2021 was, by all accounts, a breakthrough year for sustainability and climate action, and based on our expert insights on trends, 2022 promises to hold much in store for corporate progress on sustainability.
Here's a peek at the trends we'll be diving into:
- Addressing Scope 3 through supply chain collaboration
- Net-zero commitment clarity
- The cry for standardized ESG reporting
- Purposefully & digitally collecting and managing ESG data
- Financial institutions fueling the race to net-zero
- Volatility of environmental commodity markets
- Formalizing biodiversity goals and ‘nature-based solutions'
- Redesigning economies to be more circular
- Pairing mitigation with adaptation
- The growing role of regulations globally
Record numbers of companies set decarbonization targets, including more than 2,200 companies taking action via the Science Based Targets Initiative (SBTi). In November, COP26 brought together global leaders and policymakers to make some big commitments to net-zero and solidified the business community’s role in driving the net-zero transformation and in achieving the 1.5 degree Celsius warming threshold. Finally, corporates representing a diverse cross-section of geographies, sectors, and emissions profiles weighed in on the SBTi’s newest guidance for setting science-based goals, catalyzing both near-term and long-term efforts to reach net-zero emissions by 2050.
While there is much to celebrate from the past 12 months, 2021 also served as a stark reminder that the work is nowhere near done. Extreme weather ravaged communities around the world and scientists dictated in no uncertain terms that these are exacerbated by climate change in the IPCC Sixth Assessment Report on climate change.
Events like the powerful hurricanes in the Atlantic US, deadly flooding in Germany, China, and India, extended drought in Brazil and the American southwest, unprecedented heatwaves in the Pacific Northwest and Canada, and extraordinary wildfires in Siberia – just to name a few – showed us that there is absolutely no time to waste in halting climate change. 2021 was one of the hottest years on record, and the frequency and severity of these events are predicted to intensify with the progression of climate change. The unpredictability of extreme weather around the world is affecting human lives and business viability, but mitigating the worst of climate change by limiting temperature rise to 1.5 degrees Celsius by 2050 is still possible.
We remain optimistic that the year ahead will continue, or even accelerate, the momentum of corporate climate action needed to reach this goal. To prepare your organization to ride the 2022 sustainability wave, Schneider Electric’s global energy and sustainability experts have kept their eyes and ears open for trends likely to manifest this year. Here, we’ve listed our 10 Top sustainability trends for industry professionals to think about as you build your strategies.
TREND #1 Addressing Scope 3 through supply chain collaboration
Scope 3 emissions are the largest category of emissions for most companies. These indirect emissions, which occur because of a company’s upstream and downstream value chain, come from activities such as the sourcing and production of raw materials and the transportation and distribution of goods.
Scope 3 emissions are notoriously difficult to address. However, one of the most impactful ways a company can take Scope 3 action is by engaging their suppliers on decarbonization. Investors are increasingly interested in the resilience and carbon footprint of a company’s supply chain. Bringing suppliers along on the decarbonization journey by encouraging their adoption of renewable electricity can be a means to make progress on both supply chain resilience and decarbonization.
Programs like the Energize pharmaceutical industry supply chain initiative and Walmart’s Project Gigaton have laid the groundwork for other organizations and entire industries to act on their supply chain emissions. Designed and administered by Schneider Electric, these programs aim to educate suppliers on the benefits of adopting renewable energy and create economies of scale for purchasing clean power.
The benefits to suppliers and sponsors are mutualistic:
- Suppliers get clear guidance on renewable energy and sustainability at no cost, removing barriers to resources and knowledge which would otherwise be difficult for smaller organizations to access
- Increased renewable energy purchasing power for companies with low or moderate emissions
- Acceleration of organizational awareness on sustainability and renewable energy topics to support stakeholder action
Ultimately, companies engaging their supply chains on renewables receive the dual benefit of reducing their own Scope 3 emissions and gaining confidence that suppliers are implementing measures to ensure resilient operations, resulting in better long-term business partnerships. We expect to see more collaborative supply chain decarbonization programs emerging in 2022, as organizations across a wide range of industries – from retail and grocery to food and beverage to aerospace and defense – begin to tackle the Scope 3 challenge.
Contributed by: Andrew Reetz, Supply Chain Renewables Initiative Program Manager, CO (USA)
TREND #2 Net-zero commitment clarity
The need to achieve global net-zero emissions by 2050 has been made clear by climate science, but the exact meaning of a net-zero commitment is still unclear. What emission scopes should a net-zero goal cover? What is the appropriate level of absolute emissions reductions before an organization uses neutralizing mechanisms like carbon offsets? And how fast should decarbonization take place?
Net-zero emissions commitments are often conflated with carbon neutrality commitments. The lack of consensus on how to define net-zero has made commitments difficult to compare, fueling confusion and accusations of greenwashing. However, with the release of the SBTi’s official Corporate Net-Zero Standard, these and many more questions have been clarified, providing organizations with a robust set of criteria to follow.
Beginning in January 2022, the SBTi will begin validating net-zero commitments, heralding a new era of corporate climate action and raising the bar on the level of ambition required to lead in the corporate sustainability space. There are already seven companies that have set their net-zero targets under the new guidance, and more than 700 have committed to set net-zero targets in the next two years.
The SBTi Corporate Net-Zero Standard brings structure and consistency to net-zero emissions goals, both for companies that have already stated their net-zero ambition and for those that are looking to do so in the future. But even so, there are still many unanswered questions. In 2022, we expect to see more development of this standard, with additional target-setting tools, further guidance on Scope 3 target-setting for a net-zero value chain, several sector-specific guidance frameworks, recommendations on reporting and implementing carbon insetting, detailed guidance on offsets quality, and accounting, and more.
Learn more about the important elements of SBTi’s Net-Zero Standard and what has changed for companies in our blog
Contributed by: Elena Cernov, Sustainability Consultant, Budapest (HUN)
TREND #3 The cry for standardized ESG reporting
As investors and other stakeholders get more savvy about ESG impacts and how these are being addressed, we’re seeing a wave of ‘survey fatigue’ sweep across our clients. Companies around the world are trying to be more transparent about their ESG risks and opportunities by reporting their progress, but the competing standards for disclosure of ESG data can be confusing and time-consuming. From global standards & schemes like SASB, CDP, and GRI, to frameworks like IIRC and TCFD, to industry-specific standards like GRESB and SFDR, and various regional schemes, the ‘acronym soup’ of ESG reporting can get overwhelming. When companies are left to voluntarily decide which standards or frameworks to report to, an investor’s ability to assess and compare ESG performance across platforms is restricted. Regulatory developments like the EU’s proposal for a Corporate Sustainability Reporting Directive (CSRD), or Japan’s and the UK’s mandatory rules for TCFD implementation add additional complexity.
The solution to this problem seems straightforward, in theory: a universal ESG reporting mechanism that each rater, ranker, and framework plugs into for access to the relevant corporate data. However, in practice, it is much more complicated. There’s debate around whether a universal reporting solution is practical or feasible, if ESG reporting should be mandatory, and if so, how it should be implemented.
The International Sustainability Standards Board (ISSB), launched at COP26, aims to bring the world a step closer to this universal disclosure standard. ISSB was created to help investors find quality, transparent, reliable, and comparable company ESG data in one place, merging various ESG standards into one global baseline. In the second half of 2022, the ISSB is expected to deliver a comprehensive set of global sustainability reporting protocols. Given the pace at which regulations are unfolding and the scope of their influence, the private sector is likely to be impacted – exactly how remains to be seen. What we do know today is that any mandatory reporting scheme will likely align with the dominant global standards or frameworks in place today, particularly those which place an emphasis on communicating financially material sustainability information, which are SASB and TCFD.
Contributed by: Kristi Plume, Senior Sustainability Consultant, CA (USA)
TREND #4 Purposefully & digitally collecting and managing ESG data
The increase in demand for non-financial reporting drives a mountain of ESG data that companies have to collect and manage. Considering the time and investment required to collect and manage all this data, many companies find themselves wondering, is it worth it?
You may have heard the saying “you can’t manage what you don’t measure.” However, with the proliferation of energy and sustainability data, today it is equally important to consider the inverse: you shouldn’t measure what you don’t plan to – or don’t need to – manage. Not all ESG data is going to be equally important for every company; what is most material for and to the business should drive what data is identified and managed. Collecting ESG data just for the sake of having data will not lead, by itself, to a return on investment. If you don’t intend to use the data to drive decision-making, it may not be worthwhile to measure.
Equally as important as defining what data to measure is having a reliable and efficient strategy for how to collect and manage it. The insights companies need for today’s disclosures require robust digital solutions powered by next-generation technology. Digitized and centralized data management tools, combined with human expertise, accelerate decision-making and drive results. Even for companies that have moved toward a more digitized data management system, adding artificial intelligence and other enhancements to data management systems in 2022 will offer a multitude of benefits, including:
- Robotic process automation for more efficient data collection
- Machine learning for predictive analysis
- Reinforcement learning for process optimization
- Centralized collection and storage working with your existing system
Among other applications, these powerful digital tools can improve the quality, reliability, and transparency of ESG data, enabling your team to work both harder AND smarter.
Contributed by: Christopher White, Software Solutions Architect, UK
Trend #5 Financial institutions fueling the race to net-zero
Year over year, investment in low-carbon projects and technologies shatters previous records. As corporations and financial institutions come under increasing pressure to improve their performance on ESG matters and meet emissions reduction goals, more and more funds are being poured into solutions for the climate crisis. According to a survey by the Climate Bonds Initiative, investors expect global green bond investment to double by the end of 2022, reaching $1 trillion for the first time in a single year.
Financial institutions are taking a primary role in driving the net-zero transformation. Climate negotiations at COP26 in Glasgow brought sustainable finance into the spotlight with a coalition of finance firms worth $130 trillion pledging to accelerate climate change mitigation under the Glasgow Financial Alliance for Net Zero (GFANZ). The SBTi also launched a framework for financial institutions and the first tailored guidance for the private equity sector to support target-setting and potential decarbonization strategies.
The world’s leading investors are taking note. In January 2021, Blackstone announced an emissions reduction program aimed at reducing the Scope 1 and Scope 2 emissions of the investments in its large global portfolio, which represents $731 billion in assets under management. In October 2021, EQT became the first private markets firm to successfully achieve science-based target validation, aiming to set SBTs for 100% of its portfolio by 2030, in addition to its own operational emissions reduction goals. These indicators in late 2021 mean that 2022 is sure to be a big year for finance and climate action.
Contributed by: Irina Gilfanova, Sustainability Solutions Architect, Budapest (HUN)
TREND #6 Volatility of environmental commodity markets
In 2021, the market for environmental commodities, including energy attribute certificates (EACs) and carbon offsets, experienced extreme volatility and increasing prices around the world – with several markets seeing a price explosion. A tenuous balance of supply and demand has emerged with these products for several reasons, including:
- High demand for emissions-reducing solutions as corporates strive to meet carbon reduction goals
- Supply chain issues delaying the development of many projects that produce EACs and offsets
- Many new EAC-generating projects built on the back of corporate PPAs are not providing EAC supply to the open, unbundled market as corporates retain them to hit their own goals
- COVID-related issues, such as the inability of auditors to access project sites to verify emissions reductions from carbon projects
These products that were once a readily accessible and affordable way for corporates to meet their renewable energy and emissions reduction goals have become increasingly difficult and costly to source.
If bullish price trends continue through 2022, which we expect they will, companies that have been banking on using EACs or offsets to achieve their near-term goals may find themselves priced out of the market or needing to reevaluate their budget. For some companies, 2022 may be the year to evaluate alternatives to EACs, such as by procuring offsite renewables through a power purchase agreement (PPA) or investing in onsite solar installations.
Contributed by: James Lewis, Director of Global Renewables and Cleantech, Colorado (USA)
TREND #7 Formalizing biodiversity goals and ‘nature-based solutions’
Reducing emissions from electricity is often at the center of climate change plans, but it is not the only important environmental consideration. Biodiversity is a topic that has been on the periphery of corporate sustainability agendas for some time but is rising in prominence. In 2021, the World Economic Forum Global Risks Report once again ranked the irreversible consequences of biodiversity loss in its top five global threats. Besides the tragic loss of species and natural areas and systems, the destruction of natural capital will cause severe economic harm.
As a result, corporations are taking increased action to reverse nature loss. At COP26, more than 100 world leaders joined a pledge to halt deforestation – a major factor contributing to rising global emissions and biodiversity loss – by 2030. Leading companies like Schneider Electric have started to explore their biodiversity footprint, to understand impact and set targets.
The Science Based Targets Network (a coalition of many of the same organizations behind the SBTi) was formed to develop methods and resources for companies to use to set science-based targets for nature, alongside their emission reduction goals. Setting these goals in tandem ensures that nature-based solutions for climate change mitigation will result not only in carbon sequestration but also reverse nature loss. Finally, this year, CDP will add a new “biodiversity” section of questions to its annual Climate Change questionnaire. We anticipate we will see more pressure for companies to act and disclose their nature- and climate-related risks in 2022 than ever before.
Contributed by: Rebeca C. Mendoza, Sustainability Consultant, Budapest (HUN)
TREND #8 Redesigning economies to be more circular
Today’s economy is only 8% circular, and unfortunately, as noted in the 2021 Circularity Gap Report, the trend is still going in the wrong direction. This is despite plentiful known threats of linear business practices, including increased volatility of resource prices, supply chain inefficiencies, consumer preferences shifting towards sustainable solutions, lost opportunities from disruptive business models, and exposure to penalties and legal action as stricter environmental regulations arise.
In the EU, as is evident from the Circular Economy Action Plan, regulatory initiatives are emerging that aim to promote circular business practices. These include the Sustainable Products Initiative, EU Taxonomy for Sustainable Activities, Construction Products Regulation, Packaging and Waste Directive, and a review of the Sale of Goods Directive to extend the life of goods and promote repair over replacement.
Not only is the linear economy mindset harming business productivity, but it is also impeding progress toward a low-carbon future. The role of materials use and waste cannot be overlooked if we are to reach the Paris Agreement goal of limiting temperature rise to 1.5 degrees Celsius. Material handling and use across the supply chain accounts for 70% of greenhouse gases emitted. It is critical that businesses begin to look beyond energy and begin to incorporate circular economy strategies into corporate climate pledges.
Contributed by: Gaurav Sharma, Lead Circularity Practice, Paris (FR)
TREND #9 Pairing mitigation with adaptation
It used to be that organizations considering climate change adaptation were rare because of the emphasis in corporate climate action to solve the climate problem through a mitigation-only approach. However, climate change adaptation is starting to take a seat next to climate change mitigation in corporate strategies. As the size and value of climate-related risks increase, strategies to transform business to adjust to the changing climate are entering the conversation. For example, according to Financial Sustainability Board research, economic losses resulting from extreme weather-related catastrophes have increased by 60% over just one decade. Since climate change is a threat multiplier known to increase the severity and frequency of these weather events, companies cannot afford to stand idle as these impacts intensify if they want to sustain their license to operate for the long term.
Although mitigation is still very much a priority, adaptation, resilience-building, and business model transformation are essential for companies to begin scoping out and investing in. Through scenario analysis and assessment of climate-related financial risks aligned with TCFD, companies can build a climate approach that effectively embeds a combination of decarbonization and adaptation into business strategy.
Hear more about Schneider Electric’s proactive climate risk assessment services here.
Contributed by: Lindsey Edelman, Sustainability Consultant, Texas (USA)
TREND #10 The growing role of regulations globally
Corporate climate action has been largely voluntary, motivated by drivers like the Paris Agreement and the adoption of the Task Force on Climate-Related Financial Disclosures (TCFD) framework. However, recent developments signal a move toward greater government oversight and legislation of sustainability in the private sector.
Unsurprisingly, the EU has been a leader in this trend. For example, with its recent institutionalization of the Green Taxonomy, the EU is creating a classification system to establish a common definition of which economic activities will be considered environmentally sustainable. Europe has also paved the way with its Sustainable Finance Disclosure Regulation (SFDR), Corporate Sustainability Reporting Directive (CSRD), and the European Sustainability Reporting Standards (ESRS), among more than 20 other proposals for new legislation that will make Europe the first climate neutral continent.
In other regions, climate-related disclosures are yet to be mandated, but the conversation is shifting. The UK and Japan both plan to mandate TCFD reporting for large companies beginning in April 2022. And in the US, there are local as well as federal signals that the role of regulation will grow. For example, in 2020, the Town of Ithaca, New York adopted a Green New Deal resolution to transition to a carbon neutral city by 2030, and in 2021, it became the first US city to begin work on a 100% decarbonization plan for its buildings. The Biden administration is also making moves towards stronger legislative oversight on sustainability at the federal level. The recently passed US infrastructure bill, for example, includes provisions to prepare the US for climate change.
It will be important to track how large emitters like China, India, and the US keep pace with their commitments, and how global heavyweights like Russia or Brazil participate. China has pledged to become carbon neutral by 2060 with emissions peak in 2030. In 2022, it intends to release 30 sector- and province-specific documents to guide industries such as steel, cement, and transportation.
Contributed by: Jan Rosetzky, Senior Environmental, Social and Governance (ESG) Consultant, Hoofddorp (NLD)