The urgency of immediate action to mitigate climate change increases the pressure load on companies across all markets and industries. The UN Climate Change Conference in Glasgow (COP26) was a catalyst for climate commitments, calling for urgent, transformational change. One year later, the UN Climate Change Conference in Sharm El-Sheikh (COP27) is calling for more intensified efforts to implement stronger transparency obligations, addressing the gap between the pledges and the actual emissions reductions.
The rising pressure on companies to act and report on their commitments has generated claims that often lack real substance. According to the latest Climate Action 100+ Benchmark assessments, published in October 2022, there is continued progress on net-zero commitments, however, credible and transparent decarbonization strategies are missing. The assessments confirmed that net zero targets are often not supported by strategies and half of them cover all material GHG emissions, which means that scope 3 emissions are still absent.
The Center for Sustainability and Excellence (CSE) explored further Net Zero Commitments with its sixth annual Research in ESG Ratings and Reporting Trends which encompasses data from over 300 US and Canadian Fortune 500 firms from 31 industries. The findings demonstrate that although the ESG leaders set ambitious goals, there is still a lack of transparency and credible plans that will drive decarbonization. It remains to be seen if these goals are wishful thinking or unintentional greenwashing.
Impressive is also the fact that, according to CSE Research, more companies are trying to be in line with Climate standards and frameworks, aiming to secure better ratings related to climate change risk assessment. Specifically, 74% of them have complied with the SASB Standards, and 64% reference the recommendations of the TCFD, which has been established as a common backbone for a variety of other disclosure frameworks.
New Regulations and Standards
Regulators have been requiring companies to provide comparable climate-related risk reporting. In the last couple of years, the focus extended to their subsidiaries and supply chains. The European Union is aiming for leadership in the fight against greenwashing, halting the exaggerated climate-friendly claims that lead to a less green economy. In North America, the US Securities & Exchange Commission has been also advancing climate-related disclosures for companies, with the new International Sustainability Standards Board proposing disclosure rules which mainly focus on climate so far.
From the Task Force on Climate-related Financial Disclosures (TCFD) to the US Securities and Exchange Commission (SEC) and the International Sustainability Standards Board (ISSB), all the latest frameworks are developed with transparency as a baseline.
Why is transparency so important for climate commitments?
Transparency is central to the Paris Agreement.
The Enhanced Transparency Framework (ETF) was established under Article 13 of the Paris Agreement, marking a significant step up in reporting. Having 2024 as a starting point, all countries that fall under the Paris Agreement will be obliged to follow a single, universal transparency process. Specifically, every two years, countries will have to report on their progress towards their nationally determined contributions, climate finance provision, adaptation to climate change, and how they have tackled loss and damage.
Transparency is fundamental for a successful Net Zero transition.
Only when there is reliable, scientific climate data we can make informed decisions. Transparency systems allow tracking and analysis of investments made, ensuring that a net-zero future is within reach. Furthermore, solid data can help countries make tailored, realistic climate policies and even assess the support needed.
Transparency has a positive impact on a business’s reputation.
When there are no accurate, verifiable, and consistent standards of measurement, the risk of an overall lack of transparency and accountability in the market is huge. Transparency can enhance businesses’ reputations and boost their competitive advantage.
CDP highlights in its latest report that more than 29,500 global companies worth US$24.5 trillion failed to respond to the request for information from their investors and clients or provided insufficient information in their responses.
Transparency is an enabler of investments.
Access to finance is crucial and transparency can help companies break through the financial barrier. According to the International Energy Agency, clean energy investments and infrastructure will need to increase threefold by 2030 to be in line with a net-zero scenario by 2050.
SMEs that are now stepping up in the fight against climate change, still lack the resources needed. Despite the fact that they account for 90% of businesses worldwide, the portion that reports on their emissions remains small, mostly due to costs and complexity. Financial resources are the biggest challenge and a barrier to them as it is estimated that 70% of SMEs worldwide need access to external funds to reduce their emissions faster.
Creating a credible strategic roadmap for decarbonization is a complex undertaking. Appointing the right Executives with responsibility for climate strategy and establishing board-level oversight is crucial. Surveys have repeatedly shown that a great number of board members and C-suite executives are still ill-equipped to oversee climate and ESG risks. This means that companies may need to reassess the current skillset of the boards if they want to succeed. Moreover, developing a strong plan that reflects organizational goals is a necessity and regularly seeking opportunities to reduce demand is paramount to ensure success. Finally, dashboards and metrics are essential to track progress, because what cannot be measured, cannot be managed.
Nikos Avlonas is the Founder and President of the Centre for Sustainability & Excellence (CSE), a global advisory and training organization focused on Sustainability, Corporate Social Responsibility & Governance, Business Ethics, and Performance Management. With over 15 years of experience, Nikos has worked with leading organizations such as BP, Nestle, and Coca-Cola. He is also an Adjunct Professor at DePaul University in Chicago and a renowned international speaker on Sustainable Development and CSR. Co-author of two books and recognized as a CSR Professional of the Year, Nikos has trained over 3,000 managers worldwide, including executives from NASA and Walmart. He is a member of several advisory councils and non-profit organizations, including the Green Meetings Industry Council in Chicago.