How the Paris Agreement is Driving ESG Regulation and Changing How Banks and Businesses Operate

On 12 December 2015, world leaders at the UN Climate Change Conference (COP21) in Paris reached a breakthrough to tackle climate change and its negative impacts by announcing the historic Paris Agreement. The Paris Agreement includes 193 Parties from around the globe and entered into force on 4 November 2016 with a clear and simple goal:

EMISSIONS NEED TO BE CUT BY ROUGHLY 50% BY 2030 TO STAY BELOW 1.5 °C OF GLOBAL WARMING.

The Paris Agreement is a landmark in the multilateral climate change process because, for the first time, a binding agreement brings all nations into a common cause to undertake ambitious efforts to combat climate change and adapt to its effects.

The agreement is a legally binding international treaty on climate change adopted by 196 Parties at COP 21 in Paris on 12 December 2015 and entered into force on 4 November 2016.

Its goal is to limit global warming to well below 2, preferably to 1.5 degrees Celsius, compared to pre-industrial levels. Countries aim to reach the global peaking of greenhouse gas emissions as soon as possible to achieve a climate-neutral world by mid-century.

The Paris Agreement requires all Parties to put forward their best efforts through “nationally determined contributions” (NDCs) and strengthen these efforts in the years ahead. This effort includes requirements that all Parties regularly report on their emissions and implementation efforts. Every five years, there is a global stocktake to assess the collective progress towards the agreed goals and inform further individual actions by Parties.

Governments ultimately agreed to the following key actions:

• A long-term goal is to keep the increase in global average temperature to well below 2°C above pre-industrial levels;
• To aim to limit the increase to 1.5°C since this would significantly reduce risks and the impacts of climate change;
• On the need for global emissions to peak as soon as possible, recognising that this will take longer for developing countries; and
• To undertake rapid reductions thereafter, following the best available science to achieve a balance between emissions and removals in the second half of the century.

Since the UN announced the agreement, analysts and commentators have discussed the many implications of the underlying aims across global industries. More recently, during COP26 at the end of 2021, there was an apparent urgency to maintain momentum as 2030 looms closer. Alongside this, regulators in the EU, in particular, introduced stringent mandatory reporting requirements in the form of the Sustainable Finance Disclosure Regulation (SFDR), the EU Taxonomy Regulations and the imminent Supply Chain Act. These regulations follow the Paris Agreement and aim to catalyse a profound change in the way exporters operate and how financial institutions view the risks associated with their clients and their investment portfolios.

All of these measures will be introduced in 2022, and by 2023 there will be requirements to report on both the “E” and “S” aspects of ESG (Environmental, Social and Governance) criteria. More recently, the EU’s reliance on Russia for oil and gas, in particular, has spotlighted the need to source energy from alternative suppliers and alternative means. As a result of all this, the importance of “G” in ESG has also increased.

Therefore, where Anti-Money Laundering (AML) and Know Your Client (KYC) regulations have shifted onboarding and compliance processes, the ESG reporting requirements now also require a shift in the types of businesses with which banks can work. This structural shift will be the biggest in generations and affect how companies and their financial service providers operate.

The key to ensuring that such a significant shift is smooth and successful per the Paris Agreement is to offer an automated, non-biased ESG measuring tool developed in line with the underlying aims of the United Nations. Coriolis Technologies is currently working with international banks and trade organisations to build a system that provides this solution and aims to release this to the market later this year.

What is even more imperative is that we take action. It has been over six years since the Paris Agreement, and less than eight years remain on the original deadline. Time for analysis and commentary is running short, and we must take action.