1.5-2°C Paris Agreement climate objectives: Corporate responses

COP22: Paris Agreement climate objectives

This report provides a status update of corporate responses to the 1.5-2°C Paris Agreement objective. It also, identifies gaps and challenges, and their implications, and offers recommendations for driving strong responses and more meaningful climate risk disclosures. In sharing the experiences from those in the vanguard of climate risk response, we hope that others contemplating action may benefit from lessons learnt so far in this area of increasing importance.

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The past two years have seen significant shifts in corporate activity regarding climate change. For businesses, the entry into force of the Paris Agreement has perhaps been the key catalyst to contemplate a future policy environment consistent with its objective of limiting global warming to well below 2°C above pre-industrial levels. Some companies are committing to and disclosing carbon targets informed by the Paris Agreement. Others have performed and published scenario analyses showing the impacts on the business from various climate policy futures.

Both KPMG and The Climate Institute aim to encourage and facilitate robust actions to understand, respond to and communicate the risks and opportunities flowing from climate change. In undertaking this research, we sought to explore the state of corporate responses to the 2°C objective, and the Agreement’s more ambitious 1.5°C objective, as well as companies’ motivations for action and challenges faced.

The pace of change in this area is so rapid that proposed guidelines and solutions for addressing the challenges identified by companies were developed and issued while this research was being carried out. Additionally, the focus of investors and regulators on climate risks have been sharpened, 1) by the legal profession’s opinion on directors’ duties with regard to climate change, and 2) by APRA’s plans to monitor the adequacy of companies’ assessments and responses to climate risk in accordance with their risk management frameworks.

Key findings

  1. The Paris Agreement has been a strong driver for businesses to evaluate climate risks and responses more methodically. According to the Science-based Targets Initiative, the number of businesses actively committing to or disclosing carbon targets consistent with the Paris Agreement (Science-Based Targets) have grown to more than 200.
  2. Significant experimentation is taking place over approaches to analyse companies’ risks and opportunities, communicate resilience or exposures, and develop long-term carbon reduction targets consistent with the Paris Agreement.
  3. Scenario analysis is emerging as a key method for understanding risks and opportunities around climate change, and for informing strategic responses. Organisations such as the Financial Stability Board’s Task Force on Climate-related Financial Disclosure (FSB-TCFD) and the Investor Group on Climate Change have recently published or updated guidance seeking the reporting of climate change risks and opportunities flowing from a below 2°C scenario.
  4. Scenario analysis relating to climate change remains immature and there are significant problems with the reference scenarios against which corporate impacts are evaluated. Most companies rely upon mitigation scenarios that are not consistent with a below-2°C future as set out in the Paris Agreement, and none have considered the agreement’s 1.5°C objective.
  5. Businesses face the following challenges in setting long term SBTs:
    • long term commitments conflict with short-term time horizons that factor into most corporate strategy and into structures, such as management incentives
    • a lack of authoritative, detailed guidance on ‘best practice’
    • a lack of adequately detailed long-term policy guidance to understand how a 1.5-2°C scenario may play out in specific countries and sectors
    • building internal consensus on the need to analyse and respond to the 1.5-2°C objectives.

Recommendations

  1. Companies should participate in efforts to enhance and reconcile the various standards, frameworks and tools that support credible analysis of climate-related transitions and impacts.
  2. Scenario analysis is an important process for understanding how companies may fare in a 1.5-2°C future. Scenario analysis should be conducted and disclosed, along with sufficient detail about underlying assumptions.
  3. Industry bodies, companies, policy makers and regulators should develop and encourage the use of a common set of assumptions and inputs for scenario analyses. At least one of the scenarios explored should be compliant with the target of the Paris Agreement.
  4. Companies should set ambitious carbon reduction targets consistent with the objectives agreed by the Paris Agreement. The goal should be to acknowledge and confront the significant climate-driven risks, along with the challenges and opportunities of transition, and identify what strategic changes are necessary, not whether changes are needed.
  5. Boards should support a “Safe to Fail” culture that recognises the ambitious targets cannot be guaranteed to be achieved, and that weak targets present a greater risk. They should encourage, and challenge the appropriateness of, responses to a 1.5-2°C future, which should include scenario analyses that incorporates a net zero horizon.
  6. Because the timeline for climate change is long relative to the tenure of most directors and executives, boards need to ensure that a commitment to responding to long-term climate risk is appropriately incentivised.

COP22: the 22nd UN Climate Conference

COP22: the 22nd UN Climate Conference

Analysis of the 22nd UN Climate Conference (COP22) held in Marrakech, Morocco from 7–18 November 2016.

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