Why companies must produce five-year plans for climate transition
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We are at a watershed moment for corporate environmental disclosure. Global support for mandatory disclosure regulation has accelerated in the past year, with a wave of new rules being heralded from Brazil to Japan — directly shaping how companies measure and manage their environmental impacts.
It’s a welcome move that will drive accountability and presents a huge opportunity to accelerate the transformation of capital markets towards becoming sustainable. However, there is a risk that regulation will not go far enough to tackle the scale of the crisis we face.
With more countries — including the UK — set to make regulatory announcements in the run-up to and during COP26, we must consider the scope and impact of that regulation. The current focus on climate-related financial and risk-based data is an important first step. But, if we are to have any chance of limiting global warming to 1.5C above pre-industrial levels, we need a clear understanding of the effects of corporate activities on both people and the planet. Regulation should adopt this approach, which is increasingly referred to as double materiality.
Some regions and countries are making significant moves towards what we at CDP call “high quality mandatory disclosure”. These include the EU, with its proposal for a corporate sustainability reporting directive, and — more recently — Switzerland. But, as the corridor towards avoiding a breach of a 1.5C increase narrows, it is critical that other nations follow suit fast.
For regulation to have the necessary impact, forward-looking information and temperature trajectories must be incorporated alongside risks, to capture the overall potential for long-term climate performance. Companies should be required to develop and disclose climate transition plans. These should include short-, medium- and long-term targets to ensure a response to climate change with the necessary urgency and scale. Interim five-year targets are critical — they allow for transition plans that can be delivered without kicking the can down the road and raising more risk.
These plans must include robust, quantitative and accredited science-based targets outlining how companies will transition to the 1.5C-aligned business model. Companies with science-based targets in place have typically cut emissions by 6.4 per cent per year according to the Science Based Targets initiative (SBTi), well above the average rate of 4.2 per cent needed for 1.5C alignment. This type of innovation can redefine companies’ bottom lines by creating new business models and sources of value, and by disrupting currently unsustainable economic systems.
Regulation must address environment-related financial disclosure, as well as effects on people and the planet. The recommendations of the Task Force on Climate-Related Financial Disclosure (TCFD) have been instrumental in forming the basis of the current wave of regulation. But their focus on climate must be built upon. Risks are not only limited to climate change — around half of global gross domestic product ($44tn) is highly or moderately dependent on nature.
Science has told us that we cannot solve climate change without tackling environmental challenges, such as water security, deforestation and biodiversity. According to the Intergovernmental Panel on Climate Change’s sixth assessment report, we cannot limit warming to 1.5C without this holistic approach. Regulation should require companies to disclose these impacts. It is also in the interest of companies, by affording them a better understanding of their impacts and dependencies on the natural world.
We have so much further to go in reaching our global environmental goals and corporate action is essential. Regulation should not create a ceiling or serve as a “tick-box” exercise. Instead, it must be the floor: a minimum requirement that stimulates even more ambitious, broader, and deeper disclosure and action.
And now is the time for companies to act and get ahead of that regulation. I urge every company to prepare to ride the incoming wave of mandatory reporting and ensure that high-quality disclosure is at the heart of its strategy.
Mandatory environmental disclosure was a distant goal in the minds of those of us who were involved in developing ESG reporting more than 20 years ago. So I am proud of the progress CDP’s global disclosure system has made over the past 20 years. It has led, evolved, and adapted to these developments — and ensured that companies responding to our requests are already prepared for current and future mandatory disclosure regimes.
We will continue to innovate and adopt the latest standards to ensure they are implemented at scale globally, paving the way for further regulation.
Companies can play a massive role in accelerating the transition to a net zero economy and are leading the way in many ways. This year, more than 13,000 companies — accounting for over 64 per cent of global market capitalisation — disclosed through CDP, showing governments that they are ready for more ambitious disclosure. And what if you are a company not yet disclosing? You must face governments, investors and market participants, which are asking for more. Now is the time to act.
The writer is the chief executive of CDP, a charity that runs the global disclosure system for organisations seeking to manage their environmental impacts
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