Business and government need each other. Countries can sign climate agreements, but without business to implement them, they won’t meet their goals. Companies that set aggressive carbon reduction targets also won’t get there without policies that move the electric grid toward renewables.
The science behind global warming and climate change
Created in 1988, the International Panel on Climate Change (IPPC) is the United Nations’ body for assessing the science related to climate change. It provides regular assessment of the scientific basis of climate change. This focus includes current and future impacts, associated risks and sets out options for future mitigation and adaptation.11
In 2021, the IPCC released a Sixth Assessment Report, The Physical Science Basis, that address the most up-to-date understanding of the world’s climate system and the impact of climate change.12 The report’s message, ‘It is unequivocal that human influence has warmed the atmosphere, ocean and land. Widespread and rapid changes in the atmosphere, ocean, cryosphere and biosphere have occurred.’ 13 Further, the 2021 report finds that ‘unless there are immediate, rapid and large-scale reductions in greenhouse gas emissions, limiting warming to close to 1.5°C or even 2°C will be beyond reach.’ 14
The consequences of the IPCC observations are already manifesting themselves in the forms of floods, wildfires, droughts, species loss, and resource scarcity.15 Estimates from the IPCC indicate that, ’Approximately 3.3 to 3.6 billion people live in contexts that are highly vulnerable to climate change.’ 16 With the earth’s population projected to reach 7.9 billion people in 2022, that equates to 45% of people across the world.
United Nations Sustainable Development Goal (SDG) 13 — Climate action
In September 2015, the United Nations established its 17 Sustainable Development Goals. The goals recognise (quote above),
that ending poverty must go hand-in-hand with strategies that build economic growth and address a range of social needs including education, health, equality and job opportunities, while tackling climate change and working to preserve our ocean and forests.17
Goal 13, Climate action, asks us to, ‘Take urgent action to combat climate change and its impacts.’
This goal is then split into three target areas
13.1 Strengthen resilience and adaptive capacity to climate-related hazards and natural disasters in all countries.
13.2 Integrate climate change measures into national policies, strategies and planning.
13.3 Improve education, awareness-raising and human and institutional capacity on climate change mitigation, adaptation, impact reduction and early warning.18
The SDGs are a reminder that a simple carbon accounting approach is not enough and transition plans to combat climate change must be integrated and considered along with the other goals. As the world continues to rapidly change, the choices and opportunities of an organisation to affect climate change will evolve. It is also important to remember that carbon accounting must be more than a reporting activity. To impact future organisational decision-making, it must be embedded into an organisation’s governance, strategy, risk management, and, metrics and targets.
Not only should carbon accounting be a recurring inside-out exercise of the organisation’s capabilities to transition to a low carbon business model, it also requires a backwards step for an outside-in view. As Polman and Winston point out in, ‘Net Positive’, carbon accounting isn’t just an internal activity, it is part of a wider, shared goal to help solve global problems.
In a volatile world, looking inwards and serving yourself is a recipe for quickly becoming irrelevant. The beauty of an ‘outside-in perspective is that it puts people and solving shared challenges at the core.19
World Economic Forum (WEF) — Global Risks
The impacts of climate change are top of mind when thinking about global risks. In the World Economic Forum’s (WEF) Global Risk Report 2022, five of the top long-term global risks over the next 5 to 10 years are environmental, directly linked to climate change. These are,
1st Climate action failure (42.1%) 2nd Extreme weather (32.4%) 3rd Biodiversity loss (27.0%) 4th Natural resource crises (23.0%) 5th Human environment damage (21.7%).20
With these global risks having the highest potential to severely damage societies, economies, and planet, they must certainly be integrated into an organisation’s Enterprise Risk Management (ERM) systems and processes as part of their carbon accounting activities.
The Paris agreement of 2015 (Cop21)
The Paris Agreement is a legally binding international treaty on climate change. Its goal is to limit global warming to well below 2, preferably to 1.5 degrees Celsius, from pre-industrial levels, by the end of this century. More than 190 countries have adopted the Paris Agreement.
At the U.N. Climate Change Conference in November 2021 (Cop26) the combined country pledges and decarbonisation plans will, if met, only limit global warming to about 2.4 degrees Celsius.21
Carbon accounting at its heart is the desire of global institutions, national governments, local communities, corporates, organisations, and, small and mid-size enterprises (SMEs) to work towards limiting global warming to below 2 degrees Celsius.
The stakeholder perspective
Stakeholders increasingly want to understand the carbon adaptation journeys of the organisations they interact with. Stakeholders include, investors, shareholders, customers and consumers, employees, and local communities.
Currently, the lack of comparable data, metrics, reporting standards and terms has created a challenge for organizations, and lively stakeholder discussions. Fortunately, the evolution toward coherent global reporting is underway. Let’s hope that healthy conflict in the ever-evolving carbon accounting space between the different stakeholder groups inspires better collaboration, new understanding, and innovative future solutions. As Ian Leslie demonstrates, in his book, Conflicted, conflict brings us closer, makes us smarter, and inspires us.22 As the science and thinking evolve, we all need to build up our carbon accounting literacy. The best way to learn is on the job through trial and error, transparency and then applying the learning.
With respect to reporting, the reality is, even if you are not measuring and reporting on your organisation’s carbon accounting impact, somebody else is. Bodies and stakeholders use your exhaust data to benchmark your organisation’s sustainability performance and test the robustness of your strategy. Exhaust data is simply the digital trail of ‘breadcrumbs’ organisations leave that stakeholders can then hoover up to increase their understanding of an entity’s GHG emissions performance landscape and long-term viability.
Regulatory requirements for net-zero targets and the rise of mandatory climate-related disclosure
By the end of 2021, 11 countries have passed legislation on net-zero targets. These include:
2045 — Sweden
2050 — Canada, Denmark, France, Hungary, Japan, Luxembourg, New Zealand, South Korea and United Kingdom
2060 — China23
The European Union, in a June 2021 regulation, has set 2050 as a target for climate neutrality across its 27 member states. Many other countries around the world have also made policy commitments.
Where countries have set nation net-zero carbon targets, the next step for governments is the activity of translating their promises into actions for organisations. Also driven by investors, the demand for mandatory reporting of climate change organisational risks is likely to increase in the medium term.
Mandatory climate-related disclosure is likely to become a reporting requirement around the world. The Canadian, New Zealand and U.K. national governments are already introducing mandated reporting requirements.24 However, the landscape is currently messy as we move slowly towards universal accepted and defined standards for carbon accounting.
In the U.K., the Government introduced a new mandatory carbon reporting regulation in April 2019. The Streamlined Energy and Carbon Reporting (SECR) scheme requires large U.K. companies to report publicly on their energy use, carbon emissions and other related information within their annual reports.25 Similar emission reporting regulations have been introduced in:
South Africa with the National Greenhouse Gas Emissions Reporting Regulations, 2017
Canada with the Greenhouse Gas Reporting Program (GHGRP), 2004
Australia with the National Greenhouse and Energy Reporting Act (NGER), 201726
In November 2021, at COP 26, the U.K. Government announced its ambition to enshrine mandatory climate disclosures for the largest companies in law. The resulting Climate-related Financial Disclosure (CFD) regulations were enshrined in U.K. law on 17 January 2022. These changes require organisations to disclose climate-related financial information, and, ensure they consider the risks and opportunities they face as a result of climate change.27
Similarly, in March 2022 the US Securities and Exchange Commission (SEC) proposed extensive requirements for public companies to disclose their risks and mitigation strategies related to climate change.28
Also, at COP26, the International Financial Reporting Standards (IFRS) foundation announced the creation of a global sustainability standards board.29 The International Sustainability Standards Board (ISSB) has the ambition to have a global climate standard based on the TCFD recommendations release by the end of 2022. This baseline standard will focus on meeting the information needs of investors and providing comparable, consistent and sustainability data across companies for global capital markets.
The ISSB will then look to follow a building block approach to facilitate the addition of sustainability requirements to the standard that are jurisdiction-specific or aimed at a broader group of stakeholders. In March 2022, the IFRS Foundation released and published two exposure drafts.
Draft IFRS S2 Climate-related Disclosures — Sets out the requirements for the identification, measurement, and disclosure of climate-related financial information.
Draft IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information — Sets out the overall requirements for disclosing sustainability-related financial information relevant to the sustainability-related risks and opportunities faced by the entity.30
Within the EU, the Corporate Sustainability Reporting Directive (CSRD) is planned to replace the Non-Financial Reporting Directive (NFRD) in 2023. The double materiality principle that the directive is based means that organisations must disclose climate factors where they materially impact the entity’s value. But also disclose where an organisation impacts climate factors.31 This will require organisations to disclose information on their climate change mitigation and adaptation plans. The European Financial Reporting Advisory Group (EFRAG) is currently developing draft standards.32
Building business resilience
Organisations that have built their carbon literacy and are further on their ESG journeys are proving to be more resilient businesses. During the first wave of the Covid pandemic in 2020, Linda Eling-Lee, the global head of ESG research at MSCI, notes that, ‘companies with high ESG rankings have outperformed rivals during the crisis’.33 A possible reason for this is the greater corporate adaptability that ESG reporting, and scrutiny provides organisations to rethink their business models in time of stress. A focus on carbon accounting and climate transition planning for organisations can only help to strengthen their long-term resilience.
