The Continuous Improvement Cycle from the Centre for Climate Engagement’s interactive tool on climate disclosure.
In this Briefing Note…
- By gaining a clear understanding of greenhouse gas (GHG) emissions across the business, your board will have a better understanding of the materiality and cost of climate-related risks and opportunities in the short, medium and long term.
- Your board will be able to make informed decisions regarding emission reduction strategies and investment.
- You board will be able to assess your vendors’ and supply chain partners’ business operations and sustainability.
- You can ensure any legal requirements for climate reporting are fulfilled and will be in a position to respond to investor, shareholder and customer requests for information.
- Your board will be able to compare the organisation’s emissions profile and targets against others in the sector helping with competitive benchmarking and market positioning.
Calculating the company’s carbon footprint is a crucial step that will allow the business to identify where the biggest emission reductions can be made.
A comprehensive assessment of the entire value chain is recommended to understand your company’s greenhouse gas emissions – not just in relation to immediate operations, but also relative to your suppliers and customers. A full review of emissions includes scope 1, 2 and 3 emissions:
- Scope 1: direct emissions from sources owned or controlled by the company, for example emissions from company-owned or operated facilities and vehicles.
- Scope 2: emissions from the generation of electricity purchased by the company.
- Scope 3: all other indirect emissions within a company’s value chain.
Scope 3 emissions are often the hardest to tackle as they are outside of your organisation’s control, however they usually account for the more than 70% of a business’ carbon footprint, for those not in heavy industry sectors. Understanding your company’s scope 3 emissions will be essential to achieve net zero.
The Greenhouse Gas Protocol Corporate Accounting and Reporting Standard provides guidance for companies to measure their carbon footprint, including scope 2 guidance and a scope 3 standard.
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Set a target
- Investors increasingly expect businesses to have clear climate action goals – by reviewing your peers’ commitments within or outside your industry you can better understand leading best practices.
- Accountability and clarity are key to ensuring the board is serious about achieving goals that align with ambitious climate action – it can be useful to connect climate targets to performance incentives.
- By embedding climate targets and milestones into your business strategy, climate risks can be reduced, and the economic opportunities of climate action secured and enhanced.
- Setting ambitious targets and aligning them with management’s interests (e.g. through incentives) can help spur innovation and the shift in mindset required to accelerate change.
Once your company’s baseline emissions have been measured, you can set an informed and meaningful target. Climate targets usually take the form of a GHG emissions reduction target from a defined baseline, to be delivered within a specific timescale.
Ideally, the target should address emissions from your entire value chain and adhere to the Science Based Target Initiative’s (SBTi’s) Net Zero Standard. According to the World Resources Institute, to ensure corporate net zero targets are credible and accelerate climate action, companies should follow the following three approaches:
- Set Near-term science-based targets: sometimes referred to as interim targets (3 to 5 -year targets), which put a company on a net-zero trajectory without reliance on offsets. This will help your company understand how much, and how quickly, it needs to reduce emissions across the full value chain (scopes 1, 2 and 3).
- Set long term science-based net zero targets: the scientific and international policy consensus states that net zero carbon dioxide (CO2) emissions must be reached by 2050, to limit the global temperature increase to 1.5 oC, as set out in the 2015 Paris Agreement.
- Invest in cutting emissions beyond the value chain: for companies to become ‘carbon positive’ or compensate for historical emissions, financing additional mitigation or carbon removal activities will be required.
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Manage and improve performance
- Your company can benefit from reduced operational costs and climate-smart innovation by taking climate action. For example, in the shipping industry, New Climate Economy estimates if every fuel efficiency option was implemented, companies could save over $30 billion dollars annually.
- Your organisation can benefit from better access to funding, through investors or government incentives in your jurisdiction, as well as lower capital costs, such as lower valuation premiums, if your company is taking action on its net zero targets.
- As a director you may be exposed to litigation risk if you fail to meet governance standards in the stewardship of your company. For example, in the UK, environmental NGO ClientEarth, is bringing a claim against the board of Shell, alleging that it has failed to act in the best interests of the company, and with due care, skill and diligence; by failing to develop and implement a climate strategy aligned with the Paris Agreement.
- Your company’s ability to recruit and retain consumers and talent, as well as sales and income levels, could be negatively impacted if your company is not seen to be doing enough on the climate agenda.
Now your company has set a meaningful net zero target, how are you going to achieve it?
The following climate action steps draw on ERM’s ‘Promise to Action on Net Zero’ series, which highlights how businesses can translate their ambition into action.
First, your company should focus action on reducing emissions from all three scopes, before exploring greenhouse gas removal and offsetting.
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Report and Disclose
- Your company may be required to report and disclose more climate-related data and progress due to the changing policy landscape. Visit our interactive disclosure tool for further information.
- Clear climate reporting and disclosure in the public domain can help your company convey your climate ambition appropriately, and avoid greenwashing claims and any associated legal risks.
- Reporting and disclosure can help your company to secure financing and attract investment, with some banks offering discounted interested rates for companies achieving their decarbonisation goals – there is increasing demand from the lending and investor community for robust climate data and information to inform lending and investment decisions – more than 700 global investors collectively managing over $68 trillion in assets have joined Climate Action 100+, an investor-led initiative ensuring climate action by the world’s largest corporate greenhouse gas emitters.
It is important that you understand the reporting and disclosure requirements in your jurisdiction. In some regions, mandatory climate-related disclosure requirements are in place, while others encourage use of voluntary standards and frameworks as talks around mandatory requirements progress. Read the CGI and Commonwealth Climate & Law Initiative’s (CCLI) primer on climate change which explores director’s duties and disclosure obligations at a jurisdictional level.
There are several reporting and disclosure frameworks available and determining which framework to adopt can be difficult. For an overview and explanation of the tools available, visit our ‘Navigating the climate disclosure landscape’ interactive tool.
Many companies grapple with determining the correct area in the organisation to report and disclose. As climate change has the potential to create real financial impacts throughout an organisation, climate considerations should be an integral element of disclosure, and included in annual reports or financial filings, for example.
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Join your peers on this journey
Board Directors have a duty to ensure their businesses understand the risks and opportunities relevant to climate change. The Climate Governance Initiative provides a platform for the independent or non-executive director to engage and understand how their role in the boardroom can accelerate corporate climate action. With networks of board directors in over 50 countries globally, through its content and events produced exclusively for the board director audience, CGI equips boards with the knowledge and skills to take climate action in the boardroom. Join your regional Chapter to share best practices and engage in peer-to-peer networking to learn from others at different stages of their own climate journey.
Guiding your company along its net zero journey in translating climate ambition into action will play an important role in fulfilling your fiduciary responsibility as an independent director and long-term steward to the company, while ensuring all stakeholders can benefit from the opportunities arising from the net zero transition.