Behind schedule: The corporate effort to fulfill climate obligations

• Published date: 01 March 2023
• Author: Joseph E. Aldy,Patrick Bolton,Marcin Kacperczyk,Zachery M. Halem
• Date: 01 March 2023
• DOI: http://doi.org/10.1111/jacf.12560

DOI: 10.1111/jacf.12560

ORIGINAL ARTICLE

Behind schedule: The corporate effort to fulfill climate obligations

Joseph E. Aldy1Patrick Bolton2Marcin Kacperczyk2Zachery M. Halem3

1Kennedy School, Harvard University, Cambridge, Massachusetts, USA

2Business School, Imperial College, London, UK

3Lazard, Hamilton, Bermuda, UK

Correspondence

Patrick Bolton, Business School, Imperial College, London, UK.

Email: pb2208@columbia.edu

INTRODUCTION

The 2015 Paris Agreement represented the first multilateral

agreement to acknowledge and support efforts by so-called non-

state actors, including corporations, to cut their greenhouse

gas emissions. Moreover, the goals and structure of the Paris

Agreement—focused on limiting warming to well below 2◦C

relative to pre-industrial levels and allowing for national govern-

ments to set voluntary emission goals—have informed the setting

and adoption of voluntary corporate commitments. Some cor-

porations have taken on “Paris-aligned” emission commitments,

indicating that they would deliver emission reductions consis-

tent with the temperature objective of the 2015 agreement. With

the increasing adoption of mid-century net-zero emission goals

by national governments, some corporates have likewise adopted

their own net-zero emission commitments.

Before the Paris Agreement few companies had made com-

mitments to reduce their carbon emissions. Most of them did

so through the Carbon Disclosure Project (CDP), which ben-

efited from the momentum generated by the Paris agreement

to substantially expand the number of companies that would

make decarbonization pledges and voluntarily disclose their car-

bon emissions. Later, CDP along with the United NationsGlobal

Compact, the World Resources Institute (WRI), and the World-

wide Fund for Nature, founded the Science-BasedTarget initiative

(SBTi) to engage with companies to implement carbon reduction

commitments that are aligned with the Paris agreement and the

goal of limiting global overheating to less than 2◦Cabovepre-

industrial levels. As Mark Carney had predicted in the run-up to

the COP 26 in 2021, “More and more companies—and it will be

a tsunami by Glasgow—will have net zero emissions plans.”1As

1See Hook, L., and P. Temple-West.2020. “Carney Calls for ‘$100bn a year’ Global Carbon

Offset Market.” Financial Times,December 3, 2020.

This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in any medium, provided the original work is

properly cited.

© 2023 The Authors. Journal of Applied CorporateFinance published by Wiley Periodicals LLC on behalf of Cantillon & Mann.

of this writing, SBTi can boast that “more than 4,000 businesses

around the world are already working with the Science-Based

Targets initiative.”2

Other major decarbonization drives in the wake of the Paris

agreement have emerged in the financial sector, with the launch

of the Task Force on Climate-Related Financial Disclosures in

2015, Climate Action 100+in 2017, the inauguration of the

Asset Owners Net-Zero Alliance in 2019 together with the Net

Zero Asset Managers Initiative in 2020, and, the culmination

of this wave of initiatives, the creation of the Glasgow Finan-

cial Alliance for Net Zero by Mark Carney at the COP 26 in

April 2021. In parallel, the Network for Greening the Finan-

cial System (now comprising 121 central banks and financial

supervisory authorities) was set up in 2017, providing guidance

on net zero compatible decarbonization pathways. In short, the

Paris agreement has ushered in a new era of decarbonization

commitments.

An important aspect of emission reduction commitments is

the extent to which they specify interim targets. Commitments

are less credible when they specify distant targets and are vague

about the pathway toward attaining the target. Businesses cannot

decarbonize overnight. Eliminating GHG emissions is inevitably

a gradual process, which involves replacing old operating facili-

ties as they depreciate with new facilities powered by renewable

energy. The cost of decarbonization can be reduced if this replace-

ment of old with new plants and equipment is spread out over

time—hence the net zero targets that are decades away. There

is considerable uncertainty over such a long period, which could

produce new technological breakthroughs, new green regulations,

or new pandemics and wars that disrupt energy supplies. Thus,

companies need flexibility and cannot tie themselves to a path-

way that is too rigid. On the other hand, the risk of missing

2https://sciencebasedtargets.org/how-it-works

26 wileyonlinelibrary.com/journal/jacf J.Appl. Corp. Finance. 2023;35:26–34.