‘ESG' has well and truly arrived, and has triggered a new age in business and financial investment strategy. In a four-part series, Advocate and Partner Anthony Williams and Senior Associate Alex Thornton de Mauroy, of the Appleby Dispute Resolution team in Guernsey, examine what is meant by ESG, how it is measured in terms of data and investment performance, and finally the legal consequences for stakeholders (directors and trustees) in getting it wrong. In the first of this series, we look at ESG with a focus on climate change.
INTRODUCTION – ESG
ESG is widely understood to stand for ‘Environmental', ‘Social' and ‘Governance' and covers a vast array of often inter-linked issues. Here, we aim to explore one aspect of ‘E' – climate change.
THE PHYSICAL SCIENCE
We know that climate change is serious, and that something needs to be done. Major goals have been set. The two we focus on here (and as more fully set out, below) are to limit global warming to 1.5°C – 2°C, and achieve ‘net zero' by 2050 with significant progress made by 2030. In light of these ‘goals', a plethora of commitments have been made by countries, regulators and businesses. These range from promises of renewable energy and decarbonisation, the notional availability of trillions of dollars for ‘green' or ‘sustainable' investments, challenging debates around ‘climate justice', as well as demands (and now increasingly requirements) for climate-related disclosures and the associated fight against ‘green-washing'.
But before asking: “So what do we have to do to comply?”, we ask the reader if they know why we are aiming for 1.5°C, or even 2°C, at all? And why is it so important to reduce emissions by a certain amount by 2030, or be ‘net zero' by 2050?
Indeed, how can we make reasonable, objective decisions about what to do, if we do not have a reasonable understanding of why those goals are important? This topic has moved so fast, and is so complex, that many of us have missed the opportunity to step back and look at the foundations – the science behind them.
This is the purpose of this first article: to look at the science. This is achieved primarily by reference to the Working Group I Contribution to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change (“IPCC”): “The Physical Science Basis”, Summary for Policymakers (the “IPCC Summary”).1 These assessment reports summarised the most up to date climate science (the Sixth Assessment Report covering scientific literature accepted for publication by 31 January 20212), and having been negotiated and approved by nearly two hundred countries means they are widely viewed as a reliable (and if anything, conservative) source.
We refer primarily to the IPCC Summary because it is not our aim, nor would it be possible, to provide a review of the entire report in this article.3 The detail is complex and beyond our expertise. Instead, we look to draw out certain points from the IPCC Summary that have helped us better understand these two goals and, in turn, ‘why' we need to take action on climate change at all.4 It should be noted that a myriad of assumptions, complexities and caveats underlie the findings contained within the IPCC Summary. We do not intend to address issues in detail here, and attempt only to consider certain points in a summary and high-level fashion.
THE GLASGOW CLIMATE PACT – THE ‘GOALS'
In October-November 2021, the COP265 took place and the Glasgow Climate Pact was agreed. Within that Pact, the participating countries, amongst other things:
- ‘Reaffirmed' “the long-term global goal to hold the increase in the global average temperature to well below 2°C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5°C above pre-industrial levels…”;6 and
- ‘Recognised' that limiting global warming to 1.5°C would require “rapid, deep and sustained reductions in global greenhouse gas emissions, including reducing global carbon dioxide emissions by 45 per cent by 2030 relative to the 2010 level and to net zero around mid-century, as well as deep reductions in other greenhouse gases”.7
Below, we use the IPCC Summary to consider these two goals.
WHY ARE WE FOCUSSED ON LIMITING WARMING TO 1.5°C OR 2°C?
By c.2020, the global surface temperature had already increased by 1.09°C since the pre-industrial period of 1850-1900.8 Broadly, the “best estimate” of the human-caused contribution to this is 1.07°C.9
There are many consequences of global warming, both ongoing and predicted. Here are a few high-level observations from the IPCC Summary as to the current position:
- Annual average Arctic sea ice area is at its lowest level since at least 1850 (high confidence).10
- Global mean sea level has risen faster since 1900 than over any other century for at least 3000 years (high confidence).11
- Hot extremes, including heatwaves, have become more frequent and more intense (virtually certain).12
- Heavy precipitation events have become more frequent and more intense (high confidence).13
- Human influence has likely caused an increase in the chances of extreme weather events happening around the world at the same time.14
As to what happens with further warming: every further 0.5°C, for example, “causes clearly discernible increases in the intensity and frequency of hot extremes, including heatwaves (very likely), and heavy precipitation (high confidence), as well as agricultural and ecological droughts in some regions (high confidence)”.15
For some low-lying ‘Small Island Developing States', the point has been made that the difference between 1.5°C and 2°C in terms of sea-level rise could be critical.
Over the “next 2000 years, global mean sea level will rise by about 2 to 3m if warming is limited to 1.5°C, 2 to 6m if limited to 2°C and 19 to 22m with 5°C of warming, and it will continue to rise over subsequent millennia (low confidence)”.16 Beyond possible or partial submergence of some land areas, a natural consequence of rising sea levels to any extent is also the possibility for higher storm surges.
It is further predicted with high confidence that, at 1.5°C of warming, coral reefs will decline by a further 70-90%; at 2°C, that figure could increase to up to 99% (very high confidence).17
Suffice it to say, the figures of 1.5°C or 2°C are proposed as back-stops, not ideal states for global temperatures.
WHAT LEEWAY DO WE HAVE UNTIL 205018 IN ORDER TO REACH ‘NET ZERO'?
Put simply, “Every tonne of CO2 emissions adds to global warming”.19 The “best estimate” is that each 1000 GtCO220 of cumulative CO2 emissions is likely to cause an increase in global surface temperature of 0.45°C (with the likely range being 0.27°C to 0.63°C).21
With reference to the IPCC Summary, if we assume that global warming stood at 1.07°C in c.2019,22 then if we want to limit global warming to 1.5°C, that leaves 0.43°C to go from that point. In very broad terms, we understand that the net amount of CO2 that can be emitted before reaching a certain temperature is referred to as the remaining “carbon budget”.23 Below, we set out certain figures from the IPCC Summary that show different scenarios (commencing from 2020 until we reach ‘net zero' emissions), where a ‘percentage chance' is used to account for the uncertainties in measuring something so complex. By way of example:
- If we want a 67% chance of limiting warming to 1.5°C, the remaining carbon budget is estimated to be 400 GtCO2.
- If we want a 67% chance of limiting global warming to 2°C, the remaining carbon budget is estimated to be 1150 GtCO2.24
To put this in context, global CO2 emissions from fossil fuels and land-use changes were calculated by the Global Carbon Project to be 38 GtCO2 in 2020, and are projected to be 39.3 GtCO2 for 2021.25
WHY IS 2030 IMPORTANT ON OUR JOURNEY TO ‘NET-ZERO' BY 2050?
Some changes caused by global warming occur on decadal or centennial timescales – one analogy being that the trajectory of certain consequences can be like that of an oil tanker: once moving it cannot stop or turn immediately. Effects such as sea level rise and loss of arctic ice have already started and would continue even if we reached ‘net zero' by tomorrow.
In that sense, we are in an odd situation where changes (some of which will cause damage and harm) are yet to occur, but are already inevitable and could be made worse. That is one reason why there is a focus on reducing emissions sooner rather than later, and why a target for 2030 has been created.
WHAT DOES REACHING ‘NET ZERO' EMISSIONS BY 2050 ACTUALLY MEAN?
Ultimately, the aim is to reduce the amount of green-house gases in the atmosphere, or at least limit any further increases. This allows for the idea that we can ‘offset' emissions through, for example, ‘carbon removal' strategies – both natural and technological. If you produce 10 tonnes of CO2 per year and manage to ‘offset' 8 of those tonnes, your ‘net emissions' amount to 2 tonnes. Being ‘net zero' would require you to offset the entire 10 tonnes.
The science and technological innovation behind many of these carbon removal strategies are worthy of an article in and of themselves. However, once the reader is familiar with the principle, it is easier to critically analyse ‘net zero' pledges or assertions by taking a closer look at the proposed off-setting methods. It is important to consider carefully how they are measured and certified, and in some cases whether they are even sustained. In one instance, there was a “National Greening Programme” which attempted to “grow 1.5 million hectares of forest and mangroves between 2011 and 2019”, but within the “first five years 88% of it had failed”.26
Furthermore, some may look to the future emergence of increasingly effective technologies or strategies as a way to ‘solve' or increasingly mitigate the effects of emissions. In the meantime, however, our carbon budgets will continue to diminish, and the oil tanker is gathering speed.
There is no doubt that climate change, regardless of the often heated debate around it, ought to be a real consideration for any serious business which wants to thrive and survive in the new world of investing. The science is complicated and the deadlines for real and sustainable action looming fast. In the next article we will examine what is meant by social and governance considerations, and how that is driving systemic cultural change from the Boardroom down to the dynamics between employers and employees.
1 IPCC, 2021: Summary for Policymakers. In: Climate Change 2021: The Physical Science Basis. Contribution of Working Group I to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change [Masson-Delmotte, V., P. Zhai, A. Pirani, S.L. Connors, C. Péan, S. Berger, N. Caud, Y. Chen, L. Goldfarb, M.I. Gomis, M. Huang, K. Leitzell, E. Lonnoy, J.B.R. Matthews, T.K. Maycock, T. Waterfield, O. Yelekçi, R. Yu, and B. Zhou (eds.)]. Cambridge University Press, Cambridge, United Kingdom and New York, NY, USA, pp. 3−32, doi:10.1017/9781009157896.001.
2 Footnote 3 of IPCC, 2021: Summary for Policymakers. In: Climate Change 2021: The Physical Science Basis (ibid).
3 The full report can be accessed here: https://www.ipcc.ch/report/ar6/wg1/#FullReport
4 The authors wish to emphasise that the amount of climate related literature is truly vast, and while the IPCC Summary is a useful document, it is not our intention to suggest that this is all an interested party may wish or need to read in order to 'upskill' in this area. The authors understand that the science and measurement is still developing, and note that this article is necessarily broad and 'high-level'.
5 COP26 is the 26th Conference of the Parties, with the "Parties" being the 197 nations who agreed to the United Nations Framework Convention on Climate Change in 1992.
6 Decision -/CP.26 (Advance unedited version), Glasgow Climate Pact, Section IV: Mitigation, clause 15, available here: https://unfccc.int/documents/310475
7 Decision -/CP.26 (Advance unedited version), Glasgow Climate Pact, Section IV: Mitigation, clause 17, available here: https://unfccc.int/documents/310475
8 A.1.2 of IPCC, 2021: Summary for Policymakers. In: Climate Change 2021: The Physical Science Basis (ibid).
9 A.1.3 of IPCC, 2021: Summary for Policymakers. In: Climate Change 2021: The Physical Science Basis (ibid).
10 A.2.3 of IPCC, 2021: Summary for Policymakers. In: Climate Change 2021: The Physical Science Basis (ibid).
11 A.2.4 of IPCC, 2021: Summary for Policymakers. In: Climate Change 2021: The Physical Science Basis (ibid).
12 A.3.1 of IPCC, 2021: Summary for Policymakers. In: Climate Change 2021: The Physical Science Basis (ibid).
13 A.3.2 of IPCC, 2021: Summary for Policymakers. In: Climate Change 2021: The Physical Science Basis (ibid).
14 A.3.5 of IPCC, 2021: Summary for Policymakers. In: Climate Change 2021: The Physical Science Basis (ibid).
15 B.2.2 of IPCC, 2021: Summary for Policymakers. In: Climate Change 2021: The Physical Science Basis (ibid).
16 B.5.4 of IPCC, 2021: Summary for Policymakers. In: Climate Change 2021: The Physical Science Basis (ibid).
17 B.4.2 of IPCC, 2018: Summary for Policymakers. In: Global Warming of 1.5°C. An IPCC Special Report on the impacts of global warming of 1.5°C above pre-industrial levels and related global greenhouse gas emission pathways, in the context of strengthening the global response to the threat of climate change, sustainable development, and efforts to eradicate poverty [Masson-Delmotte, V., P. Zhai, H.-O. Pörtner, D. Roberts, J. Skea, P.R. Shukla, A. Pirani, W. Moufouma-Okia, C. Péan, R. Pidcock, S. Connors, J.B.R. Matthews, Y. Chen, X. Zhou, M.I. Gomis, E. Lonnoy, T. Maycock, M. Tignor, and T. Waterfield (eds.)]. Cambridge University Press, Cambridge, UK and New York, NY, USA, pp. 3-24. https://doi.org/10.1017/9781009157940.001.
18 The reader will note that clause 17 of the Glasgow Climate Pact in fact refers to "around mid-century".
19 Section D.1.1 of IPCC, 2021: Summary for Policymakers. In: Climate Change 2021: The Physical Science Basis (ibid).
20 One Gt (gigatonne) of CO2 is one billion tonnes of CO2.
21 Section D.1.1 of IPCC, 2021: Summary for Policymakers. In: Climate Change 2021: The Physical Science Basis (ibid).
22 In this context, see Table SPM.2, Section D.1.2 of IPCC, 2021: Summary for Policymakers. In: Climate Change 2021: The Physical Science Basis (ibid).
23 Section D.1.1 and footnote 43 in particular of IPCC, 2021: Summary for Policymakers. In: Climate Change 2021: The Physical Science Basis (ibid). Also refer to the Glossary at Annex VII of the Full Report. We note from the summary for Table SPM.2 that while the estimated carbon budget examples refer to CO2 emissions, they account for the global warming effect of non-CO2 emissions.
24 See Table SPM.2, Section D.1.2 of IPCC, 2021: Summary for Policymakers. In: Climate Change 2021: The Physical Science Basis (ibid). We note that this Table SPM.2 also states, amongst other things, that "Higher or lower reductions in accompanying non-CO2 emissions can increase or decrease the values [in the table] by 220 GTCO2 or more".
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