Climate change risk is an increasingly significant driver in investment models and has been cited by almost 90% of institutional investors as the most significant ESG (environmental, social, governance) factor influencing their decisions to invest in a company, according to Deloitte’s report “Building credible climate commitments - a roadmap to earning stakeholder trust”.
Investors expect consistent and credible information regarding an organization’s climate commitments before making decisions, including science-based targets linked to the organization’s business strategy, accountability for climate-driven risks and comprehensive plans and processes to achieve stated target greenhouse gas reductions in line with the objectives of the 2015 Paris Agreement, the report underlines. They also demand transparency and consistent reporting in the company’s financial statements, as well as in nonfinancial disclosures.
As the focus on climate change intensifies, companies are increasing their public commitment to reducing carbon emissions, as the net zero pledges that have tripled in 2020 over 2019, according to the report. This trend is driven not only by investors, but also by the growing demands of a wide range of stakeholder groups, from customers and employees to policymakers, NGOs and activists.
Consumers are growing increasingly aware of companies’ sustainability commitments and follow through, as they want to purchase products they view as sustainable, the report shows. They also make decisions so that their consumption habits won’t negatively affect the environment, as they are fearful of the overall impact of climate change. This is applicable not only to consumer-facing businesses, but also to business-to-business relationships, where the focus is shifting to sustainability performance across the supply chain. Many companies have developed codes of conduct for their suppliers and monitor risks and performance across them.
Employees are also stakeholders that expect specific commitments and actions from companies. They want to work for an organization whose actions support or at least do not negatively affect the environment, whose CEOs lead the way to achieving this purpose and to be involved in setting up the company’s commitments. Nearly 40% of millennials cite employer sustainability as a factor in deciding where to work, the report underlines.
“In order to comply with the increasing requirements and continue to have access to financing, companies need to embed climate considerations into all the areas - governance, strategy, risk management, metrics and targets. This is a long journey that requires great effort and planning and the board’s strong commitment and constant supervision. The global transition to a lower-carbon economy is expected to require around $1 trillion of investments per year, according to The Task Force on Climate-related Financial Disclosures, but research suggests that companies which take action on sustainability issues outperform their competitors,” said Sorin Elisei, Director, Deloitte Romania, leader of the sustainability and energy practices.
The report also suggests steps that companies can follow in order to build credible climate commitments, comply with increasing regulation and earn their stakeholder trust. A first phase is an assessment of the organization’s current climate impacts, including its direct and indirect emissions, but also other aspects such as services provided, and of the stakeholder and regulator expectations, followed by setting climate goals. Another step is related to governance, as the organization’s climate commitments need to have clear ownership and accountability, as well as to be incentivized by embedding them in performance management and remuneration policies.
Strategy is another step to consider, which needs to include long-run and near-term (one-year, five-year) targets related to emissions reduction and ways to achieve them, including transformations in product or service innovation, operations, supply chain, talent, IT. As far as the risk management is concerned, organizations need to have a comprehensive view on physical, transition climate risks and reputational risks. Finally, when it comes to metrics and targets, organizations need to align reporting to new standards, to integrate sustainability and climate measures into the internal audit plan and provide external assurance in order to meet stakeholder expectations. Major efforts are underway toward rationalization and the creation of an authoritative standard-setting body under the umbrella of the IFRS Foundation, the report adds.
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