Humanity is at a pivotal moment in its history. It dominates a planet with limited resources, using tools whose current energy sources pose a threat to its future.
Following COP21, 183 states ratified the Paris Agreement. The 6th IPCC report stresses the urgency and the importance of the actions to be taken to reduce our greenhouse gas emissions. The mobilization of states and corporations, as well as the development of appropriate new technologies, are critical conditions to achieve this collective objective.
Les Ateliers du Futur (the ADF) is a non-for-profit organization that mainly focuses on climate and that targets corporations because they
- generate the most greenhouse gas emissions
- have the power to meet the challenge of decarbonization: financial means (capabilities), decarbonization technologies (skills), and, most often, the will to implement them (will).
In order to reinforce this will, often competing with other shorter-term priorities, the ADF considers it urgent to develop comprehensive extra-financial reporting standards for climate impact. They are indeed the best lever for transparency, and therefore instrumental for enterprises that are sensitive to their reputation to increase their commitment to the benefit of the climate.
For this reason, the ADF has developed and recommended at the end of 2021 a draft climate oriented NFR standard, the Net Climate Liability (NCL) standard reporting that you will find on our website.
At the end of Q1 2022, IFRS Foundation and EFRAG issued their exposure drafts of sustainability-related and climate-related reporting standards. Following comments from reporting users, standard setters and other key stakeholders, including NGOs, these standards are planned to be in force as soon as the end of 2022.
The ADF welcomes these initiatives, as they will enhance transparency and peer pressure.
Why is it increasingly important for corporations?
For corporations, medium and long-term impact on climate will become a key differentiation factor in the eyes of:
- Society: corporations, as opposed to governments, are seen as best positioned to manage changes required to preserve future climate. As a consequence, people’s expectations for ambitious climate strategy are high and can only increase. Conversely, climate court cases rise as frustration increases against the laggers.
- Customers: their decision-making process gives an ever increasing weight to sustainability in general and climate policies in particular. According to a 2021 BETC customer sentiment analysis, 39% of mainstream clients have started to boycott brands which do not have a sustainable strategy.
- Employees: the younger generations logically accord an increasing weight to climate policies. Certain industries (such as oil and gas) or corporations find it more and more difficult to attract juniors.
All this inevitably impacts entreprise growth, margin potential, and thus value.
As a consequence, differentiating climate policy is key to success for the corporation, as a whole.
What are the key components of a sound climate strategy?
As for any strategic initiative, four critical components are necessary to build a sound decarbonization journey and to be seen as credible by all stakeholders:
1) GHG trajectory. It should include:
- Defined emissions scope (1 and 2, and scope 3 upstream at minimum)
- The starting point, levels of emissions in absolute terms targeted each year until 2030 then five-year milestones until 2050
- The planned removal and/or offsetting initiatives if any.
As a best practise, this trajectory will comply with the SBTI standard.
As a side product of this disclosure, the company should communicate the carbon intensity of its products or services through the ratio of emissions/turnover. This KPI should be available to all clients in order to feed their own planned emission trajectory regarding scope 3 upstream.
2) Decarbonization program the company has selected, with the highest transparency while protecting its competitive positioning – in compliance with auditors’ guidelines.
This program will typically include action plans supporting the emission trajectory:
Spanning across all activities (non-exhaustive):
- Energy transition plan including consumption reduction and renewable sources
- Energy efficiency of operating buildings
Specifically for each line of business (non-exhaustive):
- Portfolio management: corporate portfolio management,
- Product mix: development, obsolescence, offering and pricing evolution
- Design and manufacturing: investments, production relocation, process optimization, internalization, outsourcing
- Outsourcing management policies
- Distribution: geographies, channels
3) Financial impacts of this emission trajectory including decarbonization program if any
This financial forecast will notably include:
- The decarbonization program’s impact on CAPEX and OPEX
- Any additional expenses or revenues from taxes and carbon credits. The estimate of future carbon credits is to be based on spot and future values of representative instruments when available.
- Other impacts on revenues: corporate or product portfolio management. Pricing increases needed to partly offset decarbonization CAPEX and OPEX should be assessed with impacts on volumes, based on demand elasticity, with a special review by auditors.
- Impact on margins: pursuant to management planned pricing actions
- Costs of carbon removal/offsetting initiatives over the forecast period.
4) Specific program governance framework to secure the success of such strategic initiatives:
- Design and validation by governance bodies
- Action plan management
- Regular follow-up of actions, impacts and momentum
- Action to mitigate gaps.
Key success factors in building a climate strategy:
As with any strategic initiative, a decarbonization journey requires a number a critical success factors, including:
- Top management attention
- Competitive intelligence
- Widespread creativity
- Getting staff on board
- Disciplined assesment and, follow-up
Internal communication is a key success factor of such strategic initiative. This can be part of this governance body mission.
Another key success factor is creating visibility and support at the highest level of the organization. Therefore, such program governance should report to the top executive management.
In the wake of the publication of its draft climate-oriented reporting standard called Net Climate Liability (NCL), our NCL Forum brought together international consulting firms specialized in supporting enterprises in their decarbonization strategy.
This NCL Forum confirmed the importance of the resources and managerial time required to ensure the success of such initiatives.
Les Ateliers du Futur senior members’ experience also showed how such business initiatives demand high management attention during the first 18 months. But it is largely rewarded by the positive view of employees and clients.