How Transparency Can Make Companies Greener

15 June 2023, by Prof. Alexander Bassen

Photo: Unsplash/Cai Fang

What are companies actually doing to reduce their CO2 emissions? It is often unclear. Currently, only 600 German companies are required to publish a sustainability report – including large, publicly traded companies, banks and insurers. In this regard, a non-financial statement is enough – they don’t have to list either their emissions or their climate targets. However, this is about to change. The European Union will soon introduce mandatory regulations on transparent sustainability reporting. As part of an international working group, I helped to define those regulations.

The group’s goal: creating reporting standards for companies to report to what extent their business is sustainable. At the Cluster of Excellence for Climate Research CLICCS, I am currently pursuing research on the decarbonization of the economy, and I have spent several months working together on the new regulations with roughly 50 people from politics, NGOs, companies, professional associations and the scientific community. It was a very intensive phase, with up to three Zoom meetings a week. The result: the “European Sustainability Reporting Standards,” which are subdivided into Environment, Social and Governance. With regard to Environment, companies will be required to report on e.g. water, waste, and climate-relevant emissions. However, initially only the report on climate impacts will be mandatory; for all other topics, companies will be able to decide for themselves what is relevant and needs to be reported. Their choices will then be reviewed by an auditing company.

The report is all about transparency. For example, automobile manufacturers will have to report on how the CO2 emissions of their vehicles have developed. Higher emissions will have no direct consequences. But they could lead investors and banks to stop doing business with them. Consumers might also turn away from these companies. In this way, they are indirectly punished for their environmental policy.

New standards with up to 1000 data points

In the years to come, all companies with more than 250 employees will have to adhere to these reporting standards; that is more than 15,000 companies in Germany alone. Smaller companies will still not have to report because the expense would be too great. After all, the standards are based on up to 1,000 data points. However, since those companies affected by the regulations will also have to report on their supply chains and suppliers, smaller companies will also be affected by the new standards, albeit indirectly.

At the Cluster of Excellence CLICCS we are currently conducting a study in which we survey companies from various countries – including China and Brazil. What are they doing to reduce their emissions? For instance, I have spoken with company heads from Hong Kong. And it is already becoming clear that companies reduce emissions when they are required to be transparent. If everything goes according to plan, our new standards will help make that happen.

In the next step, the EU will more intensively focus on those sectors that are most harmful to the environment, even though many companies already have to comply with the new standards. I am very much looking forward to working on the team that develops new regulations for oil, gas and coal. At CLICCS, we will then continue to investigate whether the new reporting standards actually improve climate protection.