A low water level in the Rhine can jeopardize the supply of raw materials. Sea level rise will eventually lead to more flooding and salinization of drinking water. A prolonged heat wave can lead to shortages of cooling water. The government will more often restrict the use of fossil fuels in order to achieve climate goals. Consumer confidence in a product can decline if environmentally polluting palm oil is used in it. And the CO2price will undoubtedly continue to rise for the time being.
Companies are faced with more and greater climate-related risks. It is therefore logical that the finance ministers of the G7, a club of seven rich industrial countries, want companies to map out these risks and mention them in their annual report. In a statement after the consultation At the beginning of June, the G7 held in London – with the participation of their central bank governors, the International Monetary Fund and the World Bank – ministers called for “mandatory climate-related financial transparency”.
More openness is good for the companies themselves, is the idea. This would make them aware of the consequences of climate change. But according to the G7, it is also important for the financial sector, which can better assess the risks of investments. Ultimately, transparency should lead to less greenhouse gas emissions. Because the business community may not officially be a party to the Paris Climate Agreement, it is the companies that are committed to reducing CO2 emissions.2 have to take care of.
Dick de Waard, professor of auditing (especially checking company books on sustainability reporting) at the University of Groningen, is pleased with the G7’s decision. For decades he himself assessed corporate sustainability reports for the accountant EY. His conclusion is that more transparency about climate risks is desperately needed. “As early as Professor Heertje’s famous high school textbook, it was about the four production factors in economics: without an entrepreneurial spirit no enterprise, without nature no enterprise, without people no enterprise, and without money no enterprise,” he says in a telephone conversation. . “And then in the real economy it’s all about money. When companies account for what they have done, it is actually strange that they do not voluntarily write about, for example, human rights and the environment.”
No deadline, no schedule
The number of multinationals with a climate and environmental strategy is growing rapidly, but the most polluting companies are lagging behind. Data analytics company Signal Climate Analytics investigated commissioned by Reuters news agency the climate strategy of the world’s 250 largest polluters, collectively responsible for about a third of global CO2emissions – including Amazon, Shell and Boeing. Conclusion: No more than 41 of them have an idea of their contribution to pollution. And of those, only 27 have a strategy to reduce their CO2to reduce emissions.
De Waard does not expect the G7 proposal to be quickly converted into policy. “It’s just a plan for now. There is no deadline, there is no schedule.” Still, he finds it “hopeful.” In their final statement, the G7 ministers explicitly mention the model of the organisation Taskforce Climate-related Financial Disclosures, the TCFD. And De Waard considers that ‘a big step’.
He explains: “In April, the European Union presented a proposal for a directive. On this basis, all major European companies will have to report comprehensively on their sustainability performance. They must report what their CO2footprint is, so what impact the company has on climate change. But they also need to map the impact of the climate on the company, according to the model of the TCFD. Because the climate sometimes strikes back.”
This reporting will be introduced in the EU as early as 2023. All companies with more than 250 employees, a turnover of 40 million euros and a balance sheet total of 20 million must then report on sustainability. “I think there are about 50,000 companies in Europe, about a thousand in the Netherlands,” says De Waard. The plan is currently being worked out.
Also read: Sharper demands from Europe and the Netherlands for ‘green’ entrepreneurship
Until now, reporting has been done on a voluntary basis. Some companies do that just fine, but there are also some that have, as De Waard puts it, ‘an agenda’. For example, who use the sustainability report for ‘greenwashing’ – trying to appear greener than you are. “Not every company is equally sincere,” says De Waard. “Then it helps if legislation is introduced with hard criteria. And with a mandatory verification by an external party.”
Two years ago, the University of Groningen carried out research for the Netherlands Environmental Assessment Agency into sustainability in the annual reports of the two hundred largest Dutch companies. This showed that private companies, in particular family businesses, reported less well. The top of the listed companies do this reasonably well.
De Waard: “There are also many companies that say that they consider climate and the environment important and have a strategy. But if you are looking for concrete figures, there is little left. What are the emissions from suppliers? How much climate damage does the use of a product by the consumer lead to?
“Now you sometimes see a company that reports a million tons of CO . last year2 and only eight hundred thousand tons this year. That is a significant saving. But what if production is halved at the same time? I don’t want to know how much less water a brewer has used, but how much less per bottle of beer.”
Knowledge about climate risks is of great importance to companies themselves, says De Waard. “Take a large transport company, with a hundred trucks, all diesels. It would like to drive climate neutrally, but then the kilometer price will be 3 cents higher. His customers are not yet willing to pay that. The company must therefore find the tipping point to renew its fleet. If you do it too early, you lose to cheaper competitors and go bankrupt. If you do it too late, you will also go bankrupt. A lot of knowledge is needed to make the right choice.”
It places high demands on the audit, De Waard discovered during his time at EY. “For euros, one and one equals two. But for CO2emissions is already a lot more difficult. If a company writes that it has a hundred thousand tons of CO2 when it should have reported perhaps one hundred and fifty thousand tons, how do you show that?”
Into the chain
According to De Waard, in sustainability reporting it comes down to choice of words, which is often very subtle. How do you know for sure that a company is complete? “You have to know the company well for that. Keeping track of the economic news can help with this, as can using databases and other sources, and doing many interviews in the company. You have to be alert to signals, to documents that you find. It is a very laborious check.”
De Waard expects that the impact of a sound sustainability audit will be significant. “It starts with the big companies. But it naturally seeps into the chain. Because such a company asks its suppliers: I must report on my CO2footprint and expects not only the right figures from you, but also a positive result. So if you want to continue transporting my products, you have to ensure that your fleet is renewed.”
Banks will also set climate requirements. According to De Waard, some are already adjusting financing conditions. A company that produces much more CO2 emissions than the competition, pay a higher interest rate. “That money does not go to the bank as profit, but it is used to improve the customer’s climate policy. The European Investment Bank works that way too.”
De Waard expects the changes to take place quickly in the coming years. “Entrepreneurs should get grumpy about a rising curve in the CO2emissions. Then we will finally get concrete objectives, and managers may be judged on their choices. Entrepreneurs now receive a reward if they achieve a good profit figure. Hopefully we will reward them if they have achieved a reduction target.”
A version of this article also appeared in NRC in the morning of June 30, 2021