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Blog | Wednesday June 12, 2024

What the SBTi Battle Portends: The Decisive Decade Becomes the Dilemma Decade

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The public battle over the direction of the Science Based Targets Initiative (SBTi) as it considers the role and integrity of carbon offsets and other market-based solutions is extremely important.

The dispute also has larger significance: it is also a proxy war reflecting the growing tension between slow and steady business progress on the one hand, and the need for more profound change based on what climate science tells us is needed on the other.

It is highly likely that this tension will grow in the years ahead. Almost halfway through the “decisive decade” during which it’s broadly recognized that the world needs to reduce emissions by 45 percent compared to a 2010 baseline, two undeniable realities are clashing.

First, companies, investors, governments and other key actors have made commitments and are working toward them, in ways that were unimaginable a decade ago. This is to be celebrated and advanced. 

At the same time, emissions are not only far off the Paris target, but they also remain above 2010 levels, and continue to increase, albeit by a slowing rate. 

The SBTi battle is unfolding amidst these two competing realities, as the debate between “pragmatism vs. ambition” intensifies. 

We should not be diverted by the breathless reporting on who said what to whom. The real question is more fundamental: how will we achieve the level of progress, that’s needed within existing structures and initiatives, to achieve the emissions reductions the science makes clear are a non-negotiable?

The dawn of the 2020s saw the explosion of commitments and collaborations, promising new efforts to make good on the vision of the Paris Agreement. A few years, one pandemic, a disrupted energy market, and multiple geopolitical conflicts later, the reality of what it will take to deliver on these goals is forcing hard decisions. 

In short, the decisive decade is in some ways becoming the dilemma decade, as companies come to grips with significant tradeoffs arising from new developments and perspectives. 

Reporting and Disclosure: The rise of CSRD and other mandatory reporting requirements is producing more transparency, enabling the allocation of capital to the most sustainable companies, and ideally, comparability in reviewing companies’ relative performance. These new requirements are also diverting time and money away from performance towards measurement, creating disincentives for companies to make ambitious commitments, and putting pressure on “social” issues where verification is more challenging.

Scope 3: On a related front, the need to address and report on Scope 3 emissions is clear: that’s where most of large companies’ emissions are. Many companies have made ambitious Scope 3 commitments as part of their net-zero strategies. Making good on these commitments, however, depends on forces that are sometimes out of the control of the companies making them. Slow progress towards a cleaner energy system in Southeast Asia, amongst other regions, long timelines for decarbonizing hard to abate sectors, and supply chains that often fail to create supplier incentives to decarbonize all mean that progress on Scope 3 is halting at best.

Unknown Unknowns: The iconic—some would say notorious—formulation by former US Defense Secretary Donald Rumsfeld comes to mind as well when considering dilemmas. The rise of generative AI has sparked energy hungry and emissions producing data centers that have laid waste to some companies’ climate targets. Can AI also deliver climate benefits? Absolutely, but the race to develop and deploy new technologies has sparked a problematic “emissions now, reductions later” mindset. 

In short, the tradeoffs reflected in the simmering debate within the SBTi are also found elsewhere. Their origin is actually quite simple: they reflect the non-linear nature of the energy transition, and the constant battle between pragmatists and those calling for all out ambition.

The tension between pragmatism and ambition will always be present. For the time being, the pragmatists appear to have more momentum on their side, not least as companies are adjusting to the environment where regulatory compliance plays a new role. The dilemmas companies face are real. We can handle a short pause to learn from these dilemmas, consolidate gains, and draw new lessons.

While that may seem rational in the immediate term, it is not sufficient to meet the challenge to make decisive, and rapid, progress.

The debate on how to reconcile the need for maximum mitigation with offsets with real integrity is important not only to the SBTi; it also represents a broader battle between ambition and pragmatism. We ultimately need both: without ambitious—and public—goals, progress will be insufficient. Without the hard work of translating the goals into action; they will be nothing more than words on a page. 

Blog | Wednesday June 12, 2024

Advancing a Just Transition: Lessons from Company Practices

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Sustainability teams face numerous internal hurdles when seeking to gain traction on advancing a just transition. Obstacles include breaking down internal silos, overcoming opposition and lack of knowledge, combatting resistance to incorporating just transition principles into policies and practices, and ensuring sufficient capacity and resources for implementation. 

The challenge to ensure a just, fair, and inclusive transition is intertwined with various agendas in environmental and social sustainability, including (but not limited to) reducing greenhouse gas emissions, adapting to climate change, protecting biodiversity, ensuring respect for human rights, and reducing inequality. Advancing a just transition requires bridging these efforts to cohesively prioritize people throughout the climate transition process.  

In our work with companies, BSR has observed that in many large, multinational companies, net-zero strategies are driven by teams of dedicated climate experts, sustainability efforts are spearheaded by sustainability program managers, and social risks and impacts are managed by social performance and human rights practitioners, with little engagement across silos. The fundamental challenge lies in aligning these distinct teams to collaborate effectively and work towards the common goal of achieving a just transition through a comprehensive, people-centric approach that harmonizes climate action, environmental protection, human rights considerations, and social equity measures. By fostering cross-functional collaboration and aligning objectives, companies can more easily address the multifaceted challenges posed by the energy transition. 

Practitioners often struggle to understand how to initiate just transition efforts, break down internal silos, get the right people engaged, and gain the internal buy-in needed to advance the agenda. Additionally, given recent regulatory changes, companies are focusing on the burdensome effort required to comply with mandatory compliance measures, which is leaving little bandwidth for other priorities. 

Working with companies to advance the just transition, we have seen that there is no one-size-fits-all approach to advancing the principles of a just transition within a business, as each company faces unique challenges and must tailor its strategy accordingly. We have, however, identified a few company actions that are successfully moving the agenda forward that may serve as inspiration or sources of learning for other practitioners working to advance just transition within their companies.  

Lessons Learned on How to Advance the Just Transition Inside a Company 

Secure an Executive Champion 

A strong executive champion who can drive the just transition agenda forward within a company has proven to be a critical success factor. Their support of just transition can complement other topics for which they are champions, such as human rights or climate justice. Companies with senior leaders, such as the CEO or a dedicated sustainability executive, that are champions of just transition are well-positioned to overcome internal resistance, resolve deadlocks, and create and maintain momentum for their just transition initiatives. Conversely, organizations that have lost executive-level champions or have yet to secure dedicated sponsorship risk stalling progress and facing challenges in gaining traction for their just transition efforts. This highlights the importance of cultivating leadership support and ensuring that the just transition imperative is firmly embedded within the organization's strategic priorities. 

Integrate Just Transition into Existing Strategies and Frameworks 

Many corporate climate transition plans fail to make a direct connection between human rights and the energy transition. Given this, some companies are exploring ways to incorporate just transition principles into their existing climate transition, net zero, energy transition, or broader sustainability strategies and frameworks.  

This integrated approach allows for just transition considerations to be woven into the fabric of the organization's overall sustainability efforts, rather than existing as a separate, siloed initiative. Companies are taking varying approaches, from developing standalone just transition strategies or position statements to integrating the principles across multiple policies and strategies. While a dedicated just transition strategy or position can provide a clear and focused commitment, integration into other strategies and frameworks has allowed some companies to align their just transition ambitions with the company’s existing efforts. A clear benefit of having just transition interwoven into other strategies is integrated communication with stakeholders (whether mandatory or voluntary).  

Once these necessary elements are in place, practitioners will be better positioned to engage in targeted communication and training to align diverse internal stakeholders and promote a more holistic understanding of how the company can support a just transition, both as a process and an outcome. As a result, many practitioners have made it their priority to target capacity building and awareness towards business lines and teams, who are on the front lines of implementing just transition efforts. 

Establish Formal and Informal Governance Mechanisms 

Embedding just transition into formal decision-making structures, such as cross-functional steering committees and working groups, can be an effective approach for driving the just transition agenda forward. These governance mechanisms bring together representatives from various functions, including sustainability, legal, procurement, human resources, and communications, fostering cross-functional alignment on just transition strategies and initiatives. However, while these formal governance structures bring together various internal functions, they typically lack regular representation from a company’s business lines. That is why, in addition to formal decision-making structures, less formal channels, such as working groups without decision-making authority, can play a useful role in building connections with and across business lines and encouraging broader discussions on just transition principles. These informal networks can help raise awareness, build understanding, gather diverse perspectives, and ensure buy-in, laying the groundwork for more formal governance processes over time. 

Leverage Successful Case Studies 

Showcasing successful own-company case studies and best practices related to just transition can be a powerful tool for building internal support and momentum. Real-world examples that demonstrate the positive impact of incorporating just transition principles – this includes but is not limited to early and transparent engagement with stakeholders, social dialogue with workers and unions, and responsible site decommissioning – can help illustrate the value and feasibility of these efforts. Companies that have leveraged compelling case studies have found success in securing additional company buy-in and have been able to drive the just transition agenda forward within their organizations. Case studies can be important in both demonstrating the business case but also offering clear insights and direction on what implementation can look like which can inform future company processes and expectations. 

Take Action 

Advancing a just transition is a challenge but one companies across sectors need to embrace. For resources on advancing a just transition visit the Just Transition Resource Platform and for guidance on planning for a just transition see BSR’s Just Transition Planning Toolkit. For support advancing the just transition within your company contact us.  

Blog | Wednesday June 5, 2024

How Companies Can Navigate China’s ESG Reporting Guidelines

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This year, China released its national ESG reporting guidelines to promote sustainable development and meet global standards. This coordinated effort, in line with China's economic goals, has significant implications for businesses operating in the country.

The national ESG disclosure guidelines mandate large companies included in domestic stock indexes as well as those listed overseas (including Hong Kong), to issue sustainability reports by 2026, representing 59% of China's stock market value. The guidelines attempt to align with international reporting standards such as the Global Reporting Initiative (GRI), the International Sustainability Standards Board (ISSB) and the Task Force on Climate-Related Financial Disclosures (TCFD). This facilitates clearer and more transparent communication of a company's ESG impacts, risks, and opportunities in a standardized manner that can be easily compared and benchmarked. They emphasize double materiality, and reporting across key areas such as governance, strategy, risk management, metrics and targets for disclosure. Additionally, they suggest reporting on China-specific topics, such as pollution and climate change, along with social issues like rural development to encourage sustainable growth.

In parallel, Beijing, Shanghai, and Suzhou have issued action plans focusing on ESG transparency and developing supporting infrastructure and governance to enable sustainable business practices. While Shanghai aims to ensure that all export-oriented state-owned enterprises listed on stock exchanges publish ESG reports by 2027, Beijing is emphasizing policy frameworks and establishing ESG rating systems. We anticipate more cities to follow.

Business Implications

The new ESG guidelines spur urgency among businesses to strengthen their ESG practices and governance, as failure to do so could result in heightened operational risks, loss of investor confidence, and diminished competitiveness in the Chinese market. By embracing these guidelines, businesses can enhance transparency while strategically aligning with China's sustainable development priorities.

We have identified four key steps to maximize your company's potential in this evolving landscape:

1. Balance Global ESG Integration with China Priorities: Rather than purely aligning with international norms, the new ESG guidelines anchor distinct national issues. On the one hand, companies need to align with global ESG benchmarks, particularly climate action and human rights, to facilitate seamless compliance and credibility. Given that their operations leave a significant impact on the local market and supply chain, companies will have to consider China's specific material issues such as environmental protection and common prosperity. Many multinationals are now engaging in initiatives to tackle income inequality, a key aspect of China's common prosperity agenda. As we anticipate more policy changes in these areas, companies need to adjust their strategies accordingly to remain compliant and contribute positively to local priorities.
2. Enhance Data Accuracy and Due Diligence: As the new guidelines mandate sustainability reporting for numerous firms, company ESG data will become more accessible via increased disclosures. There's a potential for heightened investor enthusiasm and engagement with business opportunities across various sectors within the country, due to more performance regulation and increased global investment within the country. However, robust due diligence is necessary to verify data quality and accuracy, especially for financial institutions evaluating investment opportunities. It will be necessary to implement advanced data verification technologies to ensure the accuracy and reliability of ESG data, such as blockchain-based systems or AI-powered data analytics tools.
3. Foster a Collaborative ESG Approach: As the new ESG guidelines take effect, China's overall ESG landscape will continue maturing. Amid this context, awareness among business partners like suppliers and industry partners will rise rapidly. By adopting a common regulatory approach to ESG, it could open China up to global cooperation regarding ESG issue areas like sourcing and value chains. Engaging local suppliers to collaboratively address scope 3 emissions, and working with local partners to ensure ESG data accuracy, alongside understanding and adapting to local regulations and market trends, will be increasingly crucial.
4. Anticipate Growing Sustainability Awareness and Expectations: As the ESG landscape develops further under the new guidelines, public understanding of ESG and sustainability issues will increase, especially in frontrunner cities like Beijing and Shanghai. Numerous innovations in business models and technology are already underway, focusing on areas such as carbon reduction and the circular economy. Companies should prepare for heightened consumer awareness, employee expectations regarding sustainability efforts, and scrutiny of their ESG commitments. This dynamic presents both challenges and opportunities, prompting companies to develop robust ESG strategies, governance structures, and reporting mechanisms to effectively engage with and meet market and internal expectations.

In summary, China's new ESG reporting guidelines and municipal-level guidance aim to advance sustainable business practices while aligning with international norms. For companies operating in China, adhering to these regulations is essential for mitigating risks, enhancing transparency, building stakeholder trust, and driving sustainable growth opportunities. By proactively integrating ESG across operations based on global and local ESG priorities, businesses can navigate this landscape more effectively.

For more insights into China’s evolving regulations landscape, please reach out to BSR’s local team.

Audio | Tuesday June 4, 2024

Responsible and Sustainable AI

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Lale Tekisalp, Associate Director, Technology Sectors, chats with David Stearns on the topic of Responsible and Sustainable AI, exploring:

• The latest developments, including the latest regulatory developments, that listeners should be aware of.
• The risks that companies should be aware of when designing, developing and deploying these models.
• What a responsible and sustainable approach to the development and deployment of AI would look like.
• Are there ways that AI can be used to help us (companies and society more broadly) achieve a more just and sustainable world?

Audio | Tuesday June 4, 2024

Regulating AI

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Richard Wingfield, Technology and Human Rights Director, chats with David Stearns on the topic of Regulating AI, exploring:

• What the newly passed EU AI Act is, and what it regulates.
• Why the Act takes a risk-based approach and how different types of risks are categorized.
• What type of advice BSR is offering to companies on steps they should be taking to come into compliance with the AI Act.

Audio | Tuesday June 4, 2024

The Human Rights Impacts of AI

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Hannah Darnton, Technology and Human Rights Director, chats with David Stearns on the Human Rights Impacts of AI, exploring:

• How the use of AI may impact human rights and where we might see examples of this.
• Are there ways that AI can be used as a tool to protect human rights?
• In BSR’s experience, are companies receptive to conducting human rights risk assessments of their AI practices?
• Recommended resources for companies looking to get started.

Audio | Tuesday June 4, 2024

Applying a Future Lens to AI

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Jacob Park, Transformation Director and head of BSR’s Sustainable Futures Lab, chats with David Stearns about Applying a Futures Lens to AI, exploring:

• Why futures thinking techniques can be particularly useful to discussions about responsible AI.
• How scenario planning exercises work, who is typically involved within a company, and how they might be applied to mitigate a potential outcome of AI such as worker displacement.
• Some of the opportunities and innovations offered by AI that have the potential to advance sustainable business.
• How futures thinking can help to address challenges emerging from the rapid advancement of AI.

Audio | Tuesday June 4, 2024

The Environmental Impacts of AI

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Ameer Azim, Climate Change Director, chats with David Stearns on the Environmental Impact of AI, exploring:

• Why it’s important to assess the environmental impacts of a technology like AI.
• Through what type of activities or upgrades does the use of AI increase a company’s CO2 emissions?
• Beyond carbon emissions, what are some of the other environmental impacts associated with the rise of AI that companies should anticipate dealing with as they embrace this technology?
• What are some of the steps that companies can take to address these negative impacts?
• Can AI be used to combat climate change?

Blog | Monday June 3, 2024

Double Materiality and Decision Quality: An Opportunity for the Courageous

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Sustainability impacts have always presented business risks, but they’ve often struggled to gain traction in the face of more obvious and shorter-term operational and financial concerns. Emerging sustainability regulations have driven greater alignment and integration between practices in sustainability and risk management. The likes of the EU’s Corporate Sustainability Reporting Directive (CSRD) and its Corporate Sustainability Due Diligence Directive (CSDDD) will force a deeper integration of sustainability topics into the job descriptions of risk management practitioners.

On the face of it, this is a positive development—more alignment between how we understand different kinds of risk is a good thing. But, ensuring that integration results in better decision-making presents several challenges that companies will need to navigate.

First, traditional approaches to managing risk are often not equipped to handle the increasingly wide array of interconnected uncertainties—from climate change, to geopolitics, and societal polarisation. These defy the often ‘neat’ risk categories which are used to treat risks in discrete and self-contained ways as part of Enterprise Risk Management (ERM) frameworks. They raise difficult trade-offs, challenge values, and cut across organizational structures and siloes.

In addition to this is a second challenge that has long plagued traditional risk management. Approaches to ERM are—in the main—practiced separately from when and how companies make decisions. Risk information is too often collated, reported, and discussed as a compliance and governance exercise after companies decide to enter or exit markets, launch products, acquire competitors, set budgets, make operational changes, or major investments.

In spite of decades of ERM practice, the signs of strain are apparent. For instance, a recent study reveals that not only do the vast majority (83%) of risk professionals state that interconnected risks are emerging more rapidly, but 72% say that their capabilities have not kept pace.

As sustainability practices and risk practices converge, sustainability professionals need to ensure that their activities don’t similarly become perceived as a box-ticking exercise, struggling to keep up with the pace of change in the world. But this moment also presents an interesting opportunity for both sustainability and risk management practitioners to reexamine and reimagine how they influence the decisions that organizations make.

The CSRD’s mandatory Double Materiality Assessment (DMA)—which identifies sustainability topics most material to both companies and their key stakeholders—and the CSDDD’s requirement to identify, assess, prevent, and mitigate sustainability impacts together have the potential to provide the much-needed refresh to how companies navigate these challenges. 

Doing so, however, requires an approach to assessments that treats them as a strategic exercise, incorporated within—and as a key component of—organizational decision-making. DMA’s are in many ways the most comprehensive examination of a company’s sustainability-related impacts, risks, and opportunities. They can help companies identify tough trade-offs, prioritise sustainability initiatives, and navigate uncertainty and complexity successfully. However, doing so requires courage, and involves treating compliance as the by-product, not the objective of the assessment process.

With this in mind, we recommend three essential ingredients for success: 

1. Integrate and align internal approaches—Internal risk, sustainability, compliance, and other functions can get in their own way via the use of separate and sometimes contradictory methodologies and approaches, replete with their own jargon. Frameworks, processes, criteria and supporting systems can and should be designed with decision-makers in mind. That means the use of common understandable terms, methods, processes, decision-making criteria, heuristics, rules, tools, and related approaches that “join-up” clearly with one another. They should make the complexities faced by decision-makers more understandable. In integrating DMA, this may mean ensuring that a long enough time horizon is considered, external stakeholder views are incorporated and that both the upside and downside of outcomes are adequately reflected. 
2. Focus on decision quality—“Decision quality” is all about making the best possible decisions, based on what is known when decisions are made, not after the fact. A DMA can be an invaluable source of decision quality—but only if there is adequate focus placed on this. While DMA’s are often conducted as annual strategic exercises, their findings can have profound and positive reverberations throughout an organisation’s decision-making practices. For example, for large-scale, one-off decisions such as entering a new market or launching a new product, a review of the DMA findings or point-in-time DMA refresh can reveal a potential negative reaction from a key stakeholder, which may not have been identified otherwise. Similarly, the findings from a DMA can improve the quality of recurring decisions, such as choosing suppliers or dealing with customer contracts by integrating material stakeholder concerns into those operational decisions. However, to unlock these areas of value, both risk and sustainability practitioners must find ways to get involved in organisational decisions, when those decisions get made. 
3. Leverage the uncomfortable benefits of outside-in perspectives—One of the most powerful benefits of a DMA is its ability to surface alternative perspectives from key external stakeholders. Decision quality within organizations suffers adversely from a range of biases such as ‘groupthink,’ optimism bias and something called the “false consensus effect” in which we frequently overestimate how much others share our beliefs and values. Great decision-making involves seeking challenging views. This can be uncomfortable, but ultimately leads to better decisions and over time, better outcomes. By actively and regularly seeking views from a variety of critical stakeholders, a strategic approach to DMA can incorporate these benefits as a matter of regular practice. 

It is fortuitous that regulatory trends to align and integrate sustainability and risk management practices are occurring at a time in which a refresh in the latter is overdue. Businesses that lean into the challenge of getting this right—driving assessment results deep into decision-making—will ultimately empower choices in an uncertain world for themselves and their key stakeholders, while simultaneously doing their part to create a more just and sustainable world. 

If you’d like further information on BSR’s approach to double materiality or to discuss what’s right for your organization, please don’t hesitate to reach out to us. Wherever you are in your sustainability journey, we’d love to help! 

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Ben Cattaneo

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