The Paris Agreement aims to limit global warming to well below 2°C, requiring unprecedented reductions in greenhouse gas emissions. Companies play a crucial role in achieving this goal, contributing directly and indirectly to emissions. Despite growing commitments, most businesses fail to significantly reduce emissions due to a lack of regulation and awareness of climate risk. This paper addresses this challenge by establishing a rigorous framework for evaluating corporate alignment with the Paris Agreement. The authors highlight the need for consistent and defensible methods to translate global climate goals into company-specific targets, emphasizing the importance of science-based and equitable metrics. While various methodologies exist for converting global climate targets into company-specific trajectories, including the Science-Based Targets initiative (SBTi), the authors argue that many fall short in several crucial aspects. This study aims to bridge this gap by proposing a more robust and transparent framework.

The paper reviews several existing methodologies for aligning corporate greenhouse gas emissions with global climate goals, including the Sectoral Decarbonisation Approach (SDA), Greenhouse gas Emissions per Unit of Value Added (GEVA), the Absolute Contraction Approach (ACA), and the Context-based Carbon Metric method. It notes that these methods vary in their approaches to base years, decarbonization pathways, and accounting for differentiated responsibilities. The authors discuss existing initiatives like the SBTi and TPI, acknowledging their contributions but highlighting their limitations in meeting the stringent criteria proposed in this paper. They specifically address shortcomings in base year selection, target revision mechanisms, and the treatment of 'action deficits'. This review sets the stage for the authors’ proposed methodology.

The authors propose a strict methodology for assessing companies' Paris Compliance, establishing two necessary conditions and one desirable condition for any emissions allocation methodology. The first condition mandates that the underlying decarbonization pathway aligns with the Paris Agreement's goals. The second condition requires a common base year (2015 or earlier) consistent with the pathway. The desirable condition promotes accounting for differentiated responsibilities among nations. Four operationalization requirements are added to ensure practical application: annual adjustments for discrepancies between projected and actual variables (e.g., market share); definition of re-alignment pathways to correct for action deficits; accounting for mergers; and providing a reasonable timeframe for new companies to establish their market share. The Sectoral Decarbonisation Approach (SDA), using the IEA B2DS pathway, is used as an example to demonstrate the methodology. They develop Paris Compliant Pathways (PCPs) and associated metrics, considering both actual and projected market share. The methodology involves calculating PCPemissions (cumulative emissions if a company had followed its PCP) and PCPintensity (carbon intensity along the PCP). Three key metrics are proposed for evaluating performance: Performance to Date (comparing actual cumulative emissions to PCPemissions); Projected Performance (including Estimated Year to Finish the carbon budget, production levels at that year, and budget exceedance in 2050); and Re-alignment Decarbonisation Rate (quantifying the increased decarbonization speed needed to compensate for past emissions). The authors apply their methodology to ten high-emission electric utility companies and ten cement companies, using publicly available data supplemented by NEMReview software and Refinitiv Datastream for emissions and production data. A 'maximum action' scenario is used for electric utilities, while geometric emission intensity growth is used for cement companies where detailed data was unavailable.

Applying the proposed methodology to ten Australian electric utility companies and ten global cement companies revealed that almost all companies in the sample were not Paris-compliant. Specifically: Almost all companies exceeded their PCPemissions by 2021. If companies continue under a 'maximum action' scenario, most electric utilities are projected to exceed their carbon budgets before 2035, with significant exceedances (120-300%) by 2050. Similarly, all cement companies exceeded their PCPemissions, with projected exceedances by 2046. The required decarbonization rates to achieve Paris compliance are substantially higher for non-compliant companies, ranging from 1.01 to 6.6 times faster than if they had remained on their initial PCP. The study highlights the significant financial risks associated with this lack of compliance, indicating billions of dollars in assets may be at risk of stranding.

The findings highlight the substantial gap between current corporate action and the requirements of the Paris Agreement. The stringent methodology provides a more accurate assessment of corporate climate performance compared to existing approaches, revealing a more alarming situation than previously understood. The three proposed metrics offer valuable tools for companies, investors, and stakeholders to evaluate transition performance and exposure to transition risks, including asset stranding, market risks, technology risks, legal risks, and reputational risks. The study emphasizes the importance of early action to avoid drastic and disruptive decarbonization efforts in the future. The results underscore the need for increased corporate accountability and transparency regarding climate action.

This paper presents a robust, science-based methodology for evaluating corporate compliance with the Paris Agreement. The proposed framework, along with the three associated metrics, provides a more accurate and stringent assessment of companies' climate performance than existing methods. The application to electric utility and cement companies demonstrates the significant gap between current practices and Paris goals, emphasizing the need for immediate and accelerated decarbonization efforts. Future research should focus on further refining the methodology, exploring alternative decarbonization pathways, and investigating the effectiveness of different policy interventions to incentivize corporate climate action.

The study acknowledges limitations. The use of the IEA B2DS pathway is one example, other pathways consistent with the Paris goals could lead to different results. Data availability is another concern, particularly for the cement industry where projections relied on geometric growth. The 'maximum action' scenario for electric utilities may not perfectly capture all possible future scenarios. The methodology's reliance on projections of future variables, such as market share, introduces uncertainty. Despite these limitations, the proposed methodology offers a significantly improved framework for measuring corporate compliance with the Paris Agreement, compared to existing approaches.