The Case for Decarbonisation

The spotlight on climate change is greater than ever, with increasing consumer, investor, regulatory, and employee pressure driving many companies to take action. However, we know greater action is required to meet the Paris Climate Targets. 

As shared at COP26 and in the latest IPCC reports, we are falling short of what’s needed to remain on a +1.5oC trajectory. Failure to curb global emissions risks more extreme weather, as well passing of irreversible tipping points where earth systems (such as ocean currents) dramatically shift causing widespread disruption. This includes forced migration, which the World Bank estimates could top 200 million people by 2050. Even a +2oC world would have catastrophic consequences when compared to +1.5oC, including three times more species lost, and ten times more Arctic sea ice loss.

Tackling climate change has become a priority for many leaders and stakeholders, and with momentum set to increase, companies are facing numerous pressures to decarbonise their value chains and act on sustainability:

  • Consumer Pressure: 62% of customers want companies to take a stand on issues like sustainability
  • Investor Pressure: $61.3 trillion in assets under management (as of 31 May 2022) are committed to supporting the goal of net zero emissions by 2050 at the latest
  • Regulatory Pressure: 132 countries now have net zero targets
  • Employee Pressure: Over 40% of millennials say they have accepted one job over another because of the company’s sustainability

What are Scope 1-3 Emissions?

Annually, the consumer goods sector is estimated to contribute 33 Gt CO2e to global greenhouse gas emissions (GHGs), with a particularly large contribution coming from agriculture, deforestation, and other land intensive activities.

The need for an effective, efficient way to measure and track GHGs is at the heart of climate change efforts. GHGs include all the gasses that contribute to the global warming effect when in the atmosphere. Carbon Dioxide (CO2) is the biggest driver of overall climate change, but other GHGs include methane (CH4) and nitrous oxide (N2O). Some GHGs are more potent than others, meaning they have a greater global warming effect per volume of gas — this is why GHGs are often measured in terms of ‘carbon dioxide equivalent’ (CO2e).

GHGs are classified into three buckets (known as “Scopes”) defined by the international emissions accounting standard, the Greenhouse Gas Protocol. The three scopes help companies better understand the source of emissions:

  • Scope 1) direct emissions from activities under an organisation’s control or ownership
  • Scope 2) indirect emissions from the purchase of electricity and energy
  • Scope 3) indirect emissions that occur in the company’s value chain but are not owned or controlled by the company. Scope 3 emissions are often the largest emissions bucket for consumer industries companies, sometimes accounting for over 90% of the overall carbon footprint, yet they are the most difficult to measure and hence address.

Examples of Each Scope

Scope 1: operating equipment, company-owned vehicles and company buildings and facilities.

Scope 2: purchased electricity, steam, heating and cooling for own use.

Scope 3: purchased goods, ingredients & materials, transport & distribution, consumer use of products, employee commutes and supplier footprints.

Sustainability Reporting & Disclosures

Consumer industries should consider the evolving sustainability and climate disclosures landscape. Sustainability reporting and disclosures is crucial to monitoring corporate net zero progress and the pressure on businesses to demonstrate non-financial / Environmental, Social, and Governance (ESG) value for people and the planet is intensifying.

Mandatory disclosures are on the rise in many regions – at least 13 jurisdictions are planning legislations that require mandatory disclosures:

  • The Securities Exchange Commission (SEC) in the USA proposed a rule requiring mandatory climate risk disclosures in US public company filings, based on the Taskforce on Climate-Related Financial Disclosures (TCFD) framework. These disclosures are expected to be both quantitative and qualitative and would come into effect in 2024.
  • Since April 2022, over 1,300 of the largest UK-registered companies and financial institutions are required to disclose climate-related financial disclosures in line with the TCFD framework in their annual financial reports.
  • The European Commission proposed the Corporate Sustainability Reporting Directive (CSRD), which would mandate standardised disclosures from 2024. The first set of standards, built with international standardisation initiatives (including the TCFD), would be adopted by October 2022.
  • Since January 2022, EU companies covered by the Non-Financial Reporting Directory (NFRD) must report the proportion of turnover, CapEx and OpEx aligned with the EU Taxonomy.
  • From financial year 2022-2023, the Securities and Exchange Board of India (SEBI) will require the top 1,000 listed companies in India (by market capitalisation) to prepare a ‘Business Responsibility and Sustainability Report’ (BRSR), containing detailed ESG disclosures.
  • In China, the Ministry of Ecology and Environment issued measures requiring companies to submit an annual report disclosing environmental information. The measures are applicable to a wide range of companies and went into effect in February 2022.

At COP26, the International Financial Reporting Standards Foundation (IFRS) announced the formation of the International Sustainability Standards Board (ISSB), which consolidated the Value Reporting Foundation with the Climate Disclosures Standards Board and aims to develop a comprehensive global baseline of standards for sustainability disclosures. The changes would consolidate and build upon the diverse existing ESG reporting standards to enable disclosures that are globally comparable and compatible with company financial statements.

Glossary of Terms

The Intergovernmental Panel on Climate Change (IPCC) is a UN mandated taskforce of academics and experts that publish periodic reports summarising key findings from the scientific literature on climate change. 

COP26 was the 26th Conference of the Parties (COP) in the United Nations Framework Convention on Climate Change (UNFCCC) and was hosted in Glasgow in November 2021. COP26, and other COPs, are where representatives of member states (the Parties) convene to share progress on national emissions and climate change, and negotiate new treaties and amendments.

An international treaty to limit global warming to well below 2oC, preferably 1.5oC, signed by 195 countries in 2015 at COP21 in Paris, France.

Climate describes the average of weather, covering temperature but also rainfall, storms, and other types of weather. Climate change is how the Earth’s surface and weather changes over time. Since the industrial revolution, the main driver of climate change has been humans, which is why recent climate change is referred to as “anthropogenic”.

The increase over time of the Earth’s average surface temperature caused by the increasing concentrations of atmospheric greenhouse gasses from human activities.

The release of greenhouse gasses into the atmosphere from human activities like the burning of fossil fuels.

Atmospheric gasses – including carbon dioxide, methane, and water vapour – that when in the atmosphere trap energy radiating from the Earth’s surface and reflect it back as infrared energy causing a warming affect.

Actions taken to limit or reduce the atmospheric concentration of greenhouse gasses in order to avoid the worst of climate change. Actions include the decarbonisation of industries and operations (like renewable energy) and the sequestration of CO2  (for example, by planting trees).

When a company, or other organisation, takes steps to reduce CO2 emissions from activities that have traditionally released CO2. Approaches include efficiency improvements, using low-/zero-carbon alternatives, and carbon capture at source.  Note, many use decarbonisation to also refer to the reduction of other GHGs, such as methane.

Net zero is when the quantity of emissions an organisation emits into the atmosphere are balanced by an equal quantity removed. In the context of the Race to Zero, companies must abate emissions as much as possible before relying on carbon capture techniques like offsets, which are only permissible for residual (unabatable) emissions.

A business model where products and materials are reused and kept in the human economy, reducing the need to further extract and pollute the natural environment (i.e., consuming natural capital).