par Martin Courgeon (EnvIM 2018)

 

There is no doubt for anyone anymore that anthropogenic greenhouse gas emissions are one of the, if not the, greatest challenge of the 21st century. The dangers of global warming caused by the greenhouse gases emissions, notably CO2, are becoming increasingly clear. Some of the impacts of global warming are already visible today, and the private sector must cope with them. Insurance companies for instance are already confronted by new issues linked to the dangers and damages that the consequences of climate change could trigger. The link can be direct: last year was the most expensive in terms of insurance cost for natural catastrophes, (Financial Times, 2019). But climate change also impacts the insurance industry in more indirect ways. Their work and methodology are rapidly changing, with the increasing inclusion of extra-financial “ESG” (Environment, Social, Governance) criteria, leading disinvestment and even investor engagement. Global goals may be becoming common knowledge, but the way to achieve them is not always that easy. On the other side of the spectrum, individual actions and initiatives to address climate change are becoming widespread. Effects to minimize individual carbon footprints can be found in a growing number of ecological initiatives, such as the Zero Waste initiative, the vegan movement, efforts to promote short production circuits, and the consumption of local seasonal products, to name a few. However, though those two levels of actions have gained attention and media coverage in recent years, it is not always the case for corporate actions, even though a good part of the national effort required to achieve GHG emission reduction targets is through corporate emission reduction. Moreover, setting up targets and measures to reduce emissions at a corporate level is not an easy task. What activities should be considered? Are corporate emissions strictly limited to direct emissions, or should it also consider the value chain, or even the footprint of the consumers using the products? How to measure corporate emissions? How to set up consistent, credible goals in line with the global target of limiting global warming to well below 2°C? This article, rather than explaining why companies have an interest in tackling climate change mitigation, will attempt to describe how their actions can fit in the global framework, and the difficulties that may arise along the way.

 

The framework: An overview of global targets.

To understand the position of companies in the effort of GHG mitigation, an overview of the international and national targets on this matter is needed. Even if it is just to point out the lack of improvement, global warming has been an unavoidable topic of public debate during the last few years, culminating during the COP 21 and the Paris Agreement. The notable global observations and conclusions drawn from successive IPCC reports have been quite well known since, and the limit of 2°C of warming has become a household issue. Although their success is at least debatable, since the 1990s, numerous international initiatives have arisen. The main international effort on the matter comes from the negotiations of the UN Framework Convention on Climate Change (UNFCCC), first signed in 1992. Resulting from the UNFCCC, the Kyoto Protocol, signed in 1997, set up the first emission reduction targets in an international agreement. The 2010 Cancun agreement was the first to recognize the need for significant efforts in order to keep global temperature below the now famous threshold of 2°C. Finally, the 2015 Paris Agreement, gathering a majority of countries (and a majority of the GHG emission contributors) aimed to set up ambitious goals to keep the temperature well below 2°C, within a new threshold of 1.5°C.

Cycles of negotiations of the UNFCCC. Source: The Climate Group, 2014 (https://www.theclimategroup.org).

To achieve this goal, contributing countries had to bring forward Intended National Determined Contributions (INDCs). In other words, each country sets a reduction target that would fit within the global target, as well as measures to achieve this reduction. For instance, in France, the framework to achieve this goal is the “Stratégie Nationale Bas Carbone” (SNBC). The SNBC is designed to achieve carbon neutrality by 2050. At the very least, it aims to reduce carbon emissions by 75% compared to pre-industrial levels. From 2015 to 2050, emission budgets are set up for periods of 4 of 5 years. The three first budgets, covering the 2015-2028 time period, set a reduction of 27% of emissions. The SNBC can be broken down in sectors, with different contributions to the reduction targets. In this context, companies must set up their own measures and goals concerning their GHG emissions. The companies of each of those sectors are then to reduce their emissions and comply with the budget. The remaining question is how.

Reduction trends of the SNBC. Source: Ministère de la transition écologique et solidaire

 

 

The role of companies – How to measure GHG emissions?

The first step for any organizations trying to take action to reduce GHG emissions is to have a clear view of its current emissions. If the question of measure seems simple at first glance, companies in the process of development of a carbon reporting areThe main question that must be solved to measure GHG emissions of a company is: what are the boundaries to consider? First, how to define the perimeter of activities of the company? For a company with a simple ownership and one main activity, it is comparatively, easier. However, for a larger corporation, with multiple activities and subsidiaries, and complex ownership, defining the boundaries of GHG accounting can be difficult.

There are two main methods defined by the Greenhouse Gas Protocol in order to set the organizational boundaries: the control approach and the equity shares approach. In the control approach, a company accounts for all the emissions of plants, activities over which it has a control, whether it is a financial control (if the company owns a majority of shares of a subsidiary, or if it holds most of the financial rewards and risks of an activity) or an operational control (if the company has the authority to implement operating policies to an entity or activity). In the case of financial or operational control, the company accounts for all the GHG emissions of the activity or entity on which it has a control. Conversely, the equity shares approach divides the GHG emissions proportionately to the shares of equity owned by a company. If a subsidiary company is owned at 60% by a company, 60% of its GHG emissions will be counted. The two approaches can be used by companies according to what they deem to be best suited for their activities. They can also be complementary, and used by the same company, in different situations. Though the rules look quite clear in theory, it can get quite complex, especially in multinational companies with complex ownership structures of subsidiaries, joint ventures, etc.

Once organizational boundaries are established, operational boundaries can be set as well. Operational boundaries define what activities are included in corporate GHG accounting. What are the sources of GHG emissions that are taken into consideration? For the case of many industries, the emissions of the plants, on site, are probably to be considered. But what about the emissions due to the energy used to run those plants? After the production and sale of a car, it will continue to emit a lot of GHG during its use. Should the impact of the product be included as well? Operational boundaries set what sources of emissions, direct and indirect, are used in the GHG accounting. These emissions are usually separated into three categories, or scopes. Scope 1 emissions encompass all direct corporate emissions. Emissions from the buildings owned or operated by a company, emissions from industrial plants, company vehicles, etc. Every emission found in the direct line of a company’s activities fall under Scope 1 emissions. Scope 2 emissions are indirect emissions. It categorizes all the GHG emitted to produce the energy used by the company, whether that is electricity, cooling, heating, etc. Finally, scope 3 emissions are all the other indirect emissions that a company can account for. This usually encompasses upstream emissions, like the emissions due to the production of goods or services used by the company, transportation, business travels, etc. It can also include downstream emissions, most notably the impact of the products and services sold by the company, the emissions caused by their use, and even the emissions due to its end of life management (incineration, recycling, etc.). Scope 3 is thus very large, as it can include the whole value chain of a company. Scope 1 and 2 are now very commonly used, and some national regulations set an obligation for larger companies to have GHG accounting that includes both. This is the case in France for instance, where companies with 500 employees or more must establish a carbon footprint using at least Scope 1 and Scope 2.

Examples of Scope 1, 2 and 3 emissions. Source: GHG Protocol

Calculating carbon footprint is the first step for businesses willing to reduce their emissions, as it gives an overview of their contribution to global and national emissions. It can also indicate which emission sources that efforts should focus on. Numerous tools have been created to calculate the carbon footprint of companies, such as the GHG protocol, the French Bilan Carbone, or the ISO 14064 norm.

 

What actions, what targets?

Once the snapshot of a company’s carbon footprint is clear and the highest sources of GHG emissions identified, actions can be undertaken to reduce them. Depending on the type of business, the action plan varies; an industrial company will not have the same stakes as a service company. Actions undertaken can be divided under the same principle as the three emission scopes, starting with the direct emissions, on which a company has the most control. Different sources of direct emissions can be identified, according to the sector of the company. Industries for instance are likely to have direct emissions from fixed sources of combustion (furnaces for instance). Other direct sources can impact most companies, regardless of their sector of operation. This is the case for transport and logistics from company vehicles. Other sources of direct emissions can come from company facilities, such as emissions from heating systems, or fugitive emissions, coming from air conditioning systems.

Indirect emissions due to energy production is one of the most common concerns, touching both industry and service sectors. It is linked at the very least to the energy consumption of facilities and offices. Policies aimed at energy efficiency within buildings are also linked to savings on electricity and heating bills, and many norms and certifications (such as HQE in France, REACH or LEED) have already been established on this topic.

Indirect emissions from other sources (Scope 3) are harder to define for a company, as their reach can be quite large. Actions can include initiatives on employee transportation (i.e. commuting, business travels). Reduction of Scope 3 emissions can also be an opportunity to rethink the value chain and products. As it includes the impacts of a product both upstream and downstream, scope 3 emissions are closely linked to the concepts of lifecycle assessment (including supply chain) and eco-conception, both taking into consideration the sourcing, production and impact during use and end of life.

Initiatives and plan of action can include the examples described above, but one step remains: ensuring that the actions undertaken are in line with the global objectives of GHG mitigation and keeping global warming below the 2°C threshold. Moreover, as there is a growing demand for companies to take actions on environmental topics, another concern would be to ensure that the actions are credible and visible to markets and consumers. Numerous initiatives allow companies to disclose or certify their commitment toward social and environmental progress and GHG mitigation.  Global initiatives such as the Global Compact include a section regarding climate change. Global Compact is the UN initiative connecting private companies with the UN Sustainable Development Goals (SDG). The goal of Global Compact is to engage companies to adhere to its 10 guiding principles, adapted for companies, in line with the 17 UN SDGs. This includes principles on human rights, labor, the environment and anti-Corruption. Its 7th principle quotes the 1992 Rio convention that started the UNFCCC, on its introduction of the precautionary principle: “where there are threats of serious or irreversible damage, lack of full scientific certainty shall not be used as a reason for postponing cost-effective measures to prevent environmental degradation”. Global Compact thus fosters climate-related actions. However, the Global Compact sustainability initiative is not binding: companies wanting to join the initiative must send a letter of commitment, however there are no targets to be matched and no binding goals. Though being a signatory may give a signal that a company is willing to take action, it gives no indication on its compliance with 2°C scenarios. Furthermore, it certifies a general adhesion to sustainability principles, but it does not acknowledge initiatives undertaken, nor their impact towards global environmental targets.

Other initiatives are more precisely focused on climate change issues, notably among the private sector. For instance, the case of the Carbon Disclosure Project (CDP). Aiming at improving transparency of businesses, cities and states on their environmental impacts, the CDP’s focus is GHG emissions. Through a questionnaire answered by more than 7000 companies, CDP establishes a score on their performance. CDP’s questionnaire and score can give insights on the level of maturity of company on climate issues, the way it is measured and how well carbon issues are incorporated in its activities. However, CDP focuses more on the level of disclosure. Indeed, the scoring methods are mostly based on transparency. The goal being improving disclosure on environmental topics, having an answer is more rewarded than the content of the answer. CDP data and scores can provide valuable information. It can indicate how advanced a company is on its environmental management and reporting, but it does not show the company’s progress regarding the 2°C threshold, and remains on a voluntary, declarative basis.

In order to have a clearer snapshot of a company’s ability to respond to the forthcoming climate change challenge, some initiatives assess companies directly on their environmental targets compared to the 2°C goal. This is the case of the Science Based Targets Initiative (SBTi), created in 2015 afte by CDP, United Nations Global Compact (UNGC), World Resource Institute (WRI) and World Wildlife Fund (WWF). The SBTi encourages companies to take GHG reductions that are in line with the 2°C threshold. These objectives are verified by the Science Based Targets teams against the SBTi criteria, to be ambitious enough for a company to take on its share of the global effort to mitigate GHG emissions. There are three methods used to calculate and validate Science Based Targets. The Sectoral Based Approach, similar to the French low carbon strategy, divides the global carbon budget according to sectors. Each sector’s budget is calculated considering its mitigation potential. Companies in a specific sector are allocated their share of the budget, proportional to their activity in that sector. By setting targets that will respect the budget allocated, companies ensure that they meet their part of the global mitigation effort. The second method is the Absolute Based Approach. In this case, companies align their emission reduction efforts to the one recommended by Intergovernmental Panel on Climate Change (IPCC) in its fifth report, in order to stay below 2°C. Finally, the Economic Based approach makes a parallel between the global GDP and the global carbon budget. A company’s budget for respecting the 2°C goal is then calculated by comparing its gross profit compared to global GDP. These three have company-level goals, put in perspective with global targets, as described by some institutions such as the International Energy Agency (IEA) or the IPCC. Company objectives are matched with expert reports that express the best understanding to date of climate change consequences. However, uncertainties subsist. First, the complexity of climate science makes the outcomes described in the different scenarios unclear. Following these objectives might be the best signal a company can give to this day, but it is not a guarantee that the reduction undertaken will be sufficient. Indeed, the tools used today, the scenarios themselves can be discussed. IEA scenarios for instance have come under fire for being biased, in a way that all scenarios presented by the agency would exceed the threshold of 2°C or 1.5°C (The Guardian, 2018), for underrepresenting the potential renewable energy growth in the coming years (Financial Times, 2017). Thus, even with the best intentions, the actual outcome can remain unclear. Moreover, it is important to note that these initiatives to reduce GHG emissions and set consistent goals on the topic remains today outside of any legal requirements. Though there are some regulation on emission reporting, carbon reduction targets remain on a purely voluntary basis, that can be overlooked by the company itself, without repercussions.   The targets might be 2°C compliant, but they must still be enforced and respected in the long run. Companies with SBTs are setting ambitious targets for themselves, but the system lacks regular monitoring and reassessment of their efforts on GHG emissions and mitigation. Finally, the methods used by SBTi to allocate targets are in line with the 2°C objectives only if other companies of the sector take their fair share on as well. If one company sets to reduce the GHG emissions according to its share of the market and the other companies on said market refuse to reduce their emissions, the efforts provided will not be sufficient. Thus, SBTi provides an ambitious framework and send a positive signal from companies adhering to its principle, but this approach has limits.

Climate change issues are hardly avoidable today. Although the international community has had trouble setting GHG mitigation targets, with some countries refusing to set a price on carbon emissions, or even quitting on international agreements (USA, Canada from the Kyoto protocol, USA again from the Paris Agreement), the threshold established by experts and international negotiations has had an impact on civil society. At a company level, it triggered or bolstered action. To this day, initiatives such as CDP, We Mean Business, SBTi, etc. have reached many companies. More than 7000 companies around the world disclose their carbon emissions to the CDP, and in its 4 years of existence, more than 540 companies have committed to SBTi, and 163 of them have already approved their targets. Multinational companies such as L’Oreal, Sony, and McDonalds have made this commitment for instance. Today, these initiatives are going beyond the legal requirements for companies and are carried out on a voluntary basis. Because it is not binding, there is no way to make sure the targets will be respected in the long run. But it also shows that climate change is becoming enough of a concern within civil society for actions to be undertaken without any obligation.

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