Corporations are taking ambitious steps to mitigate climate change. Business and government leaders are committing to reducing their greenhouse gas (GHG) emissions to ensure that global warming stays within safe limits. The term ‘net-zero’ has emerged as a guiding principle for climate action. Net-zero emissions is a state where a business balances the GHG emissions it produces with measures that reduce and remove emissions. As governments and investors demand greater climate action, all businesses will be profoundly affected by the transition to a net-zero economy － and businesses that don’t have a net-zero strategy will be at a disadvantage.
Businesses are currently setting aspirational targets and deadlines that are all over the map. Without clear standards, it is hard to tell if businesses are taking real action to reduce their GHG emissions or just greenwashing. Many businesses at the start of their climate journey are confused by what net-zero emissions mean. In this blog, we lay out what net-zero means and why you need a net-zero strategy. Once you’re ready to start on your net-zero strategy, take a look at our blog where we lay out 4 steps to develop credible targets and a roadmap to reach net-zero emissions by 2050.
What does net-zero mean?
What does net-zero mean? It starts with your business’ GHG emissions footprint. This is the amount of GHG emissions your business produces and is responsible for, whether it’s the energy you use, the products in your supply chain, or the consumption of your products. Net-zero means your business takes several steps to reduce, offset and remove the GHG emissions within your footprint, with the ‘net’ effect being zero. To do this requires three tactics:
- Abatement: The first step is to directly reduce the emissions in your value chain. This includes shifting your business to processes, systems and/or technologies within your value chain that produce lower or no emissions. Examples of this would include switching to clean electricity for a factory or office building, or replacing your internal combustion engine vehicles with electric or hybrid vehicles.
- Compensation: The second step is to take measures to avoid or reduce emissions outside of your business’ value chain, which help to offset the emissions you cannot reduce. Compensation measures commonly used by companies include direct investment in emission reduction activities, purchase of carbon credits, and avoided emissions through the use of sold products, amongst others. It is important to note that for a net-zero strategy to be credible, this needs to be a temporary or limited step: compensating unabated emissions is only recommended during the business’ transition to net-zero. Fundamentally, to achieve net-zero, we need to directly reduce our GHG emissions as much as possible － we cannot heavily rely on purchasing offsets.
- Neutralization: Removing any remaining GHG emissions that are within or beyond your value chain. For example, companies with GHG emissions that are not feasible for society to reduce may use nature-based carbon sequestration measures, such as reforestation.
In 2018, the Intergovernmental Panel on Climate Change (IPCC) warned that global warming must not exceed 1.5°C to limit climate change’s catastrophic impacts. To achieve this, the world must halve CO2 emissions by 2030 – and drop to net-zero by 2050. Your business needs to be part of the solution to reach net-zero by 2050.
Why your business should have a net-zero target and strategy
Every business will be profoundly affected by the global transition to a net-zero economy. Companies have an opportunity to demonstrate that they understand how to adapt their business to this transition by developing credible net-zero targets and a clear transition plan. The first movers to pursue corporate net-zero targets can be leaders among their peers, and advocates for better business practices.
Investors increasingly recognize the threat posed by climate change to the global economy and, therefore, to their ability to meet their beneficiaries’ needs over the decades to come. Many now recognize the enormous opportunity for economic growth and investment returns presented by the transition to net-zero emissions.
Corporate shareholders are making net-zero commitments and are asking investee companies to do the same. Institutional investors are looking to measure their portfolios’ alignment with the transition to net-zero, so they can make their own commitments to net-zero emissions. Investors are engaging with portfolio company management to ensure that they are taking effective action to ensure the business is well-positioned to respond to risks and opportunities linked to climate change, including the policy and market implications of the net-zero transition. Collaborative investor initiatives have also emerged. For example, the Climate Action 100+ was founded in 2017 to align investor engagement to encourage the world’s largest emitting companies to take action on climate change. It is now backed by 545 institutional investors with $52 trillion under management.
Other stakeholders also want to see businesses smoothly transition to a net-zero economy, and expectations for a net-zero strategy will continue to grow. Policymakers are setting national net-zero targets. Customer preferences are shifting towards low-carbon products and services. Employees are easier to attract and retain when businesses publicly support climate action in line with their values. A net-zero strategy will help your business distinguish itself from your competitors. In contrast, unprepared businesses risk losing stakeholder confidence and market share.
Need help getting started on your net-zero strategy?
We can guide you through the net-zero strategy process and develop a roadmap in line with best practice that meets your needs. Through the Task Force for Climate-related Financial Disclosures (TCFD) framework, we can connect your net-zero work to your corporate strategy and financial planning. We can help tell your climate story, whether it is to investors or the general public. Contact us today to learn more about how we can help.