Disconnect between disclosures and decarbonisation

Categories: SustainabilityEnergy & UtilitiesFinancial ServicesTechnology

The idea behind carbon disclosure is solid. Companies measure and report on their emissions, creating visibility and enabling investors to make better decisions. However, despite the growing popularity of carbon disclosure, there is a disconnect between the disclosures and actual decarbonisation.

In a recent report, EY analysed the disclosures of more than 1,500 companies across 47 countries and 13 climate-risk-exposed financial and non-financial sectors and found a disheartening lack of consistent, comprehensive climate-related disclosures.

The issue is that many companies fail to dig deep enough into their internal operations and supply chains to capture the full picture of their emissions — meaning that even those who are diligently measuring and disclosing their emissions may be undercounting them by a significant amount.

Moreover, the report found that despite global corporate commitments to reduce emissions, many companies still struggle to set and meet targets. While some sectors, such as technology and energy, have made significant strides in decarbonising their operations, other sectors — including automotive and consumer goods — have barely begun the process.

So the question remains, is carbon disclosure a useful step on the road to decarbonisation, or another potential greenwashing tool?

The disconnect between disclosures and decarbonisation

Despite the obvious catastrophic dangers posed by climate change, current attempts to limit the global temperature increase this century to 1.5 °C above pre-industrial levels are failing.

Carbon dioxide emissions are at a record high, and unless drastic steps are taken to change our current trajectory, the global temperature will rise by more than double the 1.5 °C target, with catastrophic consequences. Despite the warnings and evidence, many companies have not done enough to reduce their emissions or even track them accurately.

The reality is that the current system of carbon disclosure is inadequate. It doesn’t go far enough to ensure that companies are taking meaningful steps towards decarbonisation, nor does it provide an effective mechanism for holding companies accountable for their emissions.

While the popularity of carbon disclosure has increased, up 70% since 2020, the quality of those disclosures has remained stagnant, rising just 2% over the same time period.

Companies are currently using this disclosure as a form of ‘greenwashing’ – announcing ambitions net zeros with attached dates, but providing no insight into how they plan to achieve their goals. This type of self-regulation is not enough to ensure that companies will actually meet their commitments.

In order for carbon disclosure to become a truly effective tool in the fight against climate change, it must go beyond declaration and incorporate more detailed, verifiable reporting on emissions reduction plans and progress towards meeting those goals.

For example, only 49% of companies surveyed had actually conducted any kind of scenario analysis to determine the potential risks and opportunities of different climate-related actions.

Less than a third even mentioned climate-related matters in their financial statements or discussed how they are responding to anticipated government regulations.

In addition, carbon disclosure initiatives have traditionally failed to account for indirect emissions associated with the production and use of products and services. This means companies can report lower emissions figures, without taking into consideration the full life cycle of their products.

In essence, the majority of carbon disclosure do not connect to any meaningful action to decarbonise the economy and mitigate climate change.

Bridging the gap

Fortunately, a number of initiatives are now emerging which seek to bridge the gap between disclosure and action on climate change. For example, investors such as Blackrock and State Street are launching global voting policies which tie executive pay to environmental, social and governance performance.

The Carbon Disclosure Project is also developing data-driven approaches to help companies understand their carbon footprints and reduce emissions.

Finally, the UN Global Compact is encouraging companies to publicly commit to reducing their greenhouse gas emissions in line with the goals of the Paris Agreement. This helps create a marketplace in which sustainability-focused investments have an impact beyond financial returns.

As these initiatives continue to gain momentum, it is increasingly important for companies to understand the value of sustainability and take action to reduce environmental risks.

But what actions can be taken?

Steps towards material decarbonisation

There are a variety of steps companies can take to reduce their carbon footprints, from investing in renewable energy sources to changing business models, including:

  • Revising the approach to disclosure – As it stands, disclosure is being treated as an end product, rather than a step on the road towards decarbonisation. Companies should therefore focus on developing an actionable disclosure plan that allows stakeholders to track progress and hold them accountable for the emissions they produce.
  • Benchmark your starting point – to be true environmental stewards, use tools such as GoCodeGreen to understand your energy efficiency performance starting point. From here, you can measure ongoing progress of your sustainability program more accurately, identifying opportunities for further improvement and drive engagement with internal and external stakeholders.
  • Set actionable targets – Instead of aiming for a vague carbon neutrality goal, companies should set specific, measurable targets and develop strategies to reach them. This could include transitioning to renewable energy sources, investing in energy-efficient technologies or introducing more sustainable production processes.
  • Increased transparency – Companies should strive to be as transparent as possible when it comes to their climate commitments. This means providing detailed information on the sources of their emissions, how they are measuring progress and any steps taken to reduce them. Companies can also use new technology and data tools to report on their carbon footprint in real-time and provide stakeholders with an accurate picture of their efforts.
  • Engagement with stakeholders – Organisations should engage with all their stakeholders, including investors, customers and employees, to ensure they are on board with the business’s sustainability goals. This could involve running public awareness campaigns or creating a dedicated forum for discussion. This can help companies build trust and show their commitment to making a positive difference.

These are just some of the ways to create a sustainable business. By setting appropriate goals and committing to responsible practices, businesses can make an impact on the planet while still achieving their bottom line. With the right approach, carbon disclosures and the connected decarbonisation will be beneficial in the long run for both companies and the environment.

Next step

Are you looking for a partner to challenge your thinking around decarbonisation? Would you benefit from a partnership focused on creating a positive impact with an ESG strategy that also meets the needs of your business? Yes? Book an introductory call with the team today

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