Sustainability is a key concern for today’s corporate world. It is not just a buzzword – there are sound business reasons for companies to take environmental, social and governance (ESG) issues seriously.
One is that climate risks to business operations can no longer be ignored. The latest report from the UN's Intergovernemental Panel on Climate Change (IPCC), released in April 2022, issued a stark warning that “it’s now or never, if we want to limit global warming”. The IPCC describes the physical impacts of climate change – including wildfires, droughts, floods and heatwaves – as “widespread, rapid and intensifying”, with every region in the world being affected. It stresses the need for urgent technological and behavioural reform to fight climate change.
Top of mind and even more pressing right now is the issue of energy security in the wake of Russia’s invasion of Ukraine. The ongoing war has caused a spike in energy prices, and focused attention on reducing Europe’s energy reliance on Russia.
Decarbonising and electrifying the energy system is a way to build long-term energy security in Europe, leading some to argue that the crisis has created an additional impetus to move to a future free of fossil fuels more quickly.
Yet another compelling reason for sustainability is generational change. “Gen Z are extremely conscious of the risks,” says Hans Biemans, head of Sustainable Markets at ING. “Millennials came to it later in their education, but they really want to take responsibility for tackling these issues.”
In fact, the pressure for change is coming from all sides – consumers choosing more sustainable products and services, regulators tightening rules, and investors demanding a clear commitment to environment, social and governance (ESG).
“We are in the decade of action,” says Roland Mees, ING’s director of Sustainable Finance. “Action on climate and sustainability is here to stay.”
Fast development
In line with the IPCC’s key insights in its latest report, Biemans adds that technology has a key role to play in helping to meet targets. “The speed of development in areas such as electric vehicles and renewable energy is hugely encouraging and impressive,” he says. Coupled with the acceleration of digital services that can replace less sustainable alternatives – such as video conferences that reduced travel during the Covid-19 pandemic, and which in many cases have stuck – these advances are having a real impact on emissions.
Like the IPCC, which does not solely focus on innovation to combat climate change, Mees says behavioural change will also be crucial.
“While the progress that has been made is tremendous, and technology helps in specific areas, we can’t innovate our way out of the issues we face,” says Mees. “There are a lot of solutions people can implement easily that are not technological – such as flying less, using public transport, and not eating meat. We know these things work and that we should act.”
There is often a gap, though, between what people say they want and what they actually do. This ‘intention-behavior’ gap occurs because individuals are confused over the right choices to make. “Organic food is a case in point,” says Biemans. “It can actually be quite carbon-inefficient, but at the same time it uses fewer pesticides. It’s not easy to weigh these things up.”
It’s also difficult for people to make decisions related to the future, because “we tend to focus on our immediate environment, and our immediate circle of friends and family,” Mees adds. Action is needed from governments to make it easier for consumers, companies and investors to know what is sustainable and what is not.
Bringing consistency
At a corporate level, the greatest source of confusion is the proliferation of standards, methodologies and approaches to sustainability. Regulators are now moving to draft universal standards, like those that govern financial reporting.
Regulators are creating clear definitions because there is so much diversity in how companies talk about what sustainability is, how investors build sustainability strategies, and the methodologies that ESG ratings agencies create. We need more consistent definitions, based on science, to ensure that capital is channeled to the most sustainable outcomes.
The European Union and the U.S. Securities and Exchange Commission (SEC) have both been hard at work creating a common set of standards. The EU's green taxonomy, for example, aims to classify all economic activities according to their environmental impact.
The SEC, for its part, announced ‘game-changing’ draft climate-risk disclosure rules in late March 2022, under which companies disclose their own direct and indirect greenhouse gas emissions, known as Scope 1 and Scope 2, as well as emissions generated by their suppliers and partners, known as Scope 3. if these are material or included in any emissions targets the company has set. Greater climate-data transparency and comparability will prompt businesses to pivot strategies and enhance investor confidence.
Balancing short and long-terms goals
Despite sustainability being top of the agenda for corporates, recent research by ING reveals some of the challenges that major corporates encounter in their journey to sustainable transformation.
ING’s qualitative and quantitative research into the priorities of key senior decision-makers from some of the world’s top corporates reveal their most pressing concerns. Without exception, they name sustainability as a key challenge but say daily challenges affect their ability to fully focus on it. These include lack of funding, market consistency and knowledge, complexity of implementation and reputational risk.
Despite these challenges, companies have a lot to gain from embracing sustainable strategies and targets, Mees points out. “Companies that pay attention to sustainability improve their performance and become significantly better businesses, which improves their credit risk. CEOs and their organisations need to realise that sustainability is essential to long-term business health.”
The C-suite is much more involved now, says Biemans, “not just in requiring treasury departments to enter sustainable markets, but also taking leadership to change the company. True leaders will succeed because they are ahead of the crowd.”
“We need leaders that have a strategic, disruptive mindset, looking across paradigms and asking fundamental questions such as ‘is my business doing the right thing?’” he adds.
Mees concludes: “I hope that Millennials and Gen Z will bring the changes we need, but we need to do more than pin our hopes on them – today’s CEOs need to take significant steps now. There’s no time to lose.”
This article has been updated and adapted from ING-WSJ custom content