The future of transition reporting

Decarbonising the economy starts with measuring companies’ capacity to cut emissions.

To cut emissions globally, businesses must start locally by decarbonising their operations. It’s time to shift our focus from a top-down scientific view of what needs to be done across sectors to a bottom-up view of what each business and its employees can do to abate emissions, given current costs, regulations and technologies. Developing a clearer, more actionable roadmap to implement transition plans is essential.

To that end, CPP Investments is proposing a framework and standardised template to measure the capacity of organisations to remove or ‘abate’ their greenhouse gas emissions. Such a framework could be applied across industries and geographies with common assumptions. The data from this ground-up assessment could catalyse decarbonisation efforts by helping boards and executives prioritise both the highest impact and most economical opportunities.

This framework could be used to benchmark companies’ performance in meeting reduction targets, give these leaders additional confidence in public pronouncements about their companies’ progress towards net zero and provide greater transparency for stakeholders. By producing a more granular view of emissions, the assessments could help regulators prioritise new rules, guide innovators in research priorities and focus investors on smarter capital allocations to finance the transition. The framework could help to shape a company’s long-term strategy for transitioning to net zero, enabling companies to annually review targets and take advantage of new economic opportunities resulting from lower technology
costs, shifts in regulation and prevailing carbon prices.

The framework involves first conducting an abatement capacity assessment of an organisation’s emissions across scopes 1, 2 and 3, and then reporting the organisation’s projected abatement capacity. This can be grouped into three categories.

First, current (proven) PAC is where an organisation estimates what portion of its emissions is economic to abate using available, efficiency measures, greening power supplies and proven, economic technologies.

Second, as part of long-term (probable) PAC, an organisation projects abatement capacity using two standardised carbon price assumptions that exceed current levels (e.g. $75 and $150 per tonne of carbon dioxide equivalent), assuming there is no change to technology costs and regulation. The increase in economic abatement capacity based on these assumptions permits users to compare outputs within and across industries and jurisdictions and enables annual updating of the data in response to new regulation or lower costs.

Third, uneconomic PAC is where residual sources of emissions across an organisation’s carbon footprint that are uneconomic even at $150 per tonne of carbon dioxide equivalent – or even technically impossible to abate with available technologies – are reported based on management’s assumptions on how they expect to address these issues.

The benefits of conducting an ACA and reporting PAC will be almost immediate for a company, its board and executives. Breaking down abatement capacity into its constituent parts will enable companies to divide transition planning into smaller, more manageable sub-strategies. Any company that has already calculated its marginal abatement cost curve should be able to allocate this information directly to each of the PAC categories. It’s important to note that for some businesses not all emissions are economic to abate. Activities with emissions that remain uneconomic to abate, even at higher carbon prices, will require removal offsets or transformations in technology to achieve net-zero GHG emissions.

The ACA framework will help enable stakeholders to hold companies to account on their emissions reduction targets. By itself, the framework cannot determine whether a business is heading towards net zero. But if a company has articulated a GHG reduction target, the framework can help validate whether the goal is achievable and track a company’s capacity to get there.

We invite all interested parties to join us in refining this proposal and helping unlock its potential to become a decision-useful reporting standard that accelerates the greening of our economy. To learn more about our proposed framework, go to our website.

Richard Manley is Head of Sustainable Investing, Global Leadership Team, CPP Investments.

This article was originally published in Global Public Pensions 2021.

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