation and rigour into the climate targets space,” Galvin says. “But self-disclosure is the best the market currently has, as most companies still aren’t required by law to disclose environmental information.”
To date, nearly 1,500 of the world’s biggest and best-known enterprises have signed up to the initiative. But this is just the beginning. Much more innovation is needed, according to Lihuan Zhou, an associate at the WRI’s Sustainable Finance Center.
“The financial markets don’t yet have consistent and comparable information from all participants. Without this, investors may not be able to allocate capital investments efficiently to support the economy in line with climate goals,” he says. “Mandatory climate-related disclosure can potentially address this challenge and level the playing field.”
Transparent disclosure can drive action
The independent verification of corporate emissions data and other key environmental metrics is crucial, therefore, but not everyone around the world is on the same page when it comes to such issues.
“We don’t need more standards; we need more transparency,” argues Masja Zandbergen, head of sustainability integration at Robeco, a global asset management firm based in Rotterdam. “European companies are fairly transparent on relevant issues, but we still lack a lot of information from those in other regions. In the biggest part of the market, even the more objective output measures, such as carbon data and water use, are still estimated. We would make great progress if more companies started reporting against any standard.”
Although numerous global sustainability benchmarks exist, definitions of sustainability still differ in various parts of the world. Measuring environmental performance also costs money, as does independent verification.
“We do see many commitments, ourselves included, to net-zero carbon emissions by 2050, but it remains very uncertain as to how we’ll get there,” Zandbergen adds. “We are developing research into the extent to which different sectors need to decarbonise, what technologies will be needed and how well companies are prepared. But this is all still quite unclear,”
The vast bulk of most companies’ environmental impacts reside in the supply chain. Recent CDP research has found that supply-chain carbon emissions are, on average, 11 times higher than operational emissions. More information and innovative ways to generate data on suppliers from around the globe will therefore be crucial in the coming years.
Ray Dhirani, the World Wide Fund for Nature’s UK head of sustainable finance, believes that progress is being made in this respect. “While it can be difficult to get the right information, this is changing rapidly with the advent of spatial data and other novel approaches, which better identify the risks related to assets on the ground,” he says.
Time to normalise reporting on sustainability
For instance, businesses are working with satellite imagery providers to verify that farmers in their supply chain are actually using the sustainable agricultural methods that they claim to be practising.
The Transition Pathway Initiative is a global scheme, created by investors for investors, that assesses how prepared companies are for the low-carbon economy. It is chaired by Adam Matthews, who is also chief responsible investment officer on the Church of England’s pensions board.
He says: “It is becoming ever more complex, yet ever more critical, to build a shared understanding of what the global low-carbon transition looks like. We need to enable companies to innovate and advance while being held accountable for delivery through their disclosure.”
We don’t need more standards; we need more transparency
The appetite for sustainable investment has increased as a result of the Covid-19 pandemic, yet it is still early days. Some people can imagine a future where environmental, social and governance (ESG) reporting is as common, credible and clear as any other type of corporate disclosure.
The London Stock Exchange’s head of sustainable finance for capital markets, Claire Dorrian, is one of them. “Companies need to treat sustainability reporting in the same way as they communicate their financial performance to investors,” she says. “They must provide the market with detailed information in publicly available annual reports.”
Until that day happens, there is a lot to play for in the ESG reporting space, but the days of the glossy brochure filled with greenwash are, with any luck, numbered.
