Better safe than sorry

By incorporating forward-looking information and reporting further than what is currently required by law, companies invest in their long standing by providing certainty to investors and lead the way for effectively adapting to climate change.


Via the Paris Climate Agreement, the global community agreed to pull efforts towards keeping global temperature variation under 2 °C. For this commitment to see its fulfillment, governments committed to reducing greenhouse gas emissions via the Nationally Determined Contributions (NDC´s). In order for the Agreement to be effective, emission reductions established via the NDC´s must find pathways and mandate within national law, in order to establish and track the progression towards such targets.


The way this is currently operating is quite ineffective, with laws[1] of different nature and scope requiring some level of disclosure in regards to emissions and reduction pathways via corporate reporting, but with no clear guideline for such disclosure. This situation, besides making the tracking of the progression of the NDC´s impossible, also leaves companies with no clear context in which to frame their reductions, since the way in which this information is to be collected, disclosed and managed is if not poorly developed, inexistent.


Understanding the situation they are faced with, members of the business sector have decided to jump ahead and fill in the gaps that law is currently not able to fill, specifically by generating forward looking information that would allow for a better understanding of how to prepare them for what is to come. Thus reducing uncertainty, and with this reducing market inefficiencies grounded in lack of or inconsistent information.


The way in which this leadership manifests itself is by companies setting themselves emission reduction targets and pathways consistent with climate science, which establish stricter and more defined emission reductions. This approach is known as the science-based targets approach, and it is based on the rational of the carbon budget[2], from which it derives its scientific character. The grounds for companies abiding to it, are far from moral and altruist, but rather stem from sensing the threat that climate change represents from an operational, as well as from a legal, financial and economic stance.


By setting themselves such targets, business are able to envision their business models under different scenarios, letting them derive forward looking information in the form of data and metrics, which serves to assist on the company´s appraisal which is further incorporated (on a voluntary basis) in corporate reports, whether it be financial or their sustainability reports. This, besides shedding some light on the company´s longstanding potential, provides an understanding on the way in which climate may affect a certain company and its operations. Depending on the potential of the affectation, this information may be regarded as material, for which in generating and acting on such information the company saves its back from potential suits on the ground of lack of fiduciary duty. Which could potentially be claimed by investors and shareholders if the company decided not to act on the information it has derived or had not in the first placed bothered to derive such information.


Companies setting themselves science-based targets enable a framework for studying the company and its impacts on and upon climate change, which allows them to better understand themselves in a certain context and as a result, better inform its shareholders and investors about its status and readiness, letting them asses the company thoroughly, which consequently derives in trust and solid investments.


Laws in place do not support this understanding, for which many company´s consider no need for going the extra mile, and will only do so if and when law tells them to. But company´s with a thorough understanding of the risks in play, wishing to be front liners, see the logic behind generating the forward looking information that investors and governments will progressively demand and respond to this logic by being ready to provide the information, for when that moment comes.


Reporting further than what law requires, enables a more comprehensive understanding of the situation and corrective steps have a greater likelihood of being set in the right direction. The current circumstance presented to us by climate change demands we act differently and shows us how old values upon the financial system once thrived, such as secrecy and lack of accountability, are no longer means to success.


In the attempt of better assessing the situation, the better information we are able to derive and feed, the higher the chance of success, a success that can no longer be measured solely on individual terms, but a success that requires everyone wins.


[1] a) German Law for Corporate Social Responsibility/CSR Richtlinie-Umsetzungsgesetz: Refers to the German Environmental Code as a guideline in which to report GHG emissions. b) French Energy Transition Law (The law sets out a roadmap to mitigate climate change and diversify the energy mix. It marks a turning point in carbon reporting, strengthening mandatory carbon disclosure requirements for listed companies and introducing carbon reporting for institutional investors).

[2] The carbon bubble is a hypothesized bubble in the valuation of companies dependent on fossil-fuel-based energy production, because the true costs of carbon dioxide in intensifying global warming are not yet taken into account in a company's stock market valuation. Harvey, Fiona (6 March 2014). "'Carbon bubble' poses serious threat to UK economy, MPs warn"

Marcela Scarpellini is in charge of the legal aspects regarding 2 °C-compatibility within right.

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