As COP26 gets underway, the G20 Leaders remain committed to the Paris Agreement goal to hold the global average temperature increase to well below 2°C, and to pursue efforts to limit it to 1.5°C above pre-industrial levels by 2050. This will require the development of clear national pathways that align long-term ambition with short and medium-term goals. Financing the sustainable development transition, climate mitigation and adaptation, and biodiversity loss will all be top of the agenda for discussion at COP26.
Separately, many standard-setting organisations have been working towards a consistent global approach to sustainability reporting. The Task Force for Climate Related Financial Disclosures (TCFD), along with many other panels and fora, have been wrestling with the complexity of carbon and climate-based reporting for several years now.
Article 6 of the Paris Agreement on greenhouse gases enables parties to cooperate in implementing their nationally determined contributions (NDCs) towards emission reduction. Among other things, this means that emission reductions can be transferred between countries and counted towards NDCs. While significant progress was made on carbon market rules at COP25 last year, full agreement was not met between countries. At COP26, countries will try to finalise this. What gets measured gets done, so it is of vital importance that in solving for Article 6, that COP delegates also consider the reporting and assurance measures that will be deployed to provide confidence and transparency for the new systems that are agreed. Lessons from the reporting framework harmonisation activities of the past years could offer a roadmap in this regard.
The recently published EY State of Sustainability Report 2021 sets out how Irish organisations view themselves with respect to sustainability and their depth of understanding of the changes that will be required of them in the years ahead.
While 61% of respondents to the survey said there was good or complete awareness of sustainability considerations and implications across their organisations, less than half (46%) utilise any recognised standards or benchmarks to measure that performance. In addition, just four in 10 organisations claim that their organisation employs an average or high level of reporting on sustainability performance to drive transparency on matters relating to sustainability.
Looking at the picture holistically, the nature of organisations’ perceived understanding may not align to the levels of readiness required to effectively meet the challenges ahead. Indeed, a separate report, the 2021 EY Global Climate Risk Disclosure Barometer,¹ revealed that public companies have made limited progress in addressing the quality and coverage of climate-related financial disclosures. The research was conducted to evaluate the uptake of the TCFD across highly impacted sectors, revealing that while in Ireland, 63% of public companies were making climate-related financial disclosures, the average quality score across the TCFD recommendations was just 25%.
Taken together the findings suggest that a large portion of Irish business will need to update their reporting processes and governance procedures to align to changing demands from investors and regulatory expectations, including the forthcoming EU Corporate Sustainability Reporting Directive, which will be in effect from 2023 onwards, and existing UK mandatory TCFD disclosure requirements.
This will place a burden of new data sourcing, more vigour and robust reporting on many – as well as the burden of being subjected to external assurance, given that only half said they engaged a third party to provide assurance of sustainability reporting, results, or measures. Indeed, there is an opportunity for Government to send clear signals in relation to those upcoming changes in order to encourage companies to prepare for them well in advance. Such preparations would in themselves support enhanced sustainability performance. Should the uptake of mandatory TCFD disclosures be endorsed at COP26, we could see a significant increase globally in the level of disclosure on climate change governance, strategy, risk, and reporting. Is it also hoped that there will be further harmonisation of sustainability and carbon reporting frameworks, to ensure consistency of global reporting on GHG emissions and ESG performance. The upcoming development of sustainable reporting standards as required by CSRD will be helpful in this regard.
The low level of adoption of independent standards is a natural corollary to the finding that 53% of respondents believe that once their organisation is compliant with Irish Government and EU related sustainability standards, they are confident the business has done enough from a sustainability perspective. Understanding that demands for improved ESG reporting are also coming thick and fast from investors and customers, it is no longer enough to just be compliant. To be competitive in todays’ business environment, you need to be clear on your ESG impacts, and you need to be able to stand over your claims of how these are being managed and reduced, without the risk of greenwashing.
Organisations that wish to reap the rewards on offer from superior ESG and sustainability performance need major improvements in relation to reporting, and also need to align their metrics to recognised frameworks and enlist the support of third parties to verify their data. It must also be recognised that sustainability is a moving target. Today’s excellence can be tomorrow’s average. Competitive advantage can disappear very quickly if businesses do not move forward continuously.
There will be a lot of discussion around success and failure factors at COP. Agreeing a way forward on Article 6 would be a major win and is for many, a stretch ambition of the talks. But at a minimum, perhaps agreement can be reached on the common purpose and language of sustainability, and that governments must take a more proactive compliance and regulatory role in critical areas of our economy to have any hope of limiting global warming in line with the Paris Agreement.