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Paris alignment: three steps for directors and senior management

Author: ICAEW

Published: 25 Jan 2022

The Paris Agreement aims to limit the increase in global average temperature to 1.5°C. Reaching this will require the world to achieve net zero emissions by 2050 or sooner. Businesses have a key role to play in this endeavour.

A sustainable future will require businesses to transition to net zero operations and providing low carbon services and products. For directors and senior management, this means that they will need to develop and adopt a robust and measurable net zero strategy – and back this up with a clear timeline for action and progress. This includes reducing emissions sooner rather than later, then offsetting the hard to abate emissions.

This will not be an easy journey for some. While there may be opportunities to drive efficiencies, reduce emissions and eliminate waste, for the most part companies will have to go on to rethink and substantially change how they operate, the materials that they use or the products they produce in order to reach the net zero emissions target. For example, they may need to alter or wind-up some business practices, shift supply chains, and/or invest in new technologies. 

These decisions will need to follow open and honest conversations with shareholders that are realistic about the future. However, this journey will also bring opportunities for those who adapt and evolve, as well as opportunities for growth in new types of industries. 

So how can directors and senior management begin this journey to Paris-alignment? We set out below some steps and resources to help you get underway. 

Step 1: Develop a meaningful, measurable net zero strategy for the future. 

  • Understand how your business operations will need to change to reach net zero. This will need to be a single, company-wide, multi-disciplinary effort. What are your organisation’s carbon emissions? Are there emissions that you can affect or influence outside of your organisation, such as in your supply chain, your sales channel, or your products? Where do they come from? How can you influence the behaviour of your customers and broader supply chain? What will you need to change to reach net zero? Read about ICAEW’s own journey here
  • Understand the risks involved in the energy transition, including the financial impacts of both physical and transition risks for your company. For example, what regulation risks are you exposed to? How will emission costs potentially increase? Will consumer demand change?  
  • Feed these operational changes into future scenario planning and strategic decision making. For example, what will these plans mean for finance requirements?
  • Set measurable targets – these should be robust, for example, developed using Science Based Targets methodologies and including interim milestones. 
  • Where businesses are relying on off-setting, consider relevant guidance such as the Oxford Principles for Net Zero Aligned Carbon Offsetting

Step 2: Embed the net zero strategy into the business. 

  • Provide clear leadership by directors and senior management that demonstrates the importance of transitioning to net zero. The tone from the top will determine how employees and stakeholders respond.
  • Develop governance and management information systems to monitor these targets, including ensuring that the audit committee discusses these issues with the auditors and assesses inclusion in financial reporting. Read here about six ways to embed climate risk into your business.
  • Review what data you currently collect and report, the quality of this information and any impediments to monitoring progress against your net zero strategy. Where gaps exist, understand and plan for how you will collect the required data.
  • Develop the skills and knowledge of your business to meet your targets. Ask whether your business may need the support of specialists, for example, to understand legal requirements, to identify energy efficient processes or ways to reengineer processes or provide assurance on progress.
  • Embed climate considerations into all business decision-making and reporting processes. For example, add in a requirement to assess the carbon impact on business cases in investment or procurement activity. 
  • Regularly review progress internally. For example, if you have an internal audit function, this guide will help you get started. 
  • Take corrective actions where targets are not being hit. We’re all in the early stages of a journey – it’s crucial to reflect and adjust along the way. 

Step 3: Update stakeholders on progress regularly. 

  • Understand what is material to your stakeholders – and consider how to report and assure it. IIGCC’s report gives insights into key interest areas. You may wish to discuss and seek approval of your net zero strategy with shareholders at your Annual General Meeting.
  • Ensure climate risks are considered and where appropriate, disclosed in the financial statements, for example, deferred tax, provisions and asset lives or impairments.

    There are a number of resources available to support you. IASB has drafted educational material to support IFRS preparers. The Climate Disclosure Standards Board has published resources as well. For a practical example, read more about how Shell has considered climate risks in its accounts.

    Where permitted under accounting standards, factor net zero assumptions into forward-looking estimates. Be transparent where net zero assumptions are not used. It may also be helpful to provide additional sensitivity analysis on forward-looking estimates in these cases.
  • Provide meaningful and consistent narrative and financial reporting that allows stakeholders to make good decisions. For example, the TCFD recommendations (which are mandatory for certain UK companies) ask companies to disclose both risks related to transition and the physical impacts of change. See our guide to TCFD here.

The time for action is now! Our Climate Hub provides more resources and insights to help you on your journey.

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