Is carbon universally material?

When the corn doesn't grow, adaptation beats mitigation

This post was inspired by Louie Alexander Woodall’s article What if emissions aren’t a good proxy for transition risk?

Carbon. To paraphrase Homer Simpson, “It is the cause of and solution for all of life’s problems.” While the world heats up, we can’t turn off fossil fuels tomorrow without significant disruptions to modern life, including healthcare, farming, and delivery of necessary goods.

If there is one area of ESG that companies are laser-focused on, it is carbon. Despite detractors, who are now in the minority, there is no doubt that carbon and greenhouse gases are heating our planet, wreaking havoc on biodiversity, and threatening our modern way of life.

And so, every company and person is affected by climate change caused by increased GHG emissions in the atmosphere. However, not every company has the opportunity to impact carbon emissions similarly. As hard as it is to read, many companies may need to focus on other related ESG issues specific to them and for your company.

For example, in working with Consumer/Product Goods (CPG) and Retail companies, I often hear about a singular challenge: Getting farmers to report their carbon emissions.

There are a few reasons why these companies ask this information:

• Some consumers want to understand their carbon footprint and make purchasing decisions based on this information.

• Companies must report their Scope 3 carbon emissions and want to understand the emissions of their value chain, including those related to sourcing.

Yet, for farming specifically, this is a heavy ask. Large corporations' data and process challenges are different at the farm level. Farmers also run on extremely tight margins. Asking them to provide activity data or their emissions requires a heavier lift than they can handle. Even incentivizing them to do so, especially at scale, is a losing proposition. The result here would only be the emissions data, not any improvements in the reported data over time.

The logical conclusion to this effort is that farmers don’t do it, and Procurement finds farms that do or that farmers do it but lack the means to improve.

Is carbon usage a valid measurement of a farm’s value or probably to manage decarbonization, or is it that companies need to report?

Farming is on the front lines of climate change, yet measuring and reducing carbon isn’t the most immediate issue they face, nor is their ability to decarbonize necessarily as simple as it is for bigger companies.

First, if you are a downstream customer of a farm, would you rather know their carbon emissions for reporting or understand how well they are mitigating their climate risk? One is not material for the farm, whereas the other directly affects the farm’s ability to supply your company with the agricultural products you need.

Second, once you have this information, what is the plan to get the farm to decarbonize? Farmers are not going to respond to non-material decarbonization strategies. As the WSJ recently reported, there might be incentives like government subsidies to help them run solar. Still, from a decarbonization perspective, the farm could also sign up with a renewable energy provider (depending on the market).

On the other hand, per the UN:

31 per cent of human-caused GHG emissions, originate from the world’s agri-food systems.

So, there is a bit of materiality here. Farms with high emissions may be subjected to an increase in cost in the market around shipping products globally (think Carbon Border Adjusted Mechanisms). What are the trade-offs between moving the critical food supply chain against pricing in carbon?

In the meantime, farmers may not have a path forward without consortiums or government incentives. I wonder if the material decarbonization opportunities differ the further upstream a company explores its value chain.

For example, whether it is a farm or a mine, material decarbonization at scale and issues like forced labor require more multilateral and public-private partnerships to help scale meaningful solutions. While a big company might be able to pressure its supplier, a farmer who has invested intense capital in farm equipment isn’t about to pressure its agricultural equipment suppliers to transition so they can have an electric tractor. Would farmers pressure their fertilizer or feed suppliers, potentially increasing their costs for sustainable options?

Again, there are too tight margins.

If companies want far upstream suppliers to decarbonize, pressure and incentives to report won’t work. This means there is no simple way out of this challenge. To support change this far up in the value chain, it takes significant cooperation, engagement, and policy support to drive this complex transition.

And perhaps at this level, we find the most significant lesson in our never-ending chase for carbon accounting. Every company will have core material issues like this that can only be solved at the systemic level.

At this low-lit intersection, we find the impact of material ESG issues with impact. Few companies have reached this destination. A handful of management teams are standing at the well-lit intersection of ESG and disclosures but are curiously looking at this intersection with distant interest.

While the world is focused on point solutions focused on mitigation through measuring and managing, we need to be aware of three key points:

• Carbon may not be your most material environmental issue.

• The further up the supply chain, the more difficult systemic issues are to address without a systemic approach.

• Adaptation may take precedence over mitigation for specific industries due to near-term and long-term challenges, like climate risk.

For now, rather than pressuring high-upstream value chain players with surveys and emissions reporting, we need to ensure they are focused on adaptation for near-term climate risk issues. Otherwise, they may not survive the short term to be long-term suppliers. Proxy data and averages can help alleviate this pressure.

In the meantime, having a frank discussion about their observations, concerns, and plans for the next few years would help ensure they are ready for the next pressing crisis.

After all, if they go down due to climate risk, what would you do? Would you last long enough yourself to save the world?