An initiative that encourages companies to meet science-based emissions targets has seen significant growth in recent months. The success of the Science-Based Targets Initiative (SBTi) has highlighted the appetite for a more stringent and universal approach to ESG reporting. This year has seen an uptick in ESG reporting around the world, partly in response to increasing scrutiny on companies’ social and environmental impacts.
Failure to adhere to ESG principles can have real-world consequences. For instance, when food delivery app Deliveroo went public on the London Stock Exchange in early 2021 it lost more than 25% of its value on the first day. Some observers attributed the steep decline to the company’s reliance on gig-economy workers, to the detriment of the “S” component of its ESG metrics.
ESG commitments have thus become a business imperative. However, the absence of a globally recognized ESG reporting system has led to accusations that companies can easily misrepresent their sustainability performance.
The rise of greenwashing
This is often called greenwashing, a blanket term that covers activities such as selective or incomplete disclosure, symbolic management, deflection, and disconnect between companies’ statements and their business activities.
Greenwashing can lead investors to finance operations that potentially harm the environment, and allows companies to delay adopting more conscientious policies.
The problem of greenwashing has grown in tandem with rising corporate awareness of ESG and sustainability issues.
A report published in March this year by the University of Oxford and the Energy and Climate Intelligence Unit, a think tank, found that 21% of the world’s 2000 largest public companies have committed to net-zero emissions.
A majority of these firms had interim targets, a published plan, and a reporting mechanism, key components of an effective net-zero strategy. But only a quarter met a full set of “robustness criteria” established by the UN Race to Zero Campaign.
Elsewhere, the UK saw the number of large companies with net-zero policies more than double in the year leading to July 2021. However, a third of these do not take into account Scope-3 emissions that arise from a company’s supply chain and often make up the bulk of emissions.
Other companies are relying on offset credits to meet their targets, a practice that shifts the problem rather than eliminating it at the source.
Such corporate tactics have given rise to concerted efforts to encourage companies to provide a more accurate picture.
A team at University College Dublin, for example, developed algorithms that can detect and quantify greenwashing. Called GreenWatch, the tool uses artificial intelligence and machine learning to scan corporate communications from 700 global companies. These are then compared to the companies’ actual carbon footprints.
Based on these results, GreenWatch categorizes companies on a spectrum that includes “green leadership”, “hidden green champion”, “green incrementalist”, “potential” or “probable greenwasher”, and “climate denier”. These classifications help investors detect which companies are sincere in their ESG efforts.
The need for global standards
Growing concerns about misrepresentation could be alleviated by the wider acceptance of science-based targets.
The SBTi is a global body that provides companies with a defined framework to reduce greenhouse gas emissions in line with the Paris Agreement. According to the SBTI science-based targets are driving decarbonization: between 2015 and 2020 companies with validated targets cut emissions by 25%.
In June 2021 more than 150 companies committed to the initiative, bringing the total to more than 600 firms with a combined $13trn in market capitalization – a value just below that of China’s GDP.
A similar initiative is the Greenhouse Gas Protocol, the world's most widely used set of greenhouse gas accounting standards.
The growing interest in science-based targets has highlighted a broader appetite for globally recognized ESG standards. Universal standards would enable investors to better compare companies within the same industry, as well as between industries, helping them to cut through greenwash.
The non-profit International Financial Reporting Standards Foundation is working on a global sustainability reporting standard. Several international bodies – among them the IMF and the UN – have expressed support for these efforts.
The foundation has said it will provide an update on its progress at the UN Climate Change Conference in October or November of this year, with draft standards issued mid-2022.
ESG standards and emerging economies
Many emerging economies are disproportionately at risk of the effects of climate change, including rising sea levels, extreme weather, drought, and agricultural disruption. The UAE, for example, is among the countries that are most vulnerable to rising global temperatures, while a 2020 study by Pictet Asset Management and the University of Oxford found that water availability issues are set to worsen in Mexico, Indonesia, and South Africa.
As such, emerging markets have a strong incentive to cut through greenwash and support concrete, verifiable ESG reporting. However, these economies face a specific set of challenges in adapting to a one-size-fits-all approach.
One such issue is language, as it will be necessary to make the new set of ESG standards accessible to a range of stakeholders. Moreover, it will be important that the international protocol will not dampen the performance of emerging economies, many of which are in an energy-intensive stage of development. Similarly, in emerging manufacturing centers such as Vietnam job creation and international competitiveness are key, which may complicate “S” and “G” metrics.
A further significant consideration is that of cost. Papua New Guinea plans to switch to 100% renewable, indigenous energy by 2050, as does Sri Lanka. However, major investment will be required if these targets are to be met, with Sri Lanka alone needing between $54bn and $56bn to meet its goals.
The pandemic highlighted the need to redouble ESG considerations. Looking to the future, it is hoped that internationally recognized, science-based ESG standards will initiate a new phase in the movement towards carbon neutrality, with the particular needs of emerging markets taken into account.
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