Sustainable reporting – a critical factor

Managing
August 9, 2021

With thanks to author Bruce Kohn.

Sustainability reporting by organisations will be a critical factor in progress made by governments in addressing the global goal for net-zero emissions by 2050.

The goal is formidable. But against the background of agreement among climate scientists that this global goal would provide only an even chance of limiting global temperature rise to 1.5C, the reporting role of the corporate sector assumes historic significance. In a New Zealand context, our net emissions rose by 57% between 1990 and 2018, placing us among the poorest performers in the OECD.

While such reporting is seen by business analysts as hugely important for corporates in the context of soliciting sustainable finance options from investors looking for social, or environmental, as well as financial returns, it’s apparent that progressive emissions reductions by organisations listed on stock exchanges will be a determinant factor in the regulatory approach to be taken by governments world-wide.

Should the corporate and commercial sectors hold back from developing clear and unambiguous reporting criteria, the pressure on democratic governments to enforce through legislation and regulation procedures, with which companies may be uncomfortable, will be irresistible for elected Parliamentary representatives.

This can be seen in New Zealand in late 2019 when the Prime Minister, Jacinda Ardern, ushered through legislation that set a target of net zero by 2050 for CO2 emissions.

Despite this, our current trajectory indicates we still won’t meet the Paris target of 56.9 million tonnes of CO2e by 2030.

In April of this year street marches by school pupils and supporters through the streets of Wellington, Auckland, and Christchurch in support of action on climate change underline the pressures bearing in on politicians.

Agriculture, fresh water and transport reforms are significant levers that, if addressed imminently, could enable us to reach our targets in time. Corporate NZ is also in their sights.

Sustainable reporting is a clear first step to meeting the challenge. ESG criteria endorsed by the New Zealand Stock Exchange (NZX) is a good starting point. It offers a route to meeting the need and is a much simpler task than the transformation of manufacturing and industrial technologies likely to be required when reducing emissions-intensive assets.

The International Energy Agency (IEA) has summarised the extent of transformation required by global heavy industries including chemicals, steel and cement. It sees the year 2050 as just one investment cycle away.

“Average lifetimes of emissions intensive assets such as blast furnaces and cement kilns are around 40 years. After about 25 years of operation, however, plants often undergo a major refurbishment to extend their lifetimes.

“The challenge is to ensure that innovative near-zero emissions industrial technologies that are at large prototype and demonstration stage today reach markets within the next decade, when around 30 percent of existing assets will have reached 25 years of age and thus face an investment decision.

“If these innovative technologies are not ready, or not used even if ready, this would have a major negative impact on the pace of emissions reductions or risk an increase in stranded assets. Conversely, if they are ready, and if existing plants are retrofitted or replaced with them at the 25-year investment decision point, this could reduce projected cumulative emissions to 2050 from existing heavy industry assets by around 40 percent.”

The IEA considers light industries fitting into this energy intensive subsectors include vehicles, machinery, food, timber, textiles, and other consumer goods.

It says that under the net zero goal, emissions from light industries decline by around 30 percent by 2030 and around 95 percent by 2050. Most of the technologies required for deep emission reductions in light industry, and in the heavy industry sub-sectors, are now available on the market and ready to deploy, the IEA believes. It says this is in part because more than 90 percent of total heat demand is low/medium temperature which can be more readily and efficiently electrified.

Governments, including that of New Zealand, which support this global goal, will increasingly look to the corporate sector to report on progress they’re making in line with this intent, or targets they have set for their domestic industries.

The not so good news is that a number of companies may face high capital expenditure to transform their operations in line with the net zero goal. Good news on the flipside, however, is that through regular reporting of their progress toward the goals, corporates will provoke positive intent from the rapidly growing responsible investment movement and lay the groundwork for creating greater shareholder value and longevity whilst avoiding potentially heavy-handed and onerous government enforcement.

Assurance that investments can be aligned with values.