It’s time to take ESG reporting to the next level. Investors today are far from silent on climate change. Trillions of dollars represented by the investors behind CDP have motivated thousands of companies to disclose their carbon emissions and climate action plans for more than a decade.
Climate action pays dividends, not only in ensuring a sustainable business but also by attracting investors. Setting targets and showing progress on climate action through annual ESG reports are table stakes. Investors, consumers, and employees all demand corporate transparency, and ESG reporting is a key avenue for companies to address this need.
Here are three ways companies can get ahead of the pack in the upcoming ESG reporting season:
1. Engage with Your Suppliers
Supply chain engagement will continue to be a bigger talking point with companies who are looking to gain a better view of their ESG impact. While a company may not know today what its supply chain is doing in terms of its sustainability practices, or even all the vendors and data it needs to collect, one thing is for sure: deeper engagement is needed. Supply chain engagement can take many forms; from setting an emissions reduction target with vendors to developing additional criteria to screen out unsustainable vendors to incrementally green the supply chain.
To paraphrase a popular Chinese proverb, the best time to start having these conversations with suppliers was ten years ago. The second-best time is now.
Jump Start Supplier Engagement
- Educate: CDP, for example, has many resources on its site to support companies in their efforts around supply chain engagement.
- Connect: Trade associations or industry associations are becoming more knowledgeable and sophisticated on supply chain engagement (i.e., the Sustainable Apparel Coalition for apparel manufacturers and retailers). Companies can partner with such associations to support engagement and get data from their suppliers.
- Survey: Surveying your supply chain can provide a base level of understanding for how sustainably your suppliers are operating. For example, you can learn how they source materials, any certifications they may put on their product(s), or safe labor practices and fair trade. All these considerations play into how the supply chain affects your own ESG reporting and performance and ensure your company is sourcing from responsible suppliers.
2. Set or Align Targets to 1.5°C Scenario or Net-Zero
In 2019, the IPCC released its 1.5°C Special Report, stating that our climate change scenario is much more severe than initially thought at the 2° scenario set out by the 2015 Paris Climate Accord. In its latest climate change assessment in 2022, the IPCC found that global emissions trajectories are even more dire than previously thought, meaning doing everything possible to meet the 1.5-degree threshold is more important than ever.
Science-Based Targets (SBTs) were specifically designed to help companies bring emissions to net-zero by the mid-century. Companies who set targets based on the 2° scenario will need to re-evaluate or set new targets based on the latest science. The market is moving beyond a 2° scenario, and there are new rules and considerations to include in setting targets, including new guidance on corporate net-zero commitments.
Jump Start 1.5°C SBTs
- Inform: Become familiar with SBTi and its latest criteria for setting an SBT, including the net-zero standard.
- Engage: Some thresholds companies have to factor into their SBT can be quite large, especially in terms of their Scope 3 emissions. If your company’s Scope 3 emissions are 40% or more of its total emissions, you must set a Scope 3 target. This calls for more insight into supply chain data, which can take time to collect.
- Advance: Companies should recognize that their initial assessment of Scope 3 emissions should be quick and accurate, but not necessarily precise. With Scope 3, think about orders-of-magnitude accuracy, not decimal-point accuracy. A high-level assessment can still drive a lot of value. From there, companies can determine where to put the most resources to addressing Scope 3 emissions.
3. Invest in Climate Change Scenario Analysis
Companies that are becoming more sophisticated in their ESG reporting and climate action strategies are assessing what it takes to align their disclosures with the Taskforce on Climate-related Financial Disclosures or TCFD. Reporting in line with TCFD recommendations requires a company to perform a climate risk scenario analysis to understand the threats at stake as a result of climate change.
Some of these risks could be transitional (i.e., economic in nature, changes in market trends, etc.) or physical (i.e., cutting operations by 2% due to closures, floods, blackouts, etc.). Companies looking to enhance the maturity of their ESG reporting program should explore and invest in Scenario Analysis. While this may be a foreign concept to some, ESG raters and rankers reward businesses that have taken the steps to do these analyses as it shows forward-looking planning to enable a low-carbon future.
Jump Start Scenario Analysis
- Collaborate: Open the conversation across stakeholders. While new trends in sustainability reporting and risk management are calling for risk and sustainability teams to work together in ways they haven’t in the past, the conversation will only make companies more resilient.
- Understand: Get familiar with what scenario options are out there. It’s important to understand the difference between IEA and WWF scenarios and know what resources you may need to draft or compile scenarios that align with your business.
- Opportunity: This exercise should be viewed as an opportunity to understand more about risks in your organization. By including energy managers, facility managers, investor relations, risk managers, and others, your company can gain a clear view of your goals and how to become more resilient.
With the start of the new decade, now is the time for companies to up-level their sustainability initiatives, and one way to show that work is through transparently disclosing environmental, social, and governance issues and performance.
Register for our upcoming webinar on March 24, 2022, From Requirement to Opportunity: The Evolving World of ESG, to hear more from companies and investors on how ESG disclosure is driving industry forward.