With the Paris Agreement of 2015, more than half of the global economy has committed to reducing greenhouse gas (GHG) emissions while investing efforts into the removal of GHG from the atmosphere. This is to meet the Paris Agreement goal of limiting temperature rise to „well below 2°C“ as well as to ensure compliance with the net-zero target by 2050 as set out by the IPCC.
More and more companies are adorning their image and business operations as climate neutral, claiming that they are on the way to a net-zero future. Various methodologies (e.g., SBTi) have been established to assess climate performance to ensure and evaluate „Paris-compliant“ progress, as well as various standards to guide appropriate reporting of climate risks (e.g. TCFD).
What does net-zero mean and what needs to be done to achieve a net-zero future?
Net-zero means the maximum reduction of GHG emissions and the simultaneous removal of excess emissions that could not be avoided. The latter means implementing measures to remove emissions directly from the air using carbon sinks or carbon capture technologies. This is often referred to as negative GHG emissions and goes beyond simply compensating for one’s own emissions, e.g., by purchasing certificates.
Are companies meeting the goals of the Paris Agreement, and how effective are their efforts to achieve a net-zero future?
A new scientific study criticizes existing methods and strategies for ensuring corporate compliance with the Paris Agreement as insufficient. According to this study even widespread and well-established approaches entail shortcomings that may distort the assessment of companies‘ climate performances and make it difficult to draw tangible comparisons.
The study proposes a new assessment framework to address these shortcomings. They illustrate their assessment of climate performance conducting a case study of 20 companies from the energy and cement industries that have committed to achieving net-zero targets. The results revealed that only one out of the 20 companies is on track to meet the net-zero goal. Whereas the other companies were classified as „not Paris Compliant“ as they are expected to exceed their climate budget by 2050 unless they double or even increase their efforts to reduce GHG emissions by a six-fold.
These companies have developed decarbonization action plans and claim to have realigned their business models to deliver on the Paris Agreement goals and stay within their carbon budgets by 2050. However, more often than not do the action plans lack proper implementation. This study identified two main problems with previous assessments of climate performance, which is why the results are rather shocking after adjusting for these deficiencies.
A first step in measuring a company’s progress is to use a reference year. This was the first challenge identified in the formulation of decarbonization strategies. Setting the reference year to a more recent year is often justified on the basis of better data availability. However, omitting earlier years from the assessment can lead to biased results and cause a company to delay certain climate actions. In addition, different carbon allocation assessment models result in companies using different reference years, making it difficult to compare performance.
Furthermore, it is common practice to use future projections to define climate action plans and set corresponding targets. The second problem identified by the study, however, is that there is a lack of regular monitoring of whether individual targets are actually being met, nor is there any regular adjustment of future projections. This may result in previously established action plans no longer being valid. Therefore, neglecting to adjust one’s action plan may ultimately result in failing to meet net-zero targets by 2050. Or, to stay within the carbon budget, future actions would require much more drastic changes that would pose a much higher transition risk.
What happens next?
There are still no clear and well-defined laws and guidelines that make compliance with the Paris Agreement mandatory and hold companies accountable. Although the agreement has been ratified by many countries, the process of creating domestic laws is not an easy task. However, this should in no way preclude companies from making improvements at this time. On the contrary, immediate action is absolutely necessary to develop decarbonization strategies that are regularly updated to reflect a company’s interim results. In this way, „Paris compliance“ can be ensured and the consequences of delayed intervention can be counteracted.
Given the rapid development of climate change, it is important for corporations to anticipate possible political, social and economic changes and to react in a precautionary manner. This is precisely what the study’s very alarming findings emphasize. Accurate evaluation methods that are more transparent, consistent and uniform and thus also enable comparability with other companies are of great significance. Above all, their constant adaptation to current circumstances is essential. Only then can potential transition risks be hedged and numerous investments protected. If action plans are not revised, increasingly drastic measures may become necessary in the future, the implementation of which will entail not only financial burdens but also social and environmental risks.
In addition, the study stresses that companies should not place too much reliance on future carbon capture technologies, as there is no guarantee yet that they can be deployed on time and on a large scale.
In case you would like to learn more about net-zero goals and strategies, you can find more information on our DFGE blog. If you have specific questions and are looking for support in figuring out how you can contribute to achieve a net-zero future, please contact us at or by calling +49 8192 99733-20.
Sources:
Rekker, S., Ives, M. C., Wade, B., Webb, L., & Greig, C. (2022). Measuring corporate Paris Compliance using a strict science-based approach. Nature communications, 13(1), 1-11.
https://www.economist.com/films/2021/07/30/what-is-net-zero
IPCC. Summary for Policymakers. In: Global Warming of 1.5°C. An IPCC Special Report on the impacts of global warming of 1.5°C above pre-industrial levels and related global greenhouse gas emission pathways, in the context of strengthening the global response to the threat of climate change, sustainable development,and efforts to eradicate poverty. (IPCC, 2018)
