The growing importance of Climate Change and Net Zero in the FTSE 350 and sub-sectors
Net zero initiatives are a crucial aspect of ESG as they directly address the environmental pillar of sustainable business practices.
By committing to achieving net-zero emissions, organisations demonstrate their dedication to mitigating climate change and transitioning to a low-carbon economy.
Net zero initiatives involve setting ambitious targets to reduce greenhouse gas emissions, adopting renewable energy sources, implementing energy-efficient practices, and investing in sustainable technologies. By aligning with net zero goals, companies can contribute to global efforts in combating climate change, reducing their carbon footprint and preserving the environment for future generations. Net zero initiatives within the ESG framework signify a proactive and responsible approach towards environmental stewardship and sustainable business practices.
By aligning with net zero goals, companies can contribute to global efforts in combating climate change, reducing their carbon footprint and preserving the environment for future generations.
When analysing climate change trends within the FTSE 350, it was possible to observe a significant increase in mentions, reflecting a growing recognition of the importance of addressing climate-related risks and opportunities.
Amongst the FTSE 100, there is a rise in mentions of 'climate change' in their most recent reports increasing to 701, compared to 525 previously. This represents an average of 35 mentions per report, compared to 26 previously.
Within the FTSE 250, there has also been a significant increase in mentions of 'climate change,' with the total number of mentions reaching 1,154, compared to 1,014 the previous year. This represents an average of 38 mentions per report, compared to 34.
33%
The FTSE 100 study increased their mentions of ‘climate change’ from a total of 525 to 701
Examining sub-sectors within the FTSE 350 provides further insights into the variations and trends related to net zero and climate change:
Within retail there was a significant increase in the use of climate change-related mentions, growing by 8% in the most recent reports. Furthermore, mentions of net zero and decarbonisation increased by 45%. Contrastingly, within the consumer goods sub-sector, mentions of climate change decreased by 8%, but a notable increase of 35% in mentions of net zero.
In leisure & hospitality, mentions of climate change rose by 44% in the most recent reports. Additionally, mentions of net zero and decarbonisation increased by 12%.
Scope 3 emissions
Scope 3 emissions are a category of greenhouse gas emissions that are indirect emissions resulting from the activities of an organisation but occur from sources not owned or controlled by the organisation. These emissions can include the extraction and production of purchased materials, transportation of goods and services, and the use and disposal of products.
In the context of consumer businesses in the FTSE 350, the number of times the phrase "Scope 3" appears in the reports has increased over time. Comparing the most recent reports with the previous years, the total number of mentions increased by 53%.
Focusing specifically on the FTSE 100 businesses, the average number of mentions of Scope 3 emissions increased from 13.3 to 20.1, representing a 51.1% increase when comparing the two years. This suggests that these businesses have been placing greater emphasis on addressing and reporting on their Scope 3 emissions.
Similarly, the FTSE 250 businesses also experienced a notable increase in the average number of mentions, rising from 12.3 to 19.8. Although still below the FTSE 100 average, this represents a 51.1% increase, indicating a growing recognition of the importance of Scope 3 emissions within this group as well.
Figure 4 - Frequency of ‘Scope 3’ mentions in FTSE 350 Annual Reports (Source: Irwin Mitchell)
Figure 5 - Percentage rise of ‘Scope 3’ mentions in FTSE 350 Annual Reports comparing most recent and previous reports (Source: Irwin Mitchell)
Overall, these findings highlight an increasing awareness and focus on Scope 3 emissions within consumer businesses in the FTSE 350, with both the FTSE 100 and FTSE 250 seeing a significant rise in the number of mentions in their reports. This suggests a growing commitment to addressing the indirect environmental impacts of these organisations.
Expert comment
“The commitment to achieving net zero by 2050 will impact every sector of the business world, including those in the consumer sector. Taking immediate climate action in the next six years, up to 2030, will be crucial to staying on course for net zero, and we anticipate a sharp increase in the number of organisations signing up to voluntary carbon reduction pledges this year.
“Large UK companies are already subject to mandatory reporting obligations regarding greenhouse gas (GHG) emissions and climate-related disclosures. These obligations include reporting requirements under the UK Streamlined Energy and Carbon Reporting regime in 2018 (SECR) and climate-related financial disclosures in annual reports since April 2022.
“Large companies have initially concentrated on reducing Scope 1 and Scope 2 GHG emissions relating to their own operations and purchased electricity. Under SECR and the Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022, reporting on Scope 3 value chain emissions was optional.
“This is now changing. Voluntary targets made by companies under the Science-Based Targets Initiative (SBTi) include requirements to also reduce Scope 3 emissions. The hardest task for consumer companies will therefore be to influence and reduce GHG emissions across their whole value chain, which typically account for over 80% of an organisation's total carbon footprint.
“This analysis of annual reports for FTSE 250 retail businesses shows a 50% increase in references to Scope 3 emissions. We expect this to significantly increase over the next few years.
“In June 2023, the International Sustainability Standards Board released IFRS S1 and S2, the first globally equivalent accounting standards for sustainability and climate change.
“Companies with accounting periods which started on or after 1 January 2024, must comply with IFRS S2, which requires the collection and reporting of Scope 3 emissions across the entire value chain. This means that even smaller companies will have to report their greenhouse gas emissions to remain within certain supply chains or tender for new work.
“Mandatory ESG reporting (which includes Scope 3 emissions) has already arrived for large EU organisations under the Corporate Sustainability Reporting Directive (CSRD) and this applies to accounting periods from 1 January 2024. CSRD is being introduced in phases and will extend to non-EU undertakings that have a subsidiary or branch in the EU from January 2028.
“The Corporate Sustainability Due Diligence Directive (CSDDD) is expected to be endorsed and adopted in 2024. It will apply to large EU companies, smaller EU companies in high-impact sectors, and non-EU companies with significant EU-generated revenue. The directive requires companies to identify and address potential and actual adverse environmental impacts and human rights issues within their own operations, subsidiaries and business chain of activities. Companies must also adopt a climate transition plan and may be liable for damages if they fail to prevent or end adverse impacts.
“By prioritising climate action, adopting net zero targets, complying with mandatory reporting obligations, and embracing corporate sustainability due diligence, businesses can contribute to a more sustainable future whilst also staying ahead in an evolving business landscape.”
Taking immediate climate action in the next six years, up to 2030, will be crucial to staying on course for net zero, and we anticipate a sharp increase in the number of organisations signing up to voluntary carbon reduction pledges this year.
Keith Davidson
Environment Partner, Irwin Mitchell