Navigating the Alphabet Soup of Corporate Climate Accountability Initiatives

The Importance of Corporate Climate Accountability

In the face of the urgent need to limit global warming, companies have a crucial role to play in the low-carbon transition. The concept of corporate climate accountability has gained traction, emphasizing the responsibility of businesses to fulfill their commitments and take action. To ensure that companies act responsibly, various initiatives have been put in place to encourage, support, and guide them in this process.The journey to a carbon-neutral future hinges on the collective action of businesses.

The transition to a carbon-free world relies on the collective efforts of all companies. Each business has a vital role to play in reducing emissions and driving the necessary changes. Corporate climate accountability is not only a moral duty towards future generations but also a catalyst for innovation and business differentiation. By embracing sustainability, companies can ensure their resilience, tap into new opportunities, and generate a positive impact on their bottom line. ????

Types of Initiatives Companies Have to Take into Account

If you're interested in learning about Climate Action, you may have come across various acronyms like ESG, CSR, GRI, ISSB, UNFCCC, TCFD, CDP, GHG, IPCC, NDC, CSRD, ESRS, SBTi or ACT. While the list can seem overwhelming, let's focus on a few key initiatives to help you get started on your sustainability journey.

1. Recommendations ??

Recommendations are non-binding advice that can have varying degrees of impact depending on the organization that formulates and supports them. One notable example is the Task Force on Climate-Related Financial Disclosures (TCFD), established by the G20 Financial Stability Board in 2015. The TCFD provided recommendations for companies to disclose climate-related issues and opportunities, enabling financial institutions to make informed investment and financing decisions. Over 1,000 organizations have pledged their support for implementing these recommendations, which have been voluntarily adopted by companies in their annual reporting and sometimes incorporated into legislative and mandatory frameworks.

Latest development is that the Task Force on Climate-related Financial Disclosures (TCFD) has completed its work, with its recommendations fully incorporated into the International Sustainability Standards Board (ISSB) Standards, specifically IFRS S1 and IFRS S2. Incorporating the TCFD recommendations into the ISSB's Standards further simplifies the "alphabet soup" of disclosure initiatives for companies and investors. Companies applying these standards will meet the TCFD recommendations, although they may still choose to use the TCFD recommendations as a starting point. The IFRS Foundation has published a comparison demonstrating the consistency between IFRS S2 and the TCFD recommendations. The ISSB Standards include additional requirements beyond the TCFD recommendations. The IFRS Foundation will now monitor the progress of companies' climate-related disclosures, taking over from the TCFD, which has disbanded.

The integration of the TCFD recommendations into the ISSB Standards and the involvement of the Financial Stability Board suggest that these standards may serve as a foundation for future regulatory developments in the area of climate-related financial disclosures.

2. Regulations ??

Talking about Regulations: they are laws and rules established by member states that impose obligations on targeted entities. In recent years, several significant legislative actions have been taken to address corporate climate accountability.

In the European Union, the taxonomy of sustainable activities and the Corporate Sustainability Reporting Directive (CSRD) have been introduced to define sustainability and outline reporting requirements. The CSRD mandates reporting according to the European Sustainability Reporting Standards (ESRS), developed by the European Financial Reporting Advisory Group (EFRAG), ensuring standardized and detailed sustainability disclosures across sectors. Similarly, the UK plans to make TCFD-aligned disclosures mandatory by 2025.

In Asia, significant strides in sustainability regulations are noted across several countries. Japan is emphasizing transition bonds as part of its capital markets, supporting industries towards low-carbon transitions. Singapore has committed to sustainable finance through various initiatives, including ISSB-aligned climate-related disclosures and a comprehensive green finance action plan. South Korea has introduced guidelines to improve ESG ratings transparency and address greenwashing. Meanwhile, China and the EU have engaged in dialogue to deepen cooperation on global green transitions, highlighting efforts towards decarbonization and environmental sustainability. For detailed insights, you can visit the Latham & Watkins LLP's update on regulatory developments in Asia.

In the United States, the SEC has adopted new rules to enhance and standardize climate-related disclosures for investors, focusing on material climate risks and their impacts on companies. These rules aim to provide investors with consistent, comparable, and reliable information, requiring public companies and offerings to disclose climate-related risks, strategies, and financial impacts. Worth mentioning too is California's Global Warming Solutions Act and the Regional Greenhouse Gas Initiative (RGGI) which works to reduce greenhouse gas emissions through market-based approaches.

These regulations operate on the "comply or explain" principle, allowing companies to either comply with the rules or provide an explanation for non-compliance. However, the effectiveness of this approach depends on the control and sanction capacities of regulatory bodies.

3. Methodological Initiatives ??

Several international initiatives offer methodologies related to corporate climate accountability. Two prominent examples are the Science Based Targets initiative (SBTi) and the Assessing Low Carbon Transition (ACT) initiative.

a. Science Based Targets initiative (SBTi):

The SBTi, led by organizations such as the Carbon Disclosure Project, helps companies set emission reduction targets that align with scientific recommendations. It translates the global carbon budget to the corporate level and offers certification of companies' objectives based on its defined methodology. The SBTi provides three levels of ambition: 1.5°C, well-below 2°C, and 2°C, allowing companies to choose targets that align with their sustainability strategies. As of 2021, over 1,000 companies worldwide have committed to setting science-based targets through the SBTi.

b. Assessing Low Carbon Transition (ACT) initiative:

Launched by the French Agency for Ecological Transition (ADEME) in collaboration with CDP during COP21, the ACT initiative provides a framework for climate accountability through sectoral methods. It assesses companies' decarbonization strategies and associated transition plans, ensuring the credibility of the means implemented to achieve emission reduction goals. ACT also offers guidance to companies in developing their decarbonization strategies and transition plans.

The initiative has developed sector-specific methodologies for industries such as automotive, electric utilities, retail, and oil and gas, among others.

4. Information Sharing Initiatives ??

Various voluntary climate information disclosure initiatives exist to centralize and share data, making it more accessible. We could name the Global Reporting Initiative (GRI), which sets global standards for sustainability reporting, helping businesses, governments, and other organizations communicate their impact. The Carbon Disclosure Project (CDP) runs a global disclosure system for investors, companies, cities, and states to manage their environmental impacts.

Additionally, the Science Based Targets initiative (SBTi) we mentioned above encourages companies to set emission reduction targets in line with climate science. These initiatives aim to promote transparency and accountability in environmental and social practices.

However, the added value of these initiatives may come into question in the medium term, as some of the reported information is already subject to regulatory reporting.

To navigate the complex landscape of corporate climate accountability initiatives, companies should focus on compliance with regulatory requirements, follow recommendations from legitimate bodies, and anticipate future regulations by relying on transparent methods. When evaluating initiatives, it is essential to consider the purpose, the organizing entity, and the independence of auditors or certifiers.

Key Steps for Companies

1. Understand Your Emissions: Know your greenhouse gas emissions profile and monitor it over time.
2. Set Ambitious Targets: Align your reduction goals with the Paris Agreement.
3. Strategize and Plan: Develop a robust decarbonization strategy and transition plan.
4. Validate Your Efforts: Seek third-party validation to ensure credibility.
5. Communicate Transparently: Keep stakeholders informed about your sustainability journey.

How SAP helps with Corporate Climate Accountability Challenges ??

AI expected to mitigate up to 10% of global greenhouse gas emissions by 2030, the transformative potential of AI extends beyond emissions reduction. Coupled with the latest Cloud Software solutions, It can revolutionize resource management, operational efficiency, and the creation of eco-friendly products.

This is why SAP, as a leading provider of enterprise software and AI solutions, can play a significant role in helping companies address the key challenges associated with corporate climate accountability. SAP's suite of sustainability and environmental, social, and governance (ESG) solutions enables businesses to effectively manage, track, and report on their sustainability performance.

With SAP's solutions, companies can:

1. Monitor and measure their greenhouse gas emissions across the entire value chain, providing a comprehensive view of their carbon footprint.
2. Set science-based emission reduction targets and track progress towards these goals using robust data analytics and reporting tools.
3. Develop and implement credible decarbonization strategies and transition plans by leveraging SAP's integrated planning and simulation capabilities.
4. Streamline sustainability reporting processes, ensuring compliance with regulatory requirements and alignment with voluntary disclosure frameworks such as TCFD and CDP.
5. Enhance transparency and stakeholder engagement by providing reliable, auditable, and easily accessible sustainability data through SAP's reporting and disclosure solutions.

By partnering with SAP, companies can navigate the complex landscape of corporate climate accountability initiatives with confidence, ensuring they have the tools and capabilities needed to drive meaningful action towards a low-carbon future.

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