Insight: Paris Alignment Methodologies, Challenges and Alternative Approaches

Businesses from all sectors are increasingly expected to demonstrate that their targets and plans for reducing carbon emissions are consistent with the goals of the Paris Agreement - commonly referred to as 'Paris Alignment'. This is now a critical board level issue, exemplified under the climate governance pillar of the TCFD reporting framework, which has become the gold standard of climate related corporate reporting. There is an accelerating trend towards it becoming a mandatory reporting standard in certain markets, for example in the United Kingdom, the host of COP26 in November 2021.

However, there is currently no standardized approach to demonstrating Paris Alignment, especially the framework and assumptions used in transition pathways. In response to growing societal pressure and the expectation from investors becoming responsible stewards of capital, the financial sector, together with other stakeholders, has pioneered a number of initiatives to develop their own assessment criteria and guidelines. This has given rise to a variety of expectations, methodologies and outcomes. Regulators, asset owners, companies and other stakeholders are now all calling for the standardization of data, methodologies and reporting standards to address the challenges.

The Science Based Targets Initiative (SBTi) and the Transition Pathway Initiative (TPI) are prominent examples of such initiatives. These initiatives have the potential to significantly influence the shape of future global energy supply and consumption. Therefore, businesses need to understand the methodologies being adopted - and the limitations and challenges in their application.

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