Understanding the Paris Agreement

In December 2015, representatives from around the globe convened in Paris to tackle one of the defining challenges of our time—climate change. The resulting treaty emphasizes the need to limit global warming to well below 2 °C above pre-industrial levels, with aspirations to hold the increase to just 1.5 °C. This critical ambition requires unprecedented reductions in greenhouse gas (GHG) emissions, calling upon countries and businesses alike to take urgent action.

As stakeholders in the global economy, companies play a pivotal role in achieving these climate objectives. Businesses are responsible not only for direct emissions generated from their operations (Scope 1) but also for significant indirect emissions arising from their supply chains and product usage (Scope 2 and Scope 3). Thus, corporate strategies must shift dramatically to align with these ambitious climate goals.

The Call for Science-Based Action

To facilitate this shift, a framework is essential—one that translates the lofty goals of the Paris Agreement into tangible actions for companies across various sectors. This is where the Science-Based Targets Initiative (SBTi) comes into play. The SBTi provides a rigorous, science-driven approach for companies to set GHG emissions reduction targets that are consistent with what the latest climate science indicates is necessary to avoid the worst impacts of climate change.

As of August 2021, more than 1,700 companies are reported to have committed to these science-based targets, a triple increase in involvement in less than two years. This growth underscores a rising recognition of corporate responsibility in the fight against climate change, but it also reveals a pressing need for accountability and transparency in how companies are measuring their progress.

Evaluating Paris Compliance: Necessary Conditions

Our research outlines vital conditions essential for evaluating whether companies are on a compliant pathway to meeting the goals of the Paris Agreement. We propose two necessary and one desirable condition to assess Paris Compliance effectively:

1. Alignment with Decarbonization Pathways: The methodologies employed by companies must be consistent with the overarching goals of the Paris Agreement. This means that emissions must peak as swiftly as possible and that pathways must be transparent, well-documented, and grounded in scientific validity.
2. Base Year Consistency: Emissions progress should be measured from a base year of 2015 or earlier, aligning with the year the Paris Agreement was signed. Consistency ensures that the carbon reduction achievements leading up to 2020 are appropriately recognized and accounted for.
3. Differentiated Responsibilities: While the above conditions are crucial, a desirable but non-essential condition would acknowledge “common but differentiated responsibilities.” Companies in higher-income countries carry a greater burden to lead in emission reductions based on their historical contributions to climate change.

The Stakes: Financial and Ethical Implications

The implications of non-compliance with the Paris Agreement are multifaceted. Companies face substantial financial risks linked to their climate inaction, including potential litigation, reputational damage, and the stranding of assets as the world transitions to a low-carbon economy. The urgency for corporate leaders to address climate risk cannot be overstated, as failing to do so not only threatens their bottom line but also poses ethical concerns related to the well-being of vulnerable global communities.

Findings: A Comparative Analysis

In our examination, we assessed ten companies from two contrasting sectors: the data-rich Australian electricity industry and the more opaque global cement sector. The results were concerning: nearly all of these companies failed to meet the conditions required for Paris Compliance. This alarming trend emphasizes the urgent need for immediate and substantial increases in decarbonization efforts.

Conclusion: A Collective Responsibility

As we continue to confront the realities of climate change, the need for corporate climate responsibility is clearer than ever. It is essential that companies embrace science-based methodologies to ensure they not only align their practices with the Paris Agreement but also make informed decisions that will secure their viability in an increasingly environmentally-conscious marketplace.

The pathway to Paris compliance is not just a corporate responsibility—it is a moral imperative, a financial necessity, and a collective call to action. As investors, consumers, and communities demand greater accountability, those who act and adapt will lead the way toward a sustainable future.