Carbon and climate core to big business

Auditing and transparency on carbon footprint are now core to big business and the reporting of financial risk associated with climate change is a critical requirement in the corporate world.

Carbon measuring and reporting has gone from sitting in the corporate social responsibility (CSR) space to being a part of the financial report.

Sustainability and environmental, social and governance (ESG) matters generally are increasingly relevant in investment decisions, customer choices, or in reputation risk management practices undertaken by businesses.

Large companies are now obliged to make statements (often as part of their financial statements and directors report) on non-financial reporting items, such as their carbon footprint. “In such cases it is vital for the reader to understand carbon implications of the business model and furthermore the methodology to score and benchmark the company making the disclosure,” Enda Gunnell, CEO of Pinergy says.

“It is also vital that the reader can trust the assessment, output or score achieved by ensuring it is validated by a trusted and reputable third party. Companies are keen to show their impact on the global sustainability challenge. Stakeholders, like their shareholders, customers and suppliers expect companies to be at the forefront of this challenge and expect consistent, high quality and comparable reporting to benchmark progress,” Gunnell says.

Lorraine McCann, director, climate change and sustainability services at EY Ireland, says the investor community is driving this within big business. But because non-financial or ESG hasn’t been through the same rigour or control as financial information, the same standards are not in place yet.

“They don’t have the same 40 or 50-year focus on standards as financial reporting has had. However, more ESG information is making it into the annual reports and there is a real focus on companies to build credibility and increase transparency,” she says.

Consistent

A standardised approach to sustainability reporting and assurance is required and there is a wide range of standards and guidelines out there to help companies report on sustainability. There are calls for a body to implement the same set of non-financial reporting standards that exist for financial reporting and for companies to be in a position to apply that to sustainability or ESG, so there is a move towards a space where there is much more consistent reporting, McCann adds.

The EU non-financial reporting directive came into play a couple of years ago and requires organisations to disclose that information. But there is currently no requirement for assurances in terms of the accuracy in Ireland, she says.

“A lot of our clients are coming to us with the challenges they face and there is traction on this. The world is now working in a much more socially conscious way than it did before. There is a realisation there is a climate crisis coming at us. Employees are also looking to get a sense that the company is not just about delivering profit but also purpose. Consumers and customers are buying into it too,” she says.

SSE is one company that has taken strategic steps over the past few years to meet the expectations of investors and stakeholders.

“At SSE, we don’t have a strategy for sustainability; we have a sustainable business strategy,” says Bethan May Freire, sustainability reporting manager, SSE plc.

“Companies are seeking to demonstrate their own climate credentials by setting ambitious long-term targets to reduce carbon emissions. This is welcome, but it is important that the credibility of those targets stand up to scrutiny. SSE is committed to open and meaningful climate disclosures, to allow stakeholders to fully assess its climate-related performance. It also believes enhanced disclosure supports a culture of continuous performance improvement.

“An important part of SSE’s strategy to support the net zero transition is to measure and report performance against stretching carbon targets. These targets must be robust enough to meet the ambitions set out in the Paris Agreement and so prevent the worst impacts of climate change,” she says.

Carbon targets

SSE has worked with the Science Based Target Initiative (SBTi) to set a series of new carbon targets that reflect the climate science and global and national momentum on climate change. These targets meet the strict SBTi criteria and were approved by SBTi in April 2020, meaning SSE’s stakeholders can be assured that its targets reflect the latest climate science.

From going through the SBTi approval process, SSE’s 2030 goal for climate action was made more stretching for 2020/21 onwards. It is now targeting a reduction in the carbon intensity of electricity generated of 60 per cent by 2030, compared to 2018 levels (the previous target was a 50 per cent reduction from the 2018 baseline).

Two years ago this was all a relatively niche activity for all but large corporates, Brian O’Kennedy of Clearstream says, but in that time there has been a very significant increase – around 50 per cent in companies that are disclosing their carbon emissions.

“They realise it’s a core business issue and a competitive issue, competing for investment. For business, being able to disclose emissions is critical and it is built into tenders and proposals and is critical for other stakeholders and employees too,” he says.

EU regulations are not “that stringent” but the real effect is seen in the fact that it mandates companies to disclose non-financial issues in their annual report and that it is now the responsibility of the board, which brings in the rigour of measurement, disclosure and verification, O’ Kennedy says.

Meanwhile organisations like the International Financial Reporting Standards (IFRS) are working with global voluntary organisations such as CDP to align around corporate reporting, he concludes.