Following the COP26 summit in Glasgow last October, sustainability and its legislation has become one of the hot topics of 2022. Indeed, over the past two years, it has become evident that sustainability-focused businesses are more resilient to the disruption caused by COVID-19. This, teamed with a host of new government regulations introduced in keeping with the philosophy of COP26, has led to an acceleration towards corporate sustainability. Global action is vital in the upcoming decade in order to curb climate change; the 2020s has even been referred to by some as the ‘make or break era’ in sustainable development. Through the COP26 summit last October, and the new changes to ESG reporting legislation, the UK is looking to be a pioneering force in the world effort towards a greener future.
It is not the first time that the UK has positioned itself at the forefront of industrial advances. A modern-day Industrial Revolution was announced by the UK government in late 2020, this time with 100% focus on achieving a positive environmental impact on a global scale. At the heart of this Green Industrial Revolution lies the commitment to achieving net zero greenhouse gas emissions by 2050: a commitment made by the UK government in July 2019, and the first of its kind for a major global economy. This will be achieved through schemes designed to offset an equivalent amount of greenhouse gas emissions, such as planting trees, alongside initiatives to move to greener energy sources, such as hydrogen or biomass. However, the cooperation of the corporate world is essential for the outcomes of these proposals to become a reality.
As a result, many contractors are now putting greater pressure on their supply chains to bring about the necessary changes, with leading UK businesses such as Rolls-Royce, AstraZeneca, Vodafone, BT Group, British Airways, Unilever, Shell and Sainsbury’s making a commitment to reduce their emissions. These commitments impact procurement processes and requests for proposals; purchasers now require suppliers to deliver the same goods or services with lower associated emissions, whilst expecting them to live up to their sustainability standards.
With regards to investment, there is growing pressure on financial institutions to ensure that they do not directly or indirectly finance activities that will have a negative impact on the environment. This means that funding that would have previously gone to fossil fuels will now be diverted to renewable energy or products that encourage environmental sustainability. As investors become more discerning, we will see a change in the methods used by businesses to access trade finance and insurance products.
In practice, this means that a company that improves on sustainable performance will be in a better position to create future investment opportunities and long-term financial benefits. Of investors surveyed by PricewaterhouseCoopers, 79% say the way a company manages ESG risks and opportunities is an important factor in their investment decision making.
Despite the fact that the UK’s total greenhouse gas emissions are 48.8% lower than they were in 1990, there remains much to be done to achieve net zero in the next 30 years. The UK’s decision to host the COP26 in Glasgow last October reiterated their commitment to doing so. Over a period of two weeks, the 26th United Nations Climate Change conference brought together countries from all over the world with the aim of continuing their commitment to achieving the goals of the 2015 Paris Agreement and the UN Framework Convention on Climate Change. The conference was also termed the ‘Business and Finance COP’, referring to the leading role the corporate world has taken this year.
During the summit, the UK government also invited the world to participate in the UN initiative Race to Zero, encouraging organisations to join their commitment to achieving net zero emissions by 2050. The coalition of leading net zero initiatives represents 733 cities, 31 regions, 3,067 businesses, 173 of the biggest investors, and 622 Higher Education Institutions. Of the companies involved, over half come from the UK private sector.
One of the key takeaways: we must continue our efforts to limit the increase in global temperatures to no more than 1.5 degrees above pre-industrial levels. The conclusion of the conference laid out how this will be achieved: a pledge to accelerate action on the climate crisis through collaboration between governments, businesses and civil society.
The targets set out by COP26 will not bring about change by themselves: legislation is needed to enforce a tangible difference. With legislation in place, organisations have clarity on what is required in order to achieve these goals. This is why the UK announced, just before COP26, their latest change to environmental legislation rules. As of 1 January 2022, greater transparency is required as listed issuers must now disclose climate-related risks and opportunities within their annual reports. On top of this, from April 2022, more than 1,300 of the country’s largest publicly listed companies and financial institutions will become the first to provide reporting in line with the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD). This will include all UK registered companies, trading on a UK registered market, with more than 500 employees, as well as private companies with over 500 employees and £500m in revenue. Moreover, from 2025, all companies will be subject to the mandatory legislation. All listed companies must also present net zero transition plans by 2023. If the UK can achieve its ambitious zero carbon emission objective before 2050, it will need to prove that it has earned its place as an international leader in global efforts to tackle climate change. Actions speak louder than words.
Created by the Financial Stability Board in 2015, the TCFD was specifically chosen by the UK government for a number of reasons. It is recognised as one of the most effective frameworks to help companies interpret and disclose their non-financial information. In addition, it follows a clear structure of four main pillars, around which the disclosure will be centred: governance, strategy, risk management, metrics & targets. The UK aims to be a world leader in sustainability disclosure by becoming the first G20 country to make TCFD-aligned disclosures mandatory nationwide by 2025. To achieve this, measures will be put in place rapidly, with most requirements expected to be in place by 2023.
Given that the companies included in the April 2022 legislation are some of the largest and most influential companies in the country, both economically and environmentally, it is expected that they will have a great contribution towards the UK’s goal of net zero. However, the TCFD guidelines will not just contribute to the ‘greening’ of the economy as a whole, but will also aid businesses and investors to better understand the financial impacts of their climate change exposure, and therefore enable them to make better-informed decisions regarding climate-related risk. In addition to their own contribution, the aim is that these larger companies will lead by example, and that over time this will become best practice, showing the way for smaller companies to follow in their footsteps. Indeed, many groups have already started to adopt the framework prior to the enforcement of the legislation in response to investor demand for transparency and clarity with regards to their ESG data.
Finance is one of the driving forces behind the corporate move to sustainability. This is why the UK set up the Green Technical Advisory Group (GTAG) in June of this year: to oversee the delivery of the UK’s “Green Taxonomy,” following a similar framework to that of the EU. The Green Taxonomy will move the UK towards sustainable finance by setting the bar for investments according to these six environmental objectives:
The ‘Technical Screening Criteria’ categorise how sustainable an economic activity may be by identifying the company with a credible environmental strategy. Companies that fall within this framework will include UK registered corporates, certain UK listed issuers, UK asset managers and asset owners such as pension schemes and insurers.
Companies that do not directly fall into scope for mandatory disclosure can use the Taxonomy on a voluntary basis: investment will inevitably drive their sustainability plans no matter where they are in the supply chain.
2021 has set out the future of corporate sustainability. It is clear that all businesses, no matter their size, will all soon be on the same path towards a sustainable future.
With this new legislation in place, the relevant companies will no longer have the freedom to decide whether they would like to disclose their ESG-related data or not, despite any increase in administration that this might involve. Our sustainability platform is designed to help with precisely this issue. We have developed this SaaS specifically to allow organisations to collect, manage and export their ESG data, in line with reporting standards such as the TCFD (*). This will not only save time in data collection and management, but also facilitate the creation of reports compliant with the recommendations of the relevant standards. In the same way as COP26 and this new legislation, our mission is to bring sustainability to the forefront of businesses, to work together towards stopping one of the biggest challenges that we face today: climate change.
(*) Besides the TCFD, our sustainability platform also integrates additional standards such as the GHG Protocol (scopes 1, 2 and 3), GRI, SDGs and SASB, to provide a holistic ESG management solution that caters to the individual needs of each organisation.
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