Joy Macknight

Ahead of the next COP27 meeting in November, research has found that no G7 country has a corporate sector likely to decarbonise fast enough to meet the Paris Agreement’s goal.

Companies in the G7 economies are failing to curb their emissions fast enough to deliver on the Paris Agreement goal of limiting global warming to 1.5°C. According to a report by CDP, formerly the Carbon Disclosure Project, and consultancy Oliver Wyman, the largest 4000 corporates’ emissions are on a 2.7°C warming path, despite progress on target-setting since 2020.

In fact, no G7 country has a corporate sector likely to decarbonise fast enough to meet the Paris Agreement, based on current emissions reduction targets set by companies. While German and Italian companies’ collective emissions are expected to match the pace of decarbonisation required to limit global warming to 2.2°C, France’s trajectory is heading towards 2.3°C, the UK’s is expected to reach 2.6°C, and the US 2.8°C. Canadian companies fare worst in the G7, with targets aligned with a temperature increase of 3.1°C on average.

This is a wake-up call ahead of November’s COP27 meeting in Sharm el-Sheikh.

Much more needs to be done, agrees Rob Bailey, partner, financial services at Oliver Wyman, but he also points out that 2.7°C is an improvement on where things were a year ago. For example, the European corporate sector improved from 2.7°C in 2020 to 2.4°C in 2022, explained in part by a rapid 85% rise in companies with science-based targets during 2021.

He believes that this is representative of more companies setting more ambitious targets. “The future stock of emissions is going down based upon increasing ambition among companies,” he says. “There’s a momentum of more ambitious targets, as evidenced by the Science Based Targets initiative being inundated with companies wanting to submit targets, which is a positive story.”

Another encouraging story is the marked shift from promises and commitments to practical implementation over the past year, as regulators begin to mandate transition plans and disclosures. This is potentially where financial institutions can play an important role in helping corporate clients to assess the credibility of their transition plans, according to James Davis, partner, financial services at Oliver Wyman. However, it can be a difficult balancing act for financial institutions when they scrutinise the companies that they are lending to or otherwise financially supporting.

“I think most financial institutions, particularly banks, want to act as partners to their clients, but they also want to have preconditions, or red lines, for doing business. But to do that, banks need to build a set of new capabilities and equip their teams with the tools they need to navigate those kind of conversations,” he says.

While the CDP data set is based on the largest companies globally, which are already submitting data to CDP and setting targets, many financial institutions are also looking at how to help the long tail of small and medium-sized enterprises (SMEs) that sit in a large company’s supply chain and are feeling the pressure because the corporate wants to set Scope 3 emissions targets – those that cover all upstream and downstream emissions in a company's value chain.

“One of the big challenges that SMEs have at the moment is in generating the data and providing it to banks or large corporates. It’s one thing for a large company to have costed net-zero transition plans, but it is completely different for an SME,” says Mr Bailey.

Mr Davis reports that many of Oliver Wyman’s banking sector clients are working on tools to help their SME customers understand their footprint and help them to take action, trying to act as “more of a partner and less of a policeman”.

Clearly, the sustainability challenge for corporates and SMEs alike is not going to diminish despite all the progress that is being made on climate. Mr Bailey believes that expansion is going to be a characteristic of the sustainability agenda for some time to come, as evidenced by the proposed inclusion of nature and biodiversity targets.

“Financial institutions will need to be ready to build data frameworks and approaches that are quite flexible, so that they can respond to regulatory and stakeholder expectations that are likely to evolve for the foreseeable future,” he adds.

Joy Macknight is editor of The Banker. Follow her on Twitter @joymacknight

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