Business will play a significant role in driving emissions reduction, it's time we properly measured its impact

From everyone and their new lockdown dog jumping on the Earthday bandwagon, to country leaders attending President Biden’s summit on climate, last week was a big one for ambitious climate pledges. If they are to be successful then we believe there will need to be a rapid evolution in the impact measurement space, which (spoiler alert) we think is already in motion.

Our own government announced it is committing to reducing carbon emissions by 78% by 2035, 15 years earlier than the previous target. This bold and exciting decision has the potential to put fire under the growing movement of businesses that are actively trying to solve the social and environmental issues of our time. 

To have any chance of hitting the target, the announcement will need to be supported by measures that target energy production and energy efficiency, and for private investment markets to pledge to get fully behind it. There has been a promising movement in this direction, with the Glasgow Financial Alliance for Net Zero (GFANZ), a group of banks and institutions with more than $70tn in assets, commiting to net zero emission by no later than 2050, sooner if possible, and transparent reporting and accounting by 2030.

Yet we will need more, and to drive more we will need policies to help businesses measure and manage their emissions. This, in turn, should enable both investors and consumers to identify and support the companies making a positive contribution to the planet. 

Measuring and managing emissions is complex, however, for a few reasons. 

First, because existing tools for measurement are imperfect, complicated and expensive. 

Second, reporting tools that present emissions information alongside other business performance metrics are challenging to understand, often necessitating the use of proxies. 

Third, the vast majority of business leaders are not experts in climate change and oversimplification can lead to unintended consequences. 

Finally, current legislation is generally targeted towards larger organisations and their supply chains, meaning there isn't currently a necessity for others to report and manage their emissions.

At a global finance level, the IFRS Foundation is proposing the formation of a Sustainability Standards Board (SSB) that will help investors across the world make better informed decisions of a company's performance. This would require not just financial metrics but the requirement to report on a wider range of sustainability issues. While the SSB’s first priority will be tackling the issue of reporting emissions to tackle climate change, it is paving the way to include other social and environmental factors. This will be vital, as if social issues play second fiddle to environmental ones, they will unlikely to gain popular support and ensure a just transition.

This is coupled with the encouraging impact measurement movement, including an apparent convergence of many of the main existing standard setters. This has required great coordination, largely conducted by the Impact Management Project, and includes strong signalling that impact measurement, management and reporting will sit neatly alongside accounting standards in the future. 

Finally, the EU has reviewed their Non-Financial Reporting Directive and have announced their Corporate Sustainability Reporting Directive proposal. This provides possibly one of the most comprehensive proposals in terms of coverage for defining what elements should be included in business reporting, covering both those sustainability issues that influence enterprise value as well its own impacts on the economy, environment and people.

The significant work in the alignment of these behind-the-scenes actors means that investors could soon have better information to guide investment decisions, including work towards the 2035 emission reduction target. This could easily drive large sums of investment towards businesses that are actively trying to solve emissions issues, whether through providing insulation for old housing stock to developing new and replacement technologies. We call these businesses trying to solve such problems as being purpose-driven.

By toughening its target, the announcement from the UK Government is hoped to spur other nations to submit enhanced emissions targets. As G7 and COP26 hosts, the UK Government could now rally nation states to support a global movement in accounting and impact management, accelerating the growth of other purpose driven businesses around the globe.

In the next few weeks, we will be launching our recommendations on how this movement can be accelerated. Watch this space.