“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.”
