Scaling private sector climate action: What can we learn from the Paris Agreement?
Christina Hood, Compass Climate and Andrew Prag, We Mean Business Coalition
A robust, clear and ambitious set of corporate carbon reporting, accounting, target-setting and verification standards matters, because these will collectively drive companies’ behaviors and underpin confidence to make significant climate investments.
Mobilizing corporate climate finance is at least a $2.6 trillion dollar challenge[1]: that’s the amount many expect private companies to step up and deliver toward the global $8 trillion dollars of climate finance needed by 2030. $8 trillion dollars is a six-fold increase from 2022 levels.
If you’re struggling to imagine 8 trillion dollars, think of how it compares to time. A million seconds ago was last week; a billion seconds ago was around the time that Whitney Houston’s “I will always love you” was top of the charts in 1993; 8 trillion seconds ago was roughly when the first ever Homo Sapiens evolved from an ape, about 200000 years ago. It’s a lot of dollars to mobilize in a short space of time.
How does private-sector climate action work?
Many private companies are already taking voluntary action and investing in the decarbonization of their operations and supply chains to combat our growing climate and nature crises. Their progress is not guided and measured by international regulation, but by an increasingly sophisticated network of non-governmental organizations and standards. These voluntary systems guide companies to measure emissions, establish targets, and make claims for emissions reductions they make or invest in, both within and beyond their value chains.
Doing this for companies is a complex undertaking by anyone’s standards. But the same is true for doing it for entire countries. And to do that, various mechanisms and processes have been set out in the Paris Agreement to guide governments and hold them to account.
Somewhat surprisingly, the private sector operates very separately from these governmental processes. So, what can companies learn from what is already done under the Paris Agreement, to help measure and manage their greenhouse gas (GHG) emissions and scale their climate action?
What can the private sector learn from the Paris Agreement?
If we want companies to upscale their investments in climate action, it is essential to measure and account for corporate GHG emissions. The corporate sector’s dynamism and complexity create undeniable challenges in this, for example for how to measure and account for emissions up the supply chain, and for how to account for use of renewable energy certificates, carbon credits and other flexible mechanisms that encourage corporate climate investment.
But these problems are not insurmountable. If we consider the corporate approach alongside that of the Paris Agreement, it highlights a number of areas where the corporate world can learn from what governments have agreed internationally. Here are three questions to consider:
Should corporates have standardized emission reduction milestones?
Under the Paris Agreement, governments must put forward national commitments every five years (so-called Nationally Determined Contributions, NDCs), and they must track and report progress towards them.
Every five years they set new, increasingly ambitious NDCs. Every two years, they submit update reports covering their GHG inventory emissions and NDC progress. But in the private sector, reporting is more individualized with each company working to self-determined milestones.
What can be learned from the Paris Agreement in terms of separating the reporting of physical emissions from market-based transactions?
The Paris Agreement has a strong focus on national inventories of direct physical emissions to underpin reporting, target setting and accounting. Those inventories are sacrosanct. Any market instruments (carbon credits, renewable energy certificates, etc.) and their emissions impacts are reported separately, rather than being used to modify the count of emissions in the inventory. This dual ledger approach provides important transparency and clarity on how market approaches are used. The market ledger shows additions and subtractions depending on whether the country has bought or sold. Taken alongside the emissions inventory, it allows for a final emissions position to be calculated that is compared to the target. But the inventory itself does not change.
However, the landscape is currently very different for private companies. Many companies adopt a hybrid approach, integrating the physical accounting of their GHG emissions with the performance accounting of their use of market instruments. Essentially, they are adjusting their inventory based on their market transactions.
Would it be better if these were separated into a physical emissions inventory; a ledger for use of market instruments (and their GHG impacts), and what is counted toward targets? This is not a new idea (it was first proposed in relation to the GHG Protocol in 2004) but could be reconsidered.
The Paris Agreement fosters direct international comparison and reporting of meaningful year-by-year progress. What could corporates learn from this?
In theory, comparison between corporates could raise standards and hold laggards to account. However, creating the basis for comparison could be challenging.
National annual inventories of the Paris Agreement reflect only those emissions released within a country’s borders, without taking into account emissions released in other countries that are due to exports and imports. This allows for direct international comparison of countries. But it is roughly equivalent to only “Scope 1” emissions for corporates – which is only part of where a company’s GHG impact lies.
Inevitably a large part of a company’s activities – and hence their emissions – are market transactions for the goods and services they buy and sell. Therefore, Scope 1 emissions are only a small part of the picture – as little as 1% for many companies. Companies therefore need to robustly account for these broader market transactions as well, which is challenging because as companies shift suppliers and change products, boundaries are always shifting.
To help assess progress robustly, corporates could use common reporting tables and formats similar to the biennual progress reports of the Paris Agreement. These would need to be expanded to capture Scope 2 and 3 emissions.
Another issue faced by both the Paris Agreement and corporate structures is how to ensure that meaningful progress is made every year, even if the main target is set for one year only, several years hence. The Paris Agreement adopted a requirement whereby if market mechanisms are used, they need to be accounted for in every single year in the period, not just the final target. This ensures that the final picture is representative of action over time, not just in one year, and can provide lessons for thinking about corporate accounting.
Going forward
Climate finance investments need to increase six-fold from 2022 levels to hit the US $8 trillion needed by 2030. In achieving this goal, it’s clear the private sector could be extremely impactful if its full potential were unlocked.
Improved accounting, reporting, and target-setting rules clearly won’t do that on their own: bold leadership will be needed. But having confidence in what investments count, and how they will be counted, is essential for companies to be able to make bold choices to significantly scale climate finance.
There are many more questions for the private sector to consider based on the lessons of the Paris Agreement.This paper was authored by Christina Hood (Compass Climate), Andrew Prag (WMBC) and Luke Pritchard (WMBC). The work was supported by a grant from the Hightide Foundation. To learn more, read the full report here.
[1] https://www.wri.org/research/state-climate-action-2022