Decarbonizing Business: Driving Accountability And Competitive Advantage In The Climate Crisis

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Consumers, investors, and regulators are actively seeking effective ways to hold companies accountable for their greenhouse gas emissions. This heightened focus is fueled by the alarming disparity between current emission reduction efforts and ambitious net zero targets set in recent years.

A recent tracker from Morningstar Sustainalytics uncovers a troubling truth: Without prompt and resolute collective action from businesses, we are on track for a temperature rise of 2.9 degrees Celsius by 2050, nearly double the 1.5-degree target set by the Paris Agreement. But amidst the challenges, there are significant opportunities to decarbonize our economy by fostering partnerships, making strategic investments, and sharing innovative, best practice solutions between businesses to effectively implement net-zero commitments.

The business case for participating in the low-carbon transition ought to be well known. Decarbonizing business not only aligns with the necessity of addressing climate change but also presents clear advantages for corporate leaders. One significant advantage is the potential for a first mover benefit. As the effects of climate change become increasingly evident, businesses will inevitably begin to face regulation, and can expect to incur mounting costs the longer they wait to transition towards a low-carbon global economy. By taking proactive steps now towards decarbonization, guided by a time-bound Transition Plan, companies can position themselves ahead of the curve, gaining a competitive edge and mitigating the potential financial burdens associated with climate change impacts. As I’ve written before, recent research suggests a connection between financial performance and efforts to reduce emissions. Buoyed by this, thousands of companies have set well publicized climate targets in recent years.

The challenge does not lie in companies setting targets, however; rather, it lies in the speed at which progress is being made from target setting to actual delivery, or from idea to impact. While no one denies that transitioning to a low-carbon future is difficult for many industries, there are instances where the implementation is simply falling too short. And because there is currently no standardized format for a transition plan that effectively guides the journey from target to implementation, it often becomes challenging to ascertain whether the actions being taken by some businesses are legitimate and aligned with their publicized objectives. Former Canadian Minister of Environment & Climate Change Catherine McKenna emphasized this during a panel discussion at Global Citizen NOW, stating, “The science on climate change is clear… You cannot buy cheap credits instead of doing the work yourself… You need to be able to see clearly who is doing the right thing… There are great companies doing the work, but we can’t distinguish because everyone is saying, ‘I’m a climate leader.’”

Highlighting the gap between commitment and action, Morningstar Sustainalytics’ new Low Carbon Transition Ratings assessed approximately 4000 large public companies on their greenhouse gas emissions management. Shockingly, the tool reveals that only 17 percent of these companies have the necessary policies and strategies in place to achieve their emissions targets. This means that a vast majority are either conveniently ignoring the facts or inadequately addressing carbon emissions and transition risks across their entire value chain. Surprisingly, only a mere 8 percent of the analyzed companies have robust greenhouse gas performance incentive plans, with notable progress seen in the utilities and real estate sectors.

The failure of the corporate sector to deliver on climate commitments has spurred regulators to strengthen their measures for holding companies accountable, while also promoting transparency and sustainability in corporate practices. The global consensus on corporate accountability is evident as regulators worldwide embrace enhanced climate disclosures, sustainability reporting, and climate-related financial risk assessments. Notably, the upcoming reporting standards from the European Commission, alongside the Sustainable Disclosure Requirements and investment labels being developed by UK regulators, mark a significant stride towards efforts to drive better accountability and implementation.

Regulators now seem set on taking multifaceted approaches, cracking down on greenwashing, ensuring accurate measurement and incorporation of emissions, and enforcing fulfillment of emission reduction claims. For instance, a proposed rule by the SEC aims to mandate the publication of full Scope 3 emissions, encompassing all indirect emissions within a company’s value chain, regardless of their climate commitments. These collective efforts showcase a determined drive to establish a new era of corporate accountability in tackling climate change. The global trend is crystal clear: we’re moving towards a low-carbon economy, despite the pushback from certain jurisdictions.

Sustainalytics’ new tracker demonstrates that a strong regulatory push does drive climate action and reporting among businesses. Better scores are seen in countries with tougher regulations on climate risk and mitigation policies. It is therefore no surprise then that businesses in France, the UK, and the EU generally outperform other regions lacking similar regulatory advancement.

Regardless of regulatory pressure, however, there are companies taking bold steps and publishing transparent Transition Plans with measurable goals. These plans may provide valuable lessons for others’ and should be shared widely to normalize best practice.

According to Sustainalytics, Novartis stands out as a company that aligns with the 1.5-degree target. Its success can be attributed to its low emissions and limited exposure, considering it operates in the pharmaceutical sector as well as the fact it started its transition to a low carbon future early on. The company demonstrates strong commitment through its emissions targets, greenhouse gas performance incentive plans, and effective integration of carbon pricing. Additionally, Novartis excels in reporting on supply chain emissions and exhibits strong leadership expertise in transitioning to a more sustainable future. Notably, the company actively engages with policymakers on climate-related matters, setting a commendable example of climate responsibility that should be followed widely.

Ultimately, businesses with net zero targets ultimately face a choice: to proactively publish and implement a time-bound Transition Plan that meticulously outlines the transformation of their assets, operations, business models, governance, and policy engagement, and enjoy the advantages of early adoption, or to wait until regulatory action inevitably catches up, resulting in higher costs. In this vein, President Macron’s upcoming New Financial Pact Summit in June serves as a crucial platform to acknowledge companies implementing such actionable change and bridging the investment gap for inclusive participation in the clean energy transition. By collaborating and sharing best practice, early movers will hopefully inspire others to contribute towards shaping a just energy transition.



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