The Net Zero dynamic

The Net Zero dynamic

The UK & other countries have set national Net Zero commitments for 2050.

In order to reach those targets - which for some countries are legally binding, then organisations across the economy need to begin their own journey to Net Zero.

Banks and insurers are being tasked with underpinning this transition to a low carbon economy, and new regulations are being introduced to establish a rigorous reporting process by both the banks as well as companies.

Regulators across the UK, EU (and imminently the US) are mandating sustainability reporting disclosure, similar to that of financial reporting.

This will require companies to disclose both the impact of climate & environmental change on their business, as well as the impact of their business on the climate & the environment.

Net Zero commitments

In addition to mandatory sustainability reporting, many companies are also publicly committing to reduce their own carbon emissions, and setting Net Zero targets (usually via the Science Based Targets Initiative SBTi). This is because both investors and citizen groups & consumers expect to see companies committing to action.

As the majority of emissions are usually generated from a company’s supply chain (Scope 3 emissions),  in order to meet their decarbonisation commitments, companies are now asking their suppliers to report their emissions, and to develop strategies to reduce those emissions across all scopes (1, 2 & 3).

ESG informs banks & private market investments & lending

Capital markets (banks etc) & private markets (private equity etc) are being forced to take ESG data into consideration when investing or lending to companies, to facilitate the switch to a low carbon (and more equitable) economy.

This then requires companies to also develop & articulate their ESG strategy (including Net Zero strategy) to investors., whether from capital markets (banks) or from private markets (private equity, debt etc).

Carbon accounting exercises, which calculate the carbon footprint of an organisation, were often performed by external consultants on a yearly basis, and there were often large gaps in data coverage and data quality.

Now it is expected that organisations will develop rigorous processes for collecting, analysing and reporting on ESG data, which will be audited in much the same way financial reporting is audited and communicated to the market.

This carbon footprint data, alongside other ESG data, will be used by investors to inform lending or investment decision making, or access to lower cost-of-capital green bonds/ sustainable finance, so it’s important that companies are able to confidently articulate their ESG and Net Zero strategy - backed up with data.