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Chapter 2. The Evolution of ESG – PART IV

 Introductory articles on emerging exposures, risk mitigation and
insurance risk transfer for clients of Omnisure.

 A compendium of introductory ESG articles on emerging exposures, risk mitigation and insurance risk
transfer for clients of Omnisure with claims examples.
Martin Birch – March 2022

The Evolution of ESG – PART IV

In December 2021 Corrs Chambers Westgarth (“CCW”) penned an article, which formed the basis of this chapter, as part of their Frontier Sustainability series on the challenges and opportunities post COP26. 1  

What does ‘net zero’ mean?

CCW describes an overall balance between greenhouse gas (GHG) emissions ‘produced’ and GHG emissions ‘removed’ from the atmosphere over a particular period (e.g. a given year). Some emissions can still be produced in a net zero world, so long as they are offset by processes that remove GHGs from the atmosphere.  Despite the apparent simplicity of this ‘balancing’ exercise, there is no universally applicable, legally binding definition of ‘net zero’. As a consequence, net zero targets can vary significantly in their relative ambition. This is reflected in practice by limitations referable to, for example, the:

  • types of GHGs covered: a net zero commitment can be framed by reference to carbon dioxide (CO2) alone (sometimes called ‘net zero carbon’), or by reference to all GHGs;
  • sources of GHGs covered: a commitment can be limited to certain ‘scopes’ of emissions, reflecting the characterisation of direct and indirect emissions as scopes 1, 2 and 3 in the Greenhouse Gas Protocol;
  • context: the commitment might apply to a particular business or a part of a business, an industry or group of industries, a portfolio of business investments, or economy wide; and/or
  • jurisdiction:a commitment might operate at a local, regional, national or supranational scale.

Such variations in scope are partly driven by necessity (reflecting the limits of control) and in some cases convenience or expediency.

Net zero and the Paris Agreement

Net zero is conceptually recognised in Article 4 of the Paris Agreement. Net zero is a critical milestone for achieving the long term temperature goal of the Paris Agreement to hold the global average temperature increase to well below 2 degrees Celsius  above pre-industrial levels, and pursue efforts to limit it to 1.5 degrees Celsius (as enshrined in Arts 4(1) and 2(1)(a) of the Paris Agreement).

Limitations of net zero

A net zero commitment has some limitations. The commitments are typically expressed in terms of a state of affairs to be reached at some future point, such as ‘net zero by 2050’. Such a commitment, by itself, says nothing about the volume of GHGs emitted before getting to that point. As a consequence, ‘transition pathways can be diverse and inconsistent, as the Chancery Lane Project has noted.

Carbon accounting and reporting

‘Carbon accounting’ describes a range of methods used to calculate how much carbon (that is, GHGs) is emitted as a result of a company or country’s activities.

Carbon accounting methods are generally divided into two categories:

  • physical carbon accounting; and
  • financial carbon accounting.

Physical carbon accounting

Physical carbon accounting aims to measure both the direct and indirect emissions of a company’s or country’s activities – in other words, a GHG inventory. Emissions are classified in three scopes under the Greenhouse Gas Protocol:

  • Scope 1: direct emissions related to a facility, such as methane emissions from a landfill;
  • Scope 2: indirect emissions caused by the consumption of energy, such as the use of electricity produced by the burning of fossil fuels elsewhere;
  • Scope 3: indirect upstream and downstream emissions that are a consequence of an organisation’s activities, but occur from sources not owned or controlled by the organisation (e.g. the emissions generated by business travel on commercial flights)

The classification of emissions is ultimately an accounting and reporting tool, and there is overlap between each. For example, the Scope 3 emissions of a coal mine can also be the Scope 1 emissions of a power station that burns the coal, and the Scope 2 emissions of a factory that sources electricity generated by the power station.

Enacted in 2007, Australia’s National Greenhouse and Energy Reporting (NGER) scheme regulates corporate reporting of Scope 1 and Scope 2 emissions and energy information. The NGER applies to facilities and corporate groups that meet certain emissions or energy thresholds:

  • Corporate group threshold: emission of 50,000 tonnes CO2 equivalent or more of GHG, production of 200TJ or more of energy, or consumption of 200TJ or more of energy per financial year.
  • Facility threshold: emission of 25,000 tonnes CO2 equivalent or more of GHG, production of 100TJ or more of energy, or consumption of 100TJ or more of energy per financial year.

Entities covered by the scheme must report their Scope 1 and 2 emissions and energy production and consumption to the Clean Energy Regulator. This information is, in turn, used to determine whether large emitters are required to offset any Scope 1 emissions that exceed the prescribed base line (the ‘safeguard threshold’) by surrendering Australian Carbon Credit Units (the safeguard mechanism under the Emissions Reduction Fund).

After five years of intensive negotiations, states parties to the UNFCC finally reached agreement at COP26 on the future structure of an international carbon market under Article 6 of the Paris Agreement.

Please refer to our Foundation Document 2 for information on Scope 3 Emissions, as well as information on a global carbon pricing mechanism and carbon financial accounting.

While the Federal Government is yet to release key details of Australia’s pathway to net zero, it has made clear its intention to place “the prosperity and wellbeing of regional Australia at its core”. In particular, the Government has committed to significant investments in rural and regional Australia to support economic growth in these communities.

If the funding is directed towards the green transition, such funding has the potential to unlock significant economic gains for regional communities. Deloitte modelling of a coordinated net zero transition indicates that on average Australians will be around $50,000 better off per person in the year 2050, with regional Australians around three times better off compared to capital city residents.

1 https://www.corrs.com.au/insights/beyond-cop26-the-key-challenges-and-opportunities-of-transitioning-to-net-zero
2 Our Foundation Document is the original full text version of “ESG Discussions – Introductory articles on emerging exposures, risk mitigation & insurance risk transfer” for clients of Omnisure, compiled by Martin Birch. Register on our website for a full copy.

Please contact Martin Birch for a copy of the full-text Foundation Document at martin.birch@omnisure.com.au