Interest in environmental, social and governance (ESG) issues has soared since the COVID-19 pandemic took hold and disrupted economies and societies around the world. While the E, S and G components are closely connected, environmental issues have taken center stage, pushed in part by the increase in grassroots activism as people see the detrimental impact climate change is having on the places where they work, live and play.
The peril from climate change has been building for years, and we are now at a critical stage in our history. Our research shows that corporate physical assets are increasingly in harm’s way as conditions intensify, with 66% of major global companies having at least one asset at high physical risk from fires, floods and more.1
Responding to the Call for Urgent Action
Asia-Pacific accounts for nearly half of global greenhouse gas (GHG) emissions and is highly vulnerable to climate change, with impacts projected to become more extreme over time.2 Regulators, exchanges and governments across the region are initiating guidelines on climate change and making commitments to net zero – but more near-term action is needed. Analysis by S&P Global Platts shows that the world must move faster to curb emissions by 2025 or risk overshooting the Paris Agreement goal of 2°C.3 To be on track, almost all energy end-use sectors must cut total annual emissions by 2025, and wind and solar options need to be substantially increased.
Removing Obstacles to Success
Along with companies, cities and financial institutions, more than 130 countries have now set or are considering a target to reduce emissions to net zero by mid-century.4 While pledges are growing, many commitments lack a cohesive action plan. Our research shows that major global companies are on track for >3°C warming, falling 72% short of required emissions reductions to achieve the 2°C goal.
There are challenges to be addressed without question, but taking action now on transparency, standardization and transition pathways can help make the journey to net zero smoother.
• Transparency: More disclosure is essential as stakeholders look for companies to report information on their environmental stance. Those that don’t tell their story risk having someone else do it for them, losing control over the narrative.
• Standardization: Common reporting standards and comparable scenario analysis can help ensure integrity in the measurement and management of GHG mitigation efforts. The Task Force on Climate-related Financial Disclosure (TCFD) recommendations are widely applicable to organizations across sectors and jurisdictions and can be a useful guideline.
• Transition pathways: Sector-specific science-based targets can provide a clearly-defined path to reduce emissions, along with other benefits. A full 79% of corporate executives surveyed by the Science Based Targets Initiative (SBTi) said their brand reputation was strengthened by committing to SBTi, and 52% said it had boosted investor confidence in their business.5
There is also considerable discussion underway about long-term climate goals, yet very little information available on near-term plans. However, those committing to reduced emissions through a number of alliances are likely to find five-year business strategies more meaningful than forecasts to 2050. Shorter-term plans should also be developed for net zero to promote action, showing how interim steps can help achieve the 2050 goals.
Adopting a Step-by-Step Approach to Meet Goals
We believe the first step in attaining net zero involves estimating a company’s carbon footprint − the measure of the impact its activities have on the amount of carbon dioxide produced through the burning of fossil fuels. This is not a new concept, but the calculation and use cases have changed significantly. A carbon footprint is no longer simply an internal record, but the foundation for developing a sound net zero strategy. It is critical to get it right.
For most business activities, the largest proportion of the carbon footprint is concealed in supply chains or in the product use and disposal phase. For example, our research shows that upstream supply chain emissions account for almost 65% of the total carbon footprint for the health care sector, and the downstream use of products by customers almost 80% for the consumer discretionary sector. GHG emissions must therefore be quantified across the entire global value chain.
We see net zero action planning as a six-step process:
1. Quantify the baseline. Estimate the starting carbon footprint to use as a benchmark.
2. Understand alignment. Determine which companies and sectors are compatible with a <2°C world, and identify the scale of reductions required.
3. Analyze future scenarios. Use credible scenario analysis to assess a range of possible future states.
4. Set targets. Let science-based business targets establish a pathway that aligns with global climate goals.
5. Report progress. Disclose activities in line with best practices.
6. Finance ambition. Reflect third-party principles and standards in green financing plans, such as the ASEAN Green Bond Standards.
An example of putting this plan into action, we recently worked with a super fund in Australia that lacked the extensive data needed to understand the carbon footprint of its portfolios, as well as the potential climate-related risks to the investments. The group leveraged our environmental, physical and transition risk and Paris-alignment datasets to successfully begin the above steps.6
With nearly half the world’s assets under management committed to net zero, companies will be increasingly called on to share detailed transition plans in order to access and maintain their capital flow from investors. The time for action is now in order to secure a resilient, equitable and sustainable future.
Michael Salvatico, Head of Asia-Pacific ESG Business Development, S&P Global Sustainable1, will be interviewed by Tony Hay, Co-founder and Joint Managing Director, Responsible Investor, in the keynote session ‘ESG market trends: what keeps investors awake in a sustainability-conscious world?’ for RI Asia 2021 on Tuesday November 9. Tune in and register here
 “The Sustainability Scorecard”, S&P Global Market Intelligence, 2021, www.spglobal.com/esg/education/essential-sustainability/climate/physical-risks.
 “Helping countries tackle climate change”, UN Environment Programme, as of October 2021 on: www.unep.org/regions/asia-and-pacific/regional-initiatives/helping-countries-tackle-climate-change.
 “2025 Could Mark a Tipping Point for the Low-Carbon Energy Transition”, Future Energy Outlooks, S&P Global Platts, as of October 2021 on: www.spglobal.com/esg/insights/2025-could-mark-a-tipping-point-for-the-low-carbon-energy-transition.
 “Net Zero, #Its Possible”, United Nations, as of October 2021 on: www.un.org/en/climatechange/net-zero-coalition.
 “Six business benefits of setting science-based targets”, SBTi, July 9, 2018, https://sciencebasedtargets.org/blog/six-business-benefits-of-setting-science-based-targets.
 Source: https://www.spglobal.com/esg/insights/a-super-fund-charts-its-path-to-net-zero