2021 saw rapid changes in the sustainable business field. New, impactful policies are coming into place, investors are being held to higher standards and expecting more from their target companies, and a host of new solutions are arriving in the market to help businesses navigating these evolving requirements.
Buckle up and let us take you for a quick tour of what we expect to see happen in 2022:
SMEs ARE BEING ASKED TO STEP UP
Sustainability-related pressures have largely been a large company affair. Whether it be investors demanding better transparency around climate action or DEI, civil society pressuring large companies to walk the sustainability talk, or regulations to combat greenwashing, the spotlight has shone almost exclusively on large, global businesses. However, while SMEs’ negative impacts are certainly lower than those of large organizations, their collective impact is substantial. In addition, as they account for the majority of business and employment worldwide, they have a critical role to play in achieving net zero and other key sustainability targets. In addition many SMEs, particularly startups, are now led by a whole new generation of entrepreneurs who strive to develop a business where profit, planet, people can seamlessly coexist.
Fortunately, SMEs and organizations representing them are getting more engaged. Initiatives and organizations such as the SME Climate Hub, Leaders for Climate Action, and International Chamber of Commerce, are stepping up to provide much needed support for SMEs and startups as they strive to integrate sustainability into how they operate. Though operating with fewer resources, their smaller size often enables them to be more adaptable and innovative. Seeing sustainability as both a risk and an opportunity, we believe that 2022 will be the year that SME sustainability efforts and actions start to outshine those of their much larger peers.
THE COST OF CARBON BECOMES CLEAR
Even before the gathering of parties at COP26 in Glasgow, the carbon markets were signaling that the world of carbon policy was a reality. Throughout the year, prices of voluntary and compliance carbon credits were climbing up, tripling or more across multiple categories, i.e. forestry, cookstoves, energy efficiency.
While there were some disappointments around financing efforts for the Global South and the limited access of activists to the negotiations and unlimited access of fossil fuel players, and insufficient reduction ambitions all around, the talks were a success when it came to the completion of the Paris Rulebook guidelines. Now its up to individual countries to determine how they will implement these rules.
But for businesses, the message is clear–carbon pricing policies are coming, if not already here, wherever you may be. We expect to see more SMEs following MNCs and announcing Science-Based Targets (SBT) to become Carbon Neutral, and SMEs and MNCs implementing corporate Internal Carbon Pricing programs to accelerate their efforts. As well, we see businesses that heavily depend on purchasing carbon credits to reach net zero emissions will develop and register their own offset projects, rather than pay the premium that exists in the voluntary carbon markets.
TECH TO THE RESCUE, AS DIGITAL CARBON & ESG SOLUTIONS ARISE
Carbon profiling for companies started as and continues to be a largely manual process, relying heavily on spreadsheets and carbon footprinting experts and consultants. While there are many online tools for individuals to calculate their carbon footprint, there has been a lack of solutions available to companies to do the same. Fortunately, with the increasing pressure from investors and regulators on understanding and minimizing climate risk, there have been a host of recent company-focused innovations in the carbon accounting space. This is an important development because it’s unlikely that the uptake of carbon accounting, and ESG adoption more broadly, will be widespread and transparent without it.
There will always be a need for expert support in the sustainability transformation process, particularly in helping companies understand how to develop and action decarbonization and ESG strategies. However, we believe that 2022 will be the year that carbon accounting steps into the 21st Century, with innovative SaaS carbon and ESG solutions fueling the acceleration of carbon profiling, measurement, and carbon reduction. (There are a myriad of interesting solutions out there, but few we’d suggest to explore are Persefoni, Plan A, RIMM, SWEEP, sustain.life, Salesforce’s Net Zero Cloud). Let us know if you want help navigating these new solutions to help you find he right fit for your organization.)
WEB 3 IS HERE TO SAVE THE DAY, TOO
For many, “Blockchain = cryptocurrency”. While the value and potential of cryptocurrency is hotly debated, our view is that crypto and its associated applications will ultimately have a transformational impact on financial systems. However, Blockchain’s potential extends well beyond finance and is much more fundamental. It is, in fact, the backbone of Web 3 — a distributed internet where power sits with its participants and transparency reigns.
Now, this is still very much an aspirational statement. Web 3 pioneers continue to work through the many growing pains that many startups and innovators face. Yet, one can quickly see the potential of this paradigm shift.
In the climate and sustainability space, this new way of connecting, transacting, and more, has a critical role to play. A distributed web has the potential to bring a broader range of participants via high quality Initial Coin Offerings (ICO) and Initial DEX Offerings (IDO) or Decentralized Finance (DeFI) into financing many of the new innovations and projects that are needed to accelerate climate action. Blockchain offers significant promise, too, in supply chain transparency. Even large companies such as SAP are working on this with their GreenToken solution. And there’s even innovators working to build a sustainable metaverse.
Of course, the Blockchain (and particularly crypto) space has faced criticism about its negative climate impact. However, we don’t believe the answer is to stop innovation, but rather improve upon and evolve it. Read the Air recently joined Climate Crypto Accord to work with others to contribute to the effort to build a greener Web 3. We believe that 2022 will be the year that the value of Web 3 for tackling climate change and other sustainability issues will become a lot clearer.
THE MARCH OF THE STANDARDS CONTINUES UNABATED
Alphabet soup time — 2021 was the year that not only saw the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB), two of the leaders in sustainability disclosure, merge into a single organization called the Value Reporting Foundation (VRF), the VRF was then “consolidated” with the International Financial Reporting Standards Foundation (IFRS) and the Climate Disclosure Standards Board (CDSB). This in turn led to formation of a new International Sustainability Standards Board (ISSB) that is tasked with creating a comprehensive global baseline of high-quality sustainability disclosure standards.
OK, now to the meat of the matter — While there is vigorous debate about how well ESG reporting and management is being done, the hard on-the-ground work of aligning frameworks and creating international sustainability standards is clearly moving steadily forward. Beyond the work of standards bodies such as the GRI, VRF and IFRS, stock exchanges are establishing new, increased disclosure requirements, countries are defining what is meant by “sustainable business” with new green finance taxonomies, and trading blocks are slipping sustainability provisions into international trade agreements [PDF], or creating standalone mechanisms to handle specific priority issues such as cross-border carbon management.
This tightening of the policy ratchet will cause businesses to examine their exposure to ESG and carbon-specific regulations, not only in terms of what and how they need to report, but more importantly in the potential financial impact of impending changes. Smart companies should get ahead of the curve by educating their decision makers and support teams on the evolving standards, mechanisms and sustainability solutions, from VRF, GRI the Taskforce for Climate-Related Disclosure (TCFD) and the EU Sustainable Finance Disclosure Regulation (SFDR), to the EU Carbon Border Adjustment Mechanism (CBAM) and corporate Internal Carbon Pricing strategies. Knowledge will be the key to success.
A DOUBLE DOSE OF MATERIALITY
We’ve believed from the start of our practice that “materiality” is one of the most powerful concepts for businesses to get a handle on their current status and to make headway in improving their sustainability stance. As we explain in “Leading Sustainably”, “In accounting, materiality is understood generally as any data that would affect investors’ decisions about a company. In practice, materiality can become a powerful tool for company management to determine sustainability strategies by unearthing the most important issues, vulnerabilities and opportunities within their business that are directly related to their relationships with society and the environment.”
Recently, there is a growing recognition that when it comes to materiality, very often businesses have been primarily focused on the threats to their business models, rather than the negative impacts that they themselves are responsible for. MSCI, in particular, was called out for this limit perspective by Bloomberg in an article that took the respected index to task for essentially greenwashing in its own self-promotion and in its function as an arbiter of which businesses are “sustainable” and which are not.
Enter “Double Materiality”. Double materiality resets the discussion by emphasizing that materiality is a two-way street — both what the world may do to your business and what your business does to the world. In 2022, we expect to see efforts redoubled by investors, policy makers, sustainability ratings providers and other invested parties to hold companies to this dual standard.
This view complements the work that we have been doing with Impact Investing, in which an enterprise intends to create positive effects within its communities and customer bases — a positive materiality if you will. To quickly prepare themselves for scrutiny under Double Materiality assessments, businesses can perform comprehensive stakeholder mapping, surveys and analysis, which will inherently improve their sustainability stance. Or, if they are even more ambitious, by envisioning themselves within the Impact rubric.
We have limited availability for our 2022 Start-of-Year Briefings, so book today
Thank you again for your partnership and patronage this year. We look forward to continuing to collaborate in 2022 and seeing you in coming year!
Trista and Donald