Environmental law firm ClientEarth has published expectations for companies seeking to make credible Paris-aligned pledges, in the latest sign that firms are facing mounting scrutiny over their climate promises.
The Principles for Paris-alignment include a requirement for companies to change their articles of association to include Net Zero objectives “subject to any restrictions in local law”. This is a growing trend in responsible investment and corporate CSR: in ‘world firsts’, Danone changed its articles to become a socially-responsible company earlier this year and Barclays committed to putting the Paris Agreement into its company bylaws.
Targets, assumptions and methodologies must also be “reasonable, precautionary and evidence-based”, and regularly updated in line with the best available science, the Principles state. In particular, “the entity must adopt a strategy which sets short, medium and long term targets to achieve its net-zero objective, including 2025 and 2030 targets (Scopes 1–3)”.
Disclosure should be subject to third party assurance, ClientEarth added.
Daniel Wiseman, a lawyer for ClientEarth, warned of a gap between ambition and action, noting that while a growing number of businesses and investors are setting Paris-aligned or Net Zero targets, “unless these targets are supported by strategies that are reasonable, transparent and include strong accountability mechanisms, there is a significant risk that stakeholders will be misled”.
There has been a sharp increase in the level of scrutiny on companies’ climate commitments in recent months. Investor group the Transition Pathway Initiative recently found that, despite more than a thousand firms declaring Net Zero ambitions as part of the UN’s ‘Race to Zero’ campaign, none of the world’s biggest oil and gas companies are on track to meet climate goals.
Leaders of collaborative shareholder engagement titan Climate Action 100+ told RI earlier this year that “we have got to the point where we’re asking for real action – changes in strategies and changes in business models”, rather than heightened transparency or loose commitments.
The UN-convened Net-Zero Asset Owner Alliance has formed a partnership with the Science Based Targets initiative “to support the validation of financial institution climate targets”. It is also currently consulting on rules for investor-level, portfolio decarbonisation targets.
Banking giant HSBC was accused of undermining its own climate pledge by working with fossil fuel companies.
Wiseman added that the new principles “can help guide firms to develop and implement meaningful net zero strategies”.
“This is in their best interests, and the best interests of all of their stakeholders in addressing systemic climate change risks. They can also help us to identify greenwashing and hold firms that are not going far enough to account.”
Investors, amongst other financial players, are also called upon to disclose a policy which explains how they will influence reductions in their Scope 3 GHG emissions in order to achieve their targets. Investors should utilise stewardship policies to establish an expectation that all portfolio companies adopt a Paris-aligned strategy. They should then explain the actions they will take – stewardship, proxy voting, and public affairs influence – to influence portfolio companies’ adoption and compliance with such strategies.
To avoid any practical challenges, investors should join and actively participate in industry-wide initiatives to demand that portfolio companies pursue Paris-alignment/net zero strategies, and hold them accountable for their progress.