An overarching theme of COP26 and a priority of the UK presidency is to enhance climate change ambition. As countries set enhanced climate plans and pledges for 2030 (called “nationally determined contributions”) and set net-zero targets for 2050 (or earlier), they are also looking to the private sector to participate in this “race to zero.” The private sector will also be under increased pressure to work toward reducing national emissions under the Paris Agreement from investor groups, consumers and other stakeholders, who expect greater disclosure and action on climate risks and opportunities. There are three key areas where the private sector can have an impact on the race to zero.
A crucial aspect of committing to reduced emissions is developing and implementing the appropriate management systems. An initial step in committing to the race to zero initiative is making a net-zero pledge by the 2040s or sooner, and providing a plan to achieve that goal. Having strong leadership and governance is critical to setting the strategic direction required to achieve net-zero goals. For companies, putting this into practice involves designing and implementing an effective governance framework that will allow them to comply with mandatory obligations or voluntary commitments in relation to climate responsibility, including corporate governance carbon reporting and management of their global carbon footprint and extended supply chains.
Climate Finance and Investment
To support climate change ambition, there is an urgent need to scale finance, technology and markets, and there are various opportunities for investment in low-carbon projects and infrastructure. Key considerations for companies seeking to take advantage of these opportunities include:
- asset-specific considerations relating to particular investments, and what carbon reduction means in practice to a particular industry sector
- documentation-specific considerations, including the evolving approaches of financial market associations
- the availability of government funding, such as that offered under the European Recovery Plan (ERP) and similar initiatives
- how the negotiations at COP26 may change the current investment scenario
Carbon Offsets and Carbon Markets
In sectors where emissions are hard or impossible to abate, and after exhausting all options to eliminate greenhouse gas emissions in the first place, companies may consider the use of carbon “offsets.” Carbon offsets (also known as carbon credits) are generated by projects that prevent or reduce greenhouse gas emissions or which remove them from the atmosphere. Once a company has done all that it can to reduce its own carbon footprint, the acquisition of carbon offsets allows it to go further to meet mandatory compliance requirements or to achieve voluntary commitments to net zero and carbon neutrality. Among the key issues at COP26 will be whether parties can finalize the “rule book” that would lay the ground for a truly international system of carbon trading. Companies looking to participate in carbon markets and offset greenhouse gas emissions will need to consider the best mode of engagement for their business and risk appetite. This may include decisions about forward or “spot” purchases of offset units, engaging directly with projects or through intermediaries such as brokers and exchanges, and even whether to invest directly in projects or project development companies. In each case, companies will need to undertake due diligence to understand and mitigate transaction risks.