Climate change – our most significant challenge ahead

The 2022 global risks report published by the World Economic Forum highlights climate action failure as the number one risk over the next decade. The effects are felt all over the planet in extreme heat, cold, massive precipitation, drought, or wildfire. Climate change affects us all. It is a global problem that we jointly need to work on to solve. GHG emissions are more than 50% higher than in 1990. On February 27, 2022, the Intergovernmental Panel on Climate Change (IPCC) released Part 2, which paints a grim picture that we continue to spiral downward but some solutions are starting to emerge to curb the climate crisis. We need to urgently transition into a sustainable way of living where we stay well within the constraints of Earth. Humanity is currently taking significantly more than we put back in. We use the equivalent of 1.75 % of Earth’s resources to provide the resources we use and absorb our waste (Ginér, et al. 2022).

Due to rising temperatures, we are approaching a tipping point, or what scientists have labeled as the danger zone. We are not taking the necessary and drastic steps to avoid a global crisis at an unprecedented scale with unimaginable consequences. To stop climate change quickly enough, we need to think differently to develop solutions that can break the carbon emission curve. The concept of net-zero carbon emissions has emerged from physical climate science. Climate policy has had a new focus in recent years: net-zero emissions. The Paris Agreement reaffirmed the commitment to limit the global temperature rise to well below 2 OC, preferably around 1.5 OC. Reaching net-zero emissions is often expressed in target dates, such as halving GHG emissions by 2030 and achieving net zero in 2040 or 2050.

According to the United Nations Environment Program (UNEP) 2020 Emissions Gap Report, Global GHG “continued to grow for the third consecutive year in 2019, reaching a record high of 52.4 GtCO2e (range: ± 5.2) without land-use change (LUC) emissions and 59.1 GTCO2e (range: ± 5.9) when including LUC” (UNEP DTU Partnership 2020). There are also other figures floating around out there regarding what the total annual GHG is. For example, Bill Gates’s book, How to Avoid a Climate Disaster, refers to 51 GTCO2 because he did not include LUC. For this book, I have chosen to use the measurement of 59.1 GTCO2e (range: ± 5.9), which also includes LUC emissions. To me, it is not essential to argue the facts of whether we collectively emit 51 or 59 GTCO2e per year, and I would much rather focus on the bigger picture of how we can, as a start, halve our global CO2 emissions in the next decade and stay within the 1.5 OC range.

Prominent scientists such as Johan Rockström and Michael E. Mann are at the forefront, climate advocates such as Christiana Figueres, David Attenborough, Al Gore, and Greta Thunberg, and assessment reports (ipcc.ch 2022) from United Nations IPCC reports tell us that the threat is imminent. We have a severe climate crisis on our hands.

The primary drivers of climate change are human emissions of CO2 and other GHGs, overpopulation, increased loss of biodiversity, an overage of finite earth metals, and an increased waste management problem, especially within electronic waste (e-waste). However, the key fundamental issue is not the exact quantity, but the solutions we need to put in place to decline the growing trend in the coming years. The climate crisis is one of the world’s most pressing challenges (IPCC 2013). Throughout Earth’s history, there has been a link between global temperature and GHG concentrations, especially CO2 (Lacis, et al. 2010).

What are GHG emissions?

Before we go any further, let us dissect what carbon footprint is. You probably have heard the term carbon footprint before, but it can be hard to grasp. Carbon footprint is the amount of GHG emissions generated by private corporate activities during a given period – such as producing a laptop, smartphone, tablet, commuting to work, or shipping a new product. It includes CO2 – the gas most commonly emitted by humans – and other climate-relevant gases such as methane, nitrous oxide, and fluorinated gases. These GHGs convert into tons of CO2 equivalent (in short, tCO2e) to ensure consistency.

Our global countdown illustrated in Figure 1.1 from 59 gigatons to net-zero covers five broad sources of emissions categories: energy, industry, agriculture, transportation, and nature (Doerr 2021). The total yearly emissions of 59 gigatons gives rise to increased heat trapping in the atmosphere. The result of trapped heat gives rise to an increase in Earth’s temperature that scientists believe needs to stay within the 1.5 °C range. The increase in temperature also results in several dangerous knock-on effects, such as melting ice caps, which lead to not only rising sea levels and flooding but also drought and wildfires:

Figure 1.1 – How GHG emissions add up

The energy sector amounts to 41% of total emissions per year. This is primarily because energy sources draw from fossil fuels such as coal and oil instead of renewable energy sources such as wind, solar, water turbines, and geothermal. The industry sector emits 20%, primarily due to GHG emissions from cement and steel manufacturing, which are both CO2-intensive. GHG emissions from agriculture release 15% of the global total. This is primarily due to the extensive use of fertilizers to grow crops and the release of methane gas from cattle, but the sector also requires an enormous amount of water contributing to water distress. Finally, nature itself releases 10% of total emissions.

To make carbon footprint more tangible, let us look at a few examples. A single flight from London to Los Angeles produces around 1.4 tons of CO2e, which is roughly 8.1 months of the CO2 budget for one person, based on the Paris Agreement’s objective of maintaining global temperature warming “well below” 2 OC. Commuting to work just under one hour a day, roughly 51.5 km (32 miles), amounts to 3.2 tons of CO2 over a full year for the average American. Approximately, one person in the United States emits 17 tons of CO2 per year compared to a person in India who only emits 1.8 tons of CO2. Mining of all the world’s Bitcoin renders a carbon footprint of 114.06 Mt CO2, which is comparable to the carbon footprint of Czech Republic. Mining of just a single Bitcoin generates about 1280.82 kg of CO2, equivalent to the carbon footprint of 2,838,745 Visa transactions or 213,470 hours of watching YouTube (Digiconomist.net n.d). Figure 1.2 illustrates a few examples described earlier:

Figure 1.2 – Carbon emission comparison between common use cases

How did we get here?

In the 1950s, we saw tremendous economic prosperity post World War II (WWII) (O. G. Rockström 2021). Still, it was also the take-off point for global warming, loss of nature, and deterioration of biodiversity. Human ingenuity gave rise to an unprecedented level of global prosperity in the form of rising GDP and income per capita, which was also regrettably unleashed over 12,000 years of relative climate change stability. By introducing emission-intensive forms of production and consumption, we have reached a point where these unprecedented levels are no longer sustainable (ipcc.ch 2021). In the past, there has been financial prosperity at the expense of environmental prosperity. Going forward, we need to find other metrics to measure our prosperity that are better in line with important socio and environmental factors.

Let us look at how the planet has warmed from the 1850s to the present day to set the scene. After seeing a stable period of temperature deviation over the past 10,000 years, we now see that the Earth’s average temperature has started to rise. In the chart from Figure 1.3, we see the global average temperature relative to the period average between 1960 and 1990. The upper and lower gray lines represent the upper and lower confidence intervals, whereas the red line demonstrates the average annual temperature trend:

Figure 1.3 – Indicating a 0.7°C rise in global temperatures

Since the 1980s, we have seen a 0.7°C rise in global temperature, which is a sharp rise compared to pre-industrial times in 1850. At that time, we noticed that the temperature was 0.4°C colder than the median. Adding these two together adds up to a 1.1°C average temperature rise (Delworth, et al. 2016).

Scientists have a large consensus that we need to limit global warming to just 1.5°C to stay in the safe zone. This is to avoid the catastrophic impacts of climate change. This was also explicitly called out in the 2015 Paris Agreement: “We cannot rule out that if Earth’s CO2 emission doubles, the Earth’s temperature might double to a catastrophic 5OC” (O. G. Rockström 2021). Cutting GHG emissions in half by 2030 and reaching net zero by 2050 is necessary to avoid a climate apocalypse.

Bending the curve

We need to stabilize concentrations of CO2 and other GHGs in Earth’s atmosphere to slow down rising temperatures and halt increasing global temperatures completely (IPCC 2013). The atmospheric concentration of CO2 measures parts per million (ppm). Since the 1960s, the atmospheric concentration of CO2 has continued to rise. The primary reason for this change was the Industrial Revolution and the rise of human emissions of CO2 from burning fossil fuels. There is a strong belief that the safety limit for CO2 in the atmosphere is around 350 ppm. Unfortunately, as we see in the chart in the following figure, we already reached that landmark back in 1987, and in 2020, we have been surpassing levels above 415 ppm. Time is running out, and the tide is working against us. As global citizens, we need to decarbonize our atmosphere and rapidly bend the curve:

Figure 1.4 – Atmospheric concentrations of CO2 continue to rise

As we have already started to operate outside the planetary boundaries (O. G. Rockström 2021), we need to work toward finding exponential solutions that can halve our GHG emissions by 2030. We need to limit CO2 emissions into the atmosphere to 350 ppm from the 450 ppm we experience today. Built on Moore’s Law principles from the computer industry, the number of transistors in a dense integrated circuit (IC) doubles roughly every two years. The Carbon law is built on a similar principle to halve CO2 emissions every decade from 2020 to 2050 to eventually ramp down emissions to zero. The simple rule of thumb, called the Carbon Law (J. Rockström 2017), applies to everyone, including companies, cities, nations, and citizens. The Carbon Law outlines the global average and should be considered a minimum ambition. As we have seen previously, the estimated yearly level for 2020 is 59 billion tons of GHG emissions (Carbon Disclosure Project n.d.). The Carbon law, as illustrated in Figure 1.5, is necessary for halving our global GHG emissions every decade. By 2030, close to 30 billion tons of GHG need to be reduced and captured from emissions into the atmosphere (J. Rockström 2017):

Figure 1.5 – Carbon Law; we need to halve our CO2 emission every decade until 2050

We need to stabilize Earth’s life support system and rapidly decarbonize. We need to do most of the work in the next decade. From the starting point of 2020, we need to halve our global emissions and continue to do so every decade until 2050. This is a considerable undertaking, and the biggest challenge is halving emissions in the first decade.

Let us stop and reflect: we need to do most of the work in the next decade. How does that make you feel? Does it feel like a daunting task? Does it feel like you want to give up? Hopefully, it is the contrary! I, for one, am a technocrat. Due to rapid technological development since the 1950s, the technology and investments in unsustainable businesses such as oil, coal, and gas got us into this mess; I firmly believe that the solutions to curb the climate crisis also lie within using existing technology in the right way and exploring new technological discoveries and advancements. Most of the key concepts we will explore in this book are already here. But further improvements are still needed, such as managing ICT equipment with full circularity and renewable energy sources to meet the world’s needs.

UN Sustainable Development Goals

In 2015, the United Nations formed a blueprint for achieving a better and more sustainable future. They are a call to action to end poverty, protect the planet, and promote peace and prosperity. They are expressed in 17 goals that should be fulfilled no later than 2030. They are more commonly known as the UN’s 17 Sustainable Development Goals (https://sdgs.un.org/goals).

History of sustainability

Before we jump into the definition of sustainable IT, first, let us zoom out and look at what sustainability means and where it originates. Climate change is not something new, and policymakers, scientists, and activist organizations such as Greenpeace have been trying to turn the spotlights on these issues in the past 50 years. Some significant climate milestones and events have been occurring in the past 5 to 6 decades, as illustrated in Figure 1.6:

Figure 1.6 – History of climate action and policy change

The first person that turned the spotlight on environmental challenges was Rachel Carson in 1962, with the release of her environmental science book Silent Spring, which opened the issue to the American people. She primarily focused on the uncritical use of pesticides and accused the chemical industry of spreading disinformation.

In 1972, the first United Nations Climate Conference was held in Stockholm, Sweden. This marked the first time that climate was highlighted as a major issue. Since then, 50 decades have passed, and June 2022 marked the 50th anniversary of the event. Once again, the United Nations convened in Stockholm for the Stockholm+50 conference.

Our common future

In 1983, the United Nations appointed former Norwegian prime minister Gro Harlem Brundtland to run the new World Commission on Environment and Development (Our Common Future, Chapter 2, Towards Sustainable Development n.d.). This commission is more famously known as the Brundtland Commission. The Our Common Future report was released after 4 years and outlined sustainable development as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs. (Our Common Future, Chapter 2, Towards Sustainable Development n.d.).

Furthermore, the commission unified environmentalism by defining three pillars of sustainability in the world’s development agenda. The three pillars of sustainability consider ecological, social, and economic dimensions (see Figure 1.7), recognizing that all three elements are heavily dependent on each other to build lasting prosperity:

Figure 1.7 – Three pillars of sustainability: Environment, Society, and Economy

Environmental sustainability

Environmental sustainability makes sure that Earth’s ecological integrity is maintained. The planetary boundaries are balanced while natural resources can replenish themselves faster than they are consumed.

Social sustainability

Social sustainability provides fulfillment of basic human necessities for all people worldwide. People have to have access to enough resources to guarantee that their families and communities are healthy and secure.

Economic sustainability

Economic sustainability outlines that all people worldwide can maintain their interdependence and access the resources they require to meet their financial and other needs. The economic system is available and intact for everyone to ensure secure sources of livelihood.

Today, building environmental, social, and economic prosperity has become a mainstream business issue. The expectations of companies have shifted dramatically from, in the past, principally serving shareholders’ needs to serving the employees, customers, and communities in which they operate. It has become necessary for companies to become purpose-driven with solid values and a robust ESG program. Companies that do these things well are more likely to attract and retain top talent, enhance their reputation with investors and customers, and boost shareholder returns.

Triple bottom line – people, planet, and profit

Although Our Common Future was the forefather of defining the three pillars of sustainability, the Triple Bottom Line (3Ps) is the most common framework referenced within business language today. It is still gaining popularity. The 3Ps were created by John Elkington back in 1995, almost three decades ago, and he defines that the key imperative for sustainability is simultaneously maximizing benefits for people, the planet, and profit (Kraaijenbrink 2019). Identical to Our Common Future, the 3Ps stand for people, planet, and profit:

• People: The citizens of our planet. What positive or negative impact does a corporation have on our people?
• Planet: Our planet and the environment in which we reside. What positive and negative does an organization have on our planet and our environment?
• Profit: The financial and long-term value creation of a corporation. What positive and negative impact does an organization have on the local, national, and international economy?

As Figure 1.8 illustrates, when these three factors intersect, you can maximize the benefits and create a sustainable future:

Figure 1.8 – 3Ps of the triple bottom line

Several accounting and reporting frameworks have emerged out of the 3Ps, for example, ESG (a framework focusing on Environmental, Social, and Governance factors), Social Return of Investment (SROI), Return of Sustainable Investment (ROSI), and the Trucost approach.

We will be referencing the 3Ps framework frequently throughout the book.

Sustainability trends

Sustainability has become a global trend, and it can no longer be ignored. Here are some of the most relevant sustainability trends to consider as you start thinking about forming your own Sustainable IT agenda:

• Renewable energy transition: Energy usage amounts to 73.2% of global GHGs (Ritchie 2020), where the most significant share comes from energy use in industry (24.2%), energy use in residential and commercial buildings (17.5%), and transportation (16.2%). The transition from fossil fuel energy to renewable energy is inescapable. As data centers are a large energy consumer, this is a crucial trend. Electrification of the energy and transportation sectors are two must-wins.
• Sustainable investments on the rise: As the global financial markets are closely interlinked, allocating funds is a powerful lever for climate action. The financial sector is starting to shift funds to ESG investments and setting high standards on ESG criteria. As the ESG criteria become stricter, funding will eventually dry up if there are unmet requirements.
• Shift to sustainable products: Consumer behavior and purchasing power are powerful change levers. Consumers are increasingly seeking out sustainable products and leaving non-sustainable products on the shelf. A report from Unilever suggests that one-third of consumers seek out environmental and socially responsible products (Unilever 2017). With consumers’ rising expectations of sustainable brands, the report highlights a EUR 966 billion opportunity to be seized out of 2.5 trillion markets. Making the switch to supply the market with sustainable products and services under a sustainable brand will become table stakes to doing business in the future.
• Sustainable buildings and materials will become the norm: As we saw earlier in the chapter, the industry emits 12 gigatons of CO2, roughly 20% of the total global emission per annum. Cement and steel are two major contributing factors; therefore, there is a big push to overhaul the construction and building landscape. Three major trends are spearheading this transformation within the industry: prefabrication, modularization, and digitalization (building information modeling (BIM). Alternative low-cost carbon materials are being assessed, such as graphene instead of bricks, cross-laminated timber instead of steel, and ethylene tetrafluoroethylene (ETFE) instead of glass (Howarth 2022). There are also several initiatives currently ongoing in Scandinavia to develop carbon-neutral steel.
• Cost of inaction will surpass the cost of action: Companies have started identifying the risks and the opportunities of developing a solid purpose-led sustainability agenda. The options include developing new products and solutions, strengthening the brand and employee branding, and financial or government incentives. Companies that do not take this route will see their market share and profits dwindle and will fail to recruit talent.

In this section, Nicole Mercedes Zethelius, Head of Global Sustainability and ESG Strategy at CGI, shares her point of view on the importance of data-driven ESG decision-making. CGI is one of the largest IT and business consulting firms in the world and Nicole leads their Global Sustainability and ESG Strategy practice, advising clients on ESG strategy and execution.

The importance of data-driven ESG decision-making

Corporate sustainability is complex for many reasons, with one central crux being that the three pillars holding up the ideology – economic, environmental, and social – are frequently at odds with and contradict one another. To find a balance and make the best possible sustainable business decisions, we will need accurate data to calculate all possible outcomes – both short- and long-term. Right now, the world is only operating on hypotheticals because much of the reliable, up-to-date information needed is not available in the data universe or is disconnected.

Solving most of the world’s problems goes beyond human intervention and intelligence, leveraging technology for connecting IT, OT, IoT, data lakes, clouds, and information that is yet to be connected to the data universe.

It sounds simple enough, doesn’t it? Top management and the big five management consulting firms have spent decades and have amassed billions advising companies to globalize and decentralize, with the tunnel vision of short-term gain. Companies and governments bought this strategy, and it was good while it worked.

But it is not working anymore.

The industry has expanded too quickly, without any logical management foundation considering long-term effects. The world’s economies are now in a sunken cost fallacy typhoon, doubling down on antiquated business models and strategies. Too much focus on over-complexity and short-term profits has created a macro-trend of instability and volatility. And as a final coup de grâce, the COVID-19 pandemic, followed by the war in Ukraine, punctured any hope of mass globalization as a panacea for all problems.

Anecdotally, the day before I met with the leadership of one of the big six oil companies, including the CIO, I read in the news that they had divested several essential rigs. The article stated the core reason was social and political pressures and the focus on renewables.

I do not think any of them expected me – as a senior sustainability and ESG strategy advisor – to advise them not to divest any more essential rigs.

My argument was as follows:

• Society still desperately requires fossil fuels to function
• The company has spent decades making mistakes and learning from them
• It has invested trillions in reducing negative environmental impact while increasing internal and external safety.
• It has invested billions in researching alternatives to fossil fuels, regenerative models, and IT innovation
• Most importantly, the company is highly regulated and follows strict legislation and penalties

It only took a few months for another, smaller, oil company that happens to be entirely unregulated, irresponsible, and reprehensible to capitalize on the big company’s attempt to “do the right thing.” Divesting made things far worse environmentally and socially. One thing we know for sure from game-theoretic principles is that while we might know the last move our business opponent has made, we can never be entirely sure of their next move or if they will upend the whole chessboard altogether.

Game theory is arguably the most important discovery about human behavior in the 20th century and was awarded a Nobel Prize in 2002. The theory addresses how individuals and other entities compete and cooperate. Success with the principles comes from the awareness that every decision must be made in relation to the decisions and possible future decisions of others that compete and cooperate within the field. In this case, the giant oil company was so focused on handling the pressures of social capital that they neglected to consider their unregulated, much smaller competitor’s opportunistic moves onto their divested rigs.

Whether private or public enterprise, the common core issue is a lack of connectivity across the value chain. Had the company integrated sustainable IT infrastructure and received accurate data, they could have a proven reason to keep the lucrative rigs and invest in the improvements needed to keep it running in the most sustainable way possible to meet political pressures. It could have set the bar for the entire industry and its duty to invest in more sustainable extraction. Instead, the company took a severe blow to its bottom line while – in reality – enabling more unsustainable business practices.

The preceding case illustrates the need to move away from decision making based on hypotheticals and estimates to strategies based on accurate and actionable data. The surge of interest in sustainable technology is partly due to a rising need for business health and hygiene. Companies need to know what they are doing – by implementing traceability throughout the value chain – and where they are going – by leveraging data using technologies such as automation, AI, and analytics. If correctly implemented, they will enable new revenue streams, more robust risk mitigation, resource access, and ensured longevity.

Nicole Mercedes Zethelius, Head of Global Sustainability and ESG Strategy

The Paris Agreement

At the Conference of the Parties (COP) 21 in Paris, the Paris Agreement, often referred to as the Paris Climate Accords, was adopted in 2015. Signed by 196 parties, the Paris Climate Accords is a legally binding international treaty on climate change. The Paris Agreement was the first unison commitment. World governments have committed to curbing global temperatures, rising to well below 2°C above pre-industrial levels, and pursuing efforts to limit warming to 1.5°C. Under the agreement, each party must draft a plan and report regularly on the progress.

A major flaw with the Paris Agreement is that it lacks a common reporting framework, robust guidelines, and governance. Instead, it leaves it up to its parties to define their emission pathways to net zero. Since there is no common framework based on climate science, the Paris Agreement relies on process.

As we will see later in the chapter, other standards such as the SBTi Net-Zero Standard enable corporations to set a net-zero target. But so far, there has not been a unilateral framework for countries prior to COP 26, which took place in Glasgow, Scotland, in 2021, for ratification of the Paris Rulebook.

The finalization of the Paris Rulebook provides the framework and guidelines for the implementation of the Paris Agreement. It is a significant milestone after many years of negotiations.

Consistent with the objectives in the Paris Agreement, more than 120 countries have now pledged to reach net zero around the mid-century. They include the world’s three largest greenhouse emitters, the EU, the United States, and China (Fankhauser, et al. 2021).

As of June 2021, at least 14 countries – including Germany, Canada, the United Kingdom, and France – had a law or legislation proposed to ratchet down their carbon emission to net zero by 2050. The problem is that all of these countries combined account for only 17% of total global emissions.

Only recently have the very largest emitters begun to signal their ambitions. The Biden administration’s plan for climate action calls for net zero by 2050, an aggressive leap beyond previous administrations’ policy. The EU has committed to doing the same and has enacted the EU Taxonomy Climate Delegated Act (DA). China has declared a national commitment to get there by 2060. India and Russia have yet to make any form of a net-zero pledge.

The 2021 United Nations Climate Change Conference, more commonly called COP26, was the 26th United Nations Climate Change Conference, held in Glasgow, Scotland, United Kingdom. It became apparent, more than ever, that the private sector has a critical role in driving change and leading by example. Requirements for companies to provide transparent reports are continually growing, due to increased pressure from policymakers, investors, organizations, and governing bodies for more transparent and accurate reporting. ESG has become a mainstream business issue, and non-financial disclosure requirements and the EU Taxonomy and SBTi are examples of increased compliance and regulation directives surfacing. Later in the chapter, we will go deeper into the GHG Protocol Corporate Standard and SBTi concepts as they are fundamental concepts to establish our carbon emission IT baseline.

EU Taxonomy

By 2050, Europe plans to become the first climate-neutral continent and make the EU’s economy sustainable (Price 2018). In Europe, the EU met to discuss climate and energy targets for 2030 and reach the objectives of the European green deal. In the summer of 2021, the European Council approved the EU Taxonomy Climate DA, confirming into EU law the adoption of Technical Screening Criteria (TSC) for activities that contribute substantially to the climate change mitigation and adaptation objectives. The EU has seen the need to redirect money toward sustainable projects to make our environmental systems more resilient against climate and environmental shocks.

The EU Taxonomy acts as a central piece to the European Green Deal puzzle to classify whether an economic activity is considered environmentally sustainable. To use a common language and a clear definition of “sustainable,” a standard classification system, the “EU Taxonomy,” was formed. As outlined in Figure 1.9, the EU Taxonomy outlines six environmental objectives to provide policymakers, companies, and investors with a standard set of definitions of what can be classified as ecologically sustainable:

Figure 1.9 – The EU Taxonomy–six environmental objectives

The EU Taxonomy regulation establishes six environmental objectives:

• Climate change mitigation
• Climate change adoption
• The sustainable use and protection of water and marine resources
• The transition to a circular economy
• Pollution prevention and control
• The protection and restoration of biodiversity and ecosystems

The sectors that the EU Taxonomy currently covers are listed as follows:

• Agriculture, forestry, and fishing
• Manufacturing
• Electricity, gas, steam, and air conditioning supplies
• Water, sewage, waste, and related remediation
• Transportation and storage
• ICT
• Buildings

Any large public-interest company with more than 500 employees falls under the Non-Financial Reporting Directive (NFRD). Additionally, the European Commission has also made it clear that it intends to expand the NFRD into Small- and Medium-Sized Enterprises (SMEs) with time. These companies must disclose non-financial information in annual reports, including sustainability-related policies such as environmental protection. The NFRD directive is being legislated to include the EU Taxonomy from January 2023.

Embedded within the EU Green Deal, the NFRD directive is a leap forward toward consistent sustainability reporting across the EU member states. On April 21st, 2021, the European Commissions adopted an amendment to the NFRD to called Corporate Sustainability Reporting Directive (CSRD) extending the existing reporting requirements. As highlighted in Figure 1.10, the EU Taxonomy will come into effect quite quickly as per the schedule. By 2022, financial institutions and large companies will need to report on Taxonomy eligibility and TSC for climate change adaptation and mitigation to start to apply. By 2023, large companies must report on Taxonomy alignment, and the remainder of the TSC for environmental objectives starts to spread. Finally, by 2024, the entire EU Taxonomy will affect both financial institutions and large companies:

Figure 1.10 – EU Taxonomy – schedule

The EU Taxonomy is a foundational tool for the European Green Deal. It will have far-reaching impacts on countries even outside the EU due to their interlinked value chains and global economic markets.

Sustainable finance

We all operate within a global economy, which we experienced during the 2008 financial meltdown. The global financial sector is under increased pressure to become more sustainable. Now the financial market actors must disclose sustainable risks and impacts. Because of that, the term “sustainable finance” has been coined, and ESG investments will continue to rise tremendously. At the time of writing the EU Taxonomy, the European Commission published a taxonomy for sustainable finance. It is a classification instrument to help financial players and companies determine which activities qualify as sustainable. The objective is to promote investments in projects and activities that pursue the EU’s environmental goals and contribute to the transition toward a low-carbon economy.

Whether you are a start-up, a non-public company, or a public company, you will likely be required to have access to capital to invest in innovation, market expansion, or acquisitions. Financial market actors that provide finance for and invest in various sectors need to assess these risks and impacts on sustainable investments carefully. In the past, the need for transparency and accurate reporting on sustainable investments did not come under as much scrutiny as it does today, where ESG criteria weigh in heavily. Now financial market actors need to disclose many indicators that make a case for sustainable investments that are more favorable from a climate point of view. Marta Muñoz Méndez-Villamil, Technology for Sustainability and Social Impact Practice Lead in Europe at International Data Corporation (IDC), says:

If you are not transparent, you are doomed.

Some of the critical questions that financial institutions might ask themselves when looking at a prospective company seeking capital include the following:

• In what way does this investment mitigate climate change or promote adoption?
• What is the risk exposure if the company actively pursues a sustainable agenda?
• What is the ROSI?
• What sustainable public commitment has the company made? Have they committed to the SBTi?

As the financial markets rapidly shift their asset allocation toward ESG investments, capital for non-sustainable corporate ventures will eventually dry up. Clear evidence of this is due to the sharp drop in oil prices and investments are shifting to sustainable investments. If the oil price is too low, then it is no longer economically sustainable to draw oil out of the ground, refine it, store it, transport it, and sell it. As a result of dropping oil prices and finance institutions reallocating their asset allocations into more sustainable asset classes, since 2015, the US oil and gas industry has filed more than 500 bankruptcies (Takahashi 2021).

GHG Protocol Corporate Standard

Various standards have been developed over the last 20 years to ensure comparability of carbon footprints, with ISO 14064 and the GHG Protocol Corporate Standard being the most used and accepted ones. As early as the 1990s, the World Resource Institute (WRI) and the World Business Council for Sustainable Development (WBCSD) identified the need to establish a GHG measurement and reporting standard. The first version was finally published in 2001, named the GHG Protocol Corporate Standard. It has become the most widely used standard for carbon reporting. Although it has its flaws, not including Scope 3, the framework showed some early success.

By 2016, 92% of Fortune 500 companies reporting to the Carbon Disclosure Project (CDP) had already been using the GHG Protocol as the basis for their reporting. 2021 was a record year. Despite the continuing challenges of the pandemic, more than 13,000 companies have reported on their environmental impact through CDP.

The carbon disclosure was 37% higher than in 2020 and 135% higher than when governments signed the Paris Agreement on climate change in 2015. In 2021, disclosing companies accounted for 96% of the Financial Times Stock Exchange Group (FTSE) 100, over 80% of the S&P 500, and more than 1,500 companies in China. In total, this accounted for over 64% of global market capitalization (CDP - Disclosure Insight Action 2021). A public declaration on ESG ambition and emissions reporting are important levers to accelerate companies toward greater sustainability.

The GHG Protocol defines how to count carbon and defines the so-called outlining of what you can trust. The GHG Protocol is composed of three different scopes of emissions, which are illustrated in Figure 1.11:

Figure 1.11 – The three scopes of GHG emissions (World Resource Institute n.d.)

Scope 1 includes your direct emissions from owned and controlled sources such as facilities, equipment, mobile assets such as vehicles, and onsite landfills.

Scope 2 includes indirect emissions that other companies have generated to supply the reporting company with energy, such as electricity, heating, and cooling.

Scope 3 focuses on indirect emissions along the entire value chain of a company. It goes far beyond the emissions recorded in scopes 1 and 2. It accounts for both your upstream and downstream emissions across your entire value chain. They occur outside the organization, for example, in the supply chain or during production or travel. Scope 3 emissions are, on average, 11.4 times higher than a company’s operational emissions (scope 1 and scope 2); therefore, there is a need to create transparency around these emissions. Companies will fall short in their ambitions to reach net zero unless they also take a severe claim to reduce their Scope 3 emissions. On March 21, 2022, the United States’ Securities and Exchange Commission (SEC) proposed rules to enhance and standardize climate-related disclosures in their registration statements and periodic reports, which would enable investors to assess their risk exposure when making their investment decisions (SEC 2022).

Scope 4 focuses on avoided emission reduction that can be achieved through utilizing a particular product or service. Products and services that can have a significant avoided-emissions effect are employee commuting, teleconferencing, energy footprint reduction, and waste management. In Chapter 4, Data Center and Cloud, we will look at a case study from EcoDataCenter where they achieve net-positive results by feeding back excess heat and water to a combined heating and cooling water plant, which, in turn, avoids burning coal and gas for the district heating of private houses and industrial production. Scope 4 is not currently established in standard GHG reporting, but it has been a topic for discussion since 2013 when the scope 4 taxonomy was originally introduced. With the pandemic and working from home becoming the new normal, discussions have reignited that scope 4 for GHG emissions has become a necessity (Bay 2020). Figure 1.12 highlights more clearly what falls into the respective classification bucket. In the coming chapter, we will also define a sustainable IT taxonomy and what items fall into the respective category:

Figure 1.12 – Carbon emission scope classification

For most companies, including technology companies, the main drivers of carbon emissions lie primarily in Scope 3. Without accounting for Scope 3 emissions, calculating their carbon footprint would not give a complete picture:

Figure 1.13 – Scope emissions by industry

A report by the German Global Compact Network (Global Compact Network Germany n.d.) , as shown in Figure 1.13, outlines the scope of emissions by industry. For carbon-intense sectors such as automotive and manufacturing, you can see that scope 3 emissions amount to 79%–87% of the total value chain emissions.

Since 2001, the GHG Protocol Corporate Standard has been used for numerous corporate reports. The GHG Protocol Corporate Standard defines the reporting requirements for scope 1 and scope 2 emissions and recommends including scope 3, although it is neither strictly required nor specifically defined. Since a considerable proportion of corporate emissions occur within scope 3, and since there was no uniform standard to compare companies, a new standard was introduced in 2011, called the GHG Protocol Scope 3 Standard. The Scope 3 standard introduced 15 categories within indirect scope 3 emissions for companies to report on.

Later in the book, we will return to the GHG protocols as we define our own sustainable IT emission taxonomy and start working out our own current state CO2 baseline.

Science-based targets

The primary objective of the SBTi Net-Zero Standard is to enable corporations to set net-zero targets consistent with limiting the global temperature rise to 1.5°C. These targets are aligned with proven methodologies within climate science, and it includes the guidance, criteria, and recommendations that companies need to set science-based targets.

The primary focus of COP26 was the critical target of limiting global temperatures to rise to 1.5°C by halving global emissions by 2030. Additionally, it was also where the Net-Zero Standard was officially launched. This key target is well within the critical requirements of SBTi’s Net-Zero Standard.

The Net-Zero Standard has four essential requirements:

• Focus on rapid, deep emission cuts: Focusing on cutting carbon emissions is the most effective and scientifically sound way of limiting the global temperature rise to 1.5°C. Limiting global warming should be the overarching priority for companies embarking on the journey. The Net-Zero Standard covers the entire value chain emissions, including those products and services produced by their processes (scope 1), purchased electricity, heating, and cooling (scope 2), and generated by suppliers and end users (scope 3).
• Set near- and long-term targets: Companies must set both near-term and long-term science-based targets. Companies must publicly commit themselves to halve emissions by 2030 and, by 2050, decarbonize completely.
• No net-zero claims until long-term targets are met: A company can only be considered to have reached net zero if the long-term target has been fulfilled.
• Go beyond the value chain: The SBTi recommends companies divulge deeper into their value chain and make investments outside their science-based targets to help mitigate and accelerate climate change elsewhere.

So, what is the impact and commitment on SBTis, you might ask? More than 2,000 companies worldwide lead the zero-carbon transition by setting emissions reduction targets (Companies taking action n.d.). About one-third of Europe’s largest public companies have pledged to reach net-zero by 2050. However, only 1 in 10 are on track to net zero (Ollagnier, Dijkstra and Matthew 2021). We also see a paradigm shift on the social side. Companies have been expanding diversity and inclusion efforts, committing funds to fight racial and social inequity, and speaking out on societal issues they used to avoid (Winston 2021). The war in Ukraine and the sanctions imposed on Russia alongside the EU’s high dependency on gas have sparked a major energy crisis in Europe. Countries with a high percentage of gas supplied by Russia such as Germany (40%), Italy (20%), and France (18%) have triggered countries scrambling for alternative energy sources (McCarthy 2014). On a positive note, this has also started to accelerate investments in renewable energy sources to reduce Russian gas dependency.

Publicly committing to the SBTi to reduce emissions sets a standard that echoes throughout the entire value chain (Mendiluce 2022). We see several prime examples where companies such as Microsoft and Salesforce have significantly improved their supplier code of conduct, forcing suppliers to act with the risk of being dropped or paying a fine for being incompliant. Another example is where Tesco and Santander bank have teamed up to offer Tesco’s suppliers preferential financing rates to invest in sustainable business practices, such as electrical vehicles (Winston 2021). With companies such as Microsoft and Zoom supplying videoconferencing software, you could argue that this would have a major impact on their scope 4 if they were allowed to account for it:

https://sciencebasedtargets.org/net-zero