Are you prepared to deliver on your net-zero carbon commitment?

The 2018 Intergovernmental Panel on Climate Change (IPCC) special report on global warming of 1.5°C made it clear that a pathway to limit global warming to 1.5°C will require paradigm shifts in energy, land, and infrastructure industrial systems. Since this report was released, nations, regions, and cities representing over half of global GDP have set net-zero carbon targets. More and more companies are joining the race to net-zero carbon, with more ambitious targets on tighter timelines.

While the increasing acceptance of the science and momentum to change is notable and inspiring, the majority of these targets are still just targets. The journey that needs to be taken to get to net-zero remains undefined.

In 2020, over 1,200 businesses announced net-zero targets, which is a clear signal for change, leadership, and ambition. However, without a strategic roadmap underpinning these targets, there is the potential for reputational damage, with broader long-term impacts on brand loyalty, intellectual capital, and growth. As such, a business must develop a clear environmental, social, and governance (ESG) strategy and a roadmap of the actions it will take to meet its target.

Two steps to a net-zero pathway

For maximum impact, a net-zero carbon target should be aligned and consistent with a pathway that limits global warming to 1.5°C. This pathway involves two steps:

1. Mitigating all material greenhouse gas (GHG) emissions (based on technical and economic feasibility) within the organizational business boundary and along the value chain. The latter is very often the largest contributor to a company’s carbon footprint, although companies often have limited visibility into supplier operations. The COVID-19 pandemic has exposed this lack of awareness as a major vulnerability, and it points to a need to improve engagement, collaboration, and innovation.
2. Permanently removing residual emissions; that is, those emissions which remain unabated due to technical or economic constraints.

A credible mitigation strategy

Of the businesses that have committed to a net-zero carbon target, there are differences in the boundary of the emissions included, the mitigation strategy, and the timeframe. Ideally, the boundary should include all pertinent GHGs (e.g., CO2, CH4, N2O, HFCs, PFCs, and SF6) and include emissions from operations and the value chain.

The ESG strategy could include a combination of measures, such as:

• Procuring renewable heat and power.
• Implementing technical and operational solutions to improve energy and resource efficiency.
• Utilizing the business estate to generate clean energy.
• Implementing e-mobility solutions across transport assets.
• Raising sustainable finance, such as green bonds, social bonds, ESG bonds, and blue bonds, where the cost of money ties to the company’s sustainability performance.
• Investing in energy transition assets.

Beyond mitigation activities implemented within the business operations and value chain, corporate strategies can also include direct investment in emission reduction activities or the purchase of carbon credits to offset (or compensate) unabated emissions. However, if the ESG strategy truly aligns to a 1.5°C pathway, companies should aim to invest in measures that remove and permanently store atmospheric GHGs.

Moving from current practice towards future goals

Importantly the ESG strategy needs to reflect the business—specifically, the risks associated with a transition to a net-zero carbon society.

If GHG emissions from business operations or in the value chain are large, then the company will be at risk due to greater emissions constraints from increasingly stringent policies, changing consumer behavior, and shareholder expectations. Consequently, businesses should not consider the ESG strategy as an abstract initiative layered onto the company’s business model, limiting exposure to transition risk and ensuring the company’s long-term viability.

Once businesses set the ESG strategy, there needs to be a tangible roadmap with supporting action plans to ensure proper execution. This roadmap includes:

• Establishing identifying activities to meet net-zero carbon strategic objectives.
• Breaking these activities down into well-defined cascading actions, including expected results (e.g., GHG reductions as well as potential revenue improvement and new business opportunities) and associated risks (e.g., market risks).
• Defining discrete milestones and targets for the actions to ensure timely results.
• Assigning staff responsibility for implementing all aspects of the action plan.

In addition to quantifying the investment, human capital, and technical requirements, companies will need to qualify these actions through an ESG lens to ensure they adhere to robust social and environmental principles, and to ensure clearly defined modalities for monitoring the progress of each action.

The starting point for a transformational journey

Many companies have announced net-zero carbon targets, which shows ambition and a commitment to address the climate crisis. But this is only the start.

Underpinning this target should be a credible ESG strategy and roadmap that outlines a company’s undertaking to achieve net-zero carbon emissions. Companies should be careful about taking the easy route by over-relying on offsetting, which could lead to criticism of them shirking their environmental responsibility and essentially paying to continue their business as usual.

In the long-term, companies that have taken meaningful steps to manage transition risks and prepare for the new economy will stand the test of time and better position themselves as true market leaders.