24 November – Recent events in the UK have shown how instrumental a budget can be. The entire financial world, along with millions of ordinary borrowers and homeowners, watched in amazement as the UK’s two recent budgets took the country from a spending spree to extreme belt-tightening in just over a month.
Using our spending power is standard fare in economics and public finance, but for sustainability professionals and in-house legal teams it may not be familiar territory. Where companies decide to spend their pound is just as important when it comes to tackling the climate crisis.
In my last column, I highlighted four key climate-conscious business practices that organizations need to adopt: a) creating a culture of decarbonisation, b) using your spending power to drive your decarbonisation goals, c ) establishing a carbon level. budget so that carbon becomes the currency for your decarbonisation transition plan and d) rewiring contracts to meet your decarbonisation targets. Previously, I focused on creating a culture of decarbonization. This piece will track the strength of your spending and carbon budget.
1. Harness the power of your spending. Corporations need to ensure that the way they spend their budgets, such as an in-house legal budget, takes into account their decarbonisation goals.
You can use your budgets to work with suppliers who have aligned or are working to align their business with the Paris Agreement goal of limiting warming to 1.5 degrees Celsius. When purchasing goods or services, ask suppliers about their decarbonisation targets. If they are not aligned with the 1.5C target, ask them if they intend to be. If they do not have adequate decarbonization plans, you must decide whether you want to use a supplier whose GHG emissions will negatively impact your own decarbonization goals. Alternatively, find out how you can work with suppliers to set and meet appropriate decarbonisation targets.
This is likely to mean procurement takes longer and may require you to establish new supplier relationships or new ways of working with your suppliers. A good example of this is Vodafone’s work to decarbonise its supply chain supply.
You may find you have to pay a premium to work with suppliers who have decarbonisation targets aligned to 1.5C. However, to do otherwise may mean you fail to meet your greenhouse gas (GHG) targets and this will bring unwanted climate risks, including damage to your reputation. Javier’s Clause of the Chancery Lane Project (TCLP) sets out questions you can ask suppliers to explore their climate ambition.
2. Set a carbon budget. We all need to start thinking about carbon as the currency for our decarbonization transition plans.
We need to halve our GHG emissions by 2030. That’s 2,632 days. 376 weeks. Or 83 months. For a company with 1,000 tonnes of GHG emissions per year and a decarbonisation target aligned with the 1.5C Paris Agreement target, this means their carbon footprint in 2030 may be as little as 500 tonnes. They could decide to reduce their emissions by saving 10% in 2023 and increasing those savings over the next six years until they reach 50%. Another approach is to set a carbon budget in 2023 of 900 tonnes, which is reduced annually to 650 tonnes in 2026 and 500 tonnes in 2030.
Setting a carbon budget alongside its financial budget means that the company will need to allocate that carbon budget across a number of departments and projects. Each budget holder will need to determine how they can change the way they currently operate to meet their share of decarbonisation targets and stay within their carbon budget.
The TCLP’s Griff Clause provides a drafting model for board documents that require consideration of the climate impact of a significant contract or transaction and the climate risks associated with the business. Using this clause could help company boards manage their carbon budgets when deciding how to prioritize significant projects.
Another resource is Ming’s Clause, which sets a target carbon footprint for products and can help production teams set a carbon budget.
Aligning spend with decarbonisation targets and setting an organization-wide carbon budget sends a strong message to contracting partners, especially suppliers and staff, that you are changing the way you work. This approach will help your organization achieve your climate goals and is a powerful answer when answering questions from customers, regulators or other stakeholders about your decarbonisation ambition, goals and progress. As you can see, budgets can also do very well.
The opinions expressed are those of the author. They do not reflect the views of Reuters News, which, in accordance with the principles of trust, is committed to integrity, independence and freedom from bias. Sustainable Business Review, part of Reuters Professional, is owned by Thomson Reuters and operates independently of Reuters News.