The impetuses driving companies’ focus on environmental, social and governance (ESG) issues are plentiful, with oncoming regulatory requirements, demands from investors, lenders and shareholders, and other stakeholders, and calls for action from consumers and employees being just a few. Whatever the impetuses may be for a particular company, the trend is clear that companies are now focused on ESG issues more than ever. This article outlines the pathway for companies focusing on the “E” of ESG.
While some companies may view the ESG journey as a series of obligations to be met, others see it as an opportunity for value-creation – a chance to identify and calculate their non-financial risks, augment their strategy, and future-proof their business all while delivering solutions that respond to society’s biggest challenges. That journey requires an assessment of a company’s current environmental position, establishment of environmental goals and a plan to achieve those goals.
Assessing current environmental position: Carbon footprinting
Calculating carbon footprint – and the requisite data-gathering required to arrive at a comprehensive and accurate calculation – is the necessary starting point for a company looking to launch a green transition strategy. An organization’s carbon footprint measures greenhouse gas (GHG) emissions from all activities across a company, including its Scope 1, 2 and 3 emissions. As defined by the GHG Protocol, the most widely used global GHG accounting standard:
- Scope 1 emissions are direct emissions from company-owned and controlled resources;
- Scope 2 emissions are indirect emissions from the generation of purchased electricity, steam, heat and cooling; and
- Scope 3 emissions are all indirect emissions, not included in Scope 2, that occur in the company’s value chain, including both upstream and downstream emissions. Scope 3 emissions are the most challenging to calculate, given the need to access multiple stakeholders and data sources. Examples of Scope 3 emissions include, for example, business travel and employee commuting, upstream emissions such as those arising in the sourcing of raw materials or other goods and services in the company’s supply chain and downstream emissions such as those arising from activities undertaken to get the company’s products or services to market and the use of its products or services by customers.
Capturing this data will require input from a variety of sources within the organization (including finance, travel, logistics and operations) and from outside the organization, to get a full and accurate footprint. In some circumstances, it may not be possible to directly report on every business activity, and assumptions will need to be made. Third-party companies that specialize in emissions accounting can be called upon for assistance. These consultants base their assumptions on multiple data points from well-regarded sources, such as the US Environmental Protection Agency (EPA), the US Energy Information Administration (EIA), and the UK National Health Service (NHS), among many other emissions database sources. Additionally, companies should ensure that the data is gathered and calculated for a consistent time period.
Calculating carbon footprint, as tedious and painstaking as it may be, is an essential first step. With accurate information on the sources and quantities of carbon emissions within a company’s footprint, the company’s leaders can identify opportunities to improve sustainability, ideally both through reducing the risk to the business presented by climate change and enhancing the company’s value through offerings of new or improved products or services. Company leadership can also establish carbon reduction targets that are meaningful and achievable, and establish appropriate programs to monitor and manage carbon emissions and measure progress toward the targets.
Establishment of environmental goals: Carbon-neutral vs. net-zero vs. carbon-negative
Over the past year, the pace of companies announcing carbon reduction commitments has rapidly accelerated. 2020 was the year that climate commitments went mainstream, with multiple corporations and countries pledging to reach their targets by 2050 or earlier. With the recent finding by the Intergovernmental Panel on Climate Change (IPCC) that the world must halt adding emissions into the atmosphere by 2050 to limit global warming to 1.5°C above pre-industrial levels, even more net zero commitments from the private sector will come and will be welcomed by the climate community.
Additionally, continued pressure from the investor community will motivate the private sector to maintain the momentum. Organizations like Climate Action 100+, a group of more than 600 investor companies with a total of $55 trillion in assets under management, and Net Zero Asset Managers, which consists of more than 125 member investor companies with an aggregate of $43 trillion in assets under management, are increasing the pressure on corporations to measure and reduce their emissions.
While net zero is the presumed standard, options also exist for companies to commit to becoming carbon-neutral or carbon-negative. What are the differences between these levels of commitments?1
- Carbon neutral means balancing GHG emissions by offsetting – or removing from the atmosphere – an amount of carbon equivalent to the amount produced. This can be achieved by acquiring carbon credits or by investing in GHG-reduction initiatives, such as carbon capture and sequestration (CCS), renewable energy or reforestation projects. A commitment to becoming carbon-neutral, however, does not require a commitment to reduce overall GHG emissions. A carbon-neutral business need only offset the GHG emissions it produces – even if those emissions are increasing.
- Net zero means reducing GHG emissions as close to zero as possible and then investing in GHG-reduction initiatives or purchasing carbon credits to net out the remainder of emissions produced. Unlike carbon neutrality, a commitment to achieving net zero requires a company to put in place an emissions-reduction strategy.
- Carbon negative is the next and natural evolution in climate commitments. Whereas carbon neutral and net zero aim for balancing emissions generated with emissions reduced or offset, carbon negative goes further and requires a company to remove more emissions from the atmosphere than it emits.
Achieving environmental goals: Following-through on commitments
The scale and pace of change required for a company to achieve its climate commitments will depend on the sector in which it operates and its baseline carbon footprint. By and large, however, most companies will require a material shift in their operations to reach their goals. For companies in traditionally carbon-intensive industries, a GHG-reduction plan may involve a strategic pivot that includes divestment or retirements of fossil fuel-reliant assets followed by investments in green technologies, such as CCS, wind and solar power, hydrogen, or alternative transportation fuels. For other companies looking to offset their emissions, a strategy of acquiring carbon credits or offsets such as through forestry investments may be sufficient to reach their goals.
There are numerous actions a company can take to achieve its carbon reduction targets. Many of them involve novel and complex legal considerations or the company entering into transactions relating to their energy usage in which the company’s internal legal counsel has little or no prior experience. Following are approaches in which Eversheds Sutherland’s ESG attorneys have advised clients looking to reduce their carbon footprint and meet their climate commitments:
- Divestment/retirement of fossil fuel-reliant assets or investments. This may involve divesting assets held by your company or investments in funds or other companies that hold such assets.
- Acquisition of/investment in/strategic partnerships with clean energy assets, including:
- Carbon capture and sequestration. Carbon capture and sequestration involves capturing carbon dioxide (or other carbon oxides) from industrial sources that would otherwise be released into the atmosphere, or from the ambient air, and storing it underground or in commercial products. Companies can use this strategy by either developing or investing in a CCS facility.
- Wind, solar and other renewable energy technologies. There are currently a number of renewable energy technologies including wind and solar energy (increasingly combined with battery storage). Companies adopt strategies to use electricity generated by these facilities by entering into a power purchase agreement for electricity from these facilities, or by investing in the development of these facilities. Clean fuels, including hydrogen, biodiesel and other alternative fuels. Companies commit to using clean renewable fuels in lieu of fossil fuels for transportation. Substantial federal tax credits are available to incentivize and help finance each of the types of activities described above; and state and local tax incentives also may be available.
- Corporate purchases of renewable energy. Corporate “virtual” renewable energy power purchase agreements (VPPAs) help companies achieve their sustainability goals and reduce their emissions, even when they must purchase electricity from their local utility, while giving them price certainty on electricity costs and a hedge against future energy price volatility.
- Generation, acquisition and trading of environmental credits. A number of different environmental credits can be generated, acquired or traded, including Renewable Energy Credits (RECs), Renewable Identification Numbers (RINs), Low Carbon Fuel Standard (LCFS) credits, and carbon allowances and offsets.
- Implementing on-site electric and steam generation solutions. Cogeneration, or combined heat and power (CHP), merges heat and electricity into a single process that can support a company’s carbon-reduction efforts. Cogeneration facilities are typically placed on-site and use heat that would normally be lost in the power-generation process.
- Voluntary and required reporting on sustainability efforts. Companies can attract capital and customers by publicizing the extent of their sustainability practices. These public statements may be subject to regulation by a number of agencies, including the Securities and Exchange Commission and the Federal Trade Commission.
The call for the private sector to address climate issues and opportunities will only continue to grow, as pressure mounts from investors and shareholders, governments and policymakers, and customers and employees. By putting a strategic plan in place that involves calculating carbon footprint, identifying key areas of emission and priority areas of emission-reduction, and aligning company action to achieve climate targets, opportunities abound for the private sector to deliver sustainability benefits to its stakeholders, customers and employees.