Climate change risk is an increasingly significant driver in investment models and has been cited by almost 90 percent of institutional investors as the most significant ESG (environmental, social, governance) factor influencing their decisions to invest in a company, according to a Deloitte report.
Investors expect consistent and credible information regarding an organization’s climate commitments before making decisions, including science-based targets linked to the organization’s business strategy, accountability for climate-driven risks and comprehensive plans and processes to achieve stated target greenhouse gas reductions in line with the objectives of the 2015 Paris Agreement, the report underlines. They also demand transparency and consistent reporting in the company’s financial statements, as well as in nonfinancial disclosures.
As the focus on climate change intensifies, companies are increasing their public commitment to reducing carbon emissions, as the net zero pledges that have tripled in 2020 over 2019, according to the report. This trend is driven not only by investors, but also by the growing demands of a wide range of stakeholder groups, from customers and employees to policymakers, NGOs and activists.
Consumers are growing increasingly aware of companies’ sustainability commitments and follow through, as they want to purchase products they view as sustainable, the report shows. They also make decisions so that their consumption habits won’t negatively affect the environment, as they are fearful of the overall impact of climate change. This is applicable not only to consumer-facing businesses, but also to business-to-business relationships, where the focus is shifting to sustainability performance across the supply chain. Many companies have developed codes of conduct for their suppliers and monitor risks and performance across them.
Employees are also stakeholders that expect specific commitments and actions from companies. They want to work for an organization whose actions support or at least do not negatively affect the environment, whose CEOs lead the way to achieving this purpose and to be involved in setting up the company’s commitments. Nearly 40 percent of millennials cite employer sustainability as a factor in deciding where to work, the report underlines.
“In order to comply with the increasing requirements and continue to have access to financing, companies need to embed climate considerations into all the areas – governance, strategy, risk management, metrics and targets. This is a long journey that requires great effort and planning and the board’s strong commitment and constant supervision. The global transition to a lower-carbon economy is expected to require around $1 trillion of investments per year, according to The Task Force on Climate-related Financial Disclosures, but research suggests that companies which take action on sustainability issues outperform their competitors,” said Sorin Elisei, Director, Deloitte Romania, leader of the sustainability and energy practices.
This article originally appeared on The Diplomat.
