Canadian Transportation Council |  Medium-Heavy Duty Vehicle Committee | Electric Vehicle Council

A Core Motivation of Decarbonization

Jeff Hove |
May 2022

The transportation market is undergoing a significant transition focused on reducing related carbon emissions. In the past, most of this sector’s transitions have been driven by regulation – lowering sulfur dioxide, nitrogen oxide and particulate matter emissions, improving vehicle efficiency, controlling aromatics, reducing fuel volatility and incorporating oxygenates.  And while there is a regulatory angle being applied to reducing carbon, many entities are committing to the effort even without a government requirement to do so. Why?  Because there are a number of external stakeholders – financial firms, lending organizations, shareholders, employees, customers – incorporating decarbonization into how they perceive the performance of companies and how they wish to engage with those businesses. Chief among these is the increased influence of Environment, Social and Governance (ESG) reporting expectations and it is affecting publicly traded and privately held companies alike.

If your business is not familiar with ESG, you are most likely familiar with Corporate Social Responsibility (CSR).  Many companies embraced a CSR plan and policy in order to enhance their engagement with their communities, to highlight the positive influence their activities have on their customers and neighbors and demonstrate their commitment to the same. More recently, however, this level of commitment does not seem to be sufficient. Specifically, observers are looking for companies to establish a transparent plan and demonstrate progress to reducing their exposure to environmental risks (most notably those directly related to climate change), to address social justice and equality issues and to ensure appropriate processes and procedures are in place to protect themselves from inappropriate decisions relative to the governance of the business.

The initial pressure points for ESG adoption came from investment firms, who began incorporating ESG criteria in their evaluations of risk and return of publicly traded companies. In some instances, shareholders took direct action to compel companies to adopt ESG plans by influencing the election of board members to ensure these principles were given the attention they felt necessary. Following the COP-26 climate summit in Glasgow, the world’s leading financial institutions, who collectively control $130 trillion of assets, formed the Financial Alliance for Net Zero and pledged to incorporate plans to reduce carbon emission into their business decision process. The financial sector is very serious about this.

But it would be wrong to assume only companies seeking investments were susceptible to ESG. There are several reports of lending institutions beginning to incorporate ESG principles in their underwriting processes. This translates into companies potentially being denied access to capital, or being charged higher rates, based upon their commitment to ESG performance. Business relies on capital to grow and those who control access to that capital are putting pressure on companies to commit to these principles.

And if that were not enough to garner wide-spread attention from the transportation sector, there is the additional pressure from customers – both personal and corporate. From the personal side, society as a whole is becoming more sensitive to these issues and are beginning to hold companies accountable with whom they choose to do business. Commercial customers wield an even greater influence, especially large publicly traded ones who have made commitments to reach zero emissions by a certain date. They are turning to their vendors and asking them to contribute to attaining this commitment, or they could decide to change vendors. The pinscher move has been deployed.

But wait, there’s more!

One of the significant challenges with ESG is the lack of clarity of expectations, the absence of a universal standard by which companies can be evaluated and the diversity of firms claiming to be the definitive, go-to experts for ESG evaluation. This inconsistency results in dramatically different scores being applied to the same company based upon the different criteria applied and the importance with which certain attributes are weighted. Although there are several credible entities seeking to fill this void, there are also a lot of snake oil salesmen who seek to extract financial contributions before allowed companies to review their evaluation. If your company is domiciled in the U.S. but operates globally, a lack of clarity in the U.S. poses issues and competitive disadvantages in other countries that have a clear set of ESG criteria.

Due to the immense investor implications and industry-led demands for standardization and clarification of ESG requirements, the U.S. Securities and Exchange Commission (SEC) has proposed rules that may be finalized as early as December 2022. As written, these rules directly apply to publicly traded companies and indirectly apply to privately held organizations doing business with publicly traded companies.  The proposed rules would require companies subject to the rules to obtain emissions data from any business with whom they do business, as these external emissions (referred to as Scope 3) will be attributed to the regulated company’s evaluation. In other words, the SEC seeks to compel regulated entities to enforce ESG reporting requirements on non-regulated entities.

To be clear, a number of large publicly traded companies have already signaled that they are moving forward with requiring ESG reporting from their business partners. With or without the SEC ruling. As this occurs, industry may be faced with multiple organizations having a variety of demands and citing numerous different ESG “standards” or “experts”. The SEC rules are not being pushed just by climate change activists or social justice advocates but by industry players looking to bring some level of order to the existing chaos.

For this reason, and many others, it is critical that businesses engaged in the transportation sector pay attention to their environmental performance. You will be held accountable by someone at some time and its always best to get ahead of the curve. This is one of the reasons the Transportation Energy Institute is working to present viable solutions to reduce carbon emissions. Industry needs meaningful and pragmatic options to achieve decarbonization goals.  Stay tuned for more from us regarding these options as well as a special white paper exploring the world evolution of ESG.

Recent ESG Resources

Scroll to Top