Earth Day 2023: Climate ABC as easy as 1.5 degrees
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Article Type
Sustainability Soapbox
Topic
Responsible Investing
Published
April 20, 2023
Read time
4 mins
Author
Ritchie Thomson
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More and more companies are setting climate-related targets against a backdrop of increasing regulatory requirements, such as mandatory TCFD1 reporting. This means there has never been a greater need for investors to be climate literate.

 

We appreciate that there is a lot of the terminology and jargon around the subject, much of it confusing. This article explains some commonly used climate-related terms in two areas: measurement and disclosure; and long-term climate commitments.

 

Measurement and disclosure

 

Although carbon dioxide receives the most attention, there are seven greenhouse gases (GHGs) which have been found to be significantly linked to human-induced climate change2. Each has a different relative warming strength, known as global warming potential. Measurement of GHG emissions uses this concept of global warming potential to express emissions in CO2-equivelant terms. For example, methane has a global warming potential of 28-36 times that of carbon dioxide.

 

For the corporate disclosure of GHG emissions, the concept of scope 1,2 and 3 emissions is typically used.

 

  • Scope 1 emissions: GHGs that occur from sources that are owned or controlled by a company, such as from combustion of natural gas in a boiler.
  • Scope 2 emissions: GHGs from producing electricity or steam and heat that a company purchases, and related emissions at the power production plant that supplies that electricity.
  • Scope 3 emissions: Includes all other GHGs that are a consequence of a companys activities but are from sources not owned or controlled by the company. These are sometimes broken down further into upstream emissions (GHG associated with materials that a company purchases) and downstream emissions (from the products a company sells in their use phase). We illustrate this below, which shows GHG protocol scopes and emissions across the value chain.

 

 

Carbon neutral vs. net zero

 

The two main long-term climate commitments are carbon neutral and net zero. They are often used interchangeably by companies, but they arent the same. The key difference relates to the focus on emission reduction relative to the offsetting of emissions, as well as scope and coverage.

 

  • Carbon neutral: This may only cover the CO2 emissions of a company and focuses on neutralising emissions through offsetting initiatives, such as tree planting, rather than emissions reductions. This typically only covers scope 1 and 2 emissions.
  • Net zero: This covers all GHG emissions, typically across the full value chain of the company. All GHG emissions are reduced as far as possible, with only residual emissions which are difficult to abate offset.

 

We hope clients find these definitions useful. If so, well do more,

 

1Task Force on Climate-related Financial Disclosures

2These are Carbon Dioxide, Methane, nitrous oxide, hyrdofluorocarbons, perfluorocarbons, sulphur hexafluoride, all covered under the Kyoto Protocol and nitrogen trifluoride, which was added as part of the Doha Amendment.

Important disclosures

Author

Ritchie Thomson
Senior Responsible Investment Associate

Ritchie Thomson is a senior responsible investment associate responsible for analyzing and monitoring key climate change issues facing companies and industry sectors.

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