There are reasons to be optimistic about the sustainability of European business, although the year has been punctuated by some depressing headlines

2015 has been a year in which corporate commitment to corporate social responsibility has gained momentum in Europe, particularly on clean energy, and sometimes outstripping the willingness of governments to legislate.

The UN climate talks in Paris were marked not only by late-night wrangling over goals and costs but a series of high-profile announcements from companies keen to do – and be seen to do – the right thing in the eyes of consumers and other stakeholders.

On the downside, the biggest corporate villain of the year was undoubtedly German carmaker VW, which fell from grace after rigging diesel emissions tests. The spotlight shifted to other car manufacturers as trust in the sector evaporated.

The UK also came in for fierce criticism after the Conservative government ditched a raft of green policies on the grounds of the need to make financial savings. This threatened to undermine its credibility in Paris, along with future investment in UK renewables.

Ikea

Individual European companies have advanced sustainability in their own ways. Swedish giant Ikea, for instance, was aiming to source 100% sustainable cotton by the end of 2015 for all its products from lampshades to bed linen. Ikea, which uses about 0.7% of the world’s cotton, has not only transformed its own supply chain but is also helping to improve the wider cotton farming industry by bringing social and environmental benefits to thousands of workers.

In 2005 the company linked with the World Wide Fund for Nature (WWF) and other stakeholders to create the Better Cotton Initiative (BCI). Since then it has invested €1.3m in sustainable cotton farming projects and helped more than 100,000 farmers adopt more sustainable practices.

Conventional cotton farming, which runs the risk of soil depletion and falling water tables, can become financially impossible for farmers, who then move into other cash crops. It is also a relatively sensitive crop, vulnerable to both more extreme weather and the disruptions to growing seasons associated with climate change.

The BCI sets social and environmental criteria for production. These enable farmers to cut water consumption and pesticides by 50% and usage of synthetic fertilisers by 30%. Cotton yields are achieved at less cost, meaning higher earnings. Ikea aims to reduce the amount of cotton it buys by improving efficiency, blending it with other materials or using alternatives, such as cellulose fibres. But rising sales mean its use of cotton is soaring – a rise of almost 64% between 2013 and 2014. By switching to 100% sustainable cotton and making it affordable across its home furnishings range, Ikea aims to change the global market permanently.

Ikea wants to make “better cotton” a mainstream commodity that trades in line with conventional cotton market prices, promoting overall use of sustainable cotton around the world. It therefore only bought about one fifth of total sustainable cotton produced in 2013, leaving enough on the market to accelerate the process. Farmers backed by Ikea may also sell their cotton to any buyers. Again, this supports the levels of sustainable cotton on the global market, ensuring a more stable supply and curbing volatility.

Head of steam

Decarbonisation gathered pace throughout the year, culminating in bold declarations at the fringes of the Paris talks by institutional investment giants Allianz, the German financial services group, and ABP, the Dutch pension fund. They joined a group of investors committed to tackling climate change by decarbonising their assets and integrating carbon information into portfolio designs.

The group, dubbed the Portfolio Decarbonisation Coalition (PDC), now consists of 25 investors with $600bn under management – far more than its original target of $100bn. PDC members have all pledged to withdraw capital from carbon-intensive companies, projects and technologies in each sector, reinvesting the money into carbon-efficient assets. They have also committed to mapping the carbon footprint of their assets and incorporating this information into their portfolio structures.

Circular economy

Another potentially significant step was the European Commission’s announcement of a new package to promote the transition to a circular economy, i.e. one where resources are used in a more sustainable way. This will boost global competitiveness, foster the right kind of economic growth and generate new jobs, as well as curbing carbon pollution, the commission said.

Unlike earlier proposals that focused too heavily on waste reduction targets (and were withdrawn at the end of 2014), the new package covers the full lifecycle from production and consumption to waste management and the market for secondary raw materials. It will therefore help “close the loop” through greater recycling and re-use, analysts say.

The transition will be supported by €5.5bn from structural funds for waste management, €650m Horizon 2020 (the EU funding programme for research and innovation) and investments in the circular economy at national level.

Key points include:

• Actions to halve food waste by 2030 to meet the applicable Sustainable Development Goal (SDG).

• Development of quality standards for secondary raw materials to increase the confidence of operators in the single market.

• Measures in the Ecodesign working plan for 2015-17 to promote reparability, durability and recyclability of products, and energy efficiency.

• A revised regulation on fertilisers to facilitate the recognition of organic and waste-based fertilisers in the single market and support the role of bio-nutrients.

• A strategy on plastics in the circular economy, addressing recyclability, biodegradability, the presence of hazardous substances and the SDG for tackling marine litter.

• Concrete measures to promote re-use and stimulate industrial symbiosis – i.e. turning one industry’s by-product into another’s raw material; economic incentives for producers to put greener products on the market and support recovery and recycling schemes (e.g. for packaging, batteries, electrical and electronic equipment, and vehicles).

  The commission also proposed a common EU target of recycling 65% of municipal waste by 2030; another to recycle 75% of packaging waste by 2030; and a binding target to reduce landfill to maximum of 10% of all waste by 2030.

     
  EU proposes recycling targets
    

    

   

  Adoption and implementation of the proposals, which drew on 1,500 submissions at public consultation over the summer, will now depend on the European Parliament and Council.

   

    

  First vice-president of the European Commission Frans Timmermans, responsible for sustainable development, said: “The circular economy is about reducing waste and protecting the environment, but it is also about a profound transformation of the way our entire economy works … This mix of smart regulation and incentives at EU level will help businesses and consumers, as well as national and local authorities, to drive this transformation.”

  A host of companies interviewed by Ethical Corporation in 2015 for a report on the circular economy 'report' said they were already applying closed-loop or design-for-disassembly principles to their operations. These included BT, Jaguar Land Rover, Maersk, Vegware and Fairphone.

  Slower lane

  Shipping, which delivers 90% of global trade and is one of the most complex industries, has made further moves towards sustainability this year as major players harness expertise, technology and best practice. The Sustainable Shipping Initiative (SSI), a coalition of 15 companies and two NGOs, was co-founded by Forum for the Future and WWF. The SSI argues that shipping can become sustainable by 2040 with determined individual and collective action.

    
  Barriers to sustainable shipping remain
   

  Of its members, 70% report on sustainability and have it embedded in their strategies; two-thirds have carbon reduction goals; 60% publicly report their CO2 emissions and half apply sustainability criteria to procurement. Most also engage their supply chains to these ends. In late 2014, members committed to report progress, link sustainability to core business strategy, set reduction targets on environmental issues and deliver a positive impact for people and society.

  Bunge, a global agribusiness, has saved thousands of tonnes of fuel by running 25% of its fleet at slower speeds since 2013. It is also looking into the creation of a global emissions index to spur the building of more fuel-efficient ships. Cargill, the food, agriculture and financial services group, has committed to using the “rightship green rankings” system for vessel selection and will only charter ships with high efficiency standards. But barriers remain. Regulatory pressures that challenge innovation, together with the complex nature of the supply chain, will both require a careful approach in the coming years, industry executives say.

  Bad smell from VW

  The Volkswagen scandal dealt the car giant another blow when it was suspended from the London Stock Exchange’s FTSE4Good index series following the news earlier this year that millions of its cars were fitted with software to cheat emissions tests. The exchange announced VW’s removal from its ethical fund in December, in its twice-yearly review of the index. The FTSE4Good advisory committee took the decision to suspend Volkswagen from the list of approved companies after subjecting the company to its “controversy monitor”, which considers the significance of crises or controversies affecting the company and its wider industry.

  The company was deemed to have “misled government agencies and consumers over vehicle emissions through the application of software designed to circumvent test requirements”. The crisis has dragged VW shares down and forced several resignations, including former chief executive Martin Winterkorn. The suspension takes effect from 21 December. Under the terms of its exclusion, VW will not be eligible for re-entry into the index for at least two years.

  The index comprises companies judged to better manage environmental, social and governance risks, and is designed to help investors integrate ethical considerations into their decision making. New entrants to the index included beermaker Carlsberg, property website Rightmove and food giant General Mills. Fashion label Christian Dior, watchmaker Swatch and another carmaker, Porsche, were among those excluded from the list.

  Sports Direct

  Other companies also proved themselves vulnerable to bad news on the corporate governance front. Sports Direct, for instance, the UK retailer run by Mike Ashley, lost more than £500m of its stockmarket value in December after reports its warehouse workers – most of them temporary – were treated unfairly, with daily searches and pay effectively below the minimum wage.

             
  Sports Direct lost value from unfair labour practices           
   

  RE100

  Along with the investment houses decarbonising their assets, a parallel trend has grown throughout the year of big businesses committing to source all their electricity from renewables. BMW and Coca-Cola Enterprises were among the latest to join the RE100 initiative. They joined Microsoft, Walmart, Nike and Marks & Spencer in moving towards 100% renewable electricity use. A further four companies have also made the pledge: International Flavors & Fragrances, Nordea Bank, Pearson and Swiss Post.

  
  BMW committed to renewable energy
   

  The timeframes for achieving the target vary – Pearson has sourced all its electricity from renewable sources since 2012, while Coca-Cola has an interim target of 40% by 2040. In total, 53 companies have now signed up. New analysis from The Climate Group and CDP suggests that these 53 RE100 participants will create demand for 90.1TWh of renewable electricity once they have made the switch - saving 56 million tonnes of carbon dioxide every year.

  If 1,000 of the world’s most influential companies switched to 100% renewable electricity, it could save around 1bn tonnes of carbon dioxide every year, shaving 3.4 per cent off global carbon emissions, according to the Climate Group and CDP.

  UK government under scrutiny

  A batch of abandoned green policies has left the UK looking not just isolated in Europe but also vulnerable to competitors in the renewables industries, analysts say. This has been borne out in 2015 by its downgrading as a place to invest in clean energy from the top sustainable energy rating of AAA to AAB by the UN accredited World Energy Council.

  In September, for the first time it fell out of Ernst & Young’s list of the 10 most attractive countries for renewable energy. EY wrote a damning critique of policy, or rather lack of it, that has led to this relegation and “confused investors and consumers”. Government justifications on the basis of cost are under scrutiny, with onshore wind and solar being touted as among the UK's cheapest energy sources, EY said. The removal of climate change levy exemptions could also lose onshore wind operators at least 6% of revenue.

  The UK has also axed planned regulations to make all new homes zero carbon from 2016; removed tax relief for community energy schemes; removed subsidies for larger solar farms and threatened to cut support for small domestic installations by 87%. It has scrapped an advanced £1bn scheme for carbon capture and storage (CCS), begun selling off the Green Investment Bank (GIB) and removed tax incentives for cleaner cars.

  
  UK lost solar subsidies
   

  And the lack of clarity and direction around UK energy policy may undermine investment in other areas, also threatening new nuclear build, CCS, and the much-hyped shale-gas revolution. “After experiencing what seems to be death by a thousand cuts, the UK renewables sector is trying to make sense of the government’s latest inconsistent actions,” the EY report states.

    

  “At best this may be misguided short-term politics obstructing long-term policy. At worst, however, it's policy-making in a vacuum, with no rationale or clear intent.” Both could sour the UK's general attractiveness as an investment destination. “If it can pull the rug from under the feet of investors backing low cost, sustainable energy when it is most needed, is any sector safe?” the report asks. Rather than continue to fight government on this issue, the UK renewables sector should consider establishing itself at the forefront of unsubsidised clean energy in Europe, EY concludes. “This won't be easy, but it may well be worth taking the risk.”  

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