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Climate transition plans: How EU rules can help companies focus on the right data and information

 

This article is a review, editing and adaptation by Sustentia, based on the original written by Frank Bold, in the framework of the Alliance for corporate transparency (ACT), for publication in Spain. It is the fourth in a series of articles to be published with the aim of spreading the word about the importance of sustainability reporting., and the regulatory changes underway in the European Union in this regard for 2021. First outlined the political developments planned for 2021, included 10 key changes envisaged in the proposed reform of the EU Non-Financial Reporting Directive. The second focused on governance information (G of ESG). The third highlighted the role of EU rules in ensuring comparable and meaningful data, fill current gaps in legislation and ease the administrative burden on businesses.

The opinions included in this article do not necessarily represent the opinions of other members of the Alliance.. In it next article we will address the challenges for Small and Medium Enterprises to address the demands of these regulatory changes and trends.

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Climate Change is a critical problem that no company can afford to ignore. The Paris Agreement and the Intergovernmental Panel on Climate Change (IPCC) they're clear: Significant steps need to be taken to reduce greenhouse gas emissions and ensure climate-resilient economies. The European Green Deal outlines lines for that meaningful action with the aim of turning Europe into a carbon neutral continent for 2050.

This transition will bring with it risks and opportunities at an unprecedented scale and speed in all sectors of the economy.. As the president of the European Central Bank has said, Christine Lagarde, “we have to transform our economies as structural changes accelerate around us”.

Recently, at the opening of the National Congress of the Environment (CONAMA) in which the COVID-19 pandemic and recovery context was present, the Fourth Vice President and Minister of Ecological Transition and Demographic Challenge, Teresa Ribera, has highlighted that "When we talk about recovery, we must think about the way in which we absorb opportunities and shed the burden of three decades, that end up becoming a problem, even from an economic point of view ".

Aligning your business models with a zero-emission future is becoming essential for success - and survival.- of the companies. To be able to do it, should develop comprehensive climate transition plans that address critical aspects of their business strategy. And companies do it more and more, as pointed out by Paul Polman, former CEO of Unilever: “The proliferation of corporate decarbonization plans and sustainability initiatives has now reached an impressive crescendo.”. But at the same time add: “Unfortunately, the same can be said for greenwashing (…) Until now, corporate data on ESG aspects lacked quality, consistency and comparability, making it difficult for asset managers to determine where to direct investments.”

As Juanjo Cordero pointed out, Partner-Director of Sustentia Social Innovation in a dialogue with experts on changes to the Directive on corporate reporting on sustainability issues, "Although there are standards on this subject, the information that companies collect in relation to climate is very heterogeneous and confusing", this in relation to an analysis on 46 Spanish companies carried out by Frank Bold and Sustentia in April.

For his part, Antoni Ballabriga, Global Director of Responsible Business at BBVA, highlighted that banks "In the areas of climate and human rights we urgently need information". He also presented a message aimed at “Companies prepare for the report and see it as an opportunity in a world where funds, financing and public policies will reward companies that integrate ESG aspects into their plans and their day-to-day life ".

In this regard, it is worth noting the approval of the Law on Climate Change and energy transition in Spain in the past 13 may, with implications for companies regarding information publication, in line with the different regulatory changes that have been taking place in Europe.

Given that the EU Sustainable Financing Strategy intends to channel 500.000 million additional euros of private investment each year towards sustainable business activities, companies must focus on generating the right information and data, and present them to take advantage of this opportunity. To help them do it, the EU is reviewing its legislation on “non-financial information” for a new Directive on Corporate Sustainability Information (IRSC), that will be based on substantive information standards or norms that allow understanding the management of risks and impacts of its business model. With these standards, companies will gain clarity on how to report on their climate transition to a net zero economy, how to perform analysis of possible scenarios, and on key metrics to assess risks, the opportunities, behavior, results and impacts.

This article addresses two questions:

? What information is critical for companies to consider in the context of their climate transition plans?

? What are the key issues to be addressed by the EU climate information standard to help companies in this regard?

Critical information for the climate transition

The EU Sustainable Finance Information Disclosure Regulation (SFDR) and the EU taxonomy already outline the main information that investors will have to disclose and collect from companies, from January 2022. (More details about it in our Article anterior). If investors have to provide this information, it follows that they will also ask companies to provide it.

In relation to this challenge, Antoni Ballabriga also highlighted in the aforementioned meeting that “Many banks have committed to the Paris Agreement as well as the scenario 2050 net-zero to limit global warming to 1.5ºC. This involves using science-based scenarios and we need feedback from our clients on their results today., the prospective and future vision, goals, intermediate objectives and decarbonisation plans. In human rights, the reporting of companies is more based on policies and procedures (not so much in goals, performances, results, risk identification and action plans). We will need this information from our clients, and we play an important role in ensuring that the United Nations Guiding Principles on Business and Human Rights are the frame of reference ”.

The information that investors have to provide falls into two main categories, both related to the business model of the company: transition plans on Climate Change, and the analysis of climate risks and opportunities. Current legislation - the Non-Financial Information Directive- offers some guidance to companies, but leave a lot of details untreated. Then, We explain what information and data are essential for the preparation of meaningful reports.
 
1. Climate transition plans
 
Climate transition plans are a way for companies' strategies to contribute and evolve in the transition to a net zero economy. The term “net zero” refers to the goal of achieving no net greenhouse gas emissions. The European Green Deal - the European Commission's flagship initiative for economic growth and transformation- has set this goal for 2050. The plans must establish the path that the company sets itself to achieve the “net zero” and how you will ensure that you meet your goal, with points for your review along the way.

Regarding the formulation of these objectives, Lennys Rivera from WWF's Climate and Energy Program, pointed out in the aforementioned Dialogue with Experts that “It is important that ambitious emission reduction targets are established for companies linked to sectors with higher emissions and connected with the 1.5ºC target.. It is also important to see how these goals are built – the basis for this is to link it with double materiality. The objectives thus integrate the risks and opportunities arising from sustainability issues., but also the actual and potential adverse impacts of companies on people and the planet. Create smart goals, linked to science, sustainable and as far as possible quantifiable and qualitative will allow us to see the real impact. "

The company's contribution consists of two parts. First of all, companies will have to eliminate their own direct and indirect emissions, and dismantle harmful activities. Secondplace, companies can develop business activities that allow transformation to zero, for example in the field of renewable energies, ecological transport, the construction industry, IT solutions and, of course, the finances.

The main elements that companies, the investors, insurers and banks should take into account in their transition plan are the following:

  • Carbon emission reduction target, that covers the company's global emissions (finance companies should focus on the carbon footprint of their investments), including:

↪️ short milestones (2025/2030), half (2035/2040) long term (2050)

↪️ alignment of the company's net-zero ambition with the 1.5 ° C target, and information on the source and details of the scenario on which the plan is based

  • Action plans corresponding to short horizons, medium and long term, including site-level transition plans for major emission sources, and identified limitations for implementation.
  • Investment objective or development of products and services that substantially contribute to the mitigation or adaptation to Climate Change and / or to the exposure objectives of the EU Taxonomy.
  • Capital allocation, including CAPEX plans in:

↪️ new sustainable activities / eligible according to taxonomy

↪️ rehabilitation / decommissioning activities for harmful activities

  • Metrics (financial companies must provide the indicators corresponding to the impacts of their assets related to the value of the investment)

↪️ Greenhouse gas emissions and intensity: Scope 1 (direct), 2 (indirect energy); 3 (indirect that occur in the value chain)

↪️ Energy: Consumption and / or production from renewables; overall consumption and efficiency (in high consumption sectors)

↪️ Percentage of turnover and CAPEX associated with activities aligned with the taxonomy that substantially contribute to mitigation and adaptation to Climate Change

* You can check this enlarged table to see more examples.

In order to develop a climate transition plan, companies must carry out two evaluations.

First of all, the plan should be based on an analysis of the entire value chain to identify where the main impacts are, as well as the sources of risks and opportunities. This is not only because what financial capital providers are increasingly expecting, and ask for the regulations, but also because it is important to understand the resilience of business models, and therefore to establish the appropriate approach.

In this sense, Lene Bjørn Serpa, Head of Corporate Sustainability at Maersk (world leader in container logistics) affirms: “Our decarbonization strategy focuses on where we can have the greatest global impact and supporting our clients' efforts to decarbonize their supply chains.”. Also, add that they have “established a goal of net zero emissions in maritime operations to 2050 and are taking steps to expand targets and reporting to include emissions from the entire value chain and align with science-based targets”.

Secondplace, companies should conduct a climate-related risk and opportunity analysis. This provides the context in which they can consider and justify investments for the transition.. The framework for reporting on this is provided by the Working Group on Climate-Related Financial Disclosure (TCFD), whose recommendations were endorsed globally and provide a basis for the development of European standards.

In March of 2021 AENA ad the investment of 550 million euros in its Climate Action Plan for the period 2021-2030, subjected to vote at the General Shareholders' Meeting, in an advisory capacity.

Recently Global Compact Red Spain and ECODES have published a Report on Business Climate Action in Spain.

2. Governance, climate-related risks and opportunities

Understanding climate-related risks and opportunities is essential for a company to define a meaningful strategy. Allows you to calculate the costs of inaction, prioritize the right investments and attract capital for your low carbon transition.

According to a CDP study, 200 of the world's largest publicly traded companies predict that Climate Change could cost them a combined total of nearly $ 1 trillion, and much of the impact will occur in the next five years. On the other hand, the value of low carbon opportunities, such as through increased demand for electric vehicles and green infrastructures, identified by 882 European companies, has reached the 1,22 billion euros, more than six times higher at the investment cost of 192.000 millions of euros, as another CDP study of 2020.

Understanding the opportunities and the risks of missing them is important to all industries. However, especially in the case of companies in high impact sectors they need a thorough analysis to understand what awaits them. The challenge is not the same in all sectors, and the challenges may lie in the business models that companies have to overcome and transform. For example, Eloi Planes, President of Fluidra, He pointed out to Social Investor that for example he cites that Fluidra has factories in South Africa, where "It is not so easy to have renewables", regarding the energy source of its production, and that for the industrial model of its sector it is not as easy to achieve neutrality in all markets.

The key factors that companies should focus on in their analysis and disclosure of information are as follows:

  • Main risks for short horizons, medium and long term, differentiating:

↪️ The risks of transition faced by the company's business model in a scenario of 1,5 °C, taking into account the EU strategy and milestones for net-zeroing, as well as the objectives of the company. This enables companies to understand whether their own goals are ambitious enough and aligned with international goals., as well as the costs of inaction.

↪️ Physical risks, such as extreme weather events and environmental changes that threaten the company's assets or value chains. This analysis should take into account other scenarios, beyond 1.5 ° C.

  • Opportunities related to the needs of mitigation and adaptation to Climate Change, namely, how business strategy, the company's products and services can take advantage of the transition. The Business Commission for Sustainable Development reported that compliance with the Sustainable Development Goals (ODS) of the United Nations would create market opportunities worth 10 billion euros a year from now to 2030.
  • Integration of the assessment of climate risks and opportunities in the corporate governance, which is essential for the company to consider the need to introduce important changes in its business model and strategy. Represents an important indicator that reflects the seriousness and maturity of the company in terms of risk and opportunity management, and its integration into the overall strategy. Details on how to advance governance-related information disclosure can be found in our previous article. “What to report on in Corporate Governance: the G of ASG)”.

The analysis should be supported by quantitative financial estimates for the issues that can be predicted, such as the costs of carbon emissions or emission rights, o the growth of the market for sustainable products or services.

The need for complex analysis is particularly high for banks and institutional investors. For his part, energy companies need to be absolutely clear about the implications of public policies for their business model, although this analysis is simple. Companies that do not have a high impact, but dependent on supply chains in vulnerable regions, they must use tools for the geomodelling of physical hazards. Companies that face no obvious risk, they should at least reflect on the increase in energy prices, and on the opportunities related to the products and services that your sector can provide to allow the mitigation of Climate Change. A good starting point is the edition of the Technical Bulletin of Climatic Risks of 2021 of SASB, showing how climate risks and opportunities are particularly manifested in 77 sectors. Two other frames that some companies They are using to help them are the Science Based Goals Initiative and the Transition Pathways Initiative..

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Key issues to be addressed by the EU climate information standard to help companies in this regard

This is a crucial moment for Europe and its companies, as we are on the threshold of the transition to a low carbon and resilient economy. The challenges and opportunities, as well as the scope and speed of change, are unprecedented.

However, as is clear from the investigation of the Alliance for Business Transparency on climate information from 300 Southern European and Central and Eastern European companies belonging to high-risk sectors, companies have difficulty analyzing climate risks and opportunities and providing adequate data on their climate transition plans. In the case of the Spanish companies analyzed, 41.1% have a science-based goal, and a 17.2% reveal forward-looking information on strategic objectives and company progress in relation to climate transition plans.

Here You can consult specific information about this study.

In April of 2021 Frank Bold and Sustentia analyzed various climate-related indicators published by 46 Spanish companies in their sustainability reports. From this analysis it follows that:

  • On information on risks and opportunities due to climate change, more than half of the companies provide information and most of them assure that they follow the recommendations of the TCFD. In relation to specific recommendations to) only the 20% provides this information on risks in different time horizons, and b) only the 25% gives explanations for the resilience of the strategy applying a scenario below 2 °

It is observed that there are companies that say they are doing the exercises, although afterwards they present very little information. On the other hand, there is a lot of difference between companies, and some are doing an excellent job. It is also noted that guidelines on how to publish the information are necessary, and maybe also lose the vertigo of transparency.

  • Regarding the objectives of Climate Change (taking as reference the science-based targets): half of the companies have an emission reduction target in line with the Paris Agreement. Of this half, the 40% of them use science-based objectives.

There is confusion about where companies are in this regard, if other methodology but also science-based are used, the terminology about neutrality, net emissions etc. This is also a problem for the companies themselves, so that they can be sure that their transition plans are truly aligned with the Paris Agreement.

To be able to identify and communicate relevant and comparable data, companies will need clarity on key elements of information, the methodologies to be followed and the sectoral specifications of the indicators. This is even more important as investors and banks are realigning their strategies to support the transition to a sustainable economy., within the framework provided by the SFDR criteria and the Taxonomy, that will come into force on 1 in January of 2022.

Companies can consult the main international standards provided by SASB, GRI and CDP. However, the sustainability reporting standards accompanying the reform of the CSRD (for more details on the interconnections and the calendar of the different legislative acts, you can consult our anterior Article) must fill current gaps.

EU rules can help companies and break down obstacles so they can report properly, by providing clear methodological criteria in four areas:

  • Climate Change transition plans. Net-zero ambition is fast becoming a standard, but it is not clear to users what needs to be reported in your app. First of all, clarity is needed on what is meant by a net zero target - including the activities and types of emissions covered by such a definition -, but also on the additional information that companies must disclose in this regard, including intermediate objectives and related deadlines, and capital alignment.
  • Reference climate scenarios and tools for scenario analysis. Using scenario analysis to identify long-term risks and opportunities is a great challenge for companies. The role of standards should not be merely a copy of the requirements of existing international standards, powerful but lazy, but to help companies assess risks. What is most needed is clarity on the scenarios that companies should use and guidance on how to apply the analysis..
  • Metrics for risks and opportunities. Another challenge companies face is the lack of clarity on what to disclose about risks and opportunities.. EU rules can provide more specific directions for companies to follow, especially with regard to sensitive key quantitative indicators for different sectors.
  • Methodologies for calculating GHG intensity and scope GHG emissions 3 (carbon footprint) specific to sectors. As can be seen from the investigation of the Alliance for Business Transparency, the methodologies used by companies for the most complicated indicators are very divergent, especially with regard to Scope emissions 3. This is especially problematic in light of the increasing relevance of value chain-related emissions for climate policies., both from public and private investors.

Clear EU standards for climate reporting in these four areas are vitally important to help companies in their transition. As concluded by the Working Group of the European Project on Non-Financial Reporting Standards, dependent on EFRAG, in its final advice to the European Commission, Climate change standards should be one of the first priorities of the future EU business sustainability reporting framework.

We are undoubtedly moving towards a scenario in which all companies have climate transition plans, for regulatory reasons, investor demand and, simply, good business. However, the challenge for companies -demonstrated by research- is that current uncertainties make it difficult for companies' sustainability reports to be sufficiently forward-looking, detailed and aligned with the Paris objectives, to meet the imperatives of Climate Change itself. In this article, We have given some details of what are the key components of a climate transition plan and we have identified the four specific areas for the European Standards to provide the necessary clarity for the future.. This can help companies navigate the next stage of their transition now.. Literally, There is no time to lose.

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