Assess Your Business's Carbon Threat Level
In the pursuit of carbon neutrality, businesses are increasingly turning to carbon trading and the purchase of carbon credits to meet their environmental requirements. This approach not only helps industries reduce their carbon footprint but also contributes to the global goal of achieving carbon neutrality.
However, managing carbon risk across a company's entire value chain is a complex task that requires a systematic and holistic approach. Multinational corporations, large institutions, and even investors are recognising the importance of understanding their portfolio's exposure to carbon risks, as it is crucial for identifying strategic moves to reduce downside risks and capitalise on value creation opportunities.
One of the primary methods for evaluating a company's carbon risk involves comprehensive carbon accounting aligned with the Greenhouse Gas (GHG) Protocol's Scope 1, 2, and 3 emissions. This approach provides a complete view of the company's carbon footprint and associated risks throughout its value chain.
The methods used for emissions estimation can vary, with some companies opting for activity-based methods that use actual physical data on materials, energy, and components used, while others prefer spend-based methods that estimate emissions based on the economic value of purchases multiplied by carbon intensity factors. A hybrid approach, combining both methods, can offer a balanced trade-off between practicality and accuracy.
Another crucial method is Life Cycle Assessment (LCA), which measures emissions over the entire life cycle of a product or service, from raw material extraction through production, distribution, use, and disposal. This method identifies emissions hotspots and guides risk and reduction strategies along the entire value chain.
Strategic boundary-setting for emissions attribution is also essential. This can involve attributing emissions based on operational or financial control (the control approach) or a proportional share based on ownership (the equity share approach). The choice depends on the company's objective—financial risk assessment might favour financial control, while decarbonization strategy development might favour operational control.
Assessing alignment with climate goals like the Paris Agreement is also important, incorporating both disclosure adequacy and the company's strategic actions towards net-zero targets. This often involves frameworks like the Science-Based Targets initiative (SBTi) and benchmarks developed by organisations such as Carbon Tracker Initiative and Climate Action 100+.
The Value of Carbon Risk (VaCR) is the key metric for evaluating a portfolio's carbon emissions and potential regulatory scenarios. Transitioning to net-zero emissions involves redesigning processes and switching to alternative resources on a global scale, a goal that presents both challenges and strategic opportunities.
The first step in addressing carbon emissions is measuring the emissions across each business's value chain. This information is crucial for identifying areas where investments can be made to reduce the carbon impact on the core business. Benchmarking performance may not reveal the entire impact, and it may require selling certain parts of a business or investing in reducing emissions.
Modeling alternative scenarios for the transition to net-zero can help companies identify potential savings and strategic opportunities. Continuous management of carbon budgets, including residual emissions, is essential during the implementation process. Strategy decisions and portfolio strategy must be framed based on the VaCR assessment.
In conclusion, evaluating a company's carbon risk across its entire value chain requires a comprehensive approach that combines comprehensive Scope 1, 2, and 3 carbon accounting aligned with the GHG Protocol, the use of both activity-based and spend-based emission estimation methods, LCA to capture full product or service impacts, strategic boundary-setting for emissions attribution, alignment and benchmarking for climate risk and strategic response under global frameworks, and the assessment of alignment with climate goals like the Paris Agreement. This approach enables companies to make informed decisions for mitigation and resilience in the face of the growing challenge of climate change.
- To effectively manage carbon risk in their business, companies often utilize methods like Life Cycle Assessment (LCA) and comprehensive carbon accounting aligned with the GHG Protocol's Scope 1, 2, and 3 emissions.
- In the process of transitioning to net-zero emissions, assessing alignment with climate goals such as the Paris Agreement and benchmarking against organizations like the Science-Based Targets initiative (SBTi) becomes crucial.
- Companies engaged in carbon trading or carbon credit purchasing, as part of their pursuit of carbon neutrality, should also consider the Value of Carbon Risk (VaCR) when making strategic decisions, as it evaluates a portfolio's carbon emissions and potential regulatory scenarios.
