Sustainability and business operations – the dynamics of regulatory and market alignment and imperatives

In 1987 the United Nations Brundtland Commission defined sustainable development as "meeting the needs of the present without compromising the ability of future generations to meet their own needs." The Commission's report presented a common future combining both the environment and global development, highlighting the inextricable link between the two.

In the intervening decades major scientific, political, and societal developments ratified, substantiated, and proved the climate change hypotheses put forward in the 1980s. At the same time, there has been a steady evolution of public opinion recognizing that the climate is changing as a direct result of human activity.

Fast forward to today, we are living in a time where there is a recognized moral imperative on organizations, countries, and individuals to reduce the negative impact of our activities on the environment to prevent our actions from compromising the needs of future generations.

Business operations are not driven solely by moral imperatives, though. Warnings of climate change may be old - Frank Capra made a film about it in 1958, and John Ruskin lectured on it as far back as 1884 - but the increasing urgency of those warnings has made action more than a matter of conscience.

In short, sustainability is a matter of incentivized rewards that pushes organizations towards making certain changes that can lead to major business benefits. In this article, we'll look at some of the regulatory and market imperatives organizations have to deal with to make their business operations sustainable.

Regulatory and market imperatives

Demonstrable commitments to sustainability measures are increasingly becoming mandatory compliance requirements, and in many instances, that need for compliance is being enshrined in law.

For example, from this year, in a world-first, the UK Government has mandated the Taskforce on Climate-related Financial Disclosures (TCFD) for UK registered companies over 500 employees, to make TCFD-aligned disclosures in their annual report and accounts.

These disclosures will cover four main areas - governance; strategy; risk management; and metrics and targets - with the aim of providing information on how organizations manage material risks and opportunities arising from climate change. The UK also requires companies to report on their global emissions, not just those at home.

Other parts of the world have also introduced regulations. The European Union's Non-Financial Reporting Directive imposes an obligation on all large companies (not just quoted companies) to include a non-financial information statement in their reports, including information on environmental impact.

In the US last year, the Securities and Exchange Commission (SEC) announced an Enforcement Task Force focused on climate and environment, social, and governance (ESG) issues. And, in March this year, the SEC announced "rule amendments that would require a domestic or foreign registrant to include certain climate-related information in its registration statements and periodic reports, including:

• Climate-related risks and their actual or likely material impacts on the registrant's business, strategy, and outlook
• The registrant's governance of climate-related risks and relevant risk management processes
• The registrant's greenhouse gas (GHG) emissions, which, for accelerated and large accelerated filers and with respect to certain emissions, would be subject to assurance
• Certain climate-related financial statement metrics and related disclosures in a note to its audited financial statements
• Information about climate-related targets and goals, and transition plan, if any."

Environmental metrics and frameworks for sustainability in business operations

These are just a few examples of mandatory regulations, and they are growing in number and scope.

There are also numerous metrics and international frameworks that relate to the environment and sustainability. Their objective is to provide the necessary guidance to help organizations quantify the environmental impact of their operations in a globally consistent way. A small sample of these include:

• The Greenhouse Gas Protocol, launched in 1998 which provides widely used and respected standards in greenhouse gas measurement
• The United Nations Framework Convention on Climate Change (UNFCCC), and the decisions made at the Glasgow Climate Change Conference in October and November 2021
• The ISO 14064 international standard, which includes guidance at an organizational level for the quantification and reporting of greenhouse gas emissions and removals
• The Sustainability Accounting Standards Board (SASB) Financial Information Disclosure ESG Standard, which identifies the subset of environmental, social, and governance (ESG) issues most relevant to financial performance in 77 industry sectors
• The Partnership for Carbon Accounting Financials (PCAF), which helps financial institutions assess and disclose the greenhouse gas (GHG) emissions from their loans and investments through GHG accounting.

Organizations need to deal with this complex mesh of compliance and voluntary measures for effective disclosures. Of course, it doesn't end there - there's an ever-growing market pressure coming from a number of critical directions: from investors making investment decisions based on ESG measures in place; from policy-makers in all countries in which businesses operate; and from customers, whether they be consumers or other businesses, who want organizations to actively pursue sustainable targets as a way of justifying their custom.

Such market and regulatory imperatives can positively or negatively impact the market value of organizations, which is further exacerbating the need to effectively act.

Even from the few examples we've given here, it's clear that achieving sustainability compliance is by no means straightforward. Simply staying on top of all the standards and recommendations is a full-time job: organizations need to know not just what's obligatory, but which of the voluntary metrics best suit their own circumstances.

The real challenge, though, is not in the external paperwork, but in the hard graft of improving operational sustainability. Take carbon accounting: accurately recording the sources of emissions across all facets of a multi-national organization is a major task, especially when considering the emissions contributions from the extended supply chain.

That's why, in the next article, we'll be looking at some basic principles for how this hard graft might be achieved, and at the benefits to the business that will accrue. Ways of achieving sustainability - repeatable, self-supporting improvements - are the rewards that offset the obligations we've considered here.

This entire exercise isn't about merely ticking the box. It's about showing you understand the wider context, that it's important to you as a business, and that you're putting in the necessary effort and resources to enhance and build on the sustainability measures you've implemented.

To learn how Capgemini can drive sustainability and carbon accounting into your business operations, contact: [email protected] or [email protected]