When does my Board need to add Emissions Reduction into our Strategy?

Introduction

Before reading this paper, for each of your boards write down how long you think they have before they need to introduce emissions reduction into its strategy – Not required, 1, 2, 3, 5 years etc.

This paper is based on material used in a webinar for Corporate Secretaries International Association that was held across 13 countries and an article published in Global Governance Voice¹.

Many of the forces driving change are global. Emissions and sustainability regulations and standards are being developed at a global level and these cascade down to countries and sectors. As a consequence, boards may not see the forces driving change coming. 

The Drivers for Change

The following five are some of the drivers for change. Their individual importance to your company’s long term financial viability will vary according to your business activities.

• Scope 3 emission targets

Scope 3 emissions are indirect emissions in the downstream and upstream value chains of your business. They are emissions from your supply chain. Banks addressing emissions in their lending portfolios is an example of reducing scope 3 emissions. Scope 3 emissions reduction activity will have a systemic and compounding impact on emission reduction across the economy. For example, Woolworths, Australia’s largest retailer, net zero plans are:

• • “We will reduce our scope 1 and 2 emissions by 63 percent from our 2015 baseline by 2030 This target has been ratified by the Science Based Targets initiative (SBTi) …

• We are currently committed to achieving a 19% reduction in value chain emissions by 2030.
• These scope 3 value chain emissions are calculated to be approximately 14 times greater than both our scope 1 and 2 emissions combined. We acknowledge the scale of this challenge, and in F22 improved our measurement of emissions across our entire value.”²

There is a ‘trickle down’ effect where large corporates include emissions reduction and sustainability requirements into supplier contracts and supplier questionnaires. Businesses who are not foreseeing the changes that will be expected of them from their supply chain customers will lose access to markets if they cannot meet the emissions reduction targets expected of them. 

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• Regulatory change

Government regulatory change requiring emissions reduction is rapidly occurring.

1. Listed Company emissions reduction plans: Listed companies in the EU, UK, Switzerland, Hong Kong, Japan, Singapore, California and New Zealand are required to disclose climate risks and emission reduction targets. The USA annual greenhouse gas (GHG) emissions and the climate-related risks disclosures are being developed.³

The Australian Accounting Standards Board has released a proposed climate change reporting standards framework for industry feedback based on the Taskforce for Climate Related Disclosures (TFCD). There are two significant implications of implementation of disclosure of emissions reduction targets:

• A wide range of companies will begin addressing their scope 3 emissions and demanding their suppliers also begin the transition to net zero which will have a compounding effect across domestic economies and trading partners.
• As consumers see more companies reducing emissions this will increase community sentiment for emissions reduction across all sectors of domestic economies. 

1. Government Purchasing Requirements: Governments are beginning to align their purchasing and tender requirements to their stated emission reduction targets. For example, Singapore’s GreenGov.SG⁴ policy states, “We will require Government agencies to purchase products that meet high efficiency or sustainability standards.” and “We will factor in companies’ sustainability-related policies and practices when evaluating government tenders”. The US government has just released a regulation for public comment, the ‘Federal Supplier Climate Risks and Resilience Rule’, which will require Federal suppliers and contractors to publicly disclose their greenhouse gas emissions and climate-related financial risks and set science-based emissions reduction targets.⁵

As governments align their purchasing and tendering to legislated emissions reduction targets an increasing number of small businesses and not for profits across wide range sectors will be required to act on emissions reduction.

1. Carbon Border Adjustments: The EU is the first jurisdiction to approve a greenhouse gas border adjustment fee. The EU Carbon Border Adjustment Mechanism (CBAM) is a tariff on carbon intensive products designed to deter carbon-intensive processes, encourage manufacturers to “green” as much of their processes as possible and to prevent companies transitioning operations to countries with lower emissions policies⁶. It has been reported that the US is also considering a carbon border adjustment mechanism.

Boards don’t need a great deal of strategic foresight to predict that countries will move to ensure their economies are not unfairly disadvantaged by competition from imports from companies in low emission jurisdictions or have their economies impacted by companies moving to low emission jurisdictions. 

• Access to capital

“Institutional investors are rebalancing their portfolios to support global decarbonization. Companies that cannot articulate a compelling decarbonization strategy may find it increasingly hard to access capital.” Ernst & Young⁷

As an example of the global and national changes, 85% of Australian banks are taking steps to reduce their investment and lending portfolio emissions⁸. The implications of this are clear financial institutions will reduce emissions in their lending portfolios to meet their 2030 and 2050 targets. Access to capital will be increasingly difficult for businesses that have not committed to emission reductions and businesses should anticipate emission reduction targets and assurance requirements being included in banking covenants.

• Customers

There is considerable consumer research highlighting the importance of sustainability to consumers. For example:

• 62% of consumers say it’s now more important than before that companies behave in a more sustainable and eco-friendly way⁹
• 75% of consumers are willing to change their purchasing habits to reduce environmental impact¹⁰
• consumers are willing to pay as much as a 60% premium for environmentally friendly products¹¹

Whilst consumer sentiment towards net zero will fluctuate with cost-of-living pressures and extreme weather events the long-term trend is clear. Yale University surveys identify that only 9% of Americans are ‘dismissive’ of climate change but 33% are ‘alarmed’¹². The ‘alarmed’ segment has nearly double in 4 years. Consider the impact on your financial sustainability of losing 20 – 30% of your customers as they move to competitors who are more sustainable. 

There are ‘first mover’ advantages to capture the interested consumer but as more B2C businesses and NFPs reduce emissions and strive for net zero consumers will have increasing choice. The laggards, those entities that don’t respond to consumer expectations to be more sustainable, will be left wondering what happened to their customers.

• Employee sentiment

“Sustainability is very important to employees and is an important indicator of employee engagement, retention, performance, and well-being. Employees are attracted to companies that focus on sustainability as part of their business strategy because it gives meaning to the work they do”.¹³

Closely related to consumer sentiment towards sustainability there is strong evidence that potential and current employees favour companies acting on sustainability:

• 75% of employees state they are more likely to work for a company with a green footprint¹⁴
• 40% of millennials state they have taken one job offer over another because of a company’s sustainability, and 70% said it would impact their decision to stay with a company for the long haul¹⁵
• 47% of Gen Z want to make a positive impact on community and society¹⁶

Across many countries this is a particularly challenging time for recruiting and retaining staff. The evidence strongly indicates that an organisational focus on sustainability and emissions reduction will give your business or NFP an edge in the recruitment market and lift your employee value proposition.  Those entities slow to respond to sustainability will lose the ‘war for talent’.

Conclusion

This paper identifies five drivers of change for boards to act on emissions reduction – consumer sentiment, employee sentiment, access to capital, scope 3 emission targets and regulatory change. Individually they will have varying degrees of relevance and impact on your business but consider the cumulative and systemic impact they will have across your country’s economy and in turn on your entity. 

There are opportunities and risks for Board’s driving early adoption of emission reductions. The opportunities include – increased market share, lower costs and energy savings, enhanced brand, new products and services, innovation, lower waste in processes and production, organisational resilience to the impact of these changes. The laggards will miss the opportunities and their board’s will wonder what happened as they face financial sustainability issues. 

After reading the five drivers of change how long do you think your board has now to include emissions reduction in its strategy?

Please contact Paul Geyer paul.geyer@vuca.com.au if you would like to discuss this article further. 

NOTE:
Please refer to a related article written by Paul Geyer on Strategy and Governance of Emissions Reduction. Go to https://www.vuca.com.au/thought-leadership/

Paul Geyer
Director, VUCA Trusted Advisors

References

¹ Five Commercial Drivers for Emissions Reduction, Global Governance Voice, Issue 31 August 2023
Climate Governance Webinar https://www.youtube.com/watch?v=IafHya3-M80
² https://www.woolworthsgroup.com.au/au/en/sustainability/Planet/net-positive-carbon-emissions-by-2050.html
³ https://www.gtlaw.com.au/knowledge/effect-secs-proposed-climate-related-disclosures-australian-companies
⁴ https://www.greenplan.gov.sg/key-focus-areas/green-government/
⁵ https://www.whitehouse.gov/briefing-room/statements-releases/2022/11/10/fact-sheet-biden-harris-administration-proposes-plan-to-protect-federal-supply-chain-from-climate-related-risks
⁶ https://www.weforum.org/agenda/2022/12/cbam-the-new-eu-decarbonization-incentive-and-what-you-need-to-know/
⁷ https://www.ey.com/en_au/assurance/how-your-decarbonization-strategy-could-impact-your-
access-to-capital
⁸ https://www.climateworkscentre.org/news/australian-banks-are-taking-steps-towards-net-zero-emissions-
but-actions-are-not-yet-comprehensive/
⁹ https://www.mastercard.com/news/insights/2021/consumer-attitudes-environment/
¹⁰ IBM Research Insights, Meet the 2020 Consumers Driving Change
¹¹ https://www.mckinsey.com/industries/retail/our-insights/climate-sustainability-in-retail-who-will-pay
¹² https://climatecommunication.yale.edu/about/projects/global-warmings-six-americas/
¹³ https://businessleadershiptoday.com/how-important-sustainability-is-to-employees/
¹⁴ https://www.hrdive.com/news/green-companies-make-the-greenest-pastures-report-says/548082/
¹⁵ HRDive, February 2019, https://bit.ly/3mcL82T
¹⁶ https://www.cpajournal.com/2021/10/22/using-sustainability-initiatives-to-engage-young-professionals/