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Climate change will most likely be an issue of debate in the upcoming November election. While the current administration has taken measures to roll back numerous rules related to the environment, the presumptive Democratic candidate for the White House recently unveiled a $2 trillion plan to combat climate change and to encourage the use of cleaner technologies. A Congressional group also recently published a Climate Crisis Action Plan, detailing 12 key areas of action, with the goal of bringing the US to net zero emissions by 2050. Both plans also include spending programs for low income areas.
 
Many companies have embraced environmental initiatives, recognizing the importance of the issue to investors and other stakeholders. Many also see the benefit of becoming more environmentally conscious as a means of building a sustainable business for the future.
 
There are many parameters to consider when evaluating a company in terms of its environmental performance. These may include:
 
  • Has the company set quantitative environmental goals addressing items such as reducing greenhouse (GHG) emissions or increasing the use of renewable energy?
  • Does the company have a history of environmental issues, such as a chemical or oil spill? How were these issues addressed?
  • What industry-specific environmental issues does the company face?
  • Does the company provide products or services to consumers that are environmentally friendly?
  • Are company facilities LEED certified or otherwise energy efficient buildings?
  • Does the company face any risks from climate change or water scarcity?
  • Is recycling promoted company-wide?
  • What is the company’s exposure to fossil fuels and coal?
Many large public companies voluntarily publish their sustainability efforts and the environmental impact of their business. Firms that exhibit the greatest commitment to improving their sustainability will often set and achieve aggressive goals to improve their own operations. These goals are developed after a company conducts an analysis of their environmental footprint and will cover impacts related to water, energy use, GHG emissions and waste. Texas Instruments, for example, made their water usage a high priority over the past five years. By setting aggressive goals for reduction, they have achieved a freshwater withdrawal intensity that is about 40% lower than their peers. Leaders in environmental sustainability are expected to be transparent in reporting their current performance and progress towards their goals.

A company’s environment impact reaches further than their own internal operations and includes the impact of their suppliers and raw materials. Lululemon has demonstrated leadership in responsible material sourcing as they thoroughly evaluate the impact that their raw materials have on the environment at their point of origin. For example, materials like rayon, viscose and modal are made from wood and tree pulp. Lululemon works with non-profits to help protect endangered forests and they do not source any fabrics that have originated from ancient or endangered forests. In addition to the raw materials themselves, it is also important to consider suppliers’ impact on the environment. Many companies invest resources in educating their suppliers on best practices and will encourage them to set goals for their own improvement. Target has recently focused on their supply chain sustainability and they aim to have 80% of their suppliers set carbon emissions reduction goals by 2023.

Lastly, in evaluating environmental sustainability, one may consider a company’s indirect impact on the environment. In terms of carbon emissions, this type of impact is referred to as “scope 3 emissions” and includes emissions from sources that are not directly owned or controlled by the company. An example of scope 3 emissions for a business is employee commuting. Many companies have goals to address their scope 3 emissions. Google, for example, is working to reduce single occupancy vehicle commuting to their Bay Area headquarters by 45% and they are increasing the number of parking spaces for electric vehicle charging.

The COVID-19 pandemic has certainly increased the awareness of the corporate world’s impact on the environment. With factories idled, transportation volumes reduced, and typical demand patterns disrupted, companies have seen how the environment has responded. What happens, though, when the COVID-19 threat is neutralized and the global economy creeps back toward normalcy? The result will depend in large part on how corporations across the globe approach the management of the “E” within ESG. In the short-term, the economic disruption and consequent short-term budget impact may delay the corporate adoption of both environment-specific measures and increased sustainability reporting. Over the long-term, however, the pandemic has likely given corporate entities a brief glimpse into what a low-carbon future might look like and further underscores how much needs to change in order to safeguard the environment over the long term. Actively managing environmental risk has become a part of the cost of doing business across the global corporate landscape now.

While the pandemic has put corporate risk management of all forms in a new light, the urgency of managing environmental risk is particularly pronounced. Enterprise software giant Salesforce’s Chief Impact Officer recently noted that “We are facing numerous challenges now, but regardless of what else is happening in the world, the climate crisis is here, it’s real, and this is the decade where we need to act.” The increased scrutiny of how a corporation manages its environmental footprint will continue to grow in importance among the investing public. Companies that ignore the need to proactively manage their environmental impact do so at great risk; inadequate approaches increase exposure to potentially costly future liabilities in the form of punitive fines, increased regulatory oversight, and remediation measures. Organizations that have policies in place to actively manage environmental risk and continuously improve in areas such as carbon emissions, waste reduction and process efficiency, are typically more sustainable, lower risk entities over the long run.


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