Sustainability & ESG Insights July '24: The Growing Role Of ESG In M&A And The Risks Of Unmeasured Scope 3 Emissions

💡Via this monthly newsletter, we'll share more knowledge and content about what's arguably the most important domain of our generation: Sustainability and ESG. The goal is to inspire and share insights so each and every one of us can make a difference in the Environmental, Social and Governance domain we call Sustainability.

Valuable ESG and Sustainability news of July '24

• Reports find ESG playing a bigger role in M&A
• Early adopters of CSRD results
• Deloitte survey reveals companies’ needs for sustainability software
• SBTi shift stance on carbon credits
• CDP report highlights risk of unmeasured scope 3 emissions
• Von der Leyen’s next term green goals
• And more…

ESG Considerations in M&A: Navigating the Changing Landscape

In today’s dynamic business environment, environmental, social, and governance (ESG) factors are no longer peripheral, they’re at the heart of strategic decision making. As companies engage in Mergers & Acquisitions (M&A), understanding the role of ESG becomes crucial. Deloitte’s 2024 M&A Trends Survey, sheds light on how dealmakers are adapting, innovating, and creating value in an ever evolving landscape.

Growing ESG Influence:

• ESG considerations are gaining prominence in the business world due to concerns about climate change, sustainability, diversity, and inclusion.
• Companies are re-evaluating their investments and activities through an ESG lens, including during M&A transactions.

2024 M&A Trends Survey Methodology:

• Deloitte conducted a comprehensive survey of 1,500 corporate and private equity dealmakers in 2024.
• Two-thirds of respondents were senior decision-makers at the C-suite or senior managing director level.
• Private equity investors represented almost half (49%) of the sample.
• The survey revealed that dealmakers are adapting to a changing M&A landscape, driven by market uncertainty and innovation.

Pivots and Innovation:

• Despite challenges, dealmakers are shifting course and persevering in their pursuit of value.
• The survey suggests that M&A activity may rebound in the coming year.
• Companies are finding new ways to realize cooperative synergies, premiums, and returns.

Private Equity vs. Corporations:

• Corporations focus on cooperative synergy realization over the medium and longer terms.
• Private equity firms prioritize shorter-term returns on investments.
• Bridging the gap between these approaches can unlock real value creation opportunities.

Embracing Uncertainty:

• Successful dealmakers centre their M&A planning, strategy, and execution around embracing uncertainty.
• Rather than avoiding complexity, they analyse and exploit the M&A landscape.
• Decision-makers are building bridges and extending their view with an ESG lens to achieve success.

In summary, ESG considerations are reshaping M&A decisions, and dealmakers are adapting to market changes. By embracing uncertainty and bridging gaps, companies can create value

Read more via the link below:

ESMA Urges Companies to Prepare for New CSRD Sustainability Reporting Requirements

The European Securities and Markets Authority (ESMA) has issued a Public Statement on the first application of the European Sustainability Reporting Standards (ESRS). This is aimed at helping companies prepare for new sustainability reporting and supervisory requirements under the EU’s Corporate Sustainability Reporting Directive (CSRD), with the first reports set to begin next year.

The CSRD is a significant update to the EU’s Non-Financial Reporting Directive (NFRD), expanding the number of companies required to provide sustainability disclosures from around 12,000 to over 50,000. It introduces more detailed reporting requirements on company impacts on the environment, human rights, social standards, and sustainability-related risk.

Key areas of relevance for companies preparing to issue their first CSRD reports include the establishment of governance arrangements and internal controls, designing and conducting materiality assessments, being transparent about transitional reliefs provided by the regulation in the first years of application, preparing a digitization-ready sustainability statement, and creating connectivity between financial and sustainability information.

ESMA emphasizes the importance of preparing data collection and management systems to meet the requirements of the CSRD. Even companies that have experience with sustainability reporting under prior regulatory systems should assess if their existing systems are still fit-for-purpose under the CSRD.

In summary, the ESMA is calling on companies to carefully set up their systems of data collection and analysis, as well as internal controls, in order to meet the ESRS’ detailed reporting requirements and to conduct double materiality assessments.

Read the details via the link below:

PwC’s Inaugural Global CSRD Survey 2024: The Promise and Reality of CSRD Reporting

In a recent development, PwC’s inaugural Global CSRD Survey 2024 reveals that companies are increasingly factoring sustainability into their decision-making processes as they prepare to report under the EU’s Corporate Sustainability Reporting Directive (CSRD). This survey, which included over 500 senior executives and business professionals, found that about three-quarters of companies are giving more weight to sustainability in business decisions. Here are some of the key takeaways from the research:

Sustainability Integration

• Companies are increasingly factoring sustainability into their decision-making processes as they prepare to report under the EU’s Corporate Sustainability Reporting Directive (CSRD).
• This directive, backed by 12 European Sustainability Reporting Standards (ESRS), will affect about 50,000 companies globally.

Optimism and Challenges

• Businesses anticipate several benefits from CSRD implementation:
• However, challenges persist:

• Data availability.
• Staff capacity.
• The need for new technology to support the transition.

Readiness and Upside Potential:

• Nearly two-thirds of companies express confidence in their readiness to report under CSRD.
• Those further along in their implementation journey are more optimistic about business benefits.

Dutch Readiness Leading the way:

• According to the research Dutch companies have the highest confidence in being ready for CSRD with 79% of respondents reporting as such.
• This is compared to 63% globally.
• Although Dutch companies express strong confidence, they encounter notable hurdles related to data availability and quality, intricate value chains, and adequate human resources. Approximately 50-60% of respondents identify these as significant obstacles.

In summary, as Dutch companies lead the way, they contribute to shaping sustainable reporting practices globally.

Read more about it via Sustaira's article below!

EFRAG’s Study on Early Implementation of ESRS: Key Insights from Q2 2024

This study provides a snapshot of the initial practices and challenges faced by selected EU companies as they begin to adopt these new standards.

Highlights from the Study:

• Scope and Methodology: The study is based on interviews with 28 large EU-based companies across various sectors, both financial and non-financial. These companies were chosen for their potential maturity and resources in applying ESRS.
• Focus Areas: Their analysis focuses on four key areas:

Preliminary Findings: The study reveals that while there is significant progress, many companies are still in the early stages of implementation. Challenges include aligning internal processes with the new standards and ensuring comprehensive data collection.

What this means for ESG Reporting:

• Emerging Practices: The study highlights emerging practices that can serve as benchmarks for other companies beginning their ESRS journey.
• Ongoing Support: Continuous support and clear guidance from regulatory bodies will be crucial for achieving robust and effective sustainability reporting practices.

Read more here:

74% of Public Companies Plan to Invest in Sustainability Reporting Technology and Tools Over Next Year: Deloitte Survey

Key Highlights from the Deloitte Survey:

• Investment in Technology: Approximately 74% of public companies are likely to invest in new technology or tools to enhance their ESG disclosure capabilities over the next year. This investment is driven by the need to meet increasing regulatory requirements and improve data quality.
• Regulatory Preparedness: Nearly all companies (99%) are preparing for new sustainability reporting mandates, including the EU’s CSRD, IFRS’s ISSB standards, and the SEC’s climate disclosure rule.
• Cross-Functional ESG Teams: The formation of cross-functional ESG teams is on the rise, with 52% of companies already having such teams in place. These teams are crucial for making significant progress towards sustainability goals.
• Executive Involvement: There is a notable increase in executive responsibility for ESG reporting, particularly in the role of the Chief Sustainability Officer (CSO).

Implications for the Future:

• Enhanced Disclosure: Companies are focusing on timely and higher-quality disclosures to meet growing ESG reporting demands.
• Strategic Advancements: Investments in technology and human resources are pivotal for strategic ESG advancements.
• Sustainability Progress: Cross-functional ESG teams are proving to be a catalyst for significant sustainability progress and preparedness.

Here’s a link to the full article:

Sustainable? But by Plan

Siemens article: It had to be catchy and new, but somehow also sound familiar. One of the trickiest tasks that entrepreneurs face when they set up a company is finding the right name for the enterprise. When Vincent de la Mar was looking for a name for his start-up in 2021, all sorts of analogies kept popping up in his mind. He was certain of one thing: Sustainability had to be part of the package. After trying out all kinds of ideas, he came up with the perfect combination: Sustaira. “It sounds like a goddess of sustainability.” That fits: Sustaira, a global company running out of Boston, Montreal, Rotterdam and Singapore, helps companies become more sustainable by aggregating, calculating and recording indicators such as CO2 emissions as well as social and regulatory aspects and assisting them with the planning of a more sustainable future.

UN Claims we’re a ‘Failing Grade’ on Global Goals Report Card

Key Highlights from the UN Report:

• Insufficient Progress: With just six years remaining to achieve the Sustainable Development Goals (SDGs), global progress is alarmingly insufficient. Only 17% of the targets are currently on track.
• Major Obstacles: The lingering effects of the COVID-19 pandemic, escalating conflicts, geopolitical tensions, and worsening climate chaos are significant barriers to progress.
• Increased Poverty and Hunger: An additional 23 million people were pushed into extreme poverty, and over 100 million more are suffering from hunger compared to 2019.
• Record Temperatures: 2023 was the warmest year on record, with global temperatures nearing the critical 1.5°C threshold.

What should we do about it?

To address the urgent challenges outlined in the report, we must take accelerated action to fulfill the 2030 promise of ending poverty, protecting the planet, and ensuring no one is left behind. This requires significantly increasing funding and expanding fiscal space, as the SDG investment gap in developing countries stands at $4 trillion per year. Additionally, resolving conflicts through dialogue and diplomacy is crucial, especially given the nearly 120 million forcibly displaced people and the 72% rise in civilian casualties between 2022 and 2023. Furthermore, massive investments and effective partnerships are essential to drive transitions in key areas such as food, energy, social protection, and digital connectivity.

Feel free to explore the full report for more details:

SBTi’s New Stance on Carbon Credits: A Shift in Corporate Net-Zero Targets

In a significant development, the Science Based Targets initiative (SBTi) has released a series of research publications that suggest a shift away from allowing companies to use carbon credits to offset value chain emissions. This move marks a departure from earlier indications by the SBTi board, which had generated considerable controversy.

Key Facts:

• Research Findings: The new standard is unlikely to permit the use of carbon credits, deemed “ineffective” in delivering intended mitigation outcomes.
• Background: The SBTi, established in 2015, aims to align corporate sustainability actions with global climate goals. It launched its Corporate Net-Zero Standard in 2021, requiring significant decarbonization by 2050.
• Scope 3 Emissions: The revised standard will focus on tackling Scope 3 emissions, which are the most challenging to measure and manage but constitute the majority of companies’ emissions.
• Controversy: Earlier this year, the SBTi board’s plan to extend the use of Environmental Attribute Certificates (EACs) to Scope 3 emissions faced internal opposition, leading to a call for evidence and subsequent clarification.

Takeaways?

• Corporate Impact: Companies will need to focus more on direct emissions reductions rather than relying on carbon credits.

Future Guidance: The SBTi plans to issue a discussion paper and further guidance on the revised standard.

Read more about the SBTi’s evolving stance and its implications for corporate climate strategies here:

Decarbonizing Road Freight: Accelerating Progress

Decarbonizing road freight is crucial for meeting global climate goals. Deloitte, in collaboration with Shell, explores the current state of the sector, the challenges it faces, and potential solutions in their new report:

Key Points:

• Current State: Road freight, essential for global trade, accounts for about 9% of global CO2 emissions, primarily from medium and heavy trucks.
• Challenges: The sector faces significant barriers, including insufficient regulatory incentives, inadequate infrastructure, and limited demand for low-emission options.
• Targets: To align with the Paris Agreement, the sector needs to reduce emission intensity by over 80% by 2050, with a 30% reduction needed by 2030.
• Opportunities: Despite challenges, there are opportunities for first movers to innovate and lead in low- and zero-emission technologies.

Proposed Solutions:

• Regulatory Support: Enhanced regulatory frameworks to incentivize decarbonization.
• Infrastructure Development: Investment in infrastructure to support low-emission vehicles.
• Market Demand: Increasing demand from shippers for sustainable freight options.

The report emphasizes the need for a collaborative approach and a comprehensive roadmap to achieve these ambitious targets.

Read more here:

BCG and CDP Report Finds unmeasured Scope 3 Emissions Pose Significant Financial Risks

A recent report by Boston Consulting Group (BCG) and CDP highlights that most companies and investors are not adequately measuring or targeting reductions in Scope 3 emissions, which are emissions generated along the value chain. This oversight leads to substantial unreported financial risks. The report, titled “Scope 3 Upstream: Big Challenges, Simple Remedies” analysed responses to CDP’s 2023 data request, revealing that supply chain emissions are, on average, 26 times higher than companies’ direct operational emissions (Scope 1 and 2).

Despite the significant impact of Scope 3 emissions, they remain the most challenging to measure and manage. Companies are twice as likely to measure and set reduction targets for Scope 1 and 2 emissions compared to Scope 3. This lack of measurement and management can result in overlooked material risks that adversely affect corporate performance. For instance, the report found an implied carbon liability of over $335 billion from the top three Scope 3 emitting sectors: manufacturing, retail, and materials, based on 2023 upstream emissions and the IMF-proposed 2030 carbon price floor.

The report underscores the need for increased accountability and action from both companies and investors to address these emissions and mitigate associated financial risks. Sherry Madera, CEO of CDP, emphasized that Scope 3 data is essential for financial market stakeholders to scale up their efforts in managing supply chain emissions.

Read more here:

Von der Leyen Pledges New Clean Industrial Deal in New Mandate as EU Commission President

European Commission President Ursula von der Leyen has committed to introducing a new “Clean Industrial Deal” early in her second mandate. This initiative aims to direct investment towards infrastructure and industry, particularly in energy intensive sectors, to support the EU’s goals for industrial decarbonization, growth, and competitiveness.

Key points from the announcement:

• The new plan will help generate progress in areas such as clean steel and clean tech, and will streamline planning, tendering, and permitting processes.
• This initiative builds on von der Leyen’s first-term achievements, including the European Green Deal and the Net-Zero Industry Act (NZIA), which aim to make Europe the first climate-neutral continent by 2050.

Von der Leyen emphasized the need for faster and simpler processes to ensure Europe can decarbonize and industrialize simultaneously, providing predictability for companies’ investments and innovations.

Read more here:

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