COP21: The Paris Agreement, NDCs and how scrutiny on business increased
Part 2 of our “Short History of COP” series, in this piece we outline what the Paris Agreement is, its major outcomes, how this has impacted businesses and how these impacts may expand in the future.
The Paris Agreement
Created at COP21, the Paris Agreement built on the progress initiated by the Kyoto Protocol. Although much of this policy was aimed primarily at countries, there were wide ranging secondary impacts for businesses globally. In this article, we will dive into these impacts in more detail.
The Paris Agreement was a major step in climate policy with two primary outcomes for signatories:
- Countries agreed to limit warming to well below 2 degrees above pre-industrial levels, and to aim for a 1.5-degree target.
- Countries agreed to achieve an equilibrium between carbon emissions and removals by 2050.
Through the Paris Agreement, countries committed to producing Nationally Determined Contributions, and to reporting publicly on their progress. Nationally Determined Contributions are the highest declared possible emission ambitions of the countries involved — although we expect these to be challenged at COP26 due to the increasing urgency to act on climate change.
The Paris Agreement entered into force within 12 months; a much quicker turnaround than the Kyoto Protocol had experienced 20 years earlier. This reflects how the atmosphere surrounding the issue of climate change has intensified, a trend that continues today.
Why was the Paris Agreement Important for Businesses?
Following COP21, large multi-national businesses (in particular) have been compelled to act on climate change, driven primarily by three core outcomes of the Paris Agreement:
- Defined, actionable and measurable targets were set
- Simplified communications enabled public engagement / scrunity with climate pledges
- Warming-based targets allowed for climate risk managed investment strategies to develop
The next three paragraphs explore these core outcomes in more detail.
Firstly, the Paris Agreement set defined and actionable targets of either well below 2 degrees or 1.5 degrees for businesses to work towards, and has deepened the need for climate action in the private sector. Due to this, many businesses now align their climate targets with the 1.5 degree scenario and an increasing number are choosing to align with a ‘Net Zero by at least 2050’ goal. In fact, over half of the global economy is now committed to Net Zero goals.
Secondly, the Paris Agreement allowed the public to both engage more directly with climate policy due to its actionable nature, and advocate for more aggressive commitments and targets to be set by businesses. We have all seen that the attention on climate action has intensified, with growing media and public scrutiny focused on how businesses are progressing towards their climate goals — for example with Exxon, Race-to-Zero Signatories, and many more.
Thirdly, climate risk management has become more central to investment portfolios, with models now built upon these 1.5-degree and well-below-2-degrees scenarios. ESG funds made up 90% of equity fund inflows in July this year. Therefore, there are significant financial opportunities for businesses that are ahead of climate action.
Furthermore, investors increasingly view climate action as a business opportunity. Businesses that choose to mitigate their climate risks by following strong climate strategies are seen as routes to long-term, sustainable financial returns. A recent study found that many CFOs experienced benefits including revenue growth and increased overall profitability through sustainability efforts in their business. In this same study, many CFOs also reported increased customer satisfaction and greater attraction and retention of talent.
How might these effects expand further?
Scrutiny on corporations’ sustainability targets is only set to increase further in the coming years, driven by three core reasons:
- COP26 will drive an increase in the ambition of countries’ Nationally Determined Contributions. Decarbonisation efforts have lagged behind the 1.5 degree pathway since the Paris Agreement so far, but countries are set to increase their ambition level, which will inevitably be passed onto corporate sustainability plans. We have already seen the start of this in recent months, as the Science Based Targets initiative (SBTi) transitions to supporting only the ‘1.5 degree’ warming pathway, rather than also supporting the ‘Well-Below 2 degrees’ warming pathway.
- Reaching an agreement on Article 6 of the Paris Agreement will help accelerate the formalisation of Voluntary Carbon Markets. This should lead these markets towards higher levels of verification, making public scrutiny easier and more accessible.
- Rollout of new reporting standards will enable the extension of sustainable investment portfolios beyond just climate risk towards climate action. Much of this regulatory change is being driven in the EU and UK. Read more about this in our article on the EU’s new Corporate Sustainability Reporting Directive.
The Paris Agreement spread awareness for climate issues and united countries in a joint effort towards reduced emissions. Owning a shared vision of a 1.5 degree future gave a defined target for businesses to work towards. However, it has become clear that the Paris Agreement NDCs are insufficient to limit global warming to 1.5 degrees and as a result, further increases to the ambition level are anticipated at the upcoming COP26 summit. The COP summit will be discussed in the next article our Short History of COP series. Follow us on Medium to be notified when these articles are published.
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