By Vittoria Caselgrandi, Eco-Business.com
November 25, 2016

With the Paris Agreement having come into force this year, 12 months after it was agreed, it is more important than ever for businesses to understand, report on, and reduce their carbon emissions.

It is also becoming increasingly unacceptable for businesses to set emission reduction targets in a vacuum. The introduction of science-based targets during the 2016 reporting cycle by CDP – the most widely used carbon reporting framework for business – indicates that emissions reductions must now be linked to the carbon budget set by scientists.

These two significant, arguably historic, activities demonstrate that we are eventually on our way to a low carbon-economy and that business needs to play its part.

For those that have just been getting to grips with the old CDP framework, this year’s changes may present a significant challenge. The new scoring system, science-based targets and revised scope 2 emissions accounting has created a lot of new information for businesses to understand.

The new scoring system combines the former disclosure numerical score and performance alphabetical grade into a single alphabetical band system this year. This approach significantly changes the way companies are scored and hence perform.

The main effect of the change is a reduction in the ‘granularity’ of the scores, so two companies with slightly different scores in 2015 are likely to obtain the same score this year. This represents both a risk and an opportunity as companies performing poorly risk falling into a lower band, but at the same time companies with a good score have a chance to ‘move up’ to the higher band. Most IMS Consulting clients have seen an improvement in score, with four achieving the highest score band of A.

There is no secret to achieving a high score; the most important aspect is being transparent and answering all the questions as exhaustively as possible. The CDP questionnaire is built in a largely non-prescriptive way and, although in some cases certain initiatives are associated with more points, in our experience most companies that lose points do so because they leave sections incomplete.

Those who perform better are in other words clear on the purpose of the questionnaire: encouraging companies to be transparent in their disclosure and to benchmark their performance with best practice to improve.

As discussed, one of the major new challenges businesses face is setting science-based targets, which are carbon emissions reduction targets set in line with reductions required globally to keep average temperature increases below the 2°C warming threshold. Science-based targets are not always more ambitious than the targets companies may have already set, but they differ from them in that they are based on the ‘fair share’ of emissions reductions a company should contribute in order to avoid dangerous climate change impacts.

IMS Consulting research demonstrated that 20 per cent of companies sampled didn’t know what they were, and if they did, they were confused by the different methodologies available. In addition, our research found that difficult-to-achieve (but of greater societal value) targets were difficult to gain internal approval for, and often businesses lack control over their total emissions, such as those from energy use, and tend to set short-term rather than long-term targets.

For any company still unsure about science-based targets, the evidence from more than 10 years of data reported to the CDP shows a positive association between the setting of ambitious emissions targets and strong financial performance.

The bottom line is that by adopting a science-based approach, you can be confident that your reduction targets are ambitious and meaningful, clearly demonstrate your company’s leadership on climate change, and that you are well-prepared for expected increases in carbon regulation.

The revised scope 2 accounting introduced in 2015 by the Greenhouse Gas (GHG) Protocol was included for the first time in this year’s CDP questionnaire. According to the GHG Protocol – a widely used international accounting tool for government and business leaders to understand, quantify, and manage greenhouse gas emissions – a company’s emissions can be divided into three scopes.

Scope 1 includes emissions deriving from activities under direct control of the company (fuel use is a typical example); scope 2 emissions are indirect emissions such as the heating and cooling the company purchases; finally, scope 3 includes all other emissions resulting from activities out of the company’s direct control (supply chain emissions or emissions coming from product use are examples).

The new accounting standards require reporting companies to provide two scope 2 emissions figures; one calculated using the standard ‘location-based method’ and one using the new ‘market-based method’.

The location-based method involves calculating emissions using grid average emissions factors (i.e. the average amount of a pollutant or material discharged into the atmosphere by a specific process) while the market-based method requires companies to measure emissions related to the specific attributes of the energy they actually purchase. This change provides a standard way for companies to account for low and zero carbon energy in their scope 2 accounting and gives a more accurate picture of the energy purchasing choices the company made, or the lack of choice in the market.

Therefore, the market-based figure will reflect companies’ purchasing choices in terms of energy, allowing companies purchasing renewable energy to consistently take this into account in scope 2 figures.

This year was under many aspects a ‘test’, both because of the new methodology and the new questions on science-based targets and scope 2 emissions accounting. As customary for CDP, the new questions accounted for relatively few points in scoring, but we can expect them to become more important over the next reporting cycle.

My advice for businesses getting to grips with carbon is to tackle the three key aspects:

• The growing importance of science-based targets 
• Understanding scope 3 emissions. As performance improves and companies get better at tackling and reducing scope 1 and 2 emissions, scope 3 will come into the spotlight while still being a poorly understood topic for many
• Detailed examining of scope 2 emissions and the market-based method

All these can be turned into an opportunity and if you get them established and embedded, you’ll be well placed to profit financially, socially, and environmentally.

Photo: Scott McLeod, CC BY 2.0