Climate change is undoubtedly a global issue. And over the past decade, the worldwide policy response to the changing climate has been growing. The 2018 United Nations Climate Change Conference in Poland (COP24) showed commitment to the Paris Agreement in response to the Special Report on Global Warming of 1.5°C published by the Intergovernmental Panel on Climate Change (IPCC), which warns of severe consequences at this temperature increase.
While China stepped up its role in climate diplomacy at COP24, Hong Kong also acceded to the Paris Agreement and published the “Climate Action Plan 2030+” report in early 2017. The government subsequently launched a public engagement on Long-term Decarbonization Strategy this June, presenting an opportunity for society at large to respond through actions.
Additionally, in May of 2019, the Stock Exchange of Hong Kong (SEHK) released a Consultation Paper on the “Review of the Environmental, Social and Governance Reporting Guide and Related Listing Rules”. The paper outlines proposed changes aligned with climate-related financial disclosures as well as the Securities and Futures Commission and the Financial Services Development Council’s recommendations on Environmental, Social and Governance (ESG) strategy. These will have far-reaching impacts in terms of stricter regulatory standards on listed companies in Hong Kong.
Here comes Science-Based Target Setting
The onus has been put on businesses to work towards this global target of 1.5°C. Society at large will need to step up efforts and implement new low-carbon measures and alternatives. Some of the most important areas of focus include the need for enhancing energy efficiency and increasing the use of zero-carbon fuel sources for electricity generation, as well as the development of environmental technologies that will further reduce carbon emissions.
Any targets that are set in line with the abovementioned governmental strategies, and specifically the 1.5°C target, is called Science-based target, or SBT for short.
Science-Based Targets vs ‘Capabilities-based’ Targets
The transition towards a low-carbon future is well underway, but for the past few decades, companies and governments have struggled to come to an agreement on the technicalities of measurement. Some of these disagreements have arisen from genuine concerns, but many have been based on an attempt to delay the inevitable.
On these premises, different economies (and by extension, companies) have historically resorted to using a “capabilities-based” approach – essentially creating arbitrary targets based on their own interests, rather than the evidence produced by the global scientific community.
This has evidently failed.
The 2016 Paris Agreement made it abundantly clear that it was about doing what is necessary, rather than what is easy or convenient. As the name suggests, SBT is scientifically based and draws a hard line in the sand. It also presents an opportunity to display bold business leadership too.
SBT setting allows companies to align with a global commitment such as the Paris Agreement, taking into account greenhouse gas emissions from across the economy, society and natural sources, defined by a time horizon of 2030.
Earning Credibility with SBT
One of the main criticisms of capabilities-based target setting is that there is a lack of credibility to the resultant efforts in demonstrating long-term corporate responsibility. The improper scientific basis upon which information is generated and analyzed creates what is known as a “credibility gap”. The introduction of SBT reduces this risk.
While the expectations on companies in terms of practicing corporate citizenship are greater than it has ever been before, it has also never been as achievable to accurately identify sources of greenhouse gases from industries given the global alignment of scientifically-informed methodologies and standards (such as the Sectoral Decarbonization Approach) with the SBT.
Driven by hard data, organizations shall put processes and procedures in place to record important information relating to environmental sustainability. In this context, it is a matter of proper data management, followed by an external and independent verification process. Once data has been recorded and sorted, it can then be analyzed, verified, reported upon for identifying opportunities for improvement. With the right infrastructure in place, SBT setting becomes a straightforward process with credibility and will ultimately set up companies for business success.
The Future Regulatory Risks Impacting on Listed Companies
The SEHK’s consultation paper on the “Review of the Environmental, Social and Governance Reporting Guide and Related Listing Rules” has put the ESG agenda as a key requirement for all listed companies.
The major implication from the paper is that the responsibility for ESG now sits at the Board level, rather than just a matter of disclosure. Company boards are now held accountable and expected to form governance structures towards ESG. Additionally, corporations are expected to implement material and effective changes to mitigate climate change in their operational controls as well as setting KPIs on environmental initiatives. Failing to do so will require the board to explain their lack of action.
This is a real opportunity for business leaders to get ahead of the regulatory curve. Another mandatory requirement arising from the paper is for companies to disclose on the progress being made against ESG-related goals.
As regulations can only be expected to be stricter, it is important to move forward and to get prepared for any possible future requirements imposed on corporations.
Taking an ambitious approach to these new regulatory requirements will help companies stay ahead of future policies and regulations around stock exchange requirements. Furthermore, companies leading the charge are better positioned to influence policymakers and the development of legislation.
Case Study: Largest Property Developer in the UK
In 2015, in the lead up to the UN climate meeting in Paris (COP 21), Landsec, the UK’s largest property developer had received queries from investors about the company’s sustainability goals. It was at the time that they determined to become the sustainability leader in the real estate sector. Landsec had a capabilities-based target to reduce energy consumption within the top 5 consuming buildings by 15% by 2020, compared to a 2013/14 baseline, which they easily achieved four years early. They as the sustainability leader in the industry have decided to set a more ambitious company-wide target to reduce carbon emissions based on SBT. By undertaking this initiative, Landsec gained credibility, confidence internally, and enhanced reputation among external stakeholders.
Since implementing SBTs, the company has achieved its ambition for credible sustainability leadership in the real estate sector. The process has enhanced their reputation and relationship with investors and has also put Landsec in an enviable position in influencing regulations and policies.
Committing to Further Actions
Until recently, the levels of climate-heating carbon dioxide in the atmosphere have been the highest ever recorded, according to the World Meteorological Organization (WMO)’s announcement in November 2019. In a world that is reaching consensus on climate action, the onus has been put on corporations to achieve science-based carbon reduction targets. The sooner companies take action, the stronger their leadership position will be. As such, Allied Sustainability and Environmental Consultants Group Limited, as a part of the Business Environmental Council’s Low Carbon Charter, has submitted a commitment letter to Science-Based Targets initiative and will set a decarbonization target aligned with the goals of the Paris Agreement.
Let’s embrace and achieve an SBT future!
This article was written by Queenie Wong, Consultant at Allied Environmental Consultants Limited