Beyond carbon - Expanding our ESG narrative
Beyond carbon - Expanding our ESG narrative
Defining a company's environmental impact, the “E” in ESG (Environmental, Social, Governance), is one of the most important factors in determining ESG risks and opportunities. At the forefront of today’s environmental conversation is climate change, specifically greenhouse gas emissions focused on carbon.
At the recent United Nations Conference on Climate Change (COP26), international leaders named carbon as the major issue concerning policy around environmental change. The conference's opening ceremony was kicked off by UK Prime Minister Boris Johnson, who spoke about the urgency of decreasing global greenhouse gas emissions and compared the problem to a "doomsday device".
There's no arguing that climate change is one of humanity's most pressing problems, making carbon a crucial component in determining our impact on the environment. However, human behavior has wide-ranging impacts on the world that extend far beyond carbon. To gain a comprehensive understanding of the impact human enterprise has on the environment, we must embrace a greater understanding of how the Earth's planetary system works and the boundaries for safe human activity.
Paying attention to Earth’s warning signs
Scientists have been warning us for decades about the environmental red flags that indicate humans are causing irreversible damage to our planet. Some of the early warning signs include increasingly frequent and severe adverse weather events, a massive decrease in biodiversity due to extinction events, and soil degradation.
These issues have far-reaching consequences for multiple aspects of human life. Soil degradation, for example, can exacerbate poverty, mass migration, and food shortages, each of which in turn has cascading social and environmental effects.
To address these warning signs, Johan Rockström, founder of Sweden's Stockholm Resilience Centre, organized an international, interdisciplinary team of experts to define the boundaries of a "safe operating environment for mankind" on Earth.
The center released the Planetary Boundaries Framework, which detailed nine main processes that endanger the planet's stability and are impacted by humanity. The integrity of these nine interconnected boundaries is critical for sustaining the delicate balance of Earth's atmosphere, oceans, and ecosystems that have allowed human civilizations to exist on the planet.
The nine planetary boundaries: A closer look
The Stockholm Resilience Centre introduced the Planetary Boundaries Framework over a decade ago that defines nine critical Earth system processes and sets safe boundaries for human activities. They are:
- Climate change: The world is focused heavily on global temperatures, which have increased to damaging levels due to rising concentrations of greenhouse gas emissions (GHG) in the atmosphere. The major GHG’s are carbon dioxide (CO2), methane (CH4), nitrous oxide (NO), and fluorinated gasses. The safe CO2 level was set at 350 parts per million, which we exceeded in 1988. CO2 levels in 2020 were estimated to be 417 parts per million.
- Novel entities: Novel entities refer to dangerous chemicals, materials, and other new compounds such as plastics, as well as naturally occurring substances like heavy metals and radioactive materials, that are discharged by human activities. Every day, humans emit tens of thousands of synthetic compounds into the environment, many of which have detrimental consequences on both human and environmental health. Novel entities endanger the ozone layer's health as well as the planet's biodiversity.
- Stratospheric ozone depletion: Three oxygen atoms make up ozone (O3), a highly reactive gas. It is a natural and man-made product that exists in the upper (stratosphere) and lower (troposphere) atmospheres of the Earth. The discovery of O3 depletion in the stratosphere due to chemical pollutants in the 1980s prompted the 1987 Montreal Protocol on Substances that Deplete the Ozone Layer. The ozone layer has begun to recover as a result of these policy changes and enforcement, indicating that reversing our negative impact on the planet is possible.
- Atmospheric aerosols: Aerosols are a catch-all name for the many natural and man-made particles that end up hanging in the atmosphere. Dust, soot, and sea salt are examples of primary aerosols that come directly from nature. Many various types of aerosols are also produced by human activities, including fossil-fuel burning particles, agriculture dust, and nitrogen products, all of which have a negative impact on air quality. Since the Industrial Revolution, humans have increased the particulate matter floating in the atmosphere by roughly 60%.
- Ocean acidification: Around 30% of the CO2 released into the atmosphere is absorbed by the ocean. As atmospheric CO2 levels rise due to human activity (i.e., burning fossil fuels and deforestation) the quantity of carbon dioxide absorbed by the ocean rises as well, triggering a chain of chemical reactions that raise the acidity of the world's oceans. Calcifying creatures lose their capacity to create and maintain their shells, skeletons, and other calcium carbonate structures as the pH of the ocean decreases. If the pH falls too low, shells and skeletons can dissolve, wreaking havoc on the ocean's food web and posing a serious threat to marine biodiversity.
- Biogeochemical flows: The processes by which elements like carbon, phosphorus, nitrogen, and sulfur, and molecules like water, travel between living organisms and the environment are known as biogeochemical cycles or flows. Excess nitrogen reduces plant diversity in terrestrial ecosystems, whereas algal blooms and eutrophication in aquatic bodies are caused by a combination of excess nitrogen and phosphorus. Human activities, particularly the synthetic production and consumption of nitrogen fertilizer, have significantly disrupted the planet's natural nitrogen and phosphorus cycles. The flow of phosphorus into the oceans is nearly three times that of pre-industrial periods, primarily due to the use of phosphorus-based fertilizers, cleaning agents, and animal waste.
- Freshwater use: Agriculture, industry, and an ever-increasing global population are straining the freshwater cycle, while climate change is disrupting weather patterns, causing drought in some areas and flooding in others. Water insecurity is a major factor in global conflicts and famines, and water pollution and scarcity present long-term economic concerns to both developing and developed countries. Water has been named as a global risk driver by the World Economic Forum for years, and institutional investors rank water among their top three ESG concerns.
- Land-system change: Human decisions at all scales, from local landowner choices to national land use planning and global trade agreements, are directly responsible for changes in the land system. As a consequence, changes in land use, particularly the conversion of forests and prairies to farmland, have a major effect on biodiversity, freshwater, and climate.
- Biosphere integrity: The concept of "biosphere integrity," recognizes the interdependencies of all species and focuses on the detrimental impact of human activities on ecosystem functioning, known as "biodiversity loss." The myriad ecosystem-services that biodiversity provides, from pollination to clean air and fresh water, are crucial to the planet's operational integrity. Rapid declines and extinctions of plant and animal populations, ecological degradation, and genetic diversity loss would impair fundamental services such as food security and healthcare, as well as increase the risk of non-communicable disease.
Researchers discovered that humanity is already operating outside the safe operating space for at least four of the nine planetary boundaries: climate change, biodiversity, land-system change, and biogeochemical processes, according to the original 2009 Planetary Boundaries report and its 2015 update. In January 2022, scientists concluded in the scientific journal Environmental Science and Technology that humanity has exceeded a fifth planetary boundary related to environmental pollutants and other “novel entities” including plastics.
The experts additionally cautioned that these limits are only estimations; we don't know how long we can continue pushing these critical planetary boundaries before combined pressures cause irreversible change and harm.
How ESG can help reverse the trend
Considering that we have already exceeded a number of the planetary boundaries, or on the path to exceeding them, it is imperative that we expand the environmental narrative in ESG beyond carbon and climate change. For example, according to a 2019 assessment by the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES), 25% of the plants & animals studied are threatened with extinction, totaling 1 million species worldwide.
Companies that fail to consider the full impact of their operations on the environment will not only contribute to breaching the ecosystem boundaries, but will also expose themselves to operational risk, regulatory sanctions, and reputational harm, all of which will have an impact on the company's financial performance. To mitigate these risks, companies can use ESG metrics and reporting methods to accurately define the extent of their environmental impact. The risk assessment process must be expanded beyond climate risk due to carbon to include other aspects such as water stress, and soil health.
ESG metrics and reporting can demonstrate a company’s commitment to operating sustainably and making a positive impact on the world. These metrics should, in theory, include all nine planetary limits and go beyond energy consumption, carbon emissions reductions, freshwater use, and waste pollution data.
With the increase in competitiveness with ESG as a strategic advantage, and the increase in regulations surrounding ESG, ESG data and reporting standards will become increasingly important both to reduce risk as well as capitalize on opportunities. It is important in light of the systemic nature of the risks and opportunities to expand our collective narrative beyond carbon. This will help us develop environmental strategies which consider a broader variety of factors and track the relevant metrics which will guide us towards success while navigating an increasingly complex and rapidly changing world.