Whilst regulation is driving ESG adoption, many enlightened companies are realising the strong business case for it beyond box ticking. Inflexion recently brought its portfolio together for its first ESG Exchange where amongst other topics they heard about the importance of net-zero targets.

The current acceleration of ESG frameworks by a growing number of companies is admirable, and largely driven by a swathe of regulation coming in which enshrines yesterday’s advice into tomorrow’s legislation. “To decarbonise the global economy in alignment with the Paris Agreement, all economic actors in the real economy need to reduce their GHG emissions in line with the 1.5°C pathway established by climate science,” stresses Caroline Clarke, Director at Carbon Intelligence, a specialist consultancy which has advised 40 UK PLCs and set the world’s first 1.5°C-aligned science-based target (SBT). Clients include Tesco, Virgin, HSBC and Coca-Cola among others.

However, many companies are waking up to the fact that embracing ESG can have a positive impact on the top and bottom line: it’s mitigating risk, reducing costs, optimising investment and enhancing growth and productivity, according to Caroline.

Done correctly, an effective ESG framework is more than a feel-good factor. Research from the Science Based Targets initiative (SBTi) puts hard numbers behind the sentiment: 79% of company execs feel their brand reputation has been boosted by setting SBTs; nearly two-thirds (63%) say SBTs drive innovation, over half (52%) have seen investor confidence boosted and 55% have gained competitive advantage.

The clue is within the name: SBTs are now crucial for maximum impact.

The goalposts have moved; while carbon-neutral was impressive a few years ago, net zero is the new target, focusing on reducing actual emissions over offsetting. Whilst it is harder to achieve, it delivers more.

Targets are considered net zero if they reduce emissions in line with limiting warming to 1.5°C and balance any remaining emissions by removing carbon dioxide from the atmosphere. There is now consensus that global warming must be limited to 1.5 degrees to avoid catastrophic consequences and scientists understand what reductions are required to achieve this.  And now firms are waking up to the need to ensure that their own emission reduction targets are aligned with this – hence the need to bring in SBTs. Targets are considered ‘science-based’ if they reduce emissions in line with limiting warming to 1.5°C above pre-industrial levels.

Return on science

Science takes time, and it’s likely that a year may elapse between deciding to embark on this worthy journey and getting baselines agreed. As it’s a big task and requires specific expertise, most firms are best off getting experts involved to guide the journey, according to Caroline.

Doing so should help you to avoid the sticks of non-compliance with a complex array of regulation coming in – reporting requirements grow as your company grows. “It’s important to remember to be ahead of the curve since we’re learning that what is voluntary today will be mandatory tomorrow,” she cautions, adding that not doing so may endanger a firm’s license to operate, with carbon data disclosure a non-negotiable if a business is supplying large corporates. Finally, if a firm is owned by PE, asset managers or banks, its greenhouse gas footprint forms part of the owner’s scope 3 and so the firm will be under increasing pressure to disclose these emissions and to reduce them with a concrete net-zero plan.

“Thankfully it’s not just about avoiding sticks but also eating some very juicy carrots,” Caroline says. This includes cheaper access to funding, with both debt and equity easier and less costly to access the greener you are.

A net-zero strategy can also help to align a company and provide strategic insight and opportunity, with an effective internal and external engagement plan creating cohesion across businesses, with all stakeholders united to achieve strategic carbon goals. Additionally, having robust, granular and trusted carbon data provides insight for strategic direction.

This can lead to stronger governance, with clear accountability and well-defined responsibilities for capturing opportunities and managing risks relating to the carbon reduction pathway.

Another often overlooked benefit is the competitive advantage gained to employer brand and marketing opportunities as people, especially the younger generations, increasingly base purchasing decisions on sustainability. This rings true for attracting and retaining talent as well, with growing numbers wanting to work for companies that take their responsibilities seriously.

Taken together, these benefits can drive a higher multiple on eventual sale of a business.

Once convinced of the merits of SBTs to drive a net-zero strategy, it can be tricky to know where to start. Caroline advises firms to “just get going” since overthinking it can lead to paralysis and a failure to start. She points to three key practical steps to get started: “Get to grips with your energy data, measuring and managing it. Adopt a green travel policy, and analyse and adjust your procurement activity.”

Inflexion’s ESG Director Jennie Galbraith is currently supporting the portfolio to align to the UN’s Sustainable Development Goals and develop net-zero strategies.