As the climate transition accelerates, more companies are setting ambitious targets to zero out their emissions. While some are choosing to do this voluntarily, others are doing this in response to investor and regulatory pressures, which are mounting as awareness of climate-related physical and transition risks have grown.
However, just because companies have set net-zero goals does not always mean they’ve laid out the appropriate plans or strategies to achieve them. According to last year’s Net Zero Stocktake, which analyzes organizations’ climate goals, more than 33% of the world’s largest publicly traded companies have set net-zero targets. While that figure is up from 2020, 65% of these targets still don’t meet the minimum standards for climate reporting.
Similar research was released in October by Climate Action 100+, an investor-led initiative focused on getting high-emitting corporations to take climate action. The group assessed 159 firms and found that while 75% committed to achieving net zero by 2050 or sooner, many have yet to produce credible climate plans.
While setting a net-zero target is a necessary step in companies’ climate journeys, they need to go further to prove they have the appropriate plans in place to achieve their goals. Without a robust roadmap, organizations’ pledges are just empty promises that may expose them to climate-related financial risks. For example, if a company sets a target to zero out its emissions by 2050 but doesn’t know what steps to take to achieve this, it could suffer reputational risks because of the gap between what its stakeholders expect to see happen and what the company actually does. Furthermore, a company that hasn’t planned how to reach net zero could end up taking inappropriate measures that could actually delay its low-carbon transition and cause it to miss out on relevant climate opportunities.
Establishing good governance
In addition to setting a net-zero target, companies need to ensure they have the proper climate governance processes in place. Without good governance, organizations will lack the necessary building blocks for good climate management.
To begin with, firms must ensure their boards and board committees are regularly informed on climate-related issues. Boards should be aware of how climate issues may impact every aspect of the business they oversee. They should also consider these issues when reviewing and developing overall corporate strategies, major action plans, risk management policies, budgets, and financial plans. Importantly, boards must monitor and oversee how their companies are progressing toward their climate targets. This will help keep companies accountable to their promises and ensure they’re transitioning smoothly toward their goals.
Additionally, companies need to make sure climate responsibilities are delegated among their management teams and committees so they can both effectively assess and manage climate risks and opportunities. Those teams and committees should also report to the board and board committees on their climate-related responsibilities.
Developing an effective climate strategy
A climate strategy describes how a company plans to achieve its climate targets and address the climate-related risks and opportunities it may encounter. An effective climate strategy starts with the identification of climate-related issues that materially affect an organization over short-, medium-, and long-term timeframes, broken down by both sector and geography as appropriate.
To ensure a robust climate strategy, firms will need to assess how climate issues could affect their financial performance. In order to do this, companies can use climate scenario analyses that align with a 2°C or lower global warming trajectory. Organizations should also use these analyses to determine their resilience against climate risks and opportunities.
Importantly, companies that have set emissions reduction or net-zero targets should develop plans that specifically outline how they’re going to reduce emissions in both their operations and value chains. They should also consider how their strategies may evolve to address future climate risks and opportunities.
Creating strong risk management processes
To manage climate-related risks, it’s not enough to only set a target. Organizations that are serious about minimizing climate impacts must develop processes for identifying and assessing climate risks and determine how they may interact with and amplify other risk factors. For example, companies may want to consider emerging climate-related regulatory requirements and how they may exacerbate their compliance risks.
To develop robust climate risk management procedures, companies should develop processes to address, mitigate, transfer, and control their climate risks. These processes should touch on each climate risk type, including policy and legal, technology, market, reputation, as well as acute and chronic physical climate risks. Finally, companies should integrate their climate risk management processes with their overall risk management strategy to ensure climate issues are dealt with holistically.
Setting meaningful climate metrics and targets
Companies’ net-zero targets are only useful to stakeholders when accompanied with credible and consistent emissions data. To show progress in aligning with net-zero targets, companies should track and report both their direct (Scope 1 and 2) and indirect (Scope 3) emissions. These should be calculated using the Greenhouse Gas Protocol to ensure consistency and comparability across reporting entities.
Besides net-zero targets, firms should think about measuring climate-related risks and opportunities associated with water, energy, land use, and waste management and developing targets to manage them. They should also consider developing targets for the proportion of revenues, assets, or other business activities that are aligned with climate opportunities and/or vulnerable to climate risks. Additionally, companies should explore linking climate performance metrics with executive remuneration policies, so that managers are held accountable for making progress on corporate climate targets.
Metrics should be updated each reporting period so that stakeholders can track companies’ progress over time. Some organizations may also consider using forward-looking metrics. For instance, financial institutions may want to produce implied temperature rise metrics that show the alignment of their portfolios with global temperature pathways.
All metrics and targets should align with incoming regulatory requirements and investor expectations. Organizations should also set interim targets to benchmark their progress against their overall net-zero pledges.
How Manifest Climate can help
As the leading Climate Risk Planning solution, Manifest Climate helps businesses identify, manage, and communicate their climate-related financial risks and opportunities. Our proprietary software assesses how organizations disclose their climate-related information and identifies opportunities for improvement based on best practices. Our solution also provides insights on how your business stacks up against industry peers, as well as expert takeaways on business-relevant climate trends that help your leaders make better decisions. Request a demo to learn more.
