The ESG Review: COP26 post-match analysis

Mainstream, financial and sustainability-focused media have been full this week of COP26 aftermath pieces assessing what lasting impact the talks had, and what comes next for industry.

The post-match analysis was inevitable, and largely predictable. There was always going to be an easy story to write about talk alone not helping the world, and rapid action being the critical marker of success. And there was always going to be the view that businesses needed to do much more to safeguard the environment, principally by reducing greenhouse gas emissions, and that attempts to polish their stories around progress would fall flat against the need to achieve science-based targets.

Before the pandemic took its grip, we saw a raft of major global businesses step forward with increasingly ambitious net-zero emissions targets, with the accompanying scrutiny over how they’d achieve them. Much of that pledging and assessment focused on the distinction between emissions reduction across the Scopes 1, 2 and 3 activities, definitions of which are now commonly accepted, though the light shone mostly on 1 and 2.

Scope 1 covers direct emissions from owned or controlled sources. Scope 2 covers indirect emissions from the generation of purchased energy, in various forms. Scope 3 includes all other indirect emissions that occur in a company's value chain - its supply chain, and the other impact created as a consequence of doing business.

With so much focus on the first two scopes so far, the third is where the harder yards now lie reputationally, and where we can expect businesses to have to get really granular in tracking and reporting on supply chain-plus emissions, and demonstrating their commitment to tackling those emissions. The Conversation outlined this as a $35 trillion blind spot in ESG investing, while Quartz pointed to the reporting loopholes in understanding ESG risks.

Bloomberg has covered the challenges that a business like Tesco has over Scope 3 emissions and cautioned against “relying on the market” while the Financial Times has described the “bumpy road” of achieving net zero given the deeper decarbonisation required by Scope 3.

Meanwhile, the investment in, and pressure for, ESG-led change on the environmental front in particular shows no sign of slowing down, with several significant announcements in the week after COP to chew on. ETF (exchange-traded fund) money coming into UBS over the past year has solely been to ESG funds, while sovereign wealth funds are turning the ESG screw further and Saudi Arabia announced a massive green bond.

Digging deeper into supply chains to decarbonise them will be complex and take time. Think of the need to transition shipping and air freight to sustainable operating models and you begin to understand the scale of the challenge. But Scope 3 emissions will only garner greater public, customer and investor scrutiny, so reporting and storytelling are going to have to embrace them.

The ESG News Review is written by Steve Earl, a Partner at BOLDT.

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