State of the climate
Our seasons are now distinguished by unprecedented heat waves, flooding and storms around the globe. According to State of the Climate, published by Carbon Brief (July 2022), this summer in the northern hemisphere is a real scorcher. In June, record-breaking heatwaves swept across continental Europe, the UK, China, North Africa and parts of the US (World Economic Forum, July 2022).
This heat also forced limits on water use, which threaten vital agricultural production across the world. To make matters worse, these extreme phenomena are taking place amid a historic energy crisis.
In the Southern hemisphere, flooding has been a major issue with record breaking daily and monthly rainfall. The latest data from the Insurance Council of Australia (published on May 3, 2022), showed that the 2022 flood was the costliest, with the event estimated to have cost $3.35bn in insured losses.
These daunting events of heat waves and catastrophic flooding, coupled with the ongoing energy and food crises have pushed the issues of climate change high on the agendas for all countries in light of the upcoming COP27 discussions in Egypt. This November, countries will be expected to commit to ambitious targets for reducing carbon emissions and further amplify their pledge to achieve those targets.
On a brighter note, the US Senate successfully passed a landmark tax, climate and health-care bill in August that is considered as the largest investment in fighting climate change ever made. It is projected to help cut greenhouse gas emissions by about 40% from 2005 levels by the end of the decade.
This comes a few months after the U.S. Securities and Exchange Commission (SEC)’s March 2022 climate-related rule proposal, according to which many companies will need to disclose their Scope 1, 2 & 3 emissions on a mandatory basis (link to Blog: SEC’s landmark climate proposal for Investors (apexgroup.com). Companies and investors are now preparing to adapt to the new rules.
Urgency to develop a climate strategy
The catastrophic consequences of climate change and the associated regulatory and public pressure are pushing many organizations to speed up their net zero ambitions. This involves measuring emissions throughout the entire value chain, setting reduction targets, taking steps to reduce the carbon footprint, and offsetting any residual emissions.
To meet net zero targets in time, companies need to follow this structure all the while communicating their efforts openly with their investors and other stakeholders. Only by being transparent throughout the process of assessing these carbon emissions and illustrating how their business is reducing and offsetting them can meaningful change really take effect.
Net Zero requires the assessment of Scope 3 emissions
Assessing Scope 3 emissions is the primary and most important tool for evaluating and managing climate related risks and opportunities.
Tracking Scope 3 supply chain emissions of underlying investments can help companies and investors to identify carbon hotspots within their value chain, distinguish suppliers with better sustainability performance from those that perform poorly, and promote the creation of more efficient and sustainable products.
Scope 3 quantification can, however, turn out to be
notoriously difficult as very few companies have a good understanding and visibility of the carbon emissions across their supply chain.
World class standards, such as the Greenhouse Gas Protocol (“GHG”), offer comprehensive guidance on how to measure Scope 3 emissions. However, if companies have limited access to the respective data, a streamlined and straightforward assessment of their Scope 3 emissions can be more challenging.
To overcome this hurdle, companies should firstly contact their suppliers and stakeholders for the data that is relevant to the exact sources of these emissions. If no actual physical data can be found, using emission factors based on specific measurement metrics may act as a valid alternative. For example, if the miles driven with a vehicle are known, this can be converted into emission estimates based on the fuel and vehicle type.
Lastly it is also possible to approximate production metrics for a given sector and thus quantify the associated emissions, however this may lessen accuracy.
Ambitious targets are essential
It is crucially important to agree carbon reduction targets across the company when setting out on a net zero journey. This gives scope-specific goals, helps plan reduction measures at an operational level, showcases transparency and demonstrates a commitment towards having a positive climate impact. Setting ambitious emission reduction targets (i.e., in line with the 1.5°C pathway) is a fundamental part of every successful climate strategy.
Offsetting: the last piece of the puzzle
Carbon offsetting will always be an important tool for any firm’s net zero strategy, but it should never be used as an excuse to continue business-as-usual – reducing carbon emissions in the first place must take precedence.
In addition, the quality of carbon credits needs to be verified by world class benchmarks to ensure that the emission removal or avoidance projects are additional, and that they would not have been developed in the absence of credits. To ensure high-quality offsetting, look out for Gold Standard verification or other trusted third parties.
Moving towards net zero
The need for urgent climate action is clear and organizations worldwide are expected to play a leading role in reducing and offsetting their carbon emissions to reach the global net zero goals together. Companies and investors that take action now to develop climate strategies will emerge as the front-runner and stand out from the competition. If there is any further delay towards achieving net zero, then it may well be too late.
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