- Businesses need to disclose the impacts of material climate-related risks
- Managing the financial implications of climate change requires first identifying relevant climate-related risks.
- Accountants have a pivotal role to play in translating these risks into potential operating impacts for decision-making.
Achieving net zero or carbon neutrality will be a tough trek for countries and organisations alike.
It will only really be achievable with co-ordinated action on all fronts. Any policies developed will need to promote technological development and support businesses.
What does net zero mean?
The Science Based Targets initiative (SBTi) has defined what it means to reach net zero emissions at the corporate level: achieving a state in which the activities within the value chain of an organisation result in no net impact on the climate from greenhouse gas (GHG) emissions.
This basically means that any emissions from the operations, supply chains and lifecycles of products are offset to zero.
The SBTi is a partnership between CDP – a not-for-profit charity that runs the global disclosure system for managing environmental impacts – the United Nations Global Compact, World Resources Institute and the World Wide Fund for Nature.
However, there are increasing concerns that many net zero claims are just greenwashing from companies seeking to join the latest fad.
Therefore, it’s important to ensure your commitment is robust and accountable – stakeholders are seeing through ‘aspirations’ and ‘commitments to commit’.
New supplementary legal opinion by Noel Hutley SC and Sebastian Hartford Davis also highlights the risk of greenwashing for directors, noting: “Companies making net zero commitments should have ‘reasonable grounds’ to support the representations contained within them – otherwise, a company (and its directors) could be found to have engaged in misleading and deceptive conduct.”
So, what would be considered ‘reasonable grounds’?
The legal opinion suggests three steps:
- The net zero strategy should be integrated with the company’s operational strategy.
- The net zero strategy should explain which emissions it encompasses and the relevant time-frame.
- If the net zero strategy is amended, not suitably fulfilled, affected by supervening circumstances, or otherwise untenable, this information should be disclosed promptly.
Which emissions are included?
There are three types of GHG emissions:
- Scope 1 emissions are direct and occur from sources controlled or owned by the organisation itself (e.g. company vehicles and facilities)
- Scope 2 emissions are indirect and associated with the purchase of electricity, steam, heat or cooling by the organisation
- Scope 3 emissions are also indirect from sources that the organisation does not own or control but that are still related to the activities of the organisation (e.g. employee commuting, transportation and distribution, waste generation in operations, processing and use of sold products, and investments).
In developing a net zero plan, scope 1 and 2 emissions are expected at a minimum and, increasingly, quantifiable scope 3 emissions. Scope 3 represents the most challenging for businesses as it is typically outside their control.
The starting point should be to reduce emissions as much as possible to begin with – this may be through, for example: shifting to electric vehicles, changing to green power, or increasing the energy efficiency of operations.
A matter of offsets
Another key aspect under increasing scrutiny relates to the offset of emissions. As mentioned earlier, it is important that emissions are reduced first before being offset. In fact, some suggest that if emissions are offset, the claim should be ‘carbon neutral’, rather than ‘net zero’. When considering offsets, they are not all created equal, so it is important to research options first.
The more common offsets are based on avoidance of emissions, e.g. preventing deforestation or using renewable energy projects. Offsets are also given for removing GHG from the atmosphere, such as through reforestation. Where the offsets are sourced from – domestically or overseas – is also a key consideration, as is the quality and integrity of the offsets.
Purchasing land for planting fast-growing forests can be an attractive option but if native flora is not used, this harms local biodiversity. There are also concerns about the effects on rural communities when prime agricultural land is used for this purpose.
So why is achieving net zero so challenging?
First is the challenge of actually starting. Becoming carbon neutral requires operational investment, not just in funds but also creating strategic alignment and a willingness to change – a hurdle that requires governance-level commitment to overcome.
But more than that, establishing the steps and associated timeframes required for decarbonisation can be challenging. Certain industries may have clearer paths than others, and scope 3 emissions can bring with them what feels like a never-ending list of considerations.
Governments and regional bodies are grappling with the future of certain industries and communities and are considering how best to incentivise and subsidise the net zero journey for local businesses. The development of low-carbon technologies is beginning to pick up pace but economies of scale are yet to occur.
Where does the finance team come in?
Finance teams can support organisational efforts in four key ways – as detailed below.
Managing the financial implications of climate change requires first identifying relevant climate-related risks. Those charged with governance need to be committed to the transition and the finance team can support and facilitate this commitment.
Businesses need to disclose the impacts of material climate-related risks and accountants have a pivotal role in translating these risks into potential operating impacts for decision-making.
Net Zero Guidance
Guidance produced by Accounting for Sustainability (A4S)Read more
Directors liable for climate disclosures: new legal opinion
Read about CA ANZ’s contribution to expert roundtable that informed the latest legal opinionRead more
Centre for Policy Development materials on directors’ duties, climate risk and net zero
A range of new materials relating to directors’ duties and climate change that have emerged from a special roundtable convened by CPD in December 2020.Read more