The Carbon Border Adjustment Mechanism (CBAM)
11 min
Level
In this article we’ll explore what the CBAM is, why it’s been created, and what importers need to know ahead of its introduction.
The voice of impact
ESG / CSR
Industries
Ecology
Greenly solutions
US
US
How can companies help to save the Earth?
Level
Companies embarking on the vital mission to help save the Earth are challenging the outdated notion that GDP and carbon emissions are inextricably linked. The flawed logic may lead some to assume that the environmental damage they create is a necessary sacrifice to keep our economy running. But this perspective is not only short-sighted, it's also out-of-date.
Not only do companies have the ability to make their business more sustainable, but many are already doing so. They are reaping financial returns, attracting investment, and responding to ever-growing consumer demand for environmentally responsible products and services. The assumption that environmental responsibility and economic growth cannot coexist is rapidly being debunked.
It can indeed be challenging to become a frontrunner in any field, but the sustainability space offers unique opportunities. The likelihood that sustainability will become mainstream in the near future suggests that improvements in this area will disrupt existing methods, opening up new avenues for innovation and growth.
The market for sustainable products and services is growing every day, and new markets are emerging. Now is the perfect time for companies to seize these opportunities and evolve toward business models that not only preserve but protect the essential resources we all depend on. This shift not only makes good business sense, but it's also an ethical imperative for our planet's future.
👉 In this article, we'll explore why companies that adopt sustainable business practices are better positioned to succeed. We'll also outline some actions that companies can implement to start them on their sustainability journey.
Do companies have an impact on the environment?
Companies undeniably have a significant impact on the environment, and this relationship is being monitored and analyzed by organizations such as the CDP, formerly known as the Carbon Disclosure Project. The CDP is a global non-profit organization that encourages companies to disclose their environmental impacts, particularly regarding emissions, and take action to reduce them.
The current data, however, paints a concerning picture. Of the companies reporting to the CDP on their climate change, forests, and water security disclosures, only around 2% have received an 'A' grade for environmental transparency and performance (around 330 companies out of 15,000). That leaves a large majority either failing to report their emissions or, worse, contributing significantly to climate change.
The situation is further exacerbated by the fact that over 30,000 companies, worth a combined 24.5 trillion USD, declined to respond to the CDP's request for information. This group includes recognizable names like DTE Energy and Glencore, known for their substantial environmental impact.
On a positive note, 2022 saw a record-breaking number of companies, over 18,700 representing over half of the global market capitalization, disclose their impacts through the CDP. This 42% increase from the previous year reflects an increasing demand for environmental transparency and accountability from consumers, employees, shareholders, and investors.
Yet, the broader issue persists. According to the Carbon Majors Report, just 100 companies are responsible for 71% of global emissions since 1988. This stark statistic illustrates the immense influence that a small number of corporations wield over our environment. Their decisions and actions hold significant sway in the systemic changes needed to confront climate change.
Adding to this complexity, analysis warns of a financial risk tied to heavy investments in fossil fuels. An estimated $1 trillion in investments in coal, gas, and oil could become stranded assets, losing their value in light of increasing international commitments to reduce carbon emissions.
Moreover, some companies' heavy investment in fossil fuels poses a financial risk as well. Carbon Tracker's research indicates that $1 trillion invested in coal, gas, and oil projects over the next decade could lose value in the face of growing international commitments to reduce carbon emissions.
“ The overwhelming evidence demonstrates that companies not only have an impact on the environment but that their actions (or lack thereof) are at the core of some of the most pressing environmental challenges today. The data underscores the critical need for transparency, accountability, and a committed shift toward sustainability. By embracing these principles, companies have the opportunity to mitigate their environmental impact and foster a healthier planet for future generations. ”
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Why should companies care about their environmental impact?
Business leaders are often aware of the ethical imperatives to reduce their environmental impact, yet many fail to incorporate sustainability into their core business strategies. It is crucial for leaders to comprehend the strategic value that lies within business sustainability.
In a 2018 BSR/Globescan survey, a significant 75% of corporate sustainability professionals believed that business leaders have not sufficiently modified their business strategies to address climate change. This vast global issue profoundly influences consumer behavior, financial flows, and the availability of materials.
The survey reveals a clear acknowledgment of the ethical reasons to pursue sustainability, with business leaders ranking ethics as the foremost motivation. Yet, the data also uncovers a gap between intent and action: fewer than 33% of respondents confirmed that their companies had integrated a sustainable strategy into their business planning.
“ Sustainability in business is not merely an altruistic endeavor. It's a strategic move that aligns with market dynamics and stakeholder expectations. The survey's North American and European respondents, 64% and 84% respectively, emphasized that sustainability needs to influence core business activities. ”
The compelling case for sustainability transcends ethical responsibility - it's a vital component of strategic business planning that can lead to long-term profitability, resilience, and success.
👉 Let’s take a closer look at the different benefits for companies that adopt sustainable business practices.
The durability of business models
If we continue with our current rate of CO2 emissions, we are poised to witness a rise in global average temperatures by approximately two degrees Celsius. Such a temperature shift signifies not just a numerical change but a drastic upheaval in our environmental patterns. With it comes a surge in severe storms, exacerbated flooding, prolonged droughts, rampant wildfires, and other forms of extreme weather events.
“ These phenomena are not mere disruptions; they have profound repercussions. They compromise the efficiency of business operations, pose risks to infrastructure, and threaten the very pillars of food and water security. The ripple effects of climate change have already begun to unsettle supply chains, deplete natural resources, and inject volatility into financial markets. Without concerted efforts to curtail CO2 emissions, these adverse consequences are set to escalate in magnitude and frequency. ”
It's imperative for business leaders to bridge the chasm between knowledge and action. A large number of them grasp the criticality of environmental sustainability. However, there's a discernible gap in translating this understanding into tangible measures that resonate with scientific recommendations. It's not just about embracing sustainable practices; it's about aligning them with global objectives. To truly make a difference, businesses need to accelerate their emission reduction strategies, targeting net zero emissions by 2050, consistent with the directives of the Paris Agreement.
The increasing legal and regulatory demands
In light of the inconsistencies and ambiguities surrounding GHG emissions data, numerous countries are now gravitating towards enforcing mandatory reporting from major organizations.
To date, both the UK and the EU have already instituted climate risk disclosure mandates. Meanwhile, the US Securities and Exchange Commission is actively deliberating on a proposition to oblige large enterprises to disclose their GHG emissions data, alongside their associated climate risks. Such regulatory moves resonate with the escalating emphasis on revealing the financial vulnerabilities tied to climate change. As the detrimental and economic implications of climate change amplify, regulatory scrutiny is poised to intensify.
Organizations that proactively align with these regulations not only foster trust with regulators but also bolster their public image. Additionally, they position themselves advantageously to evade potential penalties and fines.
Increasing investor concern over sustainability
In 2022, the momentum for sustainable investments surged to new heights. Global ESG fund assets culminated at approximately $2.5 trillion by the year's end. And according to a recent PwC report, the popularity of Environment, Social, and Governance (ESG) investing shows no signs of slowing down. Investors worldwide are championing ESG investing at a monumental scale, with projections suggesting an 84% surge to $33.9 trillion by 2026.
Today's investors are pivoting towards businesses with a broader vision of profit generation. A confluence of elements, from heightened consumer demand to evolving global policies, is shaping a megatrend that nudges investment toward enterprises that champion environmental sustainability.
“ In this landscape, institutional investors stand out. They are assessing companies not merely based on short-term profitability but also on their risk-averse operations that promise stable returns, vital for safeguarding pension funds in the years ahead. ”
A predominant challenge for these investors, however, is obtaining consistent and relatable data concerning a company's GHG emissions. Those companies equipped to supply such data and demonstrate actionable plans for emission reduction are well poised to attract favorable investor attention and commitment.
👉 To learn more about sustainable investing take a look at our article on sustainable finance. You can also find out more about specific sustainable investment methods such as socially responsible investing and impact investing by reading our articles on these investment approaches.
The values of customers and employees
Consumers are showing a growing preference for businesses that genuinely address environmental sustainability, especially in the context of climate change.
A collaborative study by McKinsey and NielsenIQ reveals compelling figures: 78% of consumers deem sustainability a crucial factor in their purchasing decisions. Furthermore, over 60% of those surveyed expressed a willingness to pay a premium for products with sustainable packaging.
The data underscores this trend. Products boasting ESG (Environmental, Social, and Governance) claims witnessed a 28% cumulative growth over the past five years. In contrast, products without such sustainability credentials lagged behind, growing only by 20%.
While many businesses are rolling out green campaigns to align with these preferences, discerning consumers are quick to differentiate between genuine efforts and mere lip service. They are becoming adept at spotting "greenwashing" – where companies overstate their environmental initiatives or focus on trivial actions that don't reflect a substantial impact when weighed against their total environmental influence.
Ultimately, companies that authentically embed environmental sustainability into their operations and showcase tangible commitments to combating climate change are positioned to garner stronger consumer loyalty and support.
The link between sustainability and profitability
We stand at a pivotal juncture where consumers, investors, and policy leaders are converging on the importance of sustainability. Businesses that seize this opportunity to address climate change could tap into a staggering financial potential estimated at $26 trillion.
Yet, the vast scope of business opportunities in this realm remains largely untapped. The recent IPCC report indicates that to meet the Paris Agreement Goals, we need to ramp up investments in clean energy technology by 3 to 6 times the current rate.
The business case for sustainability extends beyond just environmental responsibility. Addressing climate change can lead to significant reductions in operating costs, spanning areas such as materials, water, heating, electricity, waste management, and even health insurance premiums. Embracing efficiency and curbing pollution from fossil fuels translates directly into tangible financial gains.
Furthermore, aligning with the mounting demand for sustainability can supercharge a company's financial health. Sustainable businesses consistently demonstrate a heightened capacity to draw in investors, captivate customers, and recruit forward-thinking talent. As an endorsement of this approach, reports from the S&P 500 indicate that companies with proactive climate strategies witness an impressive 18% return on investment.
Now is the opportune moment for businesses to pivot towards a low-carbon future.
5 actions a company can take to help in the fight against climate change
Businesses keen on evolving to an eco-friendly model must establish robust systems and allocate clear responsibilities to design and realize their objectives. Here are some actionable steps to commence this transformative journey.
Assess your carbon footprint
Many businesses, in the absence of concrete data, remain uninformed about the extent of their operations' impact on climate change. A pivotal first step towards combating this issue is measuring GHG emissions.
By collaborating with Greenly, businesses can undertake a comprehensive carbon footprint assessment. This sheds light on which specific activities are the primary culprits behind their emissions.
“ Armed with this knowledge, companies can then explore avenues to mitigate or neutralize these emissions. Strategies might include adopting new technologies, reimagining products and services, altering organizational practices, or optimizing supply chain routes to reduce shipping journeys. ”
Reduce waste
When companies generate waste, it's not just materials they're squandering, but also significant value. Consider this: the lion's share of plastic packaging - 95% worth a staggering $120 billion annually—is used just once before being discarded.
It's imperative for companies to monitor the waste they produce, pinpointing avenues to reduce, reuse, and recycle materials. Collaborating with local organizations that specialize in extracting value from waste streams can considerably enhance a business's waste management profile.
Moreover, companies need to anticipate how their customers will interact with the products and services they create. Producing designs that promote wasteful habits inadvertently fuels an already resource-draining system.
Life Cycle Analysis offers a solution. It assists businesses in discerning optimal strategies to craft durable products that, once past their prime, can be efficiently repaired, recycled, or repurposed.
Greenly can assist you in performing a life cycle assessment, providing insights into the environmental footprint of your products or services.
Optimize energy consumption
Excessive energy consumption not only strains the electrical grid but also inflates operational costs - expenses that can be effectively curtailed. A thorough review of how your business manages heating, cooling, lighting, and the utilization of equipment and appliances can considerably diminish your energy footprint.
Buildings with insufficient insulation tend to squander energy through gaps in their walls and floorboards. By modernizing windows and bolstering insulation, you can drastically slash energy expenditures. Additionally, considering alternative and efficient heating and cooling sources, such as heat pumps powered by renewable energy, can further enhance energy savings.
When it comes to lighting, making the switch from conventional light bulbs to LEDs and incorporating smart sensors to extinguish lights when not in use can yield significant energy savings.
Regarding equipment, replacing outdated and less efficient models with their energy-saving counterparts can make a marked difference, especially during peak electricity demand periods. With certain time-of-use rate plans, businesses can even trim their costs by adjusting usage to off-peak hours.
Lastly, a thorough audit of a company's stored data and digital footprint can unearth opportunities to cut back on unnecessary energy consumption.
Encourage employees to adopt sustainable habits
Fostering a workplace culture that champions sustainable practices can significantly reduce your organization's environmental footprint. While building awareness is foundational, it often requires more than just knowledge to spur action.
By implementing guidelines, offering incentives, and training employees on best practices, businesses can encourage behaviors such as carpooling, using reusable cups, and optimizing server file storage. Engaging employees through community events and soliciting their input in sustainability planning can further cultivate a collective commitment to transforming the workplace into a beacon of environmental responsibility.
Invest in offsetting projects
Carbon offsetting is currently one of the few methods that allow businesses to neutralize their carbon footprint entirely or even achieve a net-negative impact. Companies have the option of either acquiring offsets from a dedicated provider or embarking on projects that counterbalance their emissions. Emerging technologies, such as direct air capture and carbon removal, are also in development.
Offset initiatives can encompass endeavors such as rehabilitating degraded land, practicing regenerative agriculture, or constructing renewable energy infrastructure in regions reliant on coal.
👉 To find out more about carbon offsetting, why not read our article on the topic.
What about Greenly?
At Greenly we can help you to assess your company’s carbon footprint, and then give you the tools you need to cut down on emissions. Why not request a free demo with one of our experts - no obligation or commitment required.
If reading this article has inspired you to consider your company’s own carbon footprint, Greenly can help. Learn more about Greenly’s carbon management platform here.
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