The need for corporate sustainability

The need for corporate sustainability

The green shift is now in full swing. Belgian companies are out of the starting blocks in the race to take the necessary steps and seize the opportunities offered by the green economy.

Consequences of global warming

With unprecedented flooding in the Belgian region of Wallonia in 2021 and the many heatwaves and forest fires we have seen in recent years, the consequences of global warming have suddenly become very close to home for many people and businesses. Scientists have been warning about the dangers of global greenhouse gas emissions for decades, but it is only now that the sense of urgency seems to be really getting through.

Green Deal

The European Commission has long been aware of this, prompting it to launch the Green Deal. This is a package of measures designed specifically with the aim of making Europe the first climate-neutral continent by 2050. By as early as 2023, CO2 emissions must be reduced by 55 per cent compared to 1990, and by 2040, Europe is aiming for a 90 per cent reduction.

The European Green Deal is the exponent of Europe's ambition to be a global forerunner in the fight against global warming. Companies must shoulder their societal role in pursuing this goal. This is also an absolute necessity from an economic point of view, as the climate can have a particularly significant impact on companies' business models and operations.

Wim Eraly – Senior General Manager, Corporate Banking, KBC Belgium

Measuring environmental impact

For listed companies, sustainability has long been a major concern. Both investors and regulators have for several years been forcing them to measure, track and report their environmental impact. Small and medium-sized enterprises have so far not felt the same pressure. This was reflected in a recent survey by KBC of its SME customers. Only 48% had already taken concrete steps to become more sustainable.

It would be naive to think that the efforts of the big multinationals alone will be enough to enable Europe to become the first climate-neutral continent. All companies will have to contribute. Moreover, the sustainable transition also offers opportunities. It would be a shame if SMEs failed to grasp them.

Filip Ferrante, Director of Corporate Sustainability at KBC Group.

Filip Ferrante

Urgency for all sectors

As the Green Deal reaches cruising speed and national governments amend their legislation, more and more companies will feel the practical consequences. ‘The shift towards a carbon-neutral economy is not a revolution, but an evolution that is gathering speed. So while companies shouldn’t immediately panic, they really do need to get out of the starting blocks now,, says Wim Eraly.

Towards renewable energy

noodzaak van duurzaam ondernemen

The sectors generating the highest emissions are the first to come under heavy pressure to make the switch to sustainability. In the energy sector, it is now seen as an obvious step to move away from coal and oil extraction and gradually replace them with renewable energy generation. But the real estate sector, which accounts for around 40 per cent of total energy consumption in Europe, also faces major challenges. And with the shift to electric vehicles, the mobility sector also faces a major challenge.

‘Of course, there are sectors where the transition is more urgent. But no one can duck the climate issue; every sector will have to jump on the bandwagon,’ predicts Filip Ferrante.

Climate risks for businesses

Global warming poses risks for companies at various levels.

Physical risks

To begin with, there are the physical risks. The flood disaster in Wallonia also caused a lot of harm to businesses, or even rendered their operations completely impossible. Doing nothing about global warming would mean that even more businesses could be affected by floods or other natural disasters.

Financial risks

Companies are also taking a financial risk if they ignore the transition to a sustainable economy. ‘Of course, investments will be needed to fully analyse the business process and reduce energy consumption, for example,’ says Filip Ferrante. ‘This is not only good for the environment, but is also a matter of good financial management. Because by emitting less CO2 now, a company will avoid having to pay heavy fees for its CO2 emissions in the future.’

Moreover, it is now clear that financing activities that are harmful to the environment and future generations will become less and less the norm. KBC, for example, recently phased out its direct coal financing portfolio completely. ‘This illustrates that certain sectors and companies that fail to embrace sustainability will find it harder to obtain financing, or at the very least will face higher financing costs. This is partly because policymakers will also use the capital instrument to drive the green transition,’ Wim Eraly believes.

For instance, financial institutions report to the financial regulator on what is called their green asset ratio. This ratio indicates how green a bank's assets are. ‘The next step is to impose stricter capital requirements on banks for their non-green assets. That will increase financing costs for certain companies and sectors.’ Yet Wim Eraly is optimistic. ‘I think it will only be a minority of companies which find it more expensive to raise finance. We will be able to guide most companies in the transition to a more sustainable and green business.’

Creating sustainable value

There is no doubt that failing to take the green economy into account poses risks for businesses. But according to Vlerick Business School professor and sustainability expert Xavier Baeten, companies can also approach the climate issue completely differently.

There are still some companies that see the sustainable transition as a threat. In particular, they see cost items that reduce shareholder value. Other companies, by contrast, see sustainability as a challenge. They are aware of the problems facing society and want to be a part of the solution. In practice, it is essential that companies focus on what really matters. For example, it makes no sense to print fewer documents while ignoring the CO2 emissions from the production line. Ultimately, it is about setting the right priorities, and that is still a major challenge for many companies. First of all, the shift to a sustainable business presupposes a different view of profit; the ultimate goal of a company becomes not to make a profit, but rather to create sustainable value. The financial aspects are only one part of that. To ensure sustainable value creation, the sustainability drive must penetrate through to the heart of the business. That will only be achieved when investment decisions are no longer tested exclusively against a financial yardstick. Internal processes and production must also be aligned with the vision of sustainability. This implies that a company must be willing to make decisions based on a long-term view, even if they deliver no short-term profit.

Xavier Baeten, Sustainability Expert at Vlerick Business School

Opportunities through sustainable transition

By making a full transition to a sustainable business model, a company can turn climate risks into opportunities. The company may for example develop new products or services or establish a business model focused on the future. ‘The climate challenge is forcing companies to innovate,’ Wim Eraly continues. ‘Companies that are open to this then gain a competitive advantage; companies that remain on the sidelines are put at a disadvantage, in turn leading to higher costs and loss of value of their assets.’

Green is the new digital

In some ways there is a great similarity between the sustainable transition and the digital revolution. Using the slogan 'Green is the new digital', KBC chief Johan Thijs is keen to highlight the importance of sustainability. ‘Just as the digital evolution has created a whole new economy, so the sustainability drive will create new industries with new business models and innovative service models. Companies that quickly see those new opportunities will inevitably have a competitive edge,’ says Filip Ferrante.

And so, spurred on by the sustainability drive, a whole new circular economy has emerged, where companies reuse materials, residues and energy (such as waste heat) as much as possible in order to use resources sparingly and sustainably and keep their emissions under control. This is leading to huge demand for new technologies, products and services to make this possible. One example is the ‘as-a-service’ model, where everything is cast in the form of a service model. In taking these steps, companies are laying the foundation for new revenues.

Together with stakeholders

Companies are not alone in the switch to sustainable operations. ‘To facilitate the sustainable transition, it is key for companies to secure more cooperation between the different stakeholders. It sounds simple, but something like that takes a lot of time and energy.’ Professor Xavier Baeten cites the example of carmakers who, spurred on by their stakeholders, discovered that they would become irrelevant in the long run if they saw themselves purely as manufacturers. Since then, several of them have transformed their business models. They now offer mobility solutions , which marks a completely different approach and offers new prospects for the future. ‘Most companies haven’t got that far yet. They often see sustainability as something simply as an add-on. But sustainability goes right to the heart of the business, something that usually becomes clear after consultation with all stakeholders. The blinkers then come off, opening up the way for innovation. And that could be the trigger for a totally new strategic change of direction,’ says Xavier Baeten.

Something like this requires a sea change in the mindset of business leaders. ‘Engaging with stakeholders calls for a new management model. It’s no longer enough to use the traditional 'number crunchers' who focus mainly at the financial picture. It needs a very different type of manager." This is an area where SMEs are usually already strong. ‘Though they often aren’t aware of that themselves,’ says Xavier Baeten. ‘But because SMEs are often strongly embedded in the social fabric, in many cases they already have close contacts with their stakeholders. The main issue for SMEs is to ensure a properly structured focus on stakeholders as well.’

KBC's role

For financial institutions, the sustainable transition is already a top priority. ‘As a bank-insurer, we need to manage our risks and those of our stakeholders well,’ believes to Filip Ferrante. ‘If some customers are taking risks with no prospect of future benefits, it’s our duty to challenge them on that. By doing so, we are protecting ourselves, the savings we manage and all the stakeholders who put their trust in us.’

Towards a green product range

Financial institutions can help drive the sustainable transition in many ways. They can start by offering range of green products.. ‘But that’s only the first link in the chain,’ says Wim Eraly. ‘We van use it to raise awareness among companies about the importance of a sustainable policy. But there’s no guarantee that a given company will know precisely how to put that into practice.’

That’s why KBC is going a step further. Corporate customers can use a footprint calculator to map out their own environmental footprint. For its Corporate Banking clients, KBC has also partnered with Encon, a consultancy firm that helps companies become more sustainable. As part of this service, KBC's corporate customers can receive an ‘environmental health check’ and concrete advice.

‘Financial institutions alone are of course not going to solve the climate problem. Stakeholders from all sections of society, will have to work together. Citizens, governments and businesses: we all need to come to the realisation that we need to tackle the climate problem now. There is no other choice,’ concludes Filip Ferrante.

KBC expressly points out that the use of terms such as 'green' and 'sustainable' on this webpage in no way suggests that what is described is already (fully) in line with the EU Taxonomy.