On April 22, 2016, 175 nations signed a landmark deal on climate change, ratifying the Paris COP21 agreement to limit global warming to 2°C with the ambition of achieving 1.5°C limit. The agreement requires net zero emissions of man-made greenhouse gases from 2050. Backing up the agreement are carbon reduction plans submitted by almost 190 countries including the US, China, India and European Union countries to cut emissions.
What does this mean for business?
The Paris agreement is a clear signal of international will to tackle climate change and governments around the world are under pressure to ramp up efforts to cut carbon emissions. Trucost analysis shows that achieving the 2°C target means that the retail sector would have to reduce its carbon emissions by an average of 76% by 2050, while the telecommunications sector would have to achieve an 89% cut by the same year.
To manage their exposure, companies need to set science-based targets that reflect the specific carbon reduction plans for countries in which they operate. This will involve reviewing existing carbon targets – especially targets based on existing available technology – to see if they are still fit for purpose. The Science Based Targets Initiative also requires that most companies quantify their Scope 3 value chain emissions, and where appropriate consider those in the target setting. While this may sound daunting, there are time saving modelling tools and techniques that are sufficiently robust for external disclosure and target setting.
Companies that have yet to set targets – or develop low-carbon products – need to consider how their business will remain profitable in a world in which they risk failing to align with government commitments. Suppliers should consider how the goods and services they provide will help clients achieve emissions reductions in line with science-based targets.
Investors increasingly demand climate change disclosure by companies. For example, this year, 42% of investors of US-based utility AES Corporation voted for a resolution seeking to stress-test how the company would fair in a 2°C target world. Energy producers and other utilities, including Exxon Mobil, Occidental Petroleum, Noble Energy, Anadarko, and Southern Company are also facing similar resolutions at their annual meetings. Sectors that are responsible for the greatest carbon emissions (energy, utilities, transportation, and agriculture) should expect increasing scrutiny about the scale and speed at which emissions reductions take place.
The benefits of science-based tagets
Developing science-based targets achieves the following benefits for companies, suppliers, and investors:
- Demonstrate robust environmental risk management to all stakeholders
- Reduce energy and fuel costs
- Understand the extent to which your business growth may be limited by carbon taxes and emission limits
- Make the business case for investment in emission reduction or energy conservation projects
As with any environmental accounting effort, it’s important to get the metrics and boundaries right. You’ll need to make sure emissions inventories are aligned with financial records. Another important consideration will be to address whether targets will be absolute or intensity based, so having a good understanding of business growth projections by region and business unit will help inform the analysis. Since most companies will also need to quantify the emissions from their Scope 3 value chain, it is important to begin gathering information about your company’s activities with suppliers, employee commuting and travel, distribution, and how your products are eventually used and disposed – or minimize the data gathering hurdle by first modeling these impacts.
This column has been republished with permission from Trucost