Five Climate Takeaways for Companies From IPCC Report

The Intergovernmental Panel on Climate Change’s (IPCC) sixth assessment report, published Aug. 9, focuses on the physical science of climate change. The results: human caused climate change is increasing temperatures faster than virtually all IPCC scenarios considered, and stringent emissions reductions are required.

The report describes both the current state of the climate and the possible climate futures, absent radical change, as being more dire than previously assessed or predicted. The frequency and intensity of storms, droughts, and heatwaves have increased both as stand-alone and compound events. The report also noted that rare and extreme weather events are becoming less rare at even faster rates.

Every region of the globe is already suffering the effects of extreme weather events and the frequency and intensity of these events will continue to increase.

Some of the climactic changes that have occurred are effectively locked-in now due to past emissions. Certain “tipping points” that cannot be ruled out could have immediate, extreme impacts on the climate; and rapid change, including achieving net-zero emissions, and international cooperation are necessary to limit the worst climate change impacts.

What Does This Mean for Companies?

Based on the IPCC information available to-date, there are a handful of key takeaways that companies can use to guide their own preparations.

1. The climate conversation has moved to net zero as a minimum. The report’s findings indicate that achieving climate goals will, at a minimum, require broad commitment to net-zero CO2 emissions. While this does not mean that every individual business will need to achieve net-zero emissions, it does mean that we need many organizations across the globe to drastically reduce the emissions associated with their operations, products, and services, regardless of their sector.

These findings also highlight the importance of carbon removal to address residual emissions and help businesses potentially achieve net-negative emissions. The report’s conclusions also support the need for companies that have made net-zero commitments to create and test their plans for achieving those commitments.

2. Offset use should be considered carefully. Purchasing offsets as a means to solve carbon accounting woes has grown in popularity. However, the report only considers carbon removal in the context of actual removal of emissions from the atmosphere, and companies should be aware that there is wide variability in the mainstream acceptance of offsets.

In particular, questions regarding two types of offsets are on the rise: (1) those produced via “avoided emissions” (e.g., building renewable energy projects that displace coal-fired power plants) or a change in behavior to avoid emissions that otherwise would have been released; and (2) “removal offsets” (e.g., reforestation or afforestation offsets) calculated by providing immediate reduction value to emissions that will be sequestered over a large period.

This means that companies using these types of offsets as part of their emissions management should be prepared to address questions from investors and other stakeholders on where offsets fit in their company’s long-term climate strategy and commitment to net zero.

3. Climate scenarios on which companies base their analyses are shifting. Each time the climate community provides additional detail on their climate analyses and expectations, the scenarios companies use to create their climate change risk scenario analyses are subject to change. Companies that do not shift their analyses as the underlying broadly agreed-upon scenarios shift may find themselves on the receiving end of tough questions about why they are using dated scenarios.

A shift in the underlying scenarios also may have an impact on companies’ litigation strategies to the extent that companies have publicly indicated that they will accept the scientific results of certain climate authorities like the IPCC.

4. Climate-risk disclosure may need to be updated. U.S. companies are increasingly disclosing climate-related risks in their SEC filings, however, many of these risk factors remain high-level disclosures that are not tailored to the specific company’s operations, strategy, and financial performance. With published climate scenarios revealing increasingly bleak climate outcomes, companies should undertake a review of their climate-related risk factors to identify and update underlying assumptions and boilerplate language describing risks and mitigation and management efforts.

5. This isn’t just about climate change anymore. The sheer magnitude of climate change can often dominate conversation on the topic. However, the report’s conclusions support an already emerging reality: The physical impacts of climate change on our lives are growing, and these impacts will touch on many areas of our economies, societies, laws, and cultures.

Increasingly, companies will need to be prepared to address climate change in an integrated fashion that considers matters such as human rights, biodiversity, and energy and environmental justice. This supports the need for varied and sophisticated solutions that consider both a company’s current reality and the value it currently provides to the economy and its stakeholders, and the rapidly approaching future.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

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Sarah Fortt is a corporate governance and ESG professional at Vinson & Elkins, where she works with boards on managing their approaches to corporate governance, crisis management, succession planning and risk oversight. She is the founder and co-lead of the firm’s ESG Taskforce.

Lindsay Hall is a senior associate in Vinson & Elkins’ Washington office and a member of the firm’s Environmental & Natural Resources practice. She is a member of Vinson & Elkins’ ESG Taskforce.

Austin J. Pierce was the first associate appointed to Vinson and Elkins’ ESG Taskforce. He helps clients to navigate ESG matters, both individually and in how they intersect with each other and related topics.