Summary
In this presentation, Ivan Diaz-Rainey, Professor of Finance at Griffith University, explained how carbon metrics impact businesses, and how this links to climate risks and opportunities. Professor Diaz-Rainey explained some difficulties in emissions reporting and net zero commitments and whether they fully capture corporate climate strategy. Risks and opportunities were another key theme, as directors must understand both sides of the coin when navigating their business through the climate crisis.
Key Takeaways
- Carbon footprints have limitations and cannot give a holistic picture of the net zero transition. There is little consistency in Scope 3 reporting (on emissions caused upstream and downstream in a company’s value chain), with companies often only reporting on the upstream or downstream emissions that are easiest to measure but which often are less material. Further, less than a quarter of companies actually report their emissions, so looking solely at these metrics leaves out a large portion of emissions that must be reduced. Machine learning can be used estimate emissions for non-reporting companies, but predictions for Scope 3 emissions likely remain inaccurate.
- Net zero commitments alone do not give significant information about a company’s climate strategy. Businesses may choose to count different scopes of emissions towards their net zero targets, and the contribution of different scopes towards different businesses’ climate impacts can vary based on their sector. Reaching net zero in decades’ time requires action today, so a net zero commitment is not necessarily useful if not also backed by concrete action now.
- Climate risk mitigation and management is a business opportunity. Climate impacts pose significant risks to companies, but addressing climate risk can be seen as a business opportunity. De-risking firms can lead to a lower cost of capital, giving climate-robust firms’ strategic investment advantages by reducing the cost of capital investments.
- Non-executive directors should consider thinking like investors to understand climate risks and opportunities. Seizing climate-related opportunities is important, but directors should be conscious that these opportunities could be overpriced, especially when there is competition between different green technologies. In addition to understanding how investors view the net zero transition generally, directors should also consider how they are engaging with their businesses’ own shareholders.
- Businesses need to consider the impact of multiple different scenarios. The outlook for global temperature rise and the climate policy response is unclear, so businesses must consider how they will be impacted by different scenarios. Many shareholders are now asking for this level of detail, so firms should ensure that they are considering multiple scenarios and models.
Conclusion
Metrics and targets are an important part of climate strategy, but focusing only on those numbers misses many parts of the net zero transition. Given that firms interpret emissions reporting differently, and many do not report their emissions, reporting currently only gives a partial picture of businesses’ impact on net zero. Similarly, firms take different approaches to net zero commitments, and long-term commitments may not be feasible if not backed by action in the short term. In light of this nuance, directors should consider both opportunities and risks associated with the net zero transition as a core strategic consideration and consider how their business might navigate a variety of net zero pathways.
Links
- Ivan Diaz-Rainey Profile | Griffith University
- Diaz-Rainey, I., Griffin, P.A., Lont, D.H. et al. (2023) Shareholder Activism on Climate Change: Evolution, Determinants, and Consequences. Journal of Business Ethics.
- Nguyen, Q, Diaz-Rainey, I & Kuruppuarachchi, D (2021) Predicting corporate carbon footprints for climate finance risk analyses– A Machine Learning approach, Energy Economics. 95, March 10529
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