While the challenges of dealing with climate change have not changed with the turn of the year, 2024 is the year to set the next steps in climate disclosure and action, driven in particular by the Corporate Sustainability Reporting Directive (CSRD). A company’s contribution to mitigating and adapting to climate change is one of the main challenges of the corporate sustainability journey. Climate-related reporting provides a picture of the starting point, implemented, and planned measures on the decarbonization journey.
In our expert talk, David Carlin, Head of Risk – United Nations Environment Programme Finance Initiative (UNEP FI) and Constantin Saleta, International Service Lead & Associate Manager Decarbonization at denkstatt, look at the various pieces of the climate reporting puzzle from a systemic perspective. They address questions relating to the role of the financial sector in the transition phase, corporate contributions in the form of climate transition plans, and climate risks that are already having an impact on business models. This Blog article aims to give companies practical insights into how they can shape the year 2024 for their Net Zero path and avoid and overcome common obstacles.
David Carlin is an expert on climate change and its impact on the financial system. He has authored practical reports for financial institutions and led capacity-building programs around the world. As the leader of UNEP FI’s climate risk programs, he has worked with over 100 global banks, investors, and insurers on climate scenarios, assessments, and governance. He is also an advisor to UNEP FI’s TNFD pilot program, the Net Zero Banking Alliance, and the Glasgow Financial Alliances for Net Zero.
Constantin Saleta is an Associate Manager at denkstatt with over 10 years of experience in international sustainability consulting. He specializes in climate management for companies, including climate strategy, science-based targets, climate transition plans, and reporting. As International Service Lead for Decarbonization, he is the go-to person for questions about SBTi and TCFD within the denkstatt network and is well-connected with global experts, the scientific community, and NGOs.
Marijke Janz is Senior Consultant at denkstatt. She is responsible for moderation, stakeholder engagement, and impact networks. Marijke moderated this expert talk.
The current status of climate management and reporting in 2024
This year marks a pivotal moment in the landscape of climate risk management and reporting. The introduction of the International Sustainability Standards Board (ISSB) is changing the way global reporting regulations are set for climate risk disclosures. The focus is on governance, strategy, risk management, and metrics and targets. Europe is leading the way with regulatory advancements, including the European Sustainability Reporting Standards (ESRS) under the CSRD. For companies affected by CSRD, the ESRS E1 climate standard in particular means that they must go into greater depth, even beyond their company boundaries, and present valid climate transition plans. Overall, these standards go far beyond the familiar form of climate reporting, addressing not only broader sustainability issues but also requiring companies to address important strategic aspects. More and more institutions worldwide are expected to adhere to these standards, either through mandatory compliance or as part of good practice guidelines.
CSRD requirements: What does this mean in practical terms?
Getting ready for CSRD is critical for companies that want to stay compliant with evolving sustainability and climate reporting requirements in the EU. To comply with this regulation, companies need to improve their data management processes, organizational structures, and strategic approaches. This applies to both EU-based companies and international firms with significant operations within the EU. While compliance is important, the primary task for sustainability professionals is to achieve a balance between fulfilling reporting obligations and supporting initiatives that drive environmental and social change. While everyone must contribute to the transformation, the role of the private and financial sectors differs.
The role of the financial sector in climate and sustainability reporting
The financial sector is crucial for climate and sustainability disclosures, fulfilling two main roles. Firstly, it acts as a collector and presenter of important sustainability information. Since finance spans across various sectors globally, it has the unique ability to gather data from all these areas and weave it into a comprehensive story that highlights how sustainability efforts are integrated across different business activities.
Secondly, the financial sector is also a proactive user of disclosed sustainability data. This involves using insights gained from both companies and other financial institutions to identify potential ESG opportunities and risks. This knowledge can help in making informed decisions that not only benefit the financial sector but also contribute to accelerating overall sustainability efforts. Therefore, the financial sector’s responsibility goes beyond just producing detailed sustainability reports. It is about actively utilizing this data to make better-informed decisions that enable and support a Net Zero transformation.
The financial markets encourage transformation – technology enables it
Financial institutions and corporations play a key role in promoting ESG goals. Green bonds, sustainability-linked bonds, and other forms of sustainable investment vehicles more and more prioritize sustainability. Instruments such as the EU taxonomy are used to steer cash flows towards sustainable economic activities. This means that sustainability efforts are increasingly paying off financially, for example in the form of better financing conditions or investing opportunities.
Current trends show that renewable energy has been gaining a lot of traction when it comes to financing, with 2023 marking the first time that renewable energy sources received more funding than fossil fuels. This shift is in line with ambitious global goals, such as tripling renewable energy generation by 2030 as set at COP 28. Although the results of COP 28 are the subject of much debate, the good news is that this goal is now well within reach, thanks to current trends.
Electrification in transportation and low-carbon industrial processes offer the best opportunities for sustainable practices. Technological progress offers new possibilities here as fintech and data sectors can enable this transformation. AI and big data have led to growing demand for services that support sustainable practices.
The benefits and challenges of Green Finance
Given the escalating ecological issues worldwide not only in terms of climate change risks but also in terms of biodiversity, it is clear that Green Finance is becoming more and more crucial in the efforts to create a sustainable world. But to make the most of it, we need to understand exactly what Green Finance means and how it can help:
It can support projects that are directly good for the climate.
It can help companies become more environmentally friendly.
It can identify which types of business do not fit with a sustainable future and therefore require a change in business model.
So, Green Finance involves not only investing in good projects but also making wise decisions about which types of businesses to support to truly make a difference.
Green Finance must promote the good, but also avoid the negative
Companies face the challenge of simplifying diverse information to demonstrate their commitment to environmental sustainability, taking the example of Scope 3 emissions in the supply chain or reporting environmentally sustainable economic activities according to the criteria of the EU taxonomy. A comprehensive approach is needed to address challenges in Green Finance, which includes creating innovative financial products and policies that connect capital with opportunities.
Promoting positive initiatives can help shift demand away from negative alternatives, but this is an indirect method as mentioned by David. True progress involves not only the expansion of renewable energies but also the reduction of fossil fuel consumption and overall global emissions. Therefore, in assessing the impact of financial efforts on sustainability, it’s important to consider both the promotion of positive actions and the imperative to halt negative practices. This balanced perspective ensures that financial strategies contribute effectively to the broader goal of mitigating climate change and preserving the environment.
“Green Finance alone cannot just be private finance. It needs to be both public and private. It cannot just be a development aid. It cannot just be focused on specific green tech, […] pouring more money into one element may not necessarily give you the results you want.“
Transition Finance: GFANZ lights the path to Net Zero
A key element in understanding Green Finance is the Glasgow Financial Alliance for Net Zero (GFANZ) guidance on transition finance. This guidance provides a framework for the financial sector to support the critical shift towards a Net Zero carbon economy. According to the GFANZ, Transition Finance can be categorized into three main groups:
1. Climate Solutions:
These business models actively and positively contribute to climate action, aiding in the fight against climate change.
2. Net Zero Transformation:
This category includes companies or business models that have the potential to be transformed into operations that align with Net Zero goals. It is important to note that currently, only a limited number of companies have successfully achieved this transformation.
3. Phase-Out:
This group consists of companies or business models that are unable to transition to Net Zero compliance or compatibility and, therefore, must be gradually phased out of operation to meet climate objectives.
Climate action as a key component of a company’s strategy
The whole issue of Net Zero and climate transition plans is ultimately about companies making their contribution to the climate targets of the European Union and aligning their business model accordingly. Integrating sustainability into the core strategy of a company is crucial for achieving Net Zero targets and managing climate-related risks effectively. This approach necessitates a deep connection between corporate governance, risk management, corporate finance, and climate action, ensuring that sustainability commitments are not seen merely as additional tasks but as integral to the strategic direction of the firm. Such a perspective requires the involvement of all organizational levels, especially top executives, who are pivotal in steering the company toward its sustainability goals.
That is often easier said than done. The key to this integration lies in fostering a mindset across the organization that views sustainability and Net Zero objectives as central to its operations and future success. This doesn’t mean transforming every leader into a climate expert but enabling them to apply their expertise in ways that advance sustainability objectives, acknowledging the significant impact these efforts have on the company’s overall performance.
Achieving organizational transformation toward sustainability goes beyond mere reporting or public declarations; it requires genuine commitment and understanding from the top down. Once senior leadership internalizes this approach, sustainability becomes part of the company’s culture, reflected in every decision and strategy, leading to more profound and lasting change.
Overcoming internal hurdles: How can we encourage organizations to commit to climate mitigation efforts?
Addressing the challenge of internal resistance to decarbonization strategies within organizations, it’s essential to focus on engaging with individuals who can drive change from within. These individuals, deeply familiar with their organizational context, play a pivotal role in implementing necessary sustainability practices. The support from external experts can provide valuable perspectives, expertise, and tools to empower these internal champions.
„The value of the outsider is to provide perspective, to provide support, to provide expertise, but really to give those within the tools to be successful.“
Companies need to embrace sustainability not only to comply with regulations like the CSRD but also to proactively leverage this moment to differentiate and enhance their appeal. Instead of waiting passively for external pressures to dictate change, taking a constructive approach can be more beneficial.
To encourage your organization to commit to climate change mitigation efforts, it’s crucial to demonstrate how sustainability aligns with business objectives, offering clear benefits both environmentally and financially. The evolution from academic discussions to practical applications of sustainability shows that it’s possible to make a compelling case for integrating environmentally friendly practices into business strategies. Highlighting the tangible benefits and aligning them with the organization’s goals can garner support from internal stakeholders and management, making the adoption of ambitious environmental strategies more feasible.
2024: Blend CSRD compliance with your sustainability goals focusing on opportunities
As we navigate through 2024, a pivotal year for preparing for CSRD compliance, financial actors and corporations have a significant role to play in climate action. The key is to integrate sustainability deeply into the overarching business strategy. This involves not only channeling financial resources towards more sustainable projects but also consciously moving away from activities that are harmful to the environment. Developing a comprehensive game plan for the organization that aligns with sustainable practices is crucial. This strategic approach ensures that sustainability becomes an integral part of decision-making processes, driving both compliance and positive environmental impact.
“ESG Governance needs to be seen as a broad concept. So not only concerning top management leadership but also how you trickle this down so that everybody in the organization is empowered, motivated, and activated to contribute to the transformation.”
Keeping this broader perspective in mind, understanding the importance of strategic planning, and emphasizing impactful actions over mere reporting will guide organizations in their journey toward more sustainable and responsible business practices.
Tips for sustainability and ESG managers:
How to achieve your targets
1
Utilize the extensive resources available on climate disclosure and decarbonization, such as reports from the UN, to obtain specific information and stay informed about new developments, instead of reading them in their entirety.
2
Look out for platforms and resources from groups like the ISSB and EFRAG, which offer case studies and tools to help understand and apply sustainability standards. These resources are great for learning and keeping informed about the latest in climate action.
3
Creating climate transition plans is vital for addressing the hurdles of decarbonization. Beyond meeting CSRD regulations, these plans are pivotal for steering businesses towards a sustainable, Net Zero future, offering benefits beyond mere compliance.
4
The decarbonization compliance aspect can be daunting, but it’s about seizing opportunities. A strategic approach not only meets regulatory demands but also positions companies favorably in the eyes of investors and financial stakeholders.
5
Your focus in climate management and strategies should always be on the tangible impact. Real steps to reduce emissions are critical. So, translate plans into concrete actions that make a significant difference in combating climate change.
6
Structured and comprehensive risk management for ESG issues can be emphasized by implementing recommendations from frameworks like the TCFD. This can help your organization recognize the significance of managing ESG risks systematically.
Keeping this broader perspective in mind, understanding the importance of strategic planning, and emphasizing impactful actions over mere reporting will guide organizations in their journey toward more sustainable and responsible business practices.
