As the world opens up to the gravity of the climate change challenge, companies around the world realize the importance of rapid action. Financial organizations are a central facet of the global response to climate change because of their extended influence and impact. Leading organizations are keen to become leaders by playing their part in eliminating greenhouse emissions related to their personal energy use. Subsequently, companies are expanding the scope of the policy directives to their subsidiary client investments as well. The scope of the net zero transition is being extended to cover financed emissions associated with client activities funded by financial institutions.
It is essential to recognize the landscape of the financial industry and how it is directly tied in with the broader context of the global economy. Financial service companies need to explore their personal decarbonization strategies by engaging with active stakeholders, including regulators, customers, investors, and local governmental authorities. A collaborative effort between private and public entities is essential for the initiative to succeed on a broader level.
The approach defined by financial organizations will have an integral impact on implementing decarbonization plans that facilitate lower emissions and create a sense of purpose in stakeholder initiatives. The success of the initiative depends on the organization’s ability to focus on the following segments.
- Defining scientific metrics to decrease emissions related to financial activities.
- Exploring increased financing for climate solutions derived from expediting climate change action.
- Creating a transparent disclosure-based ecosystem through extensive planning, open-ended reporting, and public disclosures.
The implementation of these steps would significantly push the decarbonization initiative forward and help companies cater to established targets. Having a methodological approach towards decarbonization can expedite goal completion by involving key stakeholders in the transformation process. Effective planning can improve the scalability of climate solutions by enhancing momentum amongst key stakeholders.
Breaking Down the Net Zero Journey – The Key Steps
It can be challenging for financial institutions to steward global assets while optimizing their own efforts. Especially due to the urgent nature of climate change, the practical steps can be highly complicated for institutions to navigate their way around. Financial leaders have equated the required progress as the development of a framework while actively implementing it.
Despite the current challenges faced by firms regarding decarbonization, the primary objective is to implement a practical framework that facilitates actionable progress towards a net-zero future. The success of the framework is deeply centered around the implementation of effective design principles.
Here are the key steps companies can take to practically approach the decarbonization process and iteratively enhance their commitment and efforts towards the climate change cause.
Step 1 – Understanding Existing Emission Patterns
Financial organizations are primarily focused on exploring their profitability and numbers. This has been the conventional approach towards profit-driven investing. However, as net-zero has started to gain broader importance in a larger context, companies are increasingly coming together to expand their scope of knowledge into developing a clear understanding of their emissions. Having that understanding represents the first stage towards a net-zero future.
Due to the complexity of organizational structures, it can be challenging to segregate internal emissions and assign emission ownerships to different business units with the company. It is essential to mark internal boundaries and explore the applicability of newer methodologies to develop an internal understanding of the landscape.
Establishing clear carbon accounting principles will help companies move to a uniform data-sharing process. Globally established standards can be used to explore emissions. Formal documentation is integration to ensure that the data is viable in the context of future scrutiny and evaluation efforts. Managers can develop comprehensive emission profiles to maintain a clear internal record of the methodologies implemented within the company.
Step 2 – Outlining Decarbonization Targets and Objectives
Credible transition planning begins by establishing clear decarbonization targets within the company. The broader development of these ambitions is directly related to the firm’s ESG commitments. Net-zero targets need to be connected to the organizations’ internal management flow and need to be integrated across all levels of strategic planning. Internal stakeholders must maintain a pragmatic approach when exploring the existing risks and opportunities associated with the green transition.
Elements of considerations along the process include the following key areas.
- Introducing new product segments to incentivize a transition to green behavior.
- Exploring additional value creation for key stakeholders within the company.
- Unveiling broader investor value by showcasing real-world impact on global economies.
- Providing specialized product offerings for different customer segments and user groups.
To enable this transition, the governance structure within the company needs to be transparent from the top-down. Real change can only be possible in the company with the implementation of trackable metrics to measure progress on Key Performance indicators (KPIs). Across leading financial companies, these elements would be directly connected to internal revenue structures.
At the same time, it is essential for financial organizations to consider the impact of external impacts on their decision-making success. Even though financial managers can decide their investment allocations, governmental policies and consumer behavior cannot be impacted by fiscal leaders. Governmental policy assumptions should be clearly outlined in policy-making to ensure that transparency is maintained across the communication.
Step 3 – Implementing Decarbonization Strategy
The implementation of an effective decarbonization strategy is directly connected to the definition of viable approaches for elements within the company’s portfolio. Companies should evaluate a comprehensive list of elements within existing business units by maintaining proper segmentation based on the following elements.
- Exploring where the organizations can make the most impact.
- Evaluating where the company has the ability to make divestment and exclusion-based decisions.
- Analyzing how the organizations can amplify their decarbonization initiative.
The steps of action need to be centered around the defined priorities with a breakdown of the costs, risks, and customer relationships factors into the equation. This will help companies develop a list of actionable steps towards better climate change.
Communicating Progress – DIF Recommendation
DIF recommends financial organizations be transparent in their communication with key stakeholders and consumers. Effective reporting should include details about underlying assumptions and the impact of governmental policies and decision-making on the company’s progress. Management decisions and emission progress should be separately reported as individual elements to ensure that the company effectively communicates regarding its progress.