The UK aims to achieve net zero greenhouse gas emissions by 2050. While industry support for the target is growing, some argue the target must be brought forward to limit global warming to 1.5°C.
Overview of change
In 2021, a key part of the European Green Deal entered into force, the Sustainable Finance Disclosure Regulation (SFDR).1 This is part of green finance regulations that will categorise investment products as sustainable or not, either dark green, light green or unsustainable (with activities classified according to impacts under the EU Taxonomy Regulation).2 The SFDR requires fund groups to provide information about the environmental, social and governance (ESG) risks in their portfolios alongside other financial risks. The EU’s 2014 Non-Financial Reporting Directive already requires all large public interest entities to disclose information on environmental, social and community matters,3 and its effectiveness will be reviewed by the EU this year.4 PwC predicts that assets in ESG investment products in Europe will reach €7.6 trillion by 2025,5 and these will be subject to disclosure requirements set by the European Supervisory Authorities.6 In 2022, funds will have to report on issues such as carbon footprint and investments in companies active in fossil fuel sectors. However, the deforestation requirements initially consulted on have not been included.7 The six UN Principles of Responsible Investment, set out in 2006 as a voluntary initiative to incorporate ESG into investment,8 had over 2,300 signatory organisations managing over US$80 trillion in assets by 2018 and has set out nine priority areas to 2027, including promoting climate action as a priority and aligning with the UN Sustainable Development Goals.9 Surveys of professional investors suggest that they consider ESG-related information key to determining whether a company is adequately managing risks from climate change, with the climate transition increasingly recognised as a central element of this assessment.10 A growing number of companies have pledged to reach net zero by a given date.11 For example, Apple has pledged carbon neutrality for its supply chain and products by 2030 despite producing 25.1 million metric tonnes of greenhouse gases (GHGs) in 2019. It intends to reduce emissions by 75% through the use of renewables, but the remaining 25% is accounted for by carbon removal or projects such as planting trees and restoring habitats to offset its remaining fossil fuel emissions. Sources of low carbon materials, such as carbon-free aluminium, have yet to be secured.12,13,14,15
Challenges and opportunities
The British Academy’s Future of the Corporation programme stated that the purpose of business is to profitably solve the problems of people and planet, and not to profit from creating problems. It has set out eight ‘Principles for Purposeful Business’. They include a principle that corporate investment should be made in partnership with private, public and not-for-profit organisations that contribute towards the fulfilment of corporate purposes, including addressing climate change.16 The Net Zero Asset Managers Initiative, launched in December 2020, has committed to supporting the goal of net zero GHG emissions by 2050 or sooner, in line with global efforts to limit warming to 1.5°C; and to supporting investing aligned with net zero emissions by 2050 or sooner.17
The Energy Transitions Commission estimates that the additional investments required to achieve net zero by 2050 will be in the order of US$1 trillion to US$2 trillion per year, equivalent to 1–1.5% of global GDP. Achieving the right trajectory will require creating the investment environment through policies, regulations and working with financial institutions to channel investment, not only to ‘green activities’, but also for energy-intensive industries making their transition.18 For example, in June 2020 Amazon launched the Climate Pledge Fund designed to invest in “sustainable and decarbonizing technologies,” across a number of industries, such as transportation and logistics, energy generation, manufacturing, and food and agriculture, and has committed to reach net zero by 2040.19,20
Industries that rely on exploiting resources will pose specific ESG risks.21 Heavy industry (cement, steel, chemicals and aluminium) and heavy-duty transport (shipping, trucking and aviation) are together responsible for nearly one-third of global CO2 emissions and may require a range of initiatives and investments.22 Renewable energy technologies, including batteries, solar panels and wind turbines, will also require increasing quantities of metals.23 The OECD’s 2060 forecast for metals has projected an increase from 8 to 20 billion tonnes (+150%) a year, doubling the environmental impacts of extraction and processing by 2060.24 However, comprehensive analyses of metals’ sustainability are limited,25,26 with concerns around the security of supply for those classed as ‘critical materials’ (POSTnote 609).27,28,29
PwC suggests that sustained growth in ESG investment will be driven by four factors: regulatory change, the performance of ESG assets, increasing investor demand and growing societal awareness of ESG risks.2 However, the lack of global standards for corporate ESG disclosures means that the availability and quality of company information is often poor,30 and unreliable.31,32,33 Research also suggests one size fits all approaches to ESG may be less effective for delivering desired societal outcomes, and an approach tailored for different ownership and industry types may be needed.34
Some studies suggest firms’ ESG policy adoption initially enhances their ability to pursue innovation activities and eventually positively affects their value and performance.35,36,37,38
There is evidence of consumers adopting a more ethical mindset during the COVID pandemic, which may lead to more companies adhering to environmentally friendly practices and production.39
Key questions for Parliament
- Should the post-COVID recovery be an opportunity for ESG implementation? More than 200 leading UK businesses have signed a letter calling for a COVID-19 recovery plan that aligns with “wider social, environmental and climate goals”.40
- What are the implications of the UK Government having opted to not implement the EU SFDR into UK domestic law before the end of the UK’s withdrawal transition period?41
- Should the 13 key non-financial reporting frameworks (NFRs) in the UK be harmonised?42 UK NFR obligations are governed by the Companies Act 2006 and the EU Non-Financial Reporting Directive (2014/95/EU).
Likelihood and impact
The International Financial Reporting Standards Foundation will launch its ‘sustainability standards board’ at the UN’s COP26 climate summit for setting out a ‘gold standard’ for ESG reporting.43
- Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability‐related disclosures in the financial services sector (Text with EEA relevance)
- European Commission. (2020). EU taxonomy for sustainable activities
- EU Commission (2014) Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014 amending Directive 2013/34/EU, accessed 18 July 2019,
- European Commission. (2020). Non-financial reporting.
- PwC Luxembourg. (2020). 2022 – The growth opportunity of the century. Are you ready for the ESG change?
- European Securities and Markets Authorities. (2021). Final Report on draft Regulatory Technical Standards.
- European Securities and Markets Authorities. (2020). Joint Consultation Paper ESG disclosures
- Principles for Responsible Innovation. [online]. What are the Principles for Responsible Investment?
- Principles for Responsible Innovation. (2017). A Blueprint for Responsible Investment
- OECD Business and Finance Outlook. (2020). Sustainable and Resilient Finance.
- Docs.Google.Com. [online]. Net Zero Corporate pledges.
- Apple.com. (2020). Environmental Progress Report.
- BBC News. (2020). Apple’s 2030 carbon-neutral pledge covers itself and suppliers.
- United Nations Climate Change. (2019). Apple’s Emissions Reduction Mission | Global
- The New York Times. (2020). Big Tech Has a Big Climate Problem. Now, It’s Being Forced to Clean Up.
- The British Academy. (2019). Principles for Purposeful Business.
- Net Zero Asset Managers Initiative. (2020). The Net Zero Asset Managers Commitment.
- Energy Transitions Commission. (2020). Making Mission Possible: Delivering a Net-Zero Economy
- CNBC. (2020). Amazon is launching a $2 billion fund to invest in climate technologies.
- MIT Technology Review. (2020). Amazon creates a $2 billion climate fund, as it struggles to cut its own emissions.
- ADBI Institute. (2020). Environmental, Social, and Governance Investment. Opportunities and Risks for Asia. Eds, Nemoto, N, and Morgan, P.
- Mission Possible Partnership. (2021). Transforming Industry In the Decisive Decade.
- Institute for European Studies. (2020). Metals for a Climate Neutral Europe. A 2050 Blueprint.
- OECD. (2019). Global Material Resources Outlook to 2060. Economic Drivers and Environmental Consequences.
- Løvik, A, et al. (2019). Improving supply security of critical metals: Current developments and research in the EU. Sustainable Materials and Technologies, vol 15, pgs 9-18
- Aznar-Sánchez, J, et al. (2018). The Sustainable Management of Metals: An Analysis of Global Research. Metals, vol 8(10), 805
- Sverdrup, H, and Olafsdottir, A. (2019). Assessing the Long-Term Global Sustainability of the Production and Supply for Stainless Steel. BioPhysical Economics and Resource Quality, vol 4, Article number: 8
- Hannu, H. (2020). Critical Metals – Competitiveness and Security of Supply. ETLA Brief 88, The Research Institute of the Finnish Economy.
- Sovacool, B, et al. (2020). Sustainable minerals and metals for a low-carbon future. Science, vol 367, Issue 6473, pgs 30-33
- Governance Insights Center PwC’s ESG Pulse. (2020). Mind the gap: the continued divide between investors and corporates on ESG.
- Widyawati, L. (2020). A systematic literature review of socially responsible investment and environmental social governance metrics. Business Strategy and the Environment, vol 29 (2), pgs 619-637.
- Plastun, A, et al. (2019). Environmental, social and governance investment standardization: moving towards sustainable economy. Environmental Economics, 10(1), pgs 12-22
- Dieter Helm. (2021). Valuing carbon offsets.
- Li , J and Wu, D. (2020). Do Corporate Social Responsibility Engagements Lead to Real Environmental, Social, and Governance Impact? Management Science, vol 66 (6), pgs 2291-2799
- Broadstock, D, et al. (2020). Does corporate social responsibility impact firms’ innovation capacity? The indirect link between environmental & social governance implementation and innovation performance. Journal of Business Research, vol 119, pgs 99-110
- Qureshi, M, et al. (2020). The impact of sustainability (environmental, social, and governance) disclosure and board diversity on firm value: The moderating role of industry sensitivity. Business Strategy and the Environment, vol 29 (3), pgs 1199-1214
- Taliento, M, et al. (2019). Impact of Environmental, Social, and Governance Information on Economic Performance: Evidence of a Corporate ‘Sustainability Advantage’ from Europe. Sustainability, vol 11(6), 1738
- Xie, J, et al. (2019). Do environmental, social, and governance activities improve corporate financial performance? Business Strategy and the Environment, vol 28 (2), pgs 286-300
- He, H. & L. Harris (2020) ‘The impact of Covid-19 pandemic on corporate social responsibility and marketing philosophy’, Elsevier Public Health Emergency Collection
- HM Government. (2019). Green Finance Strategy. Transforming Finance for a Greener Future.
- Corporate Leaders Groups, Business leadership for a climate neutral economy. (2020). More than 200 leading businesses urge UK Government to deliver clean, inclusive and resilient recovery plan.
- BEIS. (2020). Frameworks for standards for non-financial reporting. Final report. BEIS research paper number 2020/052
- IFRS. (2021). IFRS Foundation Trustees announce strategic direction and further steps based on feedback to sustainability reporting consultation
Transforming the food system, to achieve all the UN SDG long-term goals, is challenging and will require a comprehensive, longer term approach to outcomes.
The effective ways of increasing agricultural productivity while minimising environmental impacts are debated, such as if biodiversity gains can be integrated into farming systems.