Understanding Carbon - More than the new black

  • 10 min read

Understanding Carbon - More than the new black

Introduction

Since the time of the industrial revolution, carbon has fuelled our economies, providing us with reliable energy, all through theburning of fossil fuels. However, the knock-on effect of this hu- man-caused surplus of carbon in the atmosphere now threatens our planet’s climate.

Science tells us that in order to limit the impacts of climate change, we must reach net zero emissions by 2050. Open up any news source and you can be sure to come across terms such as carbon and net zero, yet the language can be confusing, with seemingly endless acronyms.

Carbon is one of life’s building blocks. Humans are made up of al- most 20% carbon and we need a certain amount of carbon dioxide (CO2) in our atmosphere for life on earth.

Net zero is a state where we add no incremental greenhouse gases to the atmosphere, where any emissions are balanced with the removal of carbon from the atmosphere. A business can be net zero, a country can even be net zero. Until we reach net zero globally, temperatures will continue to rise.

This paper aims to demystify terms such as carbon and net zero – all with a view to helping you – business leaders – understand the role you must play in addressing climate change. We will unpack the challenges in measuring your own emissions and what you can do to reduce or remove those emissions, in order to equip leaders with the knowledge you need to build a net zero strategy.

Net zero will be the law of the land in the major economies sooner rather than later, where this isn’t already the case. Waiting to put net zero arrangements in place is putting capital at risk and increasing the chances of being caught out by sharp policy adjustments in key markets.’ Generation Investment Management

The Science of Climate Change

Greenhouse gases

Our atmosphere contains greenhouse gases (GHSs), which are essential to life on earth. They trap heat from the sun, keeping our planet at a balmy temperature, capable of sustaining life. GHGsinclude carbon dioxide, methane, nitrous oxide and fluorinatedgases.1As carbon dioxide (CO2) is the most abundant,it generally gets used as a shorthand for all GHGs in many discussions.

Framing carbon

Since the industrial revolution, we have been adding more carbon (in the form of CO2) to the atmosphere than our natural systems can handle, through extracting fossil fuels and burning them. Industrial processes such as making cement and chemicals, as well as land use changes brought on by the expansion of industrial-scale agriculture, also contribute to rising levels of CO2in the atmosphere.

Media narratives often focus on our ‘war’ with carbon, yet carbon is in practically everything we use - from building materials to food and clothing. The architect and writer Bill McDonough identifiesthree categories of carbon2:

Living carbon:organic, flowing in biological cycles; something wewant to cultivate and grow

Durable carbon:locked in stable forms or recyclable polymers that are used and reused

Fugitive carbon:has ended up somewhere unwanted and can be toxic

CO2 concentration levels and UN reporting on climate change

The problem we currently face is that CO2levels in our air haveincreased significantlyin concentration (roughly 50% increase since pre-industrial levels). This has led to increasingly dangerous rises in average global temperatures.

In October 2018, the Intergovernmental Panel on Climate Change (IPCC) released a report on limiting global warming to 1.5°C above pre-industrial average temperatures.5They are unequivocal about what’s needed: By 2050, the global economy must achieve net zero emissions and thereafter go carbon negative – i.e., remove more carbon from the atmosphere than is emitted.

A new era of corporate accountability is upon us and we need to be diligent in taking all steps to mitigate our impacts, including being transparent and responsible for our GHG emissions across our supply chains.’

Marco Bizzarri, CEO Gucci

How have we responded so far?

What is COP?

COP stands for Conference of the Parties and is attended annually by member countries that have signed the United Nations Frame- work Convention on Climate Change (UNFCCC) - a treaty agreed in 1994. Leaders look to forge a response to climate change each year.

Previous agreements include the Kyoto Protocol, which was superseded by The Paris Agreement at COP21. 2021’s meeting in Glasgow, UK will be the 26th meeting. Hence the name COP26.

The Paris Agreement

In 2015, world leaders convened for COP21 in France to create and adopt the Paris Agreement. Itsgoal is to limit global warming to well below 2°C, preferably to 1.5°C, compared to pre-industrial levels.7This agreement has been signed by 196 countries, all of which are required to produce Nationally Determined Contributions (NCS)8outlining how they will reduce their own emissions to help meet the well below 2°C target.

Why 1.5°C?

Scientists say that limiting warming to 1.5°C is associated with lessdevastating impacts compared to higher temperatures, whilst still being achievable.9To be clear,a 1.5°C increase will still have ruinous impactson the biosphere, and every fractional rise beyond1.5°C will result in increasingly severe and expensive impacts.

What’s our carbon budget?

The IPCC states that from 2018, our budget (remaining emissions) is 580 GtCO2if we are to have a 50% chance
of limiting warming to 1.5°C.
10This is our carbon budget. To put this into context, we currently emit between 40- 50GtCO2per year. So that means at the current rate we will run out of ‘budget’ before 2030 and will no longer be able to prevent disastrous global warming.

Are we on track to reach our targets?

We need to reduce emissions by 7.6% every year until 2030 if we are to achieve 1.5°C of warming.11Based on today’s commitments, 2030 emissions are on track to be twice what they should be. COP26 will be a pivotal turning point in addressing this shortfall.

What can businesses do?

A: Shifting trends

Why is climate change now a business issue?

With consumer sentiment changing and little doubt that more stringent regulation of carbon emissions is coming soon, businesses must look at their own strategy for net zero.

Consumer preferences are shifting

COVID-19 has been a catalyst for a stronger move towards activism, especially among Millennials and Gen Z consumers. 2020 saw this move accelerate both in challenges and opportunities for luxury businesses. To win over consumers today, luxury companies need to adapt agile innovation and redefine their strategiesover price, values and activism to align with the new priorities and spending behaviour in the “new normal”.

According to Euromonitor International’s Lifestyles Survey (2020), around 60% of young consumers agree that their choices and actions make a difference to the world and they give back to those inneed. Meanwhile, around 30% are actively involved in political and social issues.

As we move into 2021 the luxury industry will be under stricter scrutiny. Environmental, Social and Governance (ESG) will play a much bigger role in the boardroom, and Gen Z and Millennials in particular will vote with the money they spend. By 2025, Millennial and Gen Z consumers will be the dominant luxury market demo- graphic, with an estimated 65-70% share of the market.

At the same time, luxury brands will need to demonstrate empathy in the context of newly-emerging emotional concerns and needs, focuson community building and support over profit as a sole purpose.

Growing investor interest

A Deutsche Bank report found the amount of assets under management (equities and fixed income) that fall into funds with ESG mandates is quickly growing and currently sits at about one-third of total assets under management. Following current growth projections, this proportion will climb to95% over the next decade.13In July 2020, the EU Taxonomy also entered into force - a robust, science-based transparency tool for companies and investors. It creates a common language that investors can use when investing in projects and economic activities that have a substantial positive impact on the climate and the environment.

Climate policy and regulation is coming. An example already in force is the EU Emissions Trading System (ETS), which creates a financial incentive for the biggest emitters to cut back by putting acap on the amount of GHGs they can emit each year.

Green bonds binding net zero pledges

In September 2020, luxury designer, Chanel became the latest fashion house to issue a $700 million bond linked to the achievement of its net zero goals, meaning, if they are not met, Chanel will have to pay a penalty.

B: Identify, reduce, remove

A net zero strategy in essence consists of three steps:

1) Identify emissions- This can be done by using The GreenhouseGas Protocol around Scope 1, 2 and 3 emissions.

2) Create a plan toreduce emissionsand commit to a science-based target. This will require a combination of short- and long-term changes. Often, reducing emissions results in reducing costs – but beyond savings, we see that the process of identifying and working out how to reduce emissions can act as a springboard for innovation and a new opportunity to deepen engagement with suppliers, customers and employees. Setting a target is a great way of galvanising employees and attracting new customers.

3) Lastly, the emissions you cannot immediately reduce need to beoffsetby removing carbon from the atmosphere to balance out the carbon you emit.

Companies’ targets to reduce GHG emissions are considered science- based if they are aligned with the latest climate science deemed necessary to meet the goals of the Paris Agreement.

C: Scope 1, 2 and 3 emissions

It is becoming increasingly clear that in order to stay competitive, net zero must be on the agenda of company Boards and C-Suites. But where to start?

Step 1 - How to identify your emissions

The first step to measuring your emissions is identifying them in the first place. According to the GHG Protocol (the comprehensive glob- al standardisation framework to measure and manage GHG emissions), there are 3 emissions categories.

Scopes 1 and 2 are relatively straightforward to identify. Scope 3, however, is more challenging, but is also often where the biggest opportunities for impact lie. Scope 3 emissions sit within a business’s value chain and can be both upstream and downstream.

Upstream: Means emissions associated with purchased goods and services, employee commutes, etc.

Downstream:Can be transportation and distribution of goods, end- of-life treatment, etc. More often than not,Scope 3 emissions represent the lion’s share of a business’s carbon footprint.

Scope 1 – Direct emissions that occur from sources that are owned or controlled by your company i.e., burning fossil fuels to heat buildings or to power company vehicles.

Scope 2 – Indirect emissions from electricity and steam generated elsewhere but used by your company.

Scope 3 – Indirect emissions from sources outside of your company’s control, including the production of raw materials used to make your products, customer use of your products and end of life treatment.

"You cannot reduce it without first measuring it" – Anon

Investing in renewables

In 2019, luxury beauty company, Estée Lauder signed a virtual power purchase agreement (VPPA) for a wind farm in the US. The wind farm covers more than half of the company’s global electricity footprint and helped them achieve 100% renewable energy for their scope 1 emissions by 2020.

Step 2 - Calculating your emissions

Once you have identified where your emissions lie, the process of calculating them can begin. There are myriad online tools to help from the GHG Protocol. Once you have a number on your business’ annual emissions, you can then work towards a net zero strategy.

D: Offsetting and Carbon Credits

Once you have identified your emissions and have a strategy for reducing the ones that you are able to eliminate immediately, you can look to pay for others to remove carbon from the atmosphere on your behalf. This is known as offsetting or carbon credits. Some offsets are billed as ‘avoidance offsets’ meaning you pay someone to avoid future emissions. Avoidance offsets do not contribute to net zero. We are going to focus on removal credits.

What is a carbon credit and how much is it ‘worth’?

A ‘carbon credit’ represents a removal of greenhouse gases. It is issued by a carbon crediting programme: be aware not all carbon credits are created equal. Generally, 1 credit equals 1 tonne of CO2 removed.

Carbon removal credits

If you purchase a credit through a removal project, you are removing CO2 from the atmosphere. Projects generally fall into two categories - natural/nature based and technical/engineered. (Cost - £10–£100+ per credit)

Example projects include:

  • Reforestation or afforestation- Direct Air Capture
  • Soil carbon sequestration

Marketplaces

The carbon removal market is developing at a rapid pace. As a result, there are a plethora of marketplaces and supporting platforms where you can purchasecertified removal and avoidance credits.Certification body - Gold Standard is a good resource for verifying various carbon credits.

Offset projects in the past have come under scrutiny for several reasons such as improper tracking and measuring, moral hazard and impermanence. In today’s marketplaces, clear standards andcertifications guaranteeing effectiveness and permanence are continuing to be developed.

Regenerative practice

Premium outdoor lifestyle brand, Timberland has pledged to go beyond net zero by 2030, by giving back more than it takes. The brand is turning to nature for inspiration, driving innovation through circular design and regenerative agriculture - farming practices that promote soil carbon sequestration, acting as carbon sinks.

Conclusion

Carbon is more than just the new black. Businesses must transform to a more regenerative way of working if they are to thrive in a world of rapidly changing consumer and investor sentiments, policy and regulation.

Investors, businesses, and policymakers are busy setting net zero targets – and a rising generation of citizens and consumers are demanding they go further and faster. It is imperative that businesses set interim targets for 2030 consistent with a fair share of the 50% global reduction in CO2identified as a requirement in the IPCC special report on global warming of 1.5°C – and put in place credible action plans to meet these targets. How can business leaders do this.

  • Identify, measure, and reduce your Scope 1, 2 and 3 emissions. More often than not, Scope 3 emissions represent the lion’s share of a business’s carbon footprint, resulting in the biggest opportunity for impact
  • Invest in long-term carbon removal credits where there aren’t technologically and/or financially viable alternatives toeliminate emissions

Financial markets are now adjusting to the reality that a net zero future is inevitable – and the process will only accelerate from here asnew investment products are created and money increasingly flowstowards climate solutions.

The language of carbon has moved from sustainability and supply chain practitioners to shareholders and investors. Everyone must learn the language of carbon and reading this paper is a good start.

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