Private sector emission reduction plans: regulating to avoid greenwashing

[Article originally published in El Economista]

Since the entry into force of the Paris Agreement, the private sector has, unsurprisingly, joined the fight against climate change. In many cases, through the announcement of grandiloquent commitments whose degree of compliance is subsequently unclear without the intervention of third parties to verify them. With the war in Ukraine, oil and gas companies are also abandoning their short-term commitments.

In order to avoid greenwashing in terms of emission reduction targets, Law 11/2018 already required those companies obliged to prepare a non-financial statement to include details on the greenhouse gas (GHG) reduction targets voluntarily set in the medium and long term, as well as the means implemented to this end. In 2019, the European Commission recommended describing the climate-related targets set by the company. It also recommended considering the possibility of setting a 2050 target to adapt to the Paris Agreement.

Law 7/2021 of the 20th of May on Climate Change and Energy Transition, which has not yet been fully implemented, established that by the 22nd of May 2022 a number of companies would be obliged to calculate their carbon footprint and to prepare and publish a GHG emission reduction plan. However, it was not until November 2022 that the Ministry for Ecological Transition and the Demographic Challenge published the draft Royal Decree that will regulate this obligation.

Just a few days before this publication, during COP 27, the Secretary General of the United Nations presented the report prepared by the High-Level Expert Group on the Net Zero Emissions Commitments of Non-State Entities. It is a guide against greenwashing, making it clear that non-state actors, such as companies, not only need long-term commitments but also short-term science-based targets and detailed transition plans. Among their recommendations, they included the need for reduction commitments to include targets every five years or less; for information to be provided and progress to be reported; and for such targets to cover the entire value chain and activities of companies (scope 1,2,3). Furthermore, all actions to achieve the targets should be outlined, as well as aligning governance and incentive structures, capital expenditure, research, skills and human resource development and public advocacy, while supporting a just transition. These plans must also be accurately verified and audited by independent third parties. Finally, the paper calls for the regulation of conditions and transforming the trend of voluntary commitments into ground rules for the economy as a whole.

Despite these useful recommendations, the draft Royal Decree is sparing and only establishes the obligation to calculate the carbon footprint, as well as to draw up and publish a reduction plan for companies with more than 250 employees that either have the status of public interest entities (according to the legislation on auditing of accounts, except for entities that are considered SMEs according to the EU), or that, for two consecutive financial years, meet at least one of the following criteria:

1.- That the total of the asset items exceeds 20M euros.

2.- That the net annual turnover exceeds 40M euros.

It is striking that, while public administrations obliged to draw up an emissions reduction plan will have to register it in the carbon footprint registry, companies obliged to do so will not be required to register it and the draft Royal Decree does not establish any publication obligation.

This will not come into force until the 1st of January 2025, coinciding with the implementation of the EU Directive on sustainability reporting by companies, which will have to be transposed into national law by the 6th of July 2024. This Directive requires that sustainability reporting contains absolute emission reduction targets for at least 2030 and 2050 and a description of the progress made by the company to this end, together with the company’s plans, including implementation measures and related financial and investment plans, to ensure that its business model and strategy are compatible with the transition to a sustainable economy. Sustainability information will need to be verified.

Against this backdrop, it is essential that the draft Royal Decree be reformulated to include more specific obligations and specifications on the content of emission reduction plans for companies, as well as the need for them to be verified and audited. Otherwise, there is a risk that greenwashing will continue to spread and, in consequence, the objective of the Paris Agreement will not be achieved.

Ana Barreira

Ana Barreira is a lawyer and founding Director of the International Institute for Law and Environment (IIDMA), an organisation that this year celebrates its 25th anniversary. She is co-president of the energy and environment section of the Madrid Bar Association.