Since the international Paris Agreement on climate change was adopted in 2015, there has been a massive upsurge in corporate net zero pledges. In our new article, we explored the climate commitments of large Australian companies. We wanted to understand whether and how these commitments are being propelled by the activities and initiatives of institutional investors, civil society, and other stakeholders. We also wanted to explore whether corporate net zero commitments are robust and likely to lead to real world emissions reductions in line with Paris targets, or whether they are just more greenwash.
The answer is, for the moment, neither a resounding yes nor a flat no. The Australian companies we studied are certainly shifting in response to increased stakeholder pressure to align with Paris, but this shift is slow, particularly for those with carbon-intensive business models.
Our research was based on a close examination of the 30 largest corporations by market capitalization listed on the Australian Stock Exchange (ASX). The sample included a broad range of sectors: financial services, materials and mining, industrials, health care, energy, retailing, real estate, and telecommunications. The study characterized the nature and extent of stakeholder pressure being applied to different companies and sectors and then measured the robustness of their climate commitments, looking also for evidence that stakeholder pressure was influencing company responses.
The legal and regulatory context for our study is complex. For many years, Australian climate law has been weak and misaligned with the Paris Agreement, meaning that Australian companies have had no direct legal obligations to set emissions targets and limited obligations to reduce emissions. Companies and their directors do have obligations, under corporate law, to identify, disclose, and manage climate-related financial risks that are material to the company. Alongside these corporate law obligations, there is a complex web of activities and initiatives that we describe as “private climate regulation.” This involves the activities of non-state actors, such as institutional investors, industry bodies, and civil society, in developing best practices for climate risk disclosure and management, engaging with companies to encourage their adoption of those practices, and in some cases, litigating to embed best practice expectations and hold companies accountable for their climate commitments and performance. While underlying corporate law obligations are climate-neutral and focus on achieving market transparency and ensuring appropriate risk management, this private climate regulation is seeking to drive robust corporate climate risk management, including urging companies to set Paris-aligned targets and outline and implement transition strategies to achieve these targets.
In exploring the impact of private climate regulation, we focused on adoption of, and adherence to, prominent industry standards such as those of the Task Force on Climate-related Financial Disclosure (TCFD) and the Science-based Targets Initiative (SBTi). TCFD is widely supported by investor groups and civil society and referenced by Australian regulators (although it is not yet mandatory). While it focuses on processes for risk identification and management, it also recommends that companies test their strategy against Paris-aligned emissions reduction scenarios, set emissions reduction targets, and measure and report on progress against targets. SBTi provides an independent certification platform for Paris-aligned corporate climate targets. To achieve certification, companies must commit to reducing direct operational emissions (Scope 1 and 2) as well as emissions in the value chain (Scope 3) in absolute terms (not emissions intensity), with minimal use of offsets for residual emissions.
We also explored how sample companies were targeted by investor engagement initiatives and litigation. For example, Climate Action 100+, an international coalition of institutional investors, engages with targeted companies and benchmarks their climate performance. Companies are urged to set Paris-aligned targets (certified by SBTi), set out transition strategies to achieve targets, and disclose according to TCFD standards. Strategic litigation seeking to hold companies accountable for their climate commitments is also beginning to emerge in Australia. For example, a major energy company, Santos, is currently defending litigation that alleges that the company has engaged in misleading and deceptive conduct by claiming it has a “clear and credible” plan to meet its 2040 net-zero emissions target. However, according to the allegations, Santos has not disclosed the increased emissions that will accompany the numerous new oil and gas projects it is developing, and it purports to rely on carbon capture and storage and other controversial technologies to offset emissions.
Our study illustrated that companies in the energy sector have received the most intense stakeholder pressure on climate change, followed closely by banking, mining, and insurance companies. These sectors have responded by making net-zero climate commitments and by adopting industry standards (particularly TCFD). However, companies in sectors facing far less stakeholder pressure also made similar commitments to climate action.
Looking beyond high-level commitments, we charted the actions that companies were taking to deliver on their commitments. We explored transition strategies, emissions targets, and performance reporting. Here we uncovered a diverse range of practices. For example, despite high levels of TCFD adoption, implementation of the TCFD was inconsistent. Only 16 of 30 companies had prepared TCFD-aligned reports, and fewer still were setting out high quality risk assessments, integrating these into company strategy, and outlining robust transition strategies.
Companies under the greatest stakeholder pressure relied heavily on carbon offsets and negative emissions technologies that have not yet been commercially proven (e.g., carbon capture and storage) to achieve net zero pledges. These companies appear to be responding to stakeholder pressure while protecting existing business models.
In relation to emissions targets and reporting, there is already an obligation under Australian law to report emissions produced directly from company operations (Scope 1 and 2) to the Clean Energy Regulator. It is relatively easy for companies to disclose these emissions in annual reports. By extension, it is only a small step to develop targets for Scope 1 and 2 emissions. Most sample companies do this, and for some there is a relatively simple business case for it. For example, in a period of high energy prices it makes sense for a supermarket to commit to renewable energy. Others however, appear to obfuscate by setting emissions intensity targets rather than absolute targets or targets for some parts of the business only. Further, while a handful of companies are engaging with the SBTi and some have had their targets certified, this is the minority. The companies we studied appeared reluctant to have targets independently verified and validated by an organization such as SBTi or indeed unable at this stage to meet the relatively robust SBTi certification standards.
Moving beyond direct operational emissions to report and set targets for value chain (scope 3) emissions was more problematic. Only two sample companies set unconditional Scope 3 targets. For many companies, reporting emissions and setting targets for entities in their value chain over which they had no, or little operational control was too difficult. Many were prepared to report incomplete Scope 3 data and work with their value chain on carbon reduction strategies. For example, iron ore miners committed to work with steelmakers to develop lower carbon steel production technology.
The focus on direct operational emissions creates opportunities for scope-shifting of carbon emissions. That is, creating the appearance of de-carbonizing the business while moving the responsibility for carbon emissions to another participant in the value chain. The large mining companies in the sample have been reorganizing their business to move out of fossil fuels such as coal, oil, and gas. In effect, those emissions will continue but simply appear on another company’s books. Iron ore will remain the major earner for both companies but coal production, essential to steelmaking, moves to another entity in the value chain.
Similarly, as this study was being completed, an energy company in the sample announced the sale of its interest in the controversial Beetaloo Basin gas field. However, the company will retain the right to a royalty flow, and the deal included a 10-year gas off-take agreement. This company argues this scope-shifting will free capital for investment in renewable energy. The bottom line is that scope-shifting helps the company lower direct operational emissions and respond to stakeholder pressure but, of itself, contributes nothing to Paris targets. Whether promises to invest in renewable energy or value chain emissions reduction will contribute to lower global emissions remains to be seen.
This post comes to us from professors Anita Foerster and Michael Spencer at Monash University’s Monash Business School. It is based on their recent article, “Corporate Net Zero Pledges: A Triumph of Private Climate Regulation or More Greenwash?” forthcoming in Griffith Law Review and available here.