In this guest post, Tom Mills, founder and managing director of data-driven sustainability consultancy Two Oceans Strategy (TOS), shares his take on the key forces set to influence how businesses in Europe will consider sustainability in the coming years.
How we define sustainability, both what it encompasses as well as its significance, is rapidly evolving. The criteria used by organisations to assess a company’s sustainability performance varies widely, reflecting a significant lack of consensus in the field.
A study published in the Review of Finance in 2022 revealed a staggering 56% disparity in methods used to rate companies on their environmental, social, and governance (ESG) performance. Currently, ESG funds, which are poised to constitute nearly a third of assets under management, predominantly focus on ‘green’ companies – those with lower emissions per unit of revenue. Meanwhile ‘brown’ firms, with higher emissions per unit of revenue, are often excluded.
However, some experts argue this approach may inadvertently harm the environment and society.
At the heart of the ambiguity regarding sustainability lies the issue of data. Unlike the complex financial models that meticulously analyse financial returns and ratios, boardrooms and policy committees lack concrete sustainability data on the environmental and societal consequences of their decisions. However, as measurement, reporting, and verification methods continue to evolve and as real-world impacts are quantified and contextualised, high-quality data on the consequences of economic activities will increasingly illuminate the trade-offs inherent in specific political and commercial choices.
Considering this dynamic landscape, here are four key forces and signals that will influence how businesses in Europe consider sustainability in the second half of the 2020s:
From risk management to managing the trade-offs of impacts
In the first half of the 2020s, there was a strong focus on assessing how companies managed the risks of their actions, associated negative impacts on the environment and society. However, in the second half, we will see a shift towards evaluating an organisation’s specific environmental and social impacts in granular detail. This could involve examining an organisation’s impact on biodiversity, water resources, air quality, or social well-being, including job quantity and quality and effects on local communities.
While understanding these impacts will require a deep comprehension of complex environmental and social systems, ongoing efforts such as new Life Cycle Analysis methodologies, are already underway to calculate carbon within products and services and assess their usage.
From disclosing data to contextualisation
Both mandatory and voluntary disclosures of sustainability-related data have significantly increased. However, this data often lacks context when compared to peer group benchmarks or target performance. In the coming years, there will be growing scrutiny on actual performance against company targets. To provide the necessary level of accurate benchmarking, AI and software solutions such as Compass will make It easy to aggregate and verify company by company sustainability data.
Greater scrutiny on carbon offsets
As companies approach their net-zero emissions targets, the focus on offsetting “hard to abate emissions” will intensify until alternative technologies become viable. The carbon offset market is expected to grow from US$ 300 million to as much as US$ 50 billion by 2030.
That said, a recent EU study has raised concerns, indicating that up to 85% of offset projects have not demonstrated their stated effectiveness. Key discussions revolve around differentiating between emissions avoidance and removal, as well as the permanence of emissions removal. Achieving net-zero targets will increasingly hinge on the quality of carbon offset credits.
Two-speed supply chains
In the realm of supply chains, disparities in environmental and social standards will become more pronounced. Companies producing for North American and European markets will face higher sustainability standards compared to those exporting to emerging economies. This divergence will be particularly evident in the development of premium net-zero transportation chains and the production of sustainable goods, as is already clear in the automotive sector’s use of low carbon steel and transportation methods.
In conclusion, the way we perceive and measure sustainability is rapidly evolving, driven by shifting perspectives, emerging data, and changing societal and environmental imperatives. Sustainability has often been portrayed as a marketing tactic or a generic term for “doing good.” However, as a company’s impacts become more quantifiable across a broader range of indicators, sustainability will transition from a marketing buzzword to a core component of strategic decision-making.
Businesses in Europe and beyond will need to adapt to these four key forces shaping the future of sustainability to remain competitive and responsible stewards of our planet and society.
Tom Mills is Founder and Managing Director of Two Oceans Strategy (TOS), a data-led sustainability consultancy working with some of the world’s largest companies, governments, multilateral institutions and investors. Part of Tom’s mission at TOS is developing Compass, an integrated data-management platform for companies to easily quantify, compare, forecast and report their impact on people and the planet.
Tom also founded Carbon Removal India Alliance (CRIA), to catalyse the development of a carbon removal sector in India to generate income, investment and jobs while reducing greenhouse gases in the atmosphere.
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