Do you know how your company is going to reach net zero by 2050? If we are to achieve that aim, every single business is going to need to play its part.
Many larger companies have already pledged themselves to this goal. In March 2021, Climate Action 100+ reported that 52% of its focus companies have committed to achieve net-zero GHG emissions by 2050 or sooner. Climate Action 100+ was created after the Paris Agreement but isn’t an environmental organisation – it consists of more than 615 investors, responsible for over $65 trillion in assets under management, and is engaging companies on improving climate change governance, cutting emissions and strengthening climate-related financial disclosures. The initiative focuses on 167 companies, accounting for over 80 percent of corporate industrial greenhouse gas emissions. A 2022 report from Climate Action 100+ is due any time now and is likely to show an increase on that 52% figure.
Here are some points to consider when thinking about addressing climate risks.
First, the requirement to measure, disclose and reduce emissions will increasingly be a legal obligation.
In January 2022, The Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022 (the “Regulations”) became law. These Regulations will enter into force on 6 April 2022 and will apply to financial years commencing on or after that date. The Regulations will cover publicly traded companies, banking and insurance companies, companies listed on the Alternative Investments Market (AIM), and “high-turnover” companies. “High turnover companies” means more than £500m turnover in the relevant financial year, and for parent companies covers the whole group’s aggregate turnover. Excluded from the scope of the Regulations are companies that qualify as small or medium sized pursuant to the Companies Act 2006, and those that have less than 500 employees. Similar categories of LLPs are also covered by parallel regulations.
Once in force, the Regulations will require companies in scope to include in their strategic reports (or their energy and carbon report as the case might be) information about the impact of climate related risks and opportunities (CRRO) on their businesses including the following:
- their governance arrangements in relation to assessing and managing CRRO;
- a description of how they identify, assess, and manage CRRO and how this is integrated into their overall risk management process;
- a description of the principal CRRO arising in connection with their operations, and the actual and potential impacts on their business model and strategy;
- the targets and key performance indicators used to manage those risks and opportunities and performance against those targets and KPIs;
- an analysis of the resilience of their business model and strategy, taking into consideration different climate-related scenarios;
The Regulations allow directors to omit some climate-related financial disclosures if they reasonably believe that, having regard to the nature of their business, the relevant disclosure is not necessary for an understanding of their business. They must however provide clear reasons for this belief.
The second point to bear in mind is that these obligations will over time be expanded to cover a wider range of companies so many companies which do not fall within their scope are already beginning to plan for this. However, and this is my third point, if you think you can simply ignore this issue until these Regulations are expanded to cover your company, you may be sorely disappointed.
© Supplied by CMSA company’s impact on the climate includes not only its own direct emissions, such as those from the energy and materials it consumes and the waste it generates, but also the emissions from its suppliers and from its customers while using its products. Because in many cases the majority of a company’s emissions come from its supply chain, companies which are subject to legal obligations to consider their emissions or which have simply chosen to do so, will increasingly be asking their suppliers to measure, disclose and commit to improve their emissions. If you have not received enquiries from any of your customers yet, I am confident you will start to do so in the next 12 months.
Of course, pledging to reach net zero or be “Paris-aligned” is one thing and having a credible plan to get there is another. At the moment there is an alphabet soup of organisations producing guidance and reporting frameworks for net zero planning, which can be extremely confusing for companies looking for support in developing their ESG plans. We can expect over the next few years to see a gradual alignment around what is accepted as good practice in this area and a growing trend of third party verification of ESG metrics to avoid claims of greenwashing. Meanwhile, making claims of sustainability that cannot be backed up by evidence is likely to be a growing area of climate litigation – but that’s a topic for another day.
So in short, addressing climate related risks and opportunities is already a requirement for many companies and in a very short timescale will be so for all of us.
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