How companies can improve climate strategy outcomes
ESG strategy and transformation
How companies can improve climate strategy outcomes
Tue 13 Feb 2024
COP28’s final agreement to transition away from fossil fuels – while not as binding as some would want – is groundbreaking in putting global economies more firmly on the path to net-zero emissions. Specific commitments at COP28 to triple renewable energy generation and double energy efficiency improvements by 2030 show that political intent has reached a tipping point.
From an EU regulatory perspective, the arrival of the Corporate Sustainability Reporting Directive (CSRD) and the associated European Sustainability Reporting Standards (ESRS) set the tone for how European companies can move to a more sustainable business model. The CSRD provides a valuable and much-needed uniform reporting framework for European companies, giving structure to sustainability reporting. In addition, it encourages firms to adapt internal structures and responsibilities, as well as develop strategies to respond to material sustainability-related impacts, risks and opportunities specific to the business.
The centrepiece of climate mitigation reporting is the transition plan in the E1 Standard on climate change. The transition plan aims to enable an understanding of the company’s past, current, and future mitigation efforts to ensure that its strategy and business model are compatible with limiting global warming to 1.5 °C in line with the Paris Agreement. This requires knowledge of the company’s baseline emissions, which is the reference point against which a company’s greenhouse gas (GHG) emissions are measured going forward.
However, companies in the early stages of sustainability reporting generally lack the required knowledge and transparency on baseline emissions and often do not have enabling structures and processes in place to report effectively.
Essential first steps and actions
An essential first step is to strengthen or establish processes and structures and clear responsibilities assigned within the company to support accounting and reporting functions. In addition, a streamlined and audit-proof data collection and emission accounting process in line with recognised emission accounting standards, such as the GHG protocol, is vital.
Next is to determine the system boundaries for reporting, including decisions on which company operations and which emission sources to include. There are direct emissions from company-owned and controlled resources such as heating systems powered by fossil fuels and cars, as well as unintentional emissions often due to equipment leaks and evaporative processes (Scope 1). There are also indirect emissions produced by an energy provider, resulting from the consumption of purchased electricity or heat (Scope 2). Finally, there are indirect emissions that occur within a company’s upstream and downstream supply chain (Scope 3).
Developing a solid emissions database across Scopes 1, 2 and 3 allows companies to analyse emissions hot spots to identify reduction potential. Effective measures to lower emissions can then be introduced in line with a climate strategy compatible with limiting global warming to 1.5 °C.
Data collection for companies new to emissions reporting presents a significant challenge, particularly when it comes to Scope 3 emissions. Scope 3 emissions in the supply chain are inherently difficult to record, yet often represent the biggest contribution to the carbon footprint. The mix of complexity, relevance and often large amounts of data is difficult to manage and can drain resources if not properly planned.
Designing a robust climate strategy
Once you clearly understand your baseline reference point, robust pathways to reduce emissions can be developed more accurately. Setting realistic targets underpinned by gradual, progressive actions offers a solid approach to developing temperature-aligned climate strategies that can be described in a transition plan, as required by the CSRD.
It’s also vital that climate strategies are developed based on input from all departments to ensure that steps taken are agreed upon, communicated and understood across the company. This not only helps improve climate change outcomes but can positively impact profitability and company reputation. Importantly, a climate strategy should be seen as a process over many years rather than a one-time project.
In terms of creating a robust climate strategy, focusing on taking a step-by-step approach improves the chances of long-term strategic success. It also allows companies to leverage knowledge gained at the outset to communicate sustainability goals internally and externally more effectively and with greater conviction.
Aim to turn small actions into big wins
It’s important to remember that reaching necessary climate goals and targets is a process. Successful climate transition plans should enable companies to improve consistently and in line with emission reduction pathways. In terms of making progress, first aim for low-hanging fruit by gathering emissions data within your control and more easily accessible. Use any experience gained in these early stages to underpin more challenging emissions data exercises. It’s then a question of leveraging information to make energy efficiencies and developing a plan to transition to renewable energy sources, for example.
Regulators understand the challenge of gathering sustainability data that is not readily available or concealed in the supply chain. When tackling Scope 3 reduction strategies companies should aim for a combination of low hanging fruit and focusing on emission hot spots. Of interest to regulators and stakeholders is to see companies tackle emissions that are material and can make a bigger impact on emission reduction targets.
By taking small, relevant actions consistently companies can achieve big wins that will improve the chances of meeting sustainability targets and fostering a long-term approach to achieving a sustainable business model.
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