Shifting out of the ‘pilot phase’ to achieve net zero in time
The science from the latest IPCC report couldn’t be clearer. To mitigate the worst effects of climate change, we need sustained and deep emission reductions across all sectors of the economy to make net zero possible.
At the minute, many companies and governments are dipping their toe in the sustainability waters with vague commitments and piloting schemes. While there remains uncertainty about the ‘right’ way to decarbonise, it’s unequivocal that half measures won’t suffice.
This article explores the need for reaching net zero, public and private sector collaboration, the business benefits of emission reductions, and how companies can effectively work toward full-scope decarbonisation.
How far are we from reaching net zero?
The world’s transition to net zero implies reducing global greenhouse gas emissions as close as possible to zero while ensuring that unavoidable emissions are absorbed from the atmosphere.
Reaching net zero by 2050 is necessary to limit global warming to 1.5°C, in line with the Paris Agreement. It will increase our chances of mitigating the worst effects of climate change on people, biodiversity, societies and supply chains.
According to the latest IPCC report, we have reached surface temperatures that are 1.1°C higher than pre-industrial levels. To limit global warming to 1.5°C and 2°C, we have remaining global carbon budgets of 500 GtCO2e and 1150 GtCO2, respectively.
Achieving these targets would imply globally reducing greenhouse gas emissions by:
- 43% by 2030 & 84% by 2050 to limit warming to 1.5°C
- 21% by 2030 & 64% by 2050 to limit warming to 2°C
While countries such as Japan, Canada and France have committed to net zero by 2050, the sum of national pledges is still insufficient, creating an “emissions gap” to limit warming to 1.5°C.
The pledges of all Parties under the Paris Agreement would result in global warming approaching 2.5°C by the end of the century. Such a scenario exposes society and economies to extreme weather conditions and climate events, generating significant losses and damages.
The world is currently off track to reach net zero, requiring urgency at the global, national and organisational levels. This is a global endeavour requiring sector-wide decarbonisation and the financing of carbon removals.
Will regulations have an impact?
Reaching net zero requires systemic changes in how we produce food, build infrastructure, transport people and goods, and power the economy. Given the scale of such challenges, public and private sector collaboration will be key, as no single organisation can drive the changes alone.
Examples from the United States and the European Union highlight how national and regional regulations can incentivise the private sector to decarbonise.
- Inflation Reduction Act: This historic law will direct $369bn toward investments in renewable energy and decarbonisation initiatives, with experts estimating that the bill could reduce US emissions by 40% by 2030. Investments and tax credits for renewable energy, alternative fuels, and carbon capture and storage are necessary to future-proof industries.
- Securities and Exchange Commission (SEC): A proposal of new reporting rules would require companies registered with the SEC to disclose the greenhouse gas emissions arising in their operations and supply chains. This regulation would ensure companies accurately measure their emissions, a first required step before implementing effective reduction initiatives.
- Ban on the sale of new petrol and diesel cars: As part of its 2050 climate ambitions, the European Union is working to ban the sale of internal combustion engine cars and vans by 2035. This regulation has the potential to tackle 20% of the EU’s emissions and incentivise the development of technologies such as batteries that will be needed in an electrified and renewable energy-powered world.
- Corporate Sustainability Reporting Directive (CSRD): This directive could impact 50,000 companies, requiring them to report their operational and supply chain emissions and demonstrate how their business models are compatible with the world’s transition to net zero emissions by 2050.
Governments must set regulatory frameworks to guide industrial changes aligned with a net zero future. In turn, corporations will be incentivised to develop low-carbon goods and services or be constrained by laws and policies should their climate ambitions misalign with national decarbonisation targets.
When should you trust your data?
As more countries set objectives to reach net zero, we can expect an increasing number of corporations to commit. In fact, 34% of the world’s largest companies have already committed to net zero.
However, the scale of corporate climate actions and reduction initiatives is far from where it needs to be. Of the large companies that have set net zero ambitions, 93% will fail to meet them if their emission reductions are not doubled by 2030.
Some of the limiting factors to companies setting ambitious climate targets and being able to demonstrate reductions are data availability, quality and accuracy. For business leaders to make informed procurement decisions, they need to analyse the emissions arising from their operations and supply chains with high confidence.
There are various calculation methodologies for scope 1, 2 & 3 emissions, with calculations relying on physical unit and supplier-specific data providing the greatest accuracy. Spend-based calculations are limited for companies to set net zero targets and be able to demonstrate to their stakeholders how emissions reductions are being achieved.
When setting these targets, companies should also aim to use scenario modelling to plan how their emissions might evolve in the future, considering strategic objectives, decarbonisation initiatives and business growth.
Companies should build internal and external trust with their net zero targets by calculating emissions inventories with primary data, forecasting emission reduction pathways and identifying the role strategic suppliers will play in reaching net zero.
The business benefits of climate action
The push to reach net zero is driven by government regulation, pressure from capital markets as well as customer demands.
While the benefits of reaching net zero are clear from an environmental and societal perspective, economic opportunities are also available for companies:
$9.2 trillion must be invested in decarbonisation initiatives between now and 2050 to reach net zero, with the IPCC estimating that mitigation investments need to be 6 times greater than their current levels.
As institutional investors such as pension funds or asset managers are pressured to decarbonise their portfolios, we can expect the weight of climate commitments to increase in capital allocation decisions.
Furthermore, proactive climate action can be a proxy for broader risk-mitigation capabilities, which investors can reward with a lower cost of capital when raising debt.
Cost reduction Opportunities
Reaching net zero requires companies to radically rethink how they operate. In doing so, business leaders should identify ways to reduce inefficiencies from emissions and cost perspectives.
For instance, grouping freight transportation to reduce empty miles or recovering post-consumer materials presents an opportunity for firms to reduce fuel costs or the need to finance the sourcing of virgin materials.
Committing to net zero encourages companies to take a long-term value creation and risk mitigation approach. Such forward thinking shields a company from tax and cost risks associated with carbon pricing mechanisms.
For example, companies involved in the EU Emissions Trading Scheme can reduce their need to buy emission allowances if emission reductions lead to excess allowances. These allowances could even be sold to further finance decarbonisation initiatives.
As corporations and governments aim to reach their net zero targets, they will require vendors and strategic partners to demonstrate their alignment in procurement processes.
Committing to net zero can be rewarded with customer retention and attraction. Indeed, suppliers bidding for UK government contracts need a 2050 net zero target and carbon reduction plan.
Building buy-in to reach Net Zero
Companies aiming to reach net zero must ensure board and executive-level alignment with the corporate climate strategy. Given the implications from an investment, supply chain and business model point of view, a sustainability team alone cannot drive the required changes.
Engaging your supply chain
Since 90% of a company’s greenhouse gas emissions can sit in its supply chain, supplier engagement is a key requirement for those targeting net zero. Let’s take the example of a fictional beverage company aiming to reduce its glass packaging emissions:
The company identifies that 20% of its supply chain emissions are related to one raw material category it purchases from two strategic suppliers, glass. To reduce these emissions, the Sustainability Manager works with the Chief Procurement Officer to identify the lowest-carbon provider.
By engaging their suppliers, they realise that one of the manufacturers is significantly investing in electric furnaces and Power Purchase Agreements to reduce the emissions intensity of the energy required for melting glass. On the other hand, the other supplier is resistant to change and commits to natural gas-powered furnaces.
The beverage company can use this data to inform procurement decisions and reward the supplier for proactively reducing their emissions. In turn, this will enable the company to reduce emissions from one of its significant hotspots, packaging.
Additionally, suppose there is currently a green premium associated with electrified glass manufacturing. In that case, the sustainability team can pitch the return on investment potential as lower emissions from the goods they sell could enable them to win contracts with large retailers or protect themselves from carbon taxes.
More widely, companies aiming to build internal and external buy-in with their net zero strategies should be transparent with the limitations of the current assessment, the challenges they expect to face, and how they aim to achieve their decarbonisation journey.
It is clear that there is a long road ahead for countries and businesses to reach net zero and that systemic changes are required. While it sends a strong signal, committing to net zero is only the first step.
Climate inaction will further expose companies to financial and physical risks, especially if their operations and supply chains have not built the resilience to adapt to a world increasingly impacted by the effects of climate change.
Investments in decarbonisation initiatives and radical changes in how businesses operate are needed if the world is to transition to net zero in time. This will require immediate and sustained action at the regulatory and corporate levels.