Investor and consumer pressure, alongside more detailed climate disclosure requirements, means they must do more.
Seven years on from the Paris Agreement’s commitment to limit warming to 1.5 degrees Celsius by achieving “a balance between anthropogenic emissions by sources and removal by sinks”, the net zero concept has become the central organising principle for global climate action.
Net zero commitments have now been made by 137 countries and over one third of the world’s largest companies by revenue. Eighty-three percent of global emissions and 91 per cent of GDP is now covered under some form of net zero target.
Net zero commitments are going up… so are emissions
On the surface, these numbers imply much-needed action is underway. But it is the quality of those commitments – not the volume – that needs attention.
Spurred into action by tighter regulation, investor pressure and customer expectations, many businesses are rushing into commitments that amount to little more than lip service and leave them exposed to accusations of greenwashing.
For example, of the one third of the world’s largest 2000 companies which have set net zero targets, 60 per cent reported emission scopes coverage only partially covering, or not covering, their Scope three emissions. (Scope three emissions are the result of activities from assets not owned or controlled by the reporting organisation, but that the organisation indirectly impacts in its value chain.)
According to a study from investor-led climate action initiative Climate Action 100+, only 17 per cent of the world’s 166 highest emitting companies had set interim targets aimed at limiting warming to 1.5 degrees Celsius. Only 17 per cent had quantified decarbonisation strategies, and only 5 per cent had aligned their capital expenditure with long-term emissions reduction targets.
What’s wrong with net zero?
It’s poorly defined and easily misunderstood
Many companies are unclear about how they should go about “operationalising” a broad net zero target, so they make their own decisions on a range of key issues including timeframes, emissions coverage and offsetting.
The absence of a clear definition and agreed principles for how businesses should apply the science of net zero has led to differences in the scope of their targets and mitigation strategies. The concept risks losing value if stakeholders can neither understand nor consistently apply it.
Opaqueness provides fertile ground for greenwashing and confusion
Many companies have been setting their own parameters for what a net zero target should entail. They often omit key details from their net zero pledges such as coverage of greenhouse gases, the role of offsets and whether targets include all emissions across their value chain. This variability presents a number of problems.
First, it allows companies to claim they are ambitious about making a difference merely because they have set a target. Digging deeper into their claims often reveals inadequacies.
Second, variability in the scope of net zero targets combined with a lack of transparency makes it difficult for investors, shareholders, and customers to assess the quality of a company’s commitment.
Finally, there’s the problem of offsetting. Many companies with net zero targets are making no specific commitment to reduce their emissions, instead substituting the heavy lifting of emissions reduction with carbon offsets. Relying too heavily on the “net” in net zero is risky, because of widespread concerns around the environmental and social integrity of offsets being bought and sold in global carbon markets. Companies that rely too heavily on them risk having their net zero claims dismissed as greenwashing.
Initiatives such as the Science Based Targets Net Zero Standard and the UN-backed Race to Zero campaign have given businesses guidance on how to set credible targets that seek to resolve many of these issues. A high-level expert group on net zero convened by the UN is also working to develop clearer standards for net zero. They are due to release their recommendations in late 2022.
Investor expectations and regulatory scrutiny are increasing
Increasingly, stakeholders are pressuring companies to disclose the details of any commitment, along with concrete implementation plans. And a new global baseline for investor-focused climate risk reporting (the IFRS S2 Climate-related Disclosures Standard) will require companies to be far more detailed and precise in communicating their climate plans and performance. This includes disclosing credible net zero targets, transition plans, short- and long-term emissions reduction targets, use of offsets and capital allocation.
Regulators are also becoming more diligent. Bodies including the ACCC in Australia, SEC in the United States and the European Union markets watchdog are stepping up their scrutiny of market behaviour and business claims. Deutsche Bank’s DWS was one of the first high-profile scalps. Wall Street giant Goldman Sachs is currently being investigated over the alleged ESG credentials of some funds. Clearly, litigation is now a risk for companies making questionable net zero claims. In 2021, Santos was the first company in the world to have the veracity of their net zero claims challenged in a Federal Court.
How can businesses set a credible net zero target?
Businesses need to address four key criteria:
1. Emissions reduction as a first principle
To minimise the risks associated with the “net” in net zero, deep and rapid emissions reductions should be at the centre of net zero targets and strategies, obviously because the rate at which emissions are reduced matters. To avoid making climate change worse, companies need to stop adding to the problem.
2. Set science based short- and long-term emissions reduction targets
Emissions must be reduced to limit warming to a specified target and by a specified time. So net zero targets should consist of both short- and long-term emissions reduction targets aligned to limiting global warming to 1.5 degrees Celsius, as set out in the Paris Agreement.
Long-term emissions reduction targets set a specific timeframe for the achievement of net zero, allow for planning and investment to reduce emissions and signal a multi-decade commitment.
Short-term targets serve as milestones to measure progress along the path to net zero, and show investors, customers, and other stakeholders that an organisation is genuinely taking action to meet the overall target.
3. Net zero targets should be comprehensive and transparently communicated
Corporate net zero targets should cover all sources of a company’s emissions, including scope three emissions created up and down the value chain.
While scope three emissions are more difficult to measure and mitigate than scopes one and two, it is an area of increasing focus for consumers and investors alike.
Companies are better served taking action on scope three now, rather than delaying until regulation or stakeholder pressure makes action mandatory.
Transparent communication of each element of a company’s net zero target is also essential so stakeholders can assess its credibility and likely impact. Questions to ask include:
- What sources of emissions are covered?
- Have both short- and long-term reduction targets been set?
- What proportion of the target is to be met by emissions reduction vs offsets?
- What methods of offsetting are being used?
- Does the target account for fairness and equity?
Investors and others increasingly expect this level of detail.
4. Businesses should be guided by principles of equity and fairness
Article 2.2 of the Paris Agreement calls for nations (and by extension companies) to make commitments that “reflect equity and the principle of common but differentiated responsibilities and respective capabilities in the light of national circumstances”.
Any company claiming their net zero target to be “Paris-aligned” or “contributing to the goals of the Paris Agreement” should understand that they are assenting to Paris Agreement obligations around historical emissions, capability to act and a commitment to the principles of sustainable development.
Microsoft is an example of a business that has committed to the principles of fairness and equity in its approach to net zero. The Californian giant has taken responsibility for all historical emissions in its value chain. This includes committing to, and investing in, carbon negativity by 2030, and accounting for all emissions since their founding in 1975 by 2050.
Companies must ensure rigour and clarity in their net zero targets – only then can investors and consumers make informed assessments on the validity of their claims.
