ESG

COP26: The climate emergency demands corporate focus on ESG

We are “at one minute to midnight” on the clock of the “last best chance” to combat climate change.

Those were the sobering words of UK Prime Minister Boris Johnson in setting the tone for COP26 as the UN Climate Change Conference opened in Glasgow. As with all Boris Johnson’s speeches, his use of fairy story imagery is calculating; he acknowledges a tale of darkness and difficulties that nevertheless offers the prospect – however distant – of a happy outcome. If we fail to act collectively, collaboratively, and fast to arrest climate change, our planet, its people and their prosperity will transform irretrievably for the worse.

As world leaders, climate activists, and stakeholders focus on the required route to restrict temperature rises to 1.5˚C, what messages should businesses take from COP26, and how can prioritising ESG performance help them prepare for a climate-focused future?

What is COP26 and why is this year’s conference important?

COP26 is the 26th meeting of the Conference of the Parties, comprising more than 190 countries that are signatories to the UN Framework on Climate Change. The summit aims to secure commitments and roadmaps from countries to limit climate change and support the countries and communities that are disproportionately affected.

At COP21 in 2015, members agreed to attempt to limit global warming to a maximum of 2˚C – but ideally 1.5˚C – in the widely acclaimed and legally binding Paris Agreement, submitting action plans to achieve this. COP26 is the first opportunity to review progress against those plans, making it a focus for scrutiny of whether rhetoric has translated into action.

However, COP26 also comes after a year of pandemic-induced delay, during which a slew of extreme climate events also unfolded. These have starkly highlighted the extent of global inequality and underlined that developed nations are not insulated from climate-related disasters and health crises.

Consequently, public awareness is at an all-time high and pressure on political leaders to accelerate climate initiatives and implement stringent legislative programmes is significant.

Why should businesses pay attention to COP26?

Politicians alone cannot deliver sustainable change. The business community – both within nations and particularly for those organisations that transcend international borders – has a critical role to play. As HRH Prince Charles pointed out in the introduction to businesses are in a powerful position to influence not just their own sustainability performance, but also that of suppliers, customers, employees, and the wider community.

That is why many of the focus areas of COP26 – from decarbonisation and the clean energy transition to climate regulations, sustainable finance and reporting requirements – will place immediate and long-term demands on how businesses operate.

These impacts are not necessarily negative. Writing for Reuters, EY’s Global Vice Chair – Sustainability, Steve Varley, points to climate change as both “the biggest risk and commercial opportunity of all time”. He points to the “turbo-charging” of sustainable investment and opening of new finance channels for green business innovation as institutional investors increasingly recognise the long-term dividends that investing in organisations adapting to climate change will return.

Why focus on ESG will deliver future benefits

Positioning the business to seize climate-related opportunities, while mitigating exposure to climate risk, is becoming a defining challenge for businesses and their boards. As the commitments and broader outcomes of COP26 unfold, the organisations that pay attention to emerging trends and adapt accordingly will have an advantage. Doing this successfully and understanding its impact on the business requires organisations to build focus on environmental, social and governance (ESG).

ESG brings together three linked areas of company performance that go far beyond profit-and-loss and now play a central part in a business’s licence to operate in today’s fragile climate and society. (For more detailed information check out our ESG 101):

Environment: the company’s impact on natural resources, waste generation, greenhouse gas emissions both in the production of goods and services and in their delivery, use and end-of-life recovery.

Social: the company’s impact on people and communities including its performance on equality, diversity and inclusion, working conditions, human rights and proactive support of society through education and charity activities.

Governance: the policies, structures and procedures by which the organisation is run including ensuring a fair and informed decision-making process; the distribution of rights and responsibilities between senior leaders, and standards of regulatory compliance.

Many organisations already recognise the role of ESG in answering a more holistic and complex definition of what constitutes a successful business. However, up to now corporate approaches to ESG tend to have grown organically and been driven from a tactical perspective, with the three areas developing in parallel, but siloed from each other. In reality, each area affects the others in multiple ways.

To fully respond to the challenges arising from COP26 and beyond, businesses need to view ESG through a strategic lens and achieve visibility over the interdependencies between the three spheres, so impacts can be identified and resolved.

Metrics and transparency will power improvement

Businesses must first get oversight of their ESG performance, identifying the crucial metrics in each area and setting meaningful targets for improvement. Some of these metrics will be imposed externally, such as GHG emissions reduction targets, financial reporting and regulatory requirements. Some will be imposed through pressure from stakeholders such as activist institutional investors – for example the requirement to show progression on board diversity. Some will be identified through customer sentiment analysis and emerging trends. Ideally, some will also derive from the values and purpose of the business itself.

Transparency will be critical as businesses monitor and report on progress towards targets. This will entail the collection and analysis of large amounts of data drawn from across the business.

Managing and making sense of this data is a significant challenge and demands the adoption of infrastructure and technical tools that enable data to flow from the periphery of the business to the centre, creating a reliable source of truth and evidence on which critical decisions can be made.

Diligent’s ESG solutions help organisations get to grips with ESG obligations, regulations, metrics and industry trends, enabling the dynamic progress tracking against ESG goals and objectives. They facilitate the operationalising of ESG from the boardroom and throughout the business and help position the organisation to respond to emerging trends.

On that note, in addition to the vast amount of internal data that helps define and guide ESG progress, it is also essential that business leaders have access to external intelligence. Information around government priorities, legislation, public concerns and other stakeholder sentiment should be regularly sought, curated and presented to senior decision makers.

Beyond COP26

Once the fanfare and ceremony of COP26 dies down, businesses should focus on analysing the commitments made by the nations and determining their likely impact and the opportunities they afford. From the availability of sustainable investment to shifting away from fossil fuels, reversing deforestation, and cutting methane emissions – all potentially impact the way businesses operate and plan for the future.

World leaders and politicians may set the tone and regulatory landscape for arresting climate change, but much of the real-world hard work will be undertaken by businesses. As entities that both influence, and are influenced by, changes in environmental, social and governance factors, businesses that prioritise ESG are powerfully positioned to drive improvement and play a pivotal role in the urgent task of stopping the clock at one minute to midnight.

 

 

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