The global push for net-zero emissions is a massive undertaking, but the existential threat of climate change means that companies must act now.

With the COP 26 global climate talks in Glasgow fast approaching, we held a workshop with a small group of investors, rating agencies, and corporates from the automotive, shipping and consumer goods sectors to discuss what it would take to accelerate action towards a net-zero economy.  

The wide-ranging discussion focused on whether we should adopt an earlier date for net zero – which, put simply, refers to the balance between the amount of greenhouse gas produced and the amount removed from the atmosphere. Participants also raised a number of valid challenges regarding the 2050 goals as well as some issues that need to be addressed in climate finance, including whether a carbon tax is really a silver bullet and how to balance adaptation and mitigation strategies. 

Climate targets: the road to net zero  

This issue of climate change has rapidly risen to the forefront of business strategy and public policy since the UN Paris Agreement in 2015, and the pace of activity has accelerated quickly since then. Many governments have set legally binding targets to reach net zero by 2050.  

There was a general consensus that 2050 is too distant an objective that would distract attention away from implementing high-impact initiatives today. Long-dated climate targets can lead to greenwashing, overpromising and underdelivering. After all, most corporate executives and asset managers in charge of firms today would have retired by 2050, creating issues around accountability.   

To have a decent chance of limiting warming to 1.5°C – the goal of the 2015 Paris Agreement – global emissions need to peak around 2025 and then plunge rapidly toward zero by 2050. 

One strategy to accelerate decarbonization is to look for quick wins. Cutting methane emissions has the potential to accelerate decarbonization in the short-term. Methane has more than 80 times the warming power of carbon dioxide over the first 20 years after it reaches the atmosphere. So it sets the pace for planetary warming in the shorter-term. Using existing technology, the oil and gas industry alone could achieve a 75% reduction in methane emissions by 2030, according to the International Energy Agency.  

Despite the promise of methane reductions, divergent baselines for reporting may derail progress. Although the Oil and Gas Methane Partnership (OGMP) 2.0 offers the best reporting framework and verification of emissions, the Securities and Exchange Commission (SEC) is considering requiring use of Environmental Protection Agency (EPA) estimates of baseline methane, which underestimate actual methane emissions caused by oil and gas production by as much as 76%. If the SEC adopts the EPA standards, the industry is going to be driven towards an EPA minimum baseline, which we know is wrong. Our hope is that the SEC, EPA, and OGMP can get together and figure out the right estimates that need to go into SEC reporting.   

Beyond quick wins, corporates and investors increasingly realize that simply throwing money at the problem is not going to work. Despite our progress in understanding the array of climate solutions needed, the investment implications of decarbonizing are less understood. Simply scaling carbon offset markets, be it for voluntary or compliance reasons, avoids addressing the need to create more sustainable business models. Mid-range targets in the ballpark of three to five years are needed to develop proactive strategies.  

In what has been described as a pincer move, investors and regulators can tighten scrutiny by emphasizing interim milestones and disclosures of “Scope 3” emissions, which are the greenhouse gases emitted along the whole supply chain and in the use of products or services. 

The panoramic view: cutting emissions throughout the value chain   

A more comprehensive and reliable picture of emissions is likely to help companies focus on building a consistent climate strategy, and mitigating emissions by reorganizing operations to address material concerns. 

But, to date, companies have hesitated to disclose estimates of their Scope 3 emissions, which are often overlooked by management because of the difficulty in data collection, questions about data quality, and the absence of direct control on the supply chain or other incidental activities.  

Currently, the GHG Protocol is the only internationally accepted method for companies to account for these types of emissions. The GHG Protocol classifies Scope 3 emissions into 15 different categories, divided into upstream and downstream activities. Not all 15 are equally important for all firms. Their relative importance depends on the type of business activities companies are engaged in. Therefore, a tailored approach for each company is required.

Source link for this article