The state of net zero
The second afternoon session of Greiner Packaging’s Innovation Day, was presented by Sören Stöber, who looked at the state of net zero and how to accelerate the transition to a low carbon economy. Sören Stöber is Head of ESG Solutions Northern Europe for S&P Global Sustainable 1 – the company’s centralized source for environmental, social, governance (ESG) and climate intelligence, which offers comprehensive coverage across global markets combined with ESG products, insights and solutions from across all S&P divisions.
Sören Stöber said: “Net zero refers to a state in which the greenhouse gases going into the atmosphere are balanced by removal out of the atmosphere. And the ‘net’ in net zero is important because it will be very difficult to reduce all emissions to zero on the timescale we have.”
“Scientists say the world needs to attain net zero emissions by 2050 to limit global warming to no more than 1.5 degrees. And the UN's Intergovernmental Panel on Climate Change has found that carbon emissions would need to fall by about 45% by 2030, in order to reach net zero by 2050.
While 2050 is quite far away, the 2030 deadline is not that far away. And climate change could have huge financial costs for corporations that don't act.
Assessing the risks from climate change
Sören Stöber showed examples of the S&P 1200 companies – the largest publicly listed companies in around 31 countries and accounting for 70% of global market cap. “80% of those companies will be exposed to moderate to high physical risks from climate change by 2050. Heat waves, cold waves, flooding, sea level rises – all of these are physical risks from climate change.
“We really need to understand what kinds of hazards we're looking at, so we have developed a really advanced and innovative way to help our customers understand the risks and opportunities in an investment portfolio. They need geo-specific data, good climate models and good climate scenarios. And the most important piece of information which they need is the ability to calculate the financial risk. So, a lot of large asset managers and banks and insurance companies are currently undertaking these types of assessments.
Towards mandatory disclosure
“We're seeing that scope one and scope two emissions intensity has declined 21% from 2016 to 2020. However, across all sectors, 84% of a company's emissions are sitting in scope three, so it's really important that when companies make pledges and targets, they have the ability to understand if they are reducing and tackling these indirect scope three emissions. Getting information from the supply chain is difficult, but companies are starting to do it. And this brings me to voluntary and mandatory disclosures.
“There is a growing momentum to make some of the voluntary disclosure framework, mandatory. Probably the best known to companies and investors is the influential Task Force on Climate-Related Financial Disclosures (TCFD) – which basically encourages companies to talk about the physical risks and the policy risks from climate change, and ideally, to put that in monetary terms. As of last month, 1300 of the largest UK companies are now required to publicly disclose climate risk, Switzerland has said it will make TCFD reporting mandatory, and in the EU the Non-financial Reporting Directive includes climate risk elements.
“So, we’ve talked about physical risks, and we’ve talked about legislation, but the other piece that's linked is policy risk. So how do investors, banks and asset managers look at policy risk in investment portfolios? When we talk about policy risk, we mainly focus on carbon pricing risk, but how do investors understand which companies in an investment portfolio are particularly exposed to carbon pricing regulation? And we're not talking about today, we're talking about carbon prices in 2030, 2040 or 2050. The 2021 World Bank Report noted that the potential of carbon pricing is still largely untapped, with most carbon prices below the levels needed to drive significant decarbonisation. We can already calculate the financial risk because we know company’s emissions, and we know carbon prices, so we looked at the SAP 1200 companies and found that they could face $283 billion of exposure to additional carbon costs, representing 13% of their profits at risk by 2025 – and that is a huge number.
“After a year when the United Nations warned that the world is facing a cold red for humanity, progress in the world's largest companies in reaching net zero emission remains slow. As investors accelerate their own net zero strategies, companies need to be more proactive and transparent in how they imagine climate risks, and opportunities. So, measuring emissions across the business, setting robust targets, and reporting those climate related risks will set companies on the right road to achieve net zero.”