This article is sponsored by ClearTrace.
BlackRock CEO Larry Fink wrote in his 2021 letter to CEOs of the "tectonic shift" underway, describing investors tilting investments towards sustainability-focused companies, and how "every management team and board will need to consider how this will impact their company’s stock."
His powerful statement has major implications for the business world, particularly for publicly traded companies. Lack of genuine action to combat climate change is finally going to, as the saying goes, hit where it hurts.
From consumers to investors
One of the biggest implications of the "tectonic shift" is that the world’s most sophisticated investors are paying attention to carbon reduction and the bar for quantifiable metrics is rising.
For the past few decades, businesses have catered to consumer interests around sustainability. No offense to you or me browsing cereal brands at the supermarket, but we’re pretty easy to fool. Eco-looking branding and claims without proof, often called "greenwashing," have gotten businesses fairly far, but this no longer will be the case.
Moving forward, investors will demand transparent, third-party carbon emissions accounting services used to report quantifiable carbon reduction.
For carbon emitted from buildings, which represents nearly 40 percent of global annual greenhouse gas emissions, carbon accounting will need to be traceable to meter-level sources of consumption and power production. The Securities and Exchange Commission is reevaluating its climate change disclosures now, and we can expect stricter rules soon. Carbon emissions data will be suitable for use only in financial decision-making among the world’s largest investors if it is traceable, verifiable and immutable.
Carbon will have a price
When we see quantifiable carbon reduction metrics affecting investor decision-making, a natural result will be a price on carbon. Over the years, there has been a lot of talk about the U.S. government setting a price on carbon and, while this has yet to be seen at a policy level, the private sector is on track to attach a tangible value to CO2 reduction.
If Fink’s statement is any indicator, stock values will rise for companies that reduce their carbon emissions significantly and prove it with traceable, quantifiable carbon accounting data; values will drop for companies that aren’t following suit or transparently reporting on their carbon metrics. While there may not be perfect correlations due to other factors affecting stock price, metrics will be in place for each business to see tangible carbon reduction affect the bottom line.
The effects will snowball
Big businesses hold the power to affect change in their economic ecosystems. As businesses aggressively reduce their carbon emissions and implement precise and credible carbon accounting and reporting standards, they will want to see their vendors and clients doing the same.
For example, Apple is helping its vendors achieve carbon neutrality as it pursues its own ambitious carbon reduction goals. And as more businesses change their reporting metrics, their competitors will be held to that same standard. JP Morgan Chase is proactively using carbon accounting technology to track the carbon emissions of its office buildings and inviting the rest of the banking industry to do the same.
I’d love to see more companies pressuring their vendors, competitors and business-to-business customers to follow in their lead. This could look like tech companies offering preferred pricing to their business clients reporting strong carbon reduction, or banks incorporating their clients’ carbon footprint into their underwriting models.
As pressure increases at every level of the business world and the "tectonic shift" advances, decarbonization of the economy is accelerating rapidly. The days of companies setting airy goals and self-reporting their carbon reductions are over. Carbon accounting technologies will bring clear, quantifiable metrics to the table, and companies that do their part to reduce their emissions and use such technologies will reap the highest financial rewards and, quite frankly, embarrass the competition.