• Caroline Johnstone

Wednesday Wisdom: Shedding light on sustainability and ESG jargon

Updated: 2 days ago

Each week we add an ESG or sustainability acronym/term here and explain it in practical terms. If you have a term you want explained let us know at info@rawstoneconsulting.co.uk.

  1. Carbon neutral - Organisations that are carbon neutral have prevented future carbon emissions equivalent to those that they have generated. This is done by investing in schemes that prevent emissions elsewhere in the world, e.g. preventing deforestation or providing energy efficient cookstoves to people who otherwise would be cooking on open fires. Carbon offsets are an unregulated market and to ensure the veracity of the schemes we recommend that you only purchase those certified by a reputable third party, e.g. Gold Standard or Verra, and purchase from a reputable broker. We often use Plannet Zero for this (Plannet Zero | Guiding SMEs On Their Net Zero Carbon Journey). Note that carbon neutral is NOT the same as carbon net zero and organisations should not confuse these in their communications. Carbon net zero is much more challenging. It means that an organisation’s emissions have been reduced to a minimum (typically 90-95% of baseline) with equivalent residual emissions removed from the atmosphere, i.e. through carbon capture/tree planting. Carbon neutral in contrast is often thought of as a ‘plaster’ – a quick fix to mitigate climate change impacts but it doesn’t get to the root of the problem i.e. reducing energy consumption and generation of carbon emissions in the first place. To avoid accusations of greenwashing we only recommend that organisations seek carbon neutrality when it is alongside credible, and challenging emission reduction targets.

  2. Sustainable Finance Disclosure Regulations (SFDR) - Information correct as at 22/6/2022. This is EU legislation that applies to EU financial managers and puts obligations on them to disclose the company and product (i.e. investment fund) sustainability credentials. Precise disclosures (key performance indicators) will be prescribed in the “Mandatory Reporting Template” however this has not yet been finalised, albeit a draft and clarifications have been published. The final template will be published later this year and applicable from January 2023. The UK is developing similar legislation, the Sustainability Disclosure Requirements (SDF) applicable to UK financial institutions, and this is still at the consultation stage. Whilst these regulations may on face value seem unrelated to corporates, to enable investor reporting, investee companies will need to provide them with data. It’s most likely that there will be considerable overlap between the disclosure requirements and other ESG reporting legislation and/or best practice but additional corporate reporting obligations are likely nonetheless. For any listed or investor-backed companies these regulations are ones to watch.

  3. GRI – Global Reporting Initiative. A best practice standard in multi-stakeholder sustainability reporting. The aim of GRI is to make sustainability reporting transparent and to meet the needs of a range of stakeholders – employees, NGOs, customers, suppliers, investors etc. This comprehensive standard is prescriptive and requires information to be labelled in a standard way that allows for easy comparison by stakeholders. Typically used by larger, or very impactful organisations with extensive sustainability/Annual Reports, there are two tiers of compliance, ‘GRI-Core’ or ‘GRI-Comprehensive’. Alternatively, ‘GRI-Referenced’ is also an option worth considering. This is where you cross-reference the sustainability information and data in your report to the relevant GRI code. For companies disclosing multiple sustainability metrics but not necessarily the full suite of GRI requirements this is a good quick-win. GRI - Standards (globalreporting.org)

  4. Science-based target (SBT). A carbon reduction target set to a level that has been determined by scientists will limit global warming to 1.5 degrees celsius. SBTs should be verified by the Science-Based Target initiative (SBTi) and on their website you can view a database of all companies with such targets in place. For operational carbon emissions (scope 1 and 2), SBTi requires a reduction of 4.2% per annum over 5-10 years i.e. companies could have a 21% reduction target for 5 years’ time or a 42% reduction for 10 years’ time, or something in between. Indirect (scope 3) emission targets must also be set in most cases (where such emissions are >40% of the footprint), and these will require a c.2.5% reduction over the same timeframe or a supplier engagement target (e.g. X% of suppliers/customers with a science-based target in place). SBTs give credibility to emission reduction plans and can be used in conjunction with longer-term net zero targets. The latest SBTi criteria can be found here: Resources - Science Based Targets.

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