Paris Alignment — what does it mean for business?

This ‘big picture’ agreement, and the objectives that go with it, have implications and opportunities for business, both in the long and short term.

There is much talk in the media around the topic of ‘Paris Alignment’ (PA). The talk is full of concepts but as yet, relatively light on detail. This second article in relation to Excellence in ESG 2021, the BVCA’s initiative to recognise the vital work members are undertaking to embed responsible investment principles and practices, addresses what PA is and what it may mean for business going forward.

PA refers to the process of countries meeting their obligations under the Paris Agreement. The Paris Agreement is an international treaty with the goal of “holding the increase in the global average temperature to well below 2°C above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5°C above pre-industrial levels”. The treaty was adopted at COP 21 in Paris in 2015 and has the objective of strengthening countries’ individual and collective ability to adapt to the impacts of climate change. It therefore promotes countries that are signatories to the treaty to promote both climate change mitigation measures and climate adaptation goals that can protect existing and future investments. Key to this is the achievement of ‘net zero’ GHG emissions in the 21st Century (mitigation) and ensuring that investment is climate resilient (adaptation).

At the country level, the agreement provides a mechanism for states to produce a nationally determined contribution (NDC), which will detail national emission reduction targets and adaptation goals. In addition, countries are at liberty to take additional steps in terms of strategies to move economies to a low- (or zero) carbon pathway at the national, or even sector level.

This ‘big picture’ agreement, and the objectives that go with it, have implications and opportunities for business, both in the long and short term. The NDCs will filter down through government policy into legislation and regulation, impacting not just the day to day operations of businesses; but also the requirements they face in terms of reporting and disclosure; and increasingly, their ability to access finance, and the cost of that finance.

Companies and funds need to understand what these changes are likely to mean both for day-to-day operations, but also for investment strategies going forward. There are regulatory issues to consider for operations:

• Building on the existing requirements for public reporting of ‘non-financial risk’ to include concepts such as natural capital;
• Changing requirements around emerging environmental issues such as the Circular Economy and the Blue Economy;
• Changing requirements on the technologies that are permitted for use in many countries related to the environmental impact of the use of such technologies.

There are also opportunities for business to fill and adapt as the impacts of these changes crystallise:

• Companies will require new technologies and equipment to meet the new regulation;
• Industry will need to access new technical and advisory services as they adapt and change to the new situation.

There has been significant change over the past 3 years in this space and this change will accelerate again following the COP26 meeting in Glasgow next week. Business needs to educate itself, and plan for the low-carbon economy.

Authored by

David Williamson Senior Environmental Adviser at European Bank for Reconstruction and Development, and Judge, BVCA Excellence in ESG 2021