With a few notable exceptions, the last 12 months have been tough for businesses. Tools were downed and lights switched off, as the world entered lockdown.
Covid-19 struck at a time when the sustainability movement was gaining traction on a global scale; from the Extinction Rebellion protests to the various national commitments to achieving net zero emissions, progress was being made, with the tantalising prospect of COP26 on the horizon.
However, with the hope of a return to normalcy brought about with the development and rolling out of the vaccine, it’s time to consider whether the impacts of the pandemic, and how governments and business respond, will derail or delay corporate sustainability, or will they usher in a more sustainable future as part of a broader economic recovery?
Financial struggles could see sustainability pushed to the back of the line
For many businesses, resourcing sustainability-related projects has always been a battle – often sustainability has been viewed as an optional extra – the prevailing view being that if it isn’t broke, why try to fix it? The problem is that our broader global economic system, predicated on endless economic growth, is certainly close to breaking point. Increasing government action, coupled with a shift in both business and public attitudes, mean sustainability has now entered the mainstream, but as we try to piece back our broken economies, will businesses be forced to cut funding for sustainability initiatives in the post-Covid-19 world?
Edie’s business survey from last year revealed that half of the respondents had postponed sustainability-related announcements whilst only 30% were confident that funding would remain steady post-Covid-19. Fortunately, the business case for sustainability has never been stronger; public perceptions, investor expectations and regulatory pressures are becoming increasingly more demanding. The business case has always been strong but often the benefits of sustainability have been indirect, intangible, or hard to quantify. For example, how do you quantify the benefit of a more resilient supply chain? It requires companies to rethink how they assess and manage risk and allocate investments.
What the current situation has done is give us a real-world case study on the potential impact of what climate-risk related disruption to the supply chain looks like, and it has further justified the increasing importance investors are placing on ESG criteria in making investment decisions. In fact, research indicates that ESG-focused investments have outperformed non-ESG counterparts during the Covid-19 economic downturn, which clearly suggests that corporate investment in sustainability initiatives is a sound business decision in the eyes of investors. As sustainability professionals, we need to lean on this evidence to illustrate the business case for sustainability.
Bailouts and post-Covid-19 funding will be used to pressure industries to evolve
Much has been made of opportunity to make the Covid-19 recovery a sustainable one, with everyone from senior business figures to leading economists to the International Energy Agency, calling for a ‘green recovery’. The challenge for governments now is to find the balance between ‘building back better’ and short-term emergency bailouts that avoid an economic disaster.
Many industries, including highly polluting ones such as the fossil fuel and airline industry, have already received government bailouts. There has been extensive lobbying by businesses to ensure that support came without environmental strings attached. The airline industry even managed to water down climate commitments made pre-Covid-19 but some territories have found a balance between short term bailouts and addressing the impending climate emergency. In Canada, firms receiving Covid-19 bailouts will now be required to report annual climate-related disclosure reports in line with the TCFD recommendations. Evidence suggests that the UK may follow suit; Celsa Steel UK have been given a £30m bailout conditioned on a commitment to “climate change and net zero targets”.
Whilst it’s unlikely all nations will follow the UK and Canada’s example on bailouts, it’s far more likely that the other prong of the UK’s recovery strategy, prioritising investment in greener, more sustainable industries, will be.
We’re moving into a world where we need to reduce global emissions to effectively zero within the next 30 years and no industry will be immune from the impact of this. Already majorly polluting industries are being corralled into action – the UN’s ‘Corsia’ scheme will force airlines to offset their emissions or use lower-carbon fuels. This will be the new baseline requirement for any airline. Similar schemes can be rolled out across other industries, at both a national and international level. In the UK, Climate Change Agreements are available on an industry level – where participating businesses voluntarily reduce emissions in return for tax breaks. What Covid-19 has shown us, is that governments can act quickly, and be transformative, when necessary.
With the UK government making a lot of noise about a ‘green recovery’, the lesson for businesses here is clear: policy is evolving towards incentivising growth in cleaner, greener industries, increasing climate-related disclosures and more stringent environmental regulation. Businesses should act now, lead change at a sectoral level through collaboration with competitors where possible, engage with industry bodies, and publicly advocate for change.
Getting to net zero – has Covid-19 opened up new possibilities?
One of the unintended consequences of Covid-19 is how it has forced business to implement ways of working that have had positive impacts on both the environment and employee wellbeing. They also happen to be the types of steps that we will need to take if we are going to reduce emissions to net zero. This has forced companies to realise that some elements of office life and business habits – such as office-based working and business travel – are ripe for change, and presents the potential triple benefit of being more sustainable, enabling more flexible working, and cutting costs. The challenge here is to clearly understand what are the true sustainability benefits, as well as the business impacts, of these actions.
Home working is prompting businesses to reconsider whether offices are an outdated way to organise work. From a net zero perspective, home working could prove beneficial; smaller offices mean a direct reduction in scope 1 and 2 emissions. Many businesses may choose to include emissions from home working in their scope 3 emissions – those emissions which occur as a direct of your business activity at sites or assets which you do not control or own. Ultimately scope 3 report is discretionary, but crucial to gaining a complete understanding of a company’s true environmental impact. If a significant proportion of a business’s workforce begin homeworking, there is a strong case to be made for including these emissions in an organisation’s carbon footprint.
Home working reduces the pressure on public transport networks, takes cars off the roads and produces more decentralised energy demands. That shift in energy demand however means rising energy bills for most households, with estimates suggesting that household electricity consumption will rise by 25%. If businesses do take responsibility for home working emissions, is it then the businesses responsibility to reduce those emissions over time? It seems unlikely any firm will invest in improving the energy efficiency of employee’s homes in the short term, but Google, for example,gave every employee $1,000 to buy office furniture for their homes – perhaps in the future we’ll see businesses providing employee’s with subsidies or grants to install solar panels or insulation? It’s not hard to imagine that, at scale, this could be done in a way that reduced the cost to individuals, through negotiated corporate rates. The savings to be made from reduced office space in expensive city centre location will certainly be significant, whilst the expectations employees place on employers, with regards to CSR, continue to grow each year.
The biggest impact for most businesses, in terms of emissions reductions, is likely to be the drastic reduction in flights taken in 2020. For a firm, flights emissions can account from anywhere from 25% to 50% of total emissions. Business travel emissions have always been the elephant in the room – most people like to fly, preferably in more carbon intensive business class, which they often see as a well-earned perk or status symbol. Consequently, it is one area that most businesses struggle to reduce.
People are now using video conferencing technologies in ways that they never have before, prompting us – and finance departments – to reconsider what was previously deemed to be ‘essential’. Even as the economic activity increases, flights are likely to be markedly more expensive in the short to medium term. If businesses have successfully harnessed the alternative technologies available to them for business operations, it will be harder to justify both the cost and environmental impact of business travel when the pandemic has passed. Every business should be aiming to keep travel-related emissions below 2019 levels at a minimum.
Much has been made of the opportunity for a green recovery – the WWF estimate that a well implemented green recovery could be worth as much as £90 billion to the UK economy. The reality of the recovery will differ from business to business but, at almost every level, we are going to need to re-evaluate the systems we have established. Many businesses will need to make drastic changes to their operations; from the buildings they operate out of through to the supply chains they rely upon, resilience and sustainability will need to be built into the new systems and processes that emerge.
National ambitions have been put on pause, slowing policy interventions
Whilst national commitments to emissions reductions might not directly impact businesses, the resulting policy changes certainly do. The UK initially committed to reduce emissions by 50% by 2025 and introduced mandatory greenhouse gas reporting in 2012. Some 1,500 businesses were required to document GHG emissions for the first time. For the vast majority, initially reporting on scope 1 and 2 emissions has evolved into ever more comprehensive sustainability reports that detail scope 3 emissions, climate-related risks and opportunities, and the governance structures established to tackle those risks. Policy interventions have played a key role in ever increasing levels of corporate sustainability.
Bad news then, that on 1 April, COP26 was pushed back from 2020 to 2021, denying global leaders the opportunity to decide how to limit global warming to below 1.5°C. To put this into context, the IPCC estimated that we would need to reduce emissions by 45%, on 2010 levels, by 2030. At that point, we were 12 years away from 2030. We’re now 9 years away, emissions have continued to rise (+0.6% in 2019) and we’re 10 months away from COP26. In some quarters, levels of aspiration are growing, with 200 top UK business leaders calling on Boris Johnson to show ‘leadership and influence’ at COP26.
The delay poses an opportunity for businesses to get ahead of the curve, and gain a competitive advantage by voluntarily advancing their own sustainability initiatives, rather than waiting for mandatory regulation. There are also grounds for optimism – it was reported in 2019 that 40% of the world’s annual GDP is derived from nations who have discussed or committed to net zero by 2050 – that’s significant progress from 2015 when the Paris Agreement was made. Emissions have also fallen in 2020 because of the global lockdown. At Avieco, we’ve spoken to several clients who are considering making 2020 their new baseline against which to measure performance going forward – yes, 2020 has been a year of extremes, but it has also shown that we have a greater capacity for change than we assumed.
Risk of regression or opportunity for development?
A crisis gives us the opportunity to learn and change. The pandemic could turn out to be a catalyst for radical change, or a mere stumbling block on our journey to a more sustainable society, or it could even derail the momentum that was building. The outcome will in part be determined by business and how active a role it plays in driving the transition to a sustainable future. Many businesses have led the way over the past few decades and it is often those same businesses who have outperformed their competitors, provided the best returns to investors, and will come through Covid-19 in the best shape. This transition will need to happen in a fragile and uncertain economic environment, and that will require businesses to be brave and truly embrace the concept of sustainability. If there’s one thing we can all take from Covid-19, it’s that we’ve been able to change our behaviours in ways that seemed unimaginable only one year ago and yet, for many sectors and individual firms, business is continuing pretty close to usual. If we’re brave enough to take the leap, this crisis may just usher in a more prosperous future.
Daniel Murray, Principal Consultant