Fifty-five percent of the US$58 trillion in global gross domestic product is dependent on nature, a PwC report found last year.
Arguably, the remaining 45 percent would be somewhat depleted if there were no plants or animals in the world, but the figure illustrates the scale of what’s at stake as governments introduce mandatory climate reporting to hold companies to account for their contribution to the 37 billion metric tons of carbon that are belched into the sky each year.
The impact on global businesses will be seismic as legislation designed to harmonize international requirements comes into force in the United States, Canada, the European Union, Singapore, Australia and elsewhere.
“You have to stay optimistic because the alternative is too ghastly for humanity.” – David Grayson
Companies suddenly must declare their hand across a range of energy-related factors such as carbon footprint, impact on local communities, workplace culture and ESG areas. Crucially, the new rules also cover Scope 3 emissions – those not directly produced by the reporting entity, but resulting from activity across its supply chain.
Chief executives will also have to gaze into their crystal balls to disclose just how resilient they think their companies will prove to be on the rocky road to net zero. A PwC survey last year that found only 19 percent of business leaders think climate change is a serious risk to them suggests the only gazing many of them have done so far has been in the direction of their navel.
Risky business
But when they do finally wake up and smell the ethically sourced coffee, they’ll have to worry about more than just their bottom line, one industry expert warns.
“While much of the talk is about the financial impact, the majority of the work will focus on the physical risks of a future where the climate has changed, and the transition risks of moving to a low carbon economy,” Mark Siebentritt, Executive Director of global sustainability consultancy Edge Impact, tells The CEO Magazine.
“Mandatory climate reporting means senior executives must better understand the basics of climate disclosure around governance, strategy, targets and risk, and how it’ll affect where investors put their capital.”
He argues that it’ll be particularly challenging for exporters, as the enforcement of emissions targets is down to individual countries and rules vary between jurisdictions.
It’s a view echoed by United States Treasury Secretary Janet Yellen, who predicts that European Union regulations alone will cause “unintended negative consequences for United States’ firms”. Data analysts Refinitiv put the number that will be adversely affected at more than 3,000.
How firms can adapt
Deloitte, too, sees enormous implications, describing the new mandates as “an inflection point” for the United States. It insists firms need to move quickly to adapt in a number of ways:
1. Build reporting agility through automation and standardized governance
2. Use scenario planning to assess short, medium and long-term impacts
3. Be transparent about progress toward targets
4. Integrate ESG into business strategy to encompass the risks during transition
5. Incorporate climate performance into bonus structures.
“Companies are required to disclose how their board oversees climate-related risks, including the specific board members responsible and the nature of their expertise,” Deloitte partner Kristen Sullivan says.
And if such expertise is lacking, the consequences could be severe. David Thodey, former CEO of Telstra, Australia’s biggest telco operator, describes the implication for boards as “the biggest change in my career in terms of what directors are expected to do”.
But as Australia has regularly languished at the bottom of the Climate Change Performance Index, it’s no surprise that not all his compatriots agree. The Australian Accounting Standards Board found a significant under-consideration of climate-related matters among companies listed on the Australian Stock Exchange last year, and the government’s emissions reduction target remains one of the least ambitious on the planet.
Glacial progress
This intransigence is far from unique. Only a handful of the world’s 100 biggest corporations have so far fully embraced climate risk reporting. The Taskforce on Climate-related Financial Disclosures reported in 2022 that progress in adopting its guidelines had been glacially slow, with only four of those surveyed sticking to them in full.
Ultimately, getting the feet-draggers across the line may not be entirely reliant on altruism.
“Access to international financing will increasingly hinge on adherence to global climate reporting,” says Pietro Rocco, Head of Green Finance at The Carbon Trust. “Businesses and financial institutions that want to attract investors in a global market must adopt international standards, regardless of whether it’s a requirement in their home country.”
“Senior executives will need to better understand the basics of climate disclosure around governance, strategy, targets and risk, and how it’ll affect where investors put their capital.” – Mark Siebentritt
And, according to David Grayson, Chair of the United Kingdom’s Institute of Business Ethics, that will involve much more than preserving the climate.
“It’s a much wider waterfront covering human rights, labor standards in global supply chains, modern day slavery, living wage and accountability for the misuse of a company’s products,” he tells The CEO Magazine.
“Many stock exchanges have been toughening up listing criteria to include ESG disclosures, while more global businesses than ever are including them in their tender requirements.”
He firmly believes that such stipulations shouldn’t be regarded as yet another cumbersome cost of compliance and should instead be viewed as invaluable tools that will deliver better outcomes and vastly reduce energy bills.
“You have to stay optimistic because the alternative is too ghastly for humanity,” he reflects. “As former Unilever CEO Paul Polman said, ‘It’s too late to be a pessimist.’’’
Implementing change
PwC has warned that anyone attempting to tackle the raft of new guidelines and legislation would be “overwhelmed by a veritable alphabet soup of regulations and reporting frameworks that vary by country and region, and impact some sectors more than others. It’s imperative that companies gain clarity from the regulatory clutter.”
It recommends three steps to begin the process:
1. Strategize: Select a framework, agree on the metrics to be reported and define accountability.
2. Mobilize: To meet regulatory and stakeholder pressures, ESG reporting could be tech-enabled for clearer analysis of the expanded amount of data.
3. Communicate: To mitigate cynicism around sustainability claims, consider independent vetting of reporting to build trust.
