Exploring the Route to Decarbonization
Decarbonization. ESG investing. LCFS Credits. Renewable energy credits. Carbon Offsets. Greenhouse gases. Science based targets. Over the past year, many have come to associate the prior terms with sustainability, but what do they mean – and more importantly, why do they matter? Keep reading below to learn how the Paris Agreement has led corporates, governments, and investors alike to reconfigure their business models and long-term strategic plans.
What is the Paris Agreement?
In 2015, representatives from 195 nations gathered at the United Nations Framework Convention of Climate Change’s (UNFCCC) 21st Conference of the Parties (COP21) to outline terms for what is now known as the Paris Agreement. This international accord was initiated to combat climate change and limit global warming to 2, if not 1.5, degrees Celsius above preindustrial levels. After two weeks of deliberation, these nations arrived at a consensus.
However, to formally enact the Paris Agreement, at least 55 countries, accounting for at least 55% of global emissions, needed to join this agreement – a stipulation that wasn’t met until October 5, 2016 and wasn’t ratified until November 4, 2016. Leading up to that date, on August 29, 2016, former President Barack Obama accepted the terms of the Paris Agreement on behalf of the United States – a strategic move considering after China, the United States was the world’s second largest emitter of carbon. Additionally, Obama set forth a goal to reduce the United States’ greenhouse gas emissions 26-28% by 2025 in comparison to a 2005 baseline and had committed $3 billion in aid to the Green Climate Fund by 2020 to help advance sustainable practices in developing countries.
While the United States formally withdrew from the Paris Agreement on November 4, 2020 under the Trump Administration, there were still organizations that complied with the stipulations of the agreement. This positioned them favorably for when Joe Biden was sworn into office and moved to rejoin the agreement on his first day through use of an executive order. After waiting the mandatory 30-day period, on February 19, 2021, the United States had officially rejoined the Paris Agreement.
Continue reading to learn how this has impacted the United States’ economy and key stakeholders: inclusive of governments, investors, and corporations.
Government’s Response to Decarbonization Measures
To align with the decarbonization initiatives noted within the Paris Agreement, the United States set forth a new target to reduce greenhouse gas emissions by 50-52% by 2030 compared to 2005 levels. Further, as stated within a White House briefing from April 22, 2021, the U.S. also pledged to attain carbon neutral electricity by 2035 and a net zero economy by 2050.
In response, state and federal governments have evaluated different means of targeting and reducing their respective emission levels. This map from the Center for Climate and Energy Solutions outlines all U.S. states that have committed to a set greenhouse gas emission reduction target. In achieving these stated goals, it’s no surprise many governments have prioritized the decarbonization of the transportation sector – especially considering ~29% of total emissions result from transportation.
This commitment is seen through regions such as Washington and British Colombia who have moved to adopt clean fuel standards, similar to the existing framework of California’s LCFS, Oregon’s CFP, and the federal RFS. Not only do these programs incentive the use and adoption of low carbon alternative fuels but enable more organizations to incorporate alternative fuel into their fleet portfolios, cost-effectively.
Investor’s Prioritization of ESG Criteria
Investors have also been impacted by the newfound focus on sustainability. Recognizing the significance decarbonization has in organizations’ corporate structures, investors have begun to use environmental, social, and governance (ESG) criteria to de-risk their future investments. Using a dual approach, investors weigh the impact a company’s ESG practices and sustainability commitments could have on financial returns – operating under the principle that organizations that prioritize ESG will perform better financially than those who do not. Not only has this enabled investors to take a proactive approach to protect themselves against material risks, but has led to greater returns and securer investments.
Currently, BlackRock, Vanguard, and State Street are three of the world’s largest asset managers. With 22.7% of externally managed assets being held by the top 5 asset managers and 34% being held by the top 10, corporations are having to align their business practices with these investor’s expectations to gain financial backing. Thankfully for corporations, there has been no shortage of available funds.
Relative to ESG investing, Chapman and Cutler LLP reported there is ~$250 billion in assets under management in the U.S. – a figure expected to continue growing throughout 2021 and subsequent years. Additionally, they noted how in efforts to accelerate decarbonization measures, Goldman Sachs put forth $800 million in sustainability bonds in February 2021. Because of efforts such as this, over the past three years, sustainable-based assets have quadrupled in value – accounting for 20% of total, global investments.
Corporations’ Commitment to Target Scope Emissions
Having to comply with not only regional and federal mandates but also align with investor expectations, corporations have had to target emissions throughout their value chain: particularly, Scope 1, 2, and 3 emissions.
- Scope 1 emissions include all direct emissions that result from owned and controlled operations.
- Scope 2 emissions are indirect emissions that occur from using purchased electricity for industrial applications, heating, or cooling.
- Scope 3 emissions are all other indirect emissions that are produced throughout a company’s supply chain.
Thankfully for organizations, there are proven, established solutions they can leverage to target emissions today. By using alternative fuel within owned and outsourced fleets, corporations can immediately address, and reduce their Scope 1 and 3 emissions. Countless fleets across sectors have already adopted renewable natural gas (RNG), electric, and hydrogen-based fueling solutions to decarbonize their operations.
Also – organizations can further mitigate Scope 1 emissions using renewable thermal energy opposed to fossil based substitutes such as coal or conventional natural gas. Renewable natural gas is a viable solution that can be used to reduce thermal emissions – and, when used with existing natural gas infrastructure, it results in no changes to facilities and no disruptions to operations. As of April 26, 2021, the EPA noted their top Fortune 500 partners had a collective, annual green power use amounting to more than 43 billion kWh.
Whether you’re a government looking to strengthen your stated sustainability commitments, a corporation evaluating the potential for alternative fuel or renewable energy within your organization, or a stakeholder hoping to better understand decarbonization strategies, contact us – our team is here to help.