Climate governance: Reconfiguring business operations to the global 1.5 degree goal

Climate governance: Reconfiguring business operations to the global 1.5 degree goal

Decisive climate action that’s aligned to global dynamics is no longer optional. We explore how the world is responding to the climate challenge and what this means for business leaders when reconfiguring processes, capabilities and tools.

Climate governance: Reconfiguring business operations to the global 1.5 degree goal

Aligning climate action to global dynamics is no longer optional

The world is currently undergoing a crucial climate course correction.

We have never been as reliant on each other as we are today. Getting there requires a joint and urgent effort from governments, business leaders and individuals.

For business leaders this means understanding the global context, taking aligned action, sharing knowledge with peers, learning, iterating and continuously moving forward.

Our planet depends on it as do business stakeholders.

Decisive climate action that’s aligned to global dynamics is no longer optional. The new green economy is here to stay, the rules of business are changing, and only those that adapt will maintain relevance.

Keep reading as we explore:

  • How the world is responding to the increasingly urgent climate challenge
  • What this means for today’s business governance
  • What to consider when reconfiguring business operations, including process, capability and tools

How the world is responding to the increasingly urgent climate challenge

Our collective climate goal is clear. We must limit global warming to 1.5 degrees above pre-industrial levels to avoid some the worst climate outcomes.

By most expert accounts, we have a long way to go.

Achieving net zero emissions by 2050 is essential to our primary goal, and this is at risk. The objective comes with a ‘remaining carbon budget’ - or the volume of emissions we can emit by mid-century.

Since 2020, the world has emitted half of this budget and, if emissions remain at current levels, the budget may be exhausted in a much shorter timeframe.

The first ever Global Stocktake delivered at last year’s COP 28 (28th annual Conference of the Parties) also delivered grim news. We are on a trajectory to significantly overshoot the 1.5 degree target.

So how is the world responding?

While global forums such as the COP summit provide important reality checks, renewed commitments and help maintain momentum, the real work happens in between events.

Every five years – or more often if they like – individual countries must submit updated Nationally Determined Contributions (NDCs). The NDCs are self-defined national climate pledges under the Paris Agreement and the latest updates are due later in 2024.

These commitments are then being translated to current and planned national emission regulation and nature protection policies. Most often, the first organisations impacted are the largest emitters, but the compliance regulation is expected to quickly filter down.

The individual regulations depend on each country, but the legislation frequently falls into two main categories:

  • Mandatory emissions reporting
  • Putting a price on climate and nature impact

Mandatory climate and nature impact reporting is on the rise

While many forward-looking organisations have recognised the need to proactively communicate their climate and nature related risks and opportunities, this will soon be law in many jurisdictions.

This regulation is developing in line with each country’s own global reporting and policy formulation requirements, and the need for closer governance to protect the interest of investors and other stakeholders.

Mandatory reporting requirements are growing quickly around the world. Notable examples include:

  • Australia is taking significant steps toward mandatory climate reporting.

    Its largest emitters have been required by the Safeguard Mechanism legislation to report on their emissions for quite some time.

    In January 2023 the county also announced the phased introduction of mandatory climate-related financial disclosure requirements. Following an extensive consultation, these are set to begin in 2024/2025 for certain large entities. In the coming years this regulation is expected to extend to all companies with over 100 employees that meet additional criteria, even private ones.
  • The European Union announced its Corporate Sustainability Reporting Directive (CSRD) in 2021. It came into effect in early 2023. The regulation requires large (and some small and medium) EU businesses– including qualifying EU subsidiaries of non-EU companies – to report on the environmental and social impact of their business activities.

    Like in Australia, the regulation is implemented in tiers, starting with the largest companies and working down from there.
  • California’s Mandatory Greenhouse Gas Reporting Regulation (MRR) has been in place since 2007. It has undergone several revisions since that time.

    The MRR requires companies that meet specific criteria and operate in the state of California to report on their greenhouse gas emissions. It also mandates independent verification of  company-produced reports.

    The state also recently introduced the Climate Corporate Data Accountability Act. It comes into effect in 2026 and will require companies with annual revenues of more than $1 billion to publicly disclose their emissions from operations and electricity use.

The world is increasingly putting a price on climate and nature impact

There’s been a significant rise and tightening of regulations that place a price on climate and nature impact.  Doing so builds the cost of inaction into economics and business-as-usual decision making. And, in turn, helps to drive the outcomes we will need.

Recent notable examples of these types of regulations include:

  • Australia’s Safeguard Mechanism legislation is designed to reduce emission in the country’s major industrial facilities. It sets emissions limits for each facility. Those that emit below the baseline create credits they can sell to others (in the form of Safeguard Mechanism Credits, or SMCs). Those that emit more must purchase additional carbon credits, either SMC or project-generated Australian Carbon Credit Units (ACCUs).

    At the time of writing*, the spot price of generic ACCUs is around A$35 per unit, you can track ACCU price movements here.
  • The European Union’s well-established Emissions Trading Scheme sets emissions allowances which can be traded by scheme participants. At the time of writing* the value of European Union Allowances, or EUAs is around €60 per unit.  

    In 2023, the European Union also introduced its Carbon Border Adjustment Mechanism (CBAM). The CBAM is designed to level the playing field between European importers and manufacturers. It operates by placing a carbon charge on imports to the levels imposed on local producers, with adjustments made based on mandatory carbon prices in exporting countries.
  • California’s program - the California Carbon Allowance program – is an integral part of the state’s climate goals. It sets a cap on emissions and affected entities can trade emissions allowances on the carbon markets. The current value of CCA units is around US$28*.

* Approximate value in early March, 2024

The CORE Markets team produces a monthly Global Carbon Market Snapshot which provides an overview of select compliance and voluntary carbon markets. Read the February 2024 edition here.

What this means for business governance today

Globally, 2024 is the year of governance disruption.

We are expecting to more than 50 elections that will affect how 30% of the global emissions will be treated in the next half of the decade.

On the most part, we are expecting these countries to raise the bar on their climate action within the next seven months.

This raising national ambition will – directly or indirectly – be translated into regulation affecting local businesses and create a shift in how leaders in turn govern their organisations.

And while there is some uncertainty with any new governments, the expectation for greater transparency, credibility and action also comes other stakeholders, including investors, employees and customers.

The general trends are clear. Organisations have a growing responsibility to report on their climate and nature related impact, take decisive action to address it, and this action or inaction will have an increasingly direct bottom-line impact.

An important role of the governance process is to set the guiding principles and governance framework that is aligned – and continues to evolve – with these global trends.

How this is translated into strategy and process will be different for each organisation.

For some it may mean allocating funds to fast-track emission reduction initiatives and investments in climate and nature repair, for others it may accelerating action by mean setting an internal price on emissions, thereby weaving it into business-as-usual decision making.

Whatever the model, the treasury function – traditionally responsible for managing compliance, allocating financial resources and managing financial risk – is now an integral part in steering corporate climate and nature initiatives.

What to consider when reconfiguring business operations

How the governance framework is translated into strategy and, in turn, operations, will be different for each organisation.

Here is how your operations – including process, capabilities and tools – should support you in the new green economy normal.

1. Understand your existing climate and commercial position

In a world that is increasingly putting a price on climate and nature impact, your existing climate position has a very clear commercial cost.

Once you understand your footprint, you can start building the commercial view using a price per tonne of emissions.

Different organisations use different methods to quantify the cost - for example, some using a benchmark market price, their internal carbon price or a perceived cost of trading.

This snapshot of where you are today – both in terms of your footprint and what it means for your financial exposure - serves as a baseline and as a guide to decision making. It will help you prioritise initiatives, allocate funds and minimise risk.

2. Prioritise short-term reductions, but don’t lose sight of the long-term objectives

Using the guiding principles set by your organisation, including your risk profile, determine your goal, the timeline and which emissions reductions initiatives will get you there.

Document a decarbonisation strategy that recognises and delivers on your short-term priorities as well as your long-term goal. Both are goals are important and, most often, need to be addressed in parallel.

Many forward-looking organisations are working on the following initiatives at the same time:

  • Reducing Scope 2 emissions to zero through energy efficiency and a Power Purchase Agreement
  • Implementing operational reductions such as equipment upgrades
  • Calculating residual Scope 1 and 3 emissions and actively planning how to close the gap

3. Consider your carbon and nature credit procurement strategy

The process of emissions reduction for many organisations can be long, costly and, in some cases, limited by available technology. Yet, in most circumstances, residual Scope 1 emissions and ongoing Scope 3 exposure can be calculated, or at least estimated, much earlier.

Planning how to manage these residual emissions can happen in advance and can help avoid potential financial and supply risk.

In addition, many organisations are choosing to invest in climate and nature repair and compensate for all their remaining emissions, even while their emission reductions are underway.

Studies show that organisations that actively purchase carbon credits are more likely to decarbonise faster. This is partly because they, in effect, put an internal price on carbon and want to minimise this expenditure over time.

4. Develop external feedback loops to make connected decisions

Your climate and commercial position will change over time. It will reflect the initiatives you’ve implemented, your evolving business activity, and the emissions market price you’ve selected as your benchmark.

It will also need to consider the changing national and global conditions, such as ongoing regulatory changes, stakeholder sentiment and the supply of high-impact renewable energy, and carbon or nature credits.

Advanced modelling tools with links to global clean energy, carbon and nature markets can help you understand your exposure across different scenarios.  

External data – such as market pricing and trading volumes as well as independent verification and benchmark data – helps build continuous feedback loops to help ensure you’re tracking well in the global context.

5. Consider the tools you’ll need to support your efforts

While a clear strategy always comes first, technology can help embed sustainable and commercial decision making into the DNA of an organisation.

This starts with putting your own data to work, not just seeing it. Understanding your emissions across your portfolio is the logical first step, followed by tracking the impact of your emissions reduction initiatives.

But these insights are much more powerful when combined with external data sources such as market price signals, 24/7 carbon-free energy tracking, or independent verification data.

Using these vast volumes of internal and external data to create meaningful insights for other parts of the business and to model different commercial scenarios is now an increasingly important requirement.

6. Determine how you’ll track and communicate progress

Transformation happens when entire teams understand the goal and can see the progress. As it unfolds, various stakeholders – including customers, employees and investors – will be watching with interest.

Regular reporting will become increasingly important, both to meet compliance obligations and to keep stakeholders engaged. With the right data and tools, generating reports should be as simple as a few clicks.

There is also a growing trend toward real-time, self-service update portals and dynamic dashboards.

The opportunity in alignment with global dynamics

The global climate challenge is urgent, complex and impacts us all.  

But it also presents an opportunity for business leaders to take the lead and align their operations with the new green economy.  

By understanding the global context, setting clear governance principles, reconfiguring business processes, and leveraging data and technology, organisations can reduce their climate and nature impact, manage their financial risk, and create value for their stakeholders.  

The time to act is now, and the tools and guidance are available.  

Get in touch to see how we can help you understand the global environmental market dynamics, bridge the gap between climate and commercial goals and take decisive climate action.  

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