In the previous article of this series, we discussed the key drivers for corporate sustainability action. Regulation is tightening its grip on carbon emissions, and sustainability has become intrinsically linked with company value and its licence to operate. The investor community is demanding more ESG data, following the growing trends in disclosing corporate performance, notably stress testing of physical and transition climate risks.
Deepening your sustainability efforts may seem overwhelming. How do you bring sustainability into the heart of your business? Many businesses wonder where to start once the low-hanging fruit has been picked.
This article lays out the first steps to successfully integrate sustainability into your core business strategies and operations, thereby ensuring long-term competitiveness. The three main building blocks are all covered in Step One of South Pole's climate journey.
Sustainability is a broad term which is generally taken to include a sweep of Environmental, Societal and economic issues – 'people, planet, and profits'. It is encapsulated in the 17 UN Sustainable Development Goals, and broken into 231 unique indicators.
Key sustainability risks and trends are identified and prioritised on the basis of this matrix. Such trends and risks vary by company, sector, operational geography, supply chain, and stakeholder mix. The same applies to the prioritisation.
In our experience, for the majority of large businesses, climate change is usually placed in the top right 'most material' quadrant of the matrix. This is largely due to growing investor and consumer pressure which forces climate change up in the matrix, along with a number of other interlinked issues, such as water, energy and agricultural supply chains.
Ultimately, a materiality assessment will help companies discover which factors are material, and decide which ones to prioritise. It is part of laying the ground for (an update of) your Climate Journey.
Another key building block for mapping the climate journey ahead is a carbon footprint – an assessment of the annual emissions of climate warming gases along the corporate value chain. The commonly followed standard is the GHG Protocol, which defines emission sources into three 'Scopes': on site (Scope 1), bought electricity and power (Scope 2), and emissions in supply chains, contracted services, and product use (Scope 3).
Diving deeper, a Life Cycle Assessment (LCA) will enable a more detailed investigation of the carbon 'hotspots' identified along the product or service value chain by the carbon footprint exercise. An LCA will often uncover interesting opportunities to reduce emissions through improved sourcing practices, process changes, revised transport or distribution strategies, or even in the 'use' phase of the product or service. An LCA can also help identify distinct areas where circular approaches can reduce the need for virgin raw materials and waste outputs, for example.
Although essential in Step One of the Climate Journey, these performance snapshots show a moment in time, often considering just the last 12 months of operations. Looking ahead, businesses are increasingly using scientific and economic modelling to assess scenarios for the physical and transition risks that may affect them – in other words, what might the business landscape look like under 1.5, 2 and 3 degree Celsius warming trajectories?
As part of this third building block, facilities and supply chains can be stress tested against a range of physical impacts, including precipitation, heatwaves, cyclones and sea level rise. In parallel, business strategies are evaluated against the 'transition' risks of moving to a low-carbon economy under the Paris Agreement by considering, for example, the impact of varying policy mechanisms, carbon pricing schemes, market shifts and public expectation. By taking into account these possible futures, companies can make more informed choices when hedging against risk, but also when taking advantage of new markets and technologies.
Investor calls for TCFD disclosure also reflect the growing importance of understanding and acting on climate-related risks. How businesses tackle risks and seize opportunities will hinge on an informed long-term strategy with agile and engaged governance structures, and cross-team collaboration between finance, supply chains, procurement and operations.
For any business at the start of their Climate Journey, the foundation of a strategy should include the key building blocks of a materiality assessment, a footprint, and risk measurement.
An understanding of how investors, customers and employees perceive the risks and opportunities is essential to inform the subsequent vision, targets and prioritisation of next steps. A risk assessment challenges the business strategy against a range of possible futures, and ensures its next evolution is informed by science and modelling. A credible carbon footprint is not only needed to track progress in reducing carbon risk, but also to adequately disclose climate performance to stakeholders.
Our advice to any business is to lay this solid foundation to ambitious climate action. With it, you will move with confidence to Step Two of the Climate Journey - Creating a Roadmap and Targets. We will explore this area in the next article in this series, stay tuned!