With a relentless pressure coming from all stakeholders to embrace the ESG agenda, the question now is how, where and when your business is going to respond.
What to look out for going forward
COP26 has raised the profile of ESG issues across the UK business landscape. It’s legacy, including the creation of the newInternational Sustainability Standards Board, will mean significant change for the UK and delivering on the promises made will require all organisations to play their part.
Keep reading to see a summary of key themes facing the market, and how it might change ESG strategies in your sector.
Sustainability reporting will be a must-do
The announcements made mark a new chapter for sustainability reporting both globally and in the UK. We saw the announcement of the International Sustainability Standards Board (ISSB) by the IFRS Foundation and from the UK government on mandatory climate disclosures for the largest companies.
These actions aim to address some of the key challenges faced by many investors and other stakeholders – to provide access to good quality and globally comparable sustainability information, while also helping investors to better understand the financial impact of climate change on business.
Although ESG is almost universally considered to be a high priority, many mid-market businesses are not currently delivering on fundamental measurement and reporting. The expectation is for the ISSB to develop and finalise the IFRS Sustainability Disclosure Standards next year.
"With the legislation announced by the UK government requiring the largest companies to report on climate disclosures coming into force from April 2022, businesses need to start preparing now for the regulatory changes which are coming and changes in market expectations on sustainability reporting."
A greener future for the automotive industry is accelerating
At COP 26, representatives of governments, businesses, and other organisations with an influence over the future of the automotive industry and road transport committed to rapidly accelerating the transition to zero emission vehicles to achieve the goals of the Paris Agreement. According to the International Energy Agency, transport accounts for a fifth of global greenhouse gas emissions.
The declaration works towards all sales of new cars and vans being zero emission globally by 2040, and by no later than 2035 in leading markets. Twenty-four countries, cities, investors, fleet owners and a group of leading car manufacturers have committed to ending the era of fossil-fuel powered vehicles. Not all car manufacturers signed the agreement with Volkswagen, Toyota, Renault-Nissan and Hyundai-Kia all missing, in additional not all countries signed the agreement with China, US and Germany missing.
In the UK, we are already committed to phasing out internal combustion engines by 2030, and the sales of new tail pipe emitting vehicles by 2035. With these stringent emissions regulations on the horizon, it is key that both supply and distribution chain companies work together to fulfil the COP26 requirements.
"Companies should be reviewing their strategy, on how to pivot from ICE manufactured vehicles to EVs as well as considering what requirements are need to be emissions neutral which all need careful planning."
Supply chains are the obvious area to target for ESG initiatives; COP26 continued this theme and businesses are reacting to the Net Zero challenge. We have seen lots of great initiatives such as developing alternative fuel vehicles, using specialist software to reduce overall mileage and minimising energy usage in operations. These are excellent steps but it is not known how every business will achieve net zero with the current technology – there is more to do.
In addition, supply chains must not forget the ‘S’ and the ‘G’ in ESG. There is EU new legislation coming around supply chain due diligence that will influence UK manufacturers to support ethical sourcing of products and reduce negative potential or actual human rights and environmental impacts. It is expected this legislation will attract fines and result in the whole supply chain being compliant.
"We believe that businesses are more likely to prosper in the long term if they have a mapped supply chain and a robust plan with achievable targets to support ESG wide improvements – despite the additional costs this may attract in the short term."
Energy transition will be vital to delivering net zero targets
Momentum behind the energy transition is building on the back of COP26 as the move away from fossil fuels to greener sources of energy continues to help deliver net zero targets and minimise temperature growth. A varying number of countries agreed different deals at the conference to reduce methane emissions, end deforestation and phase down coal production while financial firms pledged to commit £95 trillion towards net zero objectives.
The Scottish Government have since stated that they are opposed to the development of new oil fields in the UK, sending shock waves across the oil & gas industry and raising questions around domestic energy security and pricing. Meanwhile investment continues to pour into renewable energies with ScotWind seeing record breaking industry bids, a major hydrogen transport hub being lined up for Teesside and the first two sites being announced for the UK Government’s first round of funding for carbon capture, utilisation and storage schemes.
Banking relationships and funding arrangements are a priority
Lenders and borrowers are now beginning to realise that a transition to a net zero carbon operating model may be a significant challenge for many businesses. 2022 is likely to see an acceleration of interest in this area. Any business that has a banking renewal in the next 12 to 18 months should be treating this as a priority and developing an understanding of the sustainable lending market which is rapidly expanding.
For many businesses the transition to a low carbon operating model will bring with it both operational and transitional risks. As Mark Carney recently said, firms that align their business models to a transition to a net zero world will be rewarded handsomely. Those that fail to adapt will cease to exist.
"Businesses will need to know how their ESG credentials will be evaluated by lenders and they need to understand what sort of ESG related covenants they might be expected to agree to as part of any refinance."
ESG are a set of environmental, social and governance factors that help measure the sustainability and ethical impact of a company. You might know this about ESG already, but what exactly does it mean for your business? These frequently asked ESG questions are a good place to start when looking to create long-term value and purpose driven growth for your business.
1 What opportunities could ESG bring to my business?
Climate-related issues have never been higher in people’s considerations from both a business and personal perspective, and this is set to rise. Integrating ESG so that it aligns to your organisation’s strategy, purpose and values, could add value in a number of ways
Help create new markets for goods and services
Access to finance
Opportunities to innovate
More resilient business models
Improved bottom-line performance
Greater ability to attract and retain talent
2 What are ESG metrics and how do you report on it?
Amount of greenhouse gas emissions
Amount of energy used
Amount of waste generated
% of product from recycled materials
% of product that is recyclable or compostable
Number of product recalls
Number of data breaches
Fines related to data security
Health and safety incident rates
Diversity on the board
Revenues in countries with high corruption risk
% of equity owned by the board
Executive remuneration linked to ESG programmes
Fines or litigation related to business ethics
3 What is net zero?
The term net zero means achieving a balance between the greenhouse gases emitted into the atmosphere versus the greenhouse gases that are removed from it. Net zero will be achieved when the amount of carbon we add into the atmosphere is equal to or less than the amount removed.
4 What is ESG investing and what are ESG funds?
ESG investing allows people to invest in companies that are taking ESG factors into consideration. ESG funds are a form of sustainable investing as they consider the impact the investments have on the planet.
5 What is TCFD reporting and is it mandatory?
TCFD stands for Task Force on Climate-related Financial Disclosures. It was created by the Financial Stability Board to improve and increase reporting of climate-related financial information. TCFD can help companies disclose climate-related financial risks to all stakeholders, including investors, lenders and insurers. These rules are mandatory for premium-listed companies and the UK government announced in 2020 that TCFD-aligned disclosures will be fully mandatory by 2025.
6 What are science-based targets?
Science-based targets provide companies with a clearly defined path to reduce emissions in line with the Paris Agreement goals. More than 1,000 businesses around the world are already working with the Science Based Targets initiative (SBTi).
Targets are considered science-based if they are in line with what the latest climate science says is needed to meet the goals of the Paris Agreement: limiting global warming to well-below 2°C above pre-industrial levels and pursuing efforts to limit warming to 1.5°C.
7 What are scope 3 emissions?
TheGHG Protocol categorises greenhouse gas emissions into three groups known as ‘scopes’. Many businesses already account for their scope 1 and 2 emissions. Scope 3 has risen up the agenda as it includes accounting for other emissions that the organisation is responsible for
Scope 1 are direct emissions from owned or controlled sources (eg, company vehicles, energy/heat generation at facilities).
Scope 2 are indirect emissions from the generation of purchased energy.
Scope 3 are all indirect emissions (not included in scope 2) that occur in the value chain of the reporting company, including both upstream and downstream emissions (eg, employee commuting, transportation and distribution, franchises and investments).
ESG, climate risk and financial services
A look at the financial risk of climate change and how you can prepare your business
Building an ESG data platform for financial services
"ESG is both a critical risk and opportunity for all firms. The challenge is to be able to demonstrate ESG credentials and executive commitment underpinned by accurate consistent measurable key performance indicators. Developing an effective all compassing ESG data strategy supported by consumable data analytics is a critical enabler for any ESG initiative.
Our approach to ESG data covers three critical areas of value for companies encompassing (1) developing an effective ESG data strategy coveting both internal and external strategy, (2) developing an ESG Book of Record of data measures which is in alignment with both the ESG aspirations and risk profile of the company and (3) designing and building an ESG data analytics platform which is able to integrate all the data sources into a comprehensive dashboard of ESG progress for all stakeholders."