Updated 7 April 2020
Experience tells us that there isn’t always an obvious business case for doing the right thing or for moving too far ahead of your market. Taking a leadership position on sustainability issues can seem risky, particularly when your actions could add to your direct costs or put you at a short-term competitive disadvantage. There is also considerable political and market uncertainty at the moment, which means that many businesses are adopting a wait-and-see approach before making big decisions.
It is therefore helpful to outline some of the reasons why senior leaders at large corporates across a range of industries have been willing to commit to science-based targets, knowing that this will support long term company value creation. One major reason is to get ahead of regulatory risk. With the window of opportunity to avoid dangerous climate change getting ever shorter, indications are that governments could take an increasingly strong regulatory position on greenhouse gas emissions, especially given the growing frequency of severe climate-related incidents.
We are entering a decade that will define our global response to the threat of climate change, with ratcheting up of the speed of transition a necessary and expected development. In setting science-based targets and aligning to the ambitions of the Paris Agreement, businesses are able to anticipate the impacts of these regulatory changes.
In many countries we are already seeing increased costs for business as a result of needing to comply with national climate change policies. These are often being surpassed at the sub-national level, with major cities and regions implementing their own ambitious strategies.
Those compliance costs become even higher with the addition of a carbon price, through either taxes or cap-and-trade schemes. Currently carbon pricing is either in place or scheduled for implementation in 46 national and over 31 sub-national jurisdictions, across major economies in both developed and developing markets. These schemes already cover around a fifth of global emissions.
There is every indication this movement towards carbon pricing will expand and prices themselves will continue to increase. Of the countries signed up to the Paris Agreement, 96 have indicated they are either using or intend to use carbon pricing to deliver on their national commitments, which would result in a price being put on well over half (55%) of all global emissions. And these can spike rapidly, with costs in the EU Emissions Trading Scheme quintupling between 2017 and 2020 to reach over €25 a tonne from €5 a tonne.
Taking strong action to reduce emissions from energy use and broader resource use also drives direct operational cost savings. As the costs of low carbon technology are rapidly reducing thanks to innovation and higher levels of deployment, the business case for investing in everything from renewable energy to electric vehicle fleets becomes more and more attractive.
In addition to managing costs, reducing resource use helps to shield companies from increasingly uncertain commodity markets. These investments into new technologies also support companies involved in other popular corporate climate leadership initiatives, such as the renewable energy and electric vehicle campaigns RE100 and EV100. Indeed, it is now possible to align targets such that an RE100 target can directly be part of a company’s science-based target.
Setting big, bold, ambitious targets can also unlock the potential for innovation within an organisation. There are now numerous companies that have set stretching sustainability goals, delivering these alongside substantial cost savings, product improvements and increased market share.
The long-term nature of science-based targets provides a clear direction of travel and can offer insight into important market trends that will be shaped by the low carbon transition. This clarity can shift the focus of a business towards the development of innovative solutions and new opportunities. It allows companies to consider the two realities of the need for short term incremental change while also enabling long term transformational change. Science-based targets, covering value chain as well as own operations, will be an essential part of a corporate net zero strategy.
At the same time, there are clear reputational benefits for companies that adopt science-based targets as part of their sustainability strategy. As the physical impacts of climate change start to be felt more acutely, the public are taking an increasingly poor view of companies that do not do their fair share to reduce emissions.
Similarly, as other businesses take progressive leadership positions on climate issues, laggards may appear unreasonable and regressive. There is now a trend towards companies that have set science-based targets encouraging their major suppliers to do the same, as they seek to reduce their indirect impacts.
Strong commitments on climate change could even improve access to capital. A number of financial institutions – particularly institutional investors such as pension funds – are putting in place specific investment criteria related to environmental performance for their portfolios, including some that are linked directly to a 2°C target. Banks are also following suit developing new products such as sustainability linked loans where interest rates are directly linked to sustainability KPIs such as reduced carbon emissions and energy use.
This dovetails with the emerging implementation of the recommendations of the G20 Financial Stability Board’s Taskforce on Climate-related Financial Disclosures (TCFD). Science-based targets provide a clear signal to investors, helping companies to cut through the noise of corporate reporting and communicate to investors and regulators their commitment to long term sustainable growth.
Alongside financial capital, there is an opportunity to strengthen human capital. It is now well-established that taking positive action on sustainability and providing employees with a sense of purpose at work can boost morale and productivity, as well as improving the recruitment and retention of quality staff. Being able to claim that a company is objectively taking sufficient action on one of the most pressing environmental issues facing the planet is a simple and strong internal message. Many sustainability teams struggle to translate the actions being taken by the company into digestible messages for employees and the clarity of purpose provided by a science-based target is often a valuable way to communicate ambition.
Finally, there is the moral case for action – doing the right thing. For many, the importance of taking an ethical stance may be adequate justification in itself. Sometimes when there is an uncertain business case, good leaders need to make brave decisions based on principles, to inspire their company to succeed in the right way. As more and more leading companies set science-based targets and succeed, it will become easier for others to follow them.
This is the third in a series of five articles on science-based targets, first published in 2016 and updated with the latest developments:
Part 1: Why do we need to set science-based targets on climate change?
Part 2: What exactly is a science-based target?
Part 3: Why should a company set a science based target?
Part 4: How do you make the internal business case to set a science-based target?
Part 5: How does setting a science based target fit in with your wider sustainability strategy?