Environment relevance in ESG
The need to act on climate change is becoming increasingly clear. While the first two decades of the 21st century were a time of awareness, the next ten years will be a time of transition.
Governments are not alone in their pursuit of net zero emissions. The year 2020 has been distinguished by an increase in commitments from major companies to achieve net zero emissions. The COVID-19 pandemic has raised awareness-both among companies and investors-of the importance of non-financial risks. And climate change happens to be one of the major risks within that category.
There is still no consensus on how to measure and report on environmental indicators. Consistency in companies' ESG disclosures is essential, as it allows companies to compare their performance in this area.
Five major standards bodies - the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), the International Integrated Reporting Council (IIRC), the Climate Disclosure Standards Board (CDSB), and the CDP (formerly the Carbon Disclosure Project) - recently announced their intention to collaborate on the development of a common set of standards. In the wake of this announcement, SASB and IIRC have merged to form the Value Reporting Foundation, and further consolidation is likely to follow.
The European Union's Green Taxonomy (the classification system for environmentally sustainable business activities) is set to play a major role. This system will define the characteristics of a "green" investment and establish a uniform approach to ESG risks, including decarbonization.
As disclosure standards improve, and once the issues around what constitutes a green investment and what companies should do to contribute to the green transition are clarified, the market for green solutions will be a major source of growth for decades to come.
The environmental criteria of an ESG approach can therefore be a source of financial risks but also of opportunities for innovation and growth. In order to ensure coherence between Social, Governance and Environmental factors, the latter contribute to 29% of the stratESGy Readiness Check assessment. www.stratesgy.com/readiness