As of now, the main area of focus for companies regarding ESG is on the Environment. To that end, investors and climate change professionals have increased the intensity with which they are evaluating companies’ impact on the environment. Frameworks revolve around quantifying environmental impact, and one of the central frameworks is Climate Action 100+, developed in collaboration with top ESG investment organizations. Climate Action 100+ emphasizes reducing greenhouse gas (GHG) emissions to ensure the global temperature increases by less than 1.5 degrees Celsius in accordance with the Paris Climate Agreement. The framework was developed to evaluate the ~160 companies with the highest GHG emissions.
The Climate Action 100+ framework evaluates corporate commitment to reducing climate change by addressing ten key indicators:
- Net-zero GHG Emissions by 2050: A stated ambition to reduce 95% of Scope 1 and Scope 2 emissions and a net zero ambition covering relevant Scope 3 emissions
- Long-term (2036-2050) GHG Reduction: A target for reducing GHG emissions between 2036 and 2050 on a clearly defined scope of emissions
- Medium-term (2026-2035) GHG Reduction: A target for reducing GHG emissions between 2026 and 2035 on a clearly defined scope of emissions
- Short-term (2020-2025) GHG Reduction: A target for reducing GHG emissions between 2020 and 2025 on a clearly defined scope of emissions
- Decarbonization strategy: A decarbonization strategy to hit mid and long-term targets
- Capital stock alignment: In line with the Paris Agreement, Capital expenditures are based on decarbonizing the future of businesses
- Climate policy engagement: Lobbying of the company and trade associations they are a part of are aligned to the Paris Agreement goals
- Climate governance: The board has oversight and an agenda regarding climate change, and a senior executive(s) (C-suite) remuneration is tagged to hitting climate change KPIs
- Just transition: Not yet defined as of Q1 2021 per Climate 100+ initiative
- TCFD disclosure: Company has disclosures in line with Task Force of Climate-Related Financial Disclosures (TCFD)
Each indicator has a series of underlying sub-indicators and metrics that the Climate 100+ uses to evaluate a company’s performance against industry peers. More details of the framework can be found here.
What does it mean?
Corporations are under pressure to reduce three different types of GHG emissions:
Scope 1 Emissions: Emissions that a company directly produces from corporate activities
Scope 2 Emissions: Emissions generated by utilities a company uses (i.e., electricity, heating, cooling steam)
Scope 3 Emissions: Emissions that occur downstream and upstream in the value chain as a result of a company’s activities. A company does not directly control Scope 3 emissions, but can pivot their business activities to reduce Scope 3 emissions.
Companies are being asked to set ~95% of their emissions to net zero by 2050 for all Scope 1 and 2 emissions and for relevant Scope 3 emissions. For the energy and industrial sectors, most of the attention on Scope 3 emissions is focused on downstream use of the product.
Beyond setting KPI targets, companies are being asked to “put their money where their mouth is” via actionable plans and staged targets to achieve emission reductions. Key company expenditures, namely capital expenditures, are being scrutinized to ensure they are “green”. Additionally, executives are being charged with finding personnel well-versed in climate change initiatives, and are tying employee compensation to ESG-related metrics.
What does this mean for me?
As large corporations make their processes cleaner, carbon reducing technologies are at the forefront of the conversation. As such, when materials like chemicals or oil & gas are produced, the goal is to reduce emissions per unit of production.
Moreover, an indicator in the Climate Action 100+ framework is to provide context around how capital expenditures are directly linked to reducing climate change with respect to the Paris Agreement, providing an incentive for energy and industrial companies to optimize their spend to be more “green”. As a result, companies focused on combating GHG emissions will recognize favorable investor sentiment and stronger transaction multiples.
With Parq, you will unlock qualified, sustainable buyers & vendors, and collaborate with industry leaders on how to collectively tackle the ever-changing ESG movement. We cannot accomplish sustainable re-globalization of our supply chains alone; we must go at it together!
To join the movement, please contact Walker Ryan, Parq’s founder and CEO.