A new report has once again shed light on the shortcomings of the private sector in terms of climate leadership. The overall findings are not favorable, with many companies still behind where they should be if the world is to halve global emissions by 2030. Closer examination of the hard facts and data surrounding corporate climate efforts is essential, and should be welcomed, as companies face increased pressure on two fronts; either for not doing enough, or, as absurd as it sounds, doing too much. When it comes down to it, businesses should allow the hard facts to steer their decisions.
The NewClimate Institute and Carbon Market Watch’s second annual Corporate Climate Responsibility Monitor (CCRM) report evaluates the transparency and credibility of 24 significant corporate pledges on climate action. Similar to last year's report (as covered previously), only Maersk, a Danish freight shipping company, is identified as having a climate strategy with “reasonable integrity.”
Businessman standing in the water
In contrast to last year however, this latest report is now being released amidst growing criticism of companies and investors, particularly in the US, for doing too much. Some states have even gone so far as to pull their pension funds from asset managers who they believe are putting too much emphasis on climate change. This stance is rooted in the belief that efforts to decrease emissions and promote sustainability are both an example of “woke capitalism” and a violation of a company's fiduciary duty. In other words, they see actions to address climate change as a detriment to shareholder profits. This mounting opposition has already resulted in at least one major asset manager exiting from a net zero financing alliance.
In the face of opposing and conflicting views, it may be difficult for some business leaders to know what to do. However, the facts are clear: reducing emissions by half by 2030 is necessary to avoid the worst consequences of climate change, and the private sector has an important role to play with 10,000 publicly listed businesses alone responsible for 40% of all climate warming emissions.
Vector illustration of man having dilemma when choosing countryside or urban life.
On top of that, acting on climate change makes good business sense. Increasing evidence shows that considering climate change and other sustainability risks in decision-making leads to better returns over the long term, rather than lower returns. A recent research endeavor investigated the impact of implementing science-based emission-reduction targets (SBTs) on the financial performance of 465 companies between 2015 and 2020. SBTs are voluntary, climate goals that concentrate on reducing actual emissions and cannot be met through any type of offsetting activity. I delved into the critical role SBTs play in this previous article. In the absence of uniform regulation, such voluntary standards provide the most effective means of inspiring ambitious corporate action. The results of this particular study suggest a positive, win-win relationship between decarbonization efforts and financial results, showing it does indeed “pay to be green.”
Having a corporate climate strategy is ultimately not a matter of politics or ideology, but rather responsible management of shareholder interests. In this vein, ignoring growing climate threats may in the long run have disastrous effects on a business’ workforce, supply chain, and business models. Extreme weather damages reached over $165 billion in 2022 and are projected to continue growing. We can pretend that climate risks do not exist but the facts (and their very real world impact) speak for themselves.
Moreover, studies indicate that taking decisive action on climate change will result in trillions of dollars in added value to the global economy and generate millions of new jobs in the near future. Investment opportunities in infrastructure alone are estimated by the OECD to be $6 trillion. Ignoring the substantial economic benefits and investment opportunities that come with the clean energy transition would seem to evidently not serve the interests of stakeholders, shareholders, beneficiaries, customers, or the communities where businesses operate and live.
The facts clearly demonstrate the need for and benefits of strong corporate climate leadership. Leaders in the business world who acknowledge this should therefore also base their targets, accordingly, on empirical fact. To this end, as of 2021, more than 2200 companies have already set some form of SBT, covering 35% of global market capitalization. According to the Science Based Target initiative (SBTi), companies that have validated SBTs are making faster progress than their peers in reducing their scope 1 and 2 emissions. On average, these companies have been able to reduce their emissions by 12% year-on-year, which is higher than the 7.6% year-on-year reductions needed to meet the goal of limiting global warming to 1.5°C.
Nevertheless, as the recent CCRM report highlights, there is still plenty of progress to be made to ensure that corporate 2030 targets, in particular, are fully aligned against the latest science based net zero standard. The cornerstone of the Science-Based Target initiative’s Net-Zero Standard is for companies to pledge to specific, actual emission reduction goals throughout their operations and supply chains, typically aiming for reductions of 45-50% by 2030 and 90-95% by 2050, in line with the global efforts to prevent temperature increases exceeding 1.5°C. According to the CCRM report however, the companies evaluated have collectively pledged to reduce just 15% of their full value chain emissions by 2030. To be fair, some of these companies had set their targets prior to the release of the IPCC's landmark Special Report on 1.5°C in October 2018, which established 1.5°C as the new recommended level of climate ambition. Since July 2022 however, the SBTi only recognizes targets that align with 1.5°C. Accordingly, companies with so-called ‘legacy’ targets should look to revise their ambitions accordingly.
In the end, it remains the case that the effectiveness of any target is only as strong as the progress made towards achieving it. Action, and prompt action, is what ultimately matters. In the context of climate change, the unalterable hard fact is that global emissions must reach their peak within the next two to three years and then swiftly reduce by half by 2030. The ability to take effective action against this benchmark is what will be used to assess leadership, particularly as some regulators at least seem to be demonstrating a growing inclination to closely examine corporate statements on climate change to confirm their accuracy and consistency with reality. Additionally, starting from January 31st of this year, the SBTi's Target Dashboard will clearly indicate where companies and financial institutions fail to set clear, time-bound SBTs within the 24-month deadline after joining.
Despite the current tendency towards disregarding facts, the consequences of inaction are real. Companies that fail to take action may experience lower returns and miss out on economic benefits. Conversely, companies that make misleading claims or establish climate targets that are not in line with established scientific facts may face heightened scrutiny, public criticism, and possibly even regulatory action. In the end though, all of us will have to confront the hard reality of catastrophic climate change if action is not taken promptly.
