With 2019 already in full swing, the issue of climate change and the requirement for responsible business and investment is more apparent than ever.
Below, Greenstone explains 5 key trends it sees as shaping the direction of corporate sustainability and reporting for business and investors in 2019.
1. Setting science-based targets
With 2020 fast approaching, many businesses will be looking to set new emissions targets, and Science-Based targets are quickly becoming the new industry standard. This aligns emissions reduction targets with the Paris Climate Agreement’s aim to keep global temperature increases below 2°C, compared to pre-industrial levels. Since April 2018 the number of companies that have either set or committed to a science-based target has more than doubled, recently exceeding 500.
As uptake increases, the business case for setting such ambitious targets is becoming ever clearer. The 2018 STOXX Global Climate Leaders Index[1] showed that companies who are pro-actively reducing their carbon footprint are consistently outperforming their counterparts. In the long term, those who set a science-based target are better placed to adapt to a more controlled playing field, as governments begin imposing greater environmental regulations.
2. ESG investing
Increasingly investors are looking beyond market short-termism and shifting their focus to more long-term socially responsible investments. By considering environmental, social and corporate governance (ESG) within decision-making, the hope is to generate financial returns that also deliver a positive societal impact.
Mutual funds for ESG investing has grown by over 60% since 2012 and has now surpassed $1tn[2]. In conjunction, there has been increased divestment away from companies that fail to take ESG issues into consideration.
Growing research suggests that as well as demonstrating good corporate citizenship, companies who integrate ESG issues within their operations improve their financial performance. Between 2005 and 2010, companies with the highest ESG ratings experienced the lowest volatility in earnings per share, contrasting the volatility of those who performed poorly[3].
3. Impact reporting
As governments begin to look beyond the realms of GDP indicators, investors are also looking for the incorporation of societal and environmental impact within a company’s valuation. Consequently there is set to be a predicted uptake in the number of businesses undertaking assessments on their impacts in relation to natural and social capitals.
Despite this growing trend, there is little cohesion between the different methodologies used to measure these impacts, making the value non-financial externalities difficult to translate. In an attempt to create a standardised methodology, 2018 saw the World Business Council for Sustainable Development launch the Social and Human Capital Coalition, to sit alongside the Natural Capital Coalition. While in their infancy, these frameworks provide a more consistent approach by which to measure and value an organisation’s environmental and societal impact.
4. Cohesion between frameworks
In order to address the issue of ‘framework’ fatigue, leading frameworks and standards such as GRI, CDP and SASB have established the Corporate Reporting Dialogue. At the end of 2018 they announced a two-year project focused on better aligning their respective indicators and requirements.
While individual frameworks will continue to be tailored for different focuses and audiences, each will be mapped to identify commonalities and differences, with continual refinements being made to improve overlap. The project will also identify how non-financial metrics relate to financial outcomes, looking at how they can be incorporated into mainstream reports. This ties in with the Corporate Reporting Dialogues ultimate aim of integrating financial and non-financial reporting.
5. Use of technology to address supply chain risk
As the need to keep global temperatures within the 2 degree threshold is continually stressed, more and more companies are beginning to take greater ownership of emissions that sit outside their operational control. A recent survey by HSBC[4]of 8,500 companies showed that one in five have taken greater control of their supply chain in the past five years. Looking forward, 85% of those surveyed want to achieve a sustainability standard recognised by their sector or market.
Throughout 2019 and beyond, emerging technologies such as smart sensors, data analytics and blockchain will help companies more effectively manage their supply chain. Smart sensors facilitate the collection and sharing of multiple streams of data, allowing companies to engage with suppliers and assess their performance against their scope 3 targets.
Artificial intelligence can utilise this real time data feed by automatically scheduling tasks to optimise efficiency. Data analytics can then provide insight into these efficacy savings for reporting purposes. The wealth of information collected can be securely validated using blockchain technology, as each transaction is given a unique digital signature, with all parties accessing this information from a single database.
References
[3] ESG Part II: A Deeper Dive.” BofA Merrill Lynch Global Research report. 6-1-17
Science-Based Targets Reference
