Net-zero commitments: Where’s the plan?

Net-zero is a critical issue and boards should have oversight of decarbonization, set the right ‘tone from the top’, disclosing how often they discuss the plan, and detailing how they monitor and oversee progress. Management’s role in set-up, monitoring and implementation should also be clarified.

Top-down governance provides much-needed direction and senior oversight, while a bottom-up approach helps ensure that those charged with implementation (at site or business unit level) validate the plan’s directions and feasibility and embed them into business decision making (e.g. investment decisions, procurement decisions).

Incentives also play an important role, with companies linking progress to executive/board remuneration and wider staff key performance indicators (KPIs).

Finally, overall approval of the plan, and annual progress in delivering on the strategy, could be subject to shareholders’ vote.

Greenhouse gas emissions are categorized into three groups or ‘scopes’ by the most widely used international accounting standard, the Greenhouse Gas (GHG) Protocol. Scope 1 is direct emissions, scope 2 covers energy purchases, and scope 3 includes all other indirect emissions in a company’s value chain, such as transportation and waste disposal. Scope 3 emissions are critical, as they often represent the majority of organizations’ carbon emissions.

A detailed breakdown of targets shows the world that your organization has a serious plan for addressing climate change. And, by explaining why certain emissions are not included, companies can improve credibility.

You should be clear about the emissions covered by your net-zero commitment, it should cover all material emissions and therefore a sizeable portion of your scope 3 emissions.

The target year for the net-zero commitment should not be later than 2050, to help ensure that plans incorporate existing or emerging technologies within predictable scenarios, avoiding uncertainty. An intermediate target date (say, 2030 or 2035) is less distant for investors and stakeholders and puts pressure on companies to act quickly.

The Science-Based Target Initiative (SBTI) helps organizations define achievable pathways to help reduce emissions, on a year-by-year basis. Governments actions can, of course, impact the plan, with additional regulations, like expanding the EU Emissions Trading System to other sectors, carbon taxation, funds to speed up energy transition, and investments to scale up new technologies.

Disclose the pillars of the plan

Companies should present a comprehensive decarbonization strategy that encompasses the entire value chain and clarifies which emissions are covered. The plan would include different rates of progress for different parts of the organization, as well as scenarios for slower and faster rates of decarbonization across the supply chain, manufacturing, etc.

Disclose the level of maturity of the technologies in the plan

The greater the reliance on existing, tested technologies, the greater the feasibility and credibility. An intermediate plan can set more predictable targets and allows for integration of newer innovations at a later stage.

Disclose investment details

Most sectors require significant investment to decarbonize, and companies should include a detailed financial plan including R&D costs. These figures are best presented in a comparable format to strive for maximum impact, so that investors can appreciate the level of commitment to net-zero. Companies should also explain how they expect to fund the plan — like using carbon funds and impact investing mechanisms.

Disclose the techniques in your plan

Reducing emissions is not enough: To reach a point where humans no longer contribute to global warming, society should stop emissions from accumulating in the atmosphere. Carbon removal (‘neutralization’) neutralizes the impact of emissions, by permanently eliminating an equivalent volume of CO2. Carbon offsets (‘compensation’), on the other hand, are a last resort and should only be considered for those emissions that can’t feasibly be removed. Decarbonization plans should specify the proportion of neutralization and compensation.

Companies should describe the risks, challenges and uncertainties to achieve the net-zero plan, assumptions made and the source of information for these assumptions.

• Fluctuating decarbonization costs: Net-zero plans are dependent on a number of external factors that can cause costs to change significantly — therefore, trends should be monitored carefully.
• Political development: Factors such as speed of renewal energy deployment, governments subsidies, and funding will likely all impact the pace of a net-zero strategy.
• Countries’ future energy mix: Companies should expect to make assumptions and define scenarios based upon changing circumstances.
• Technological breakthrough: The speed of development and adoption of innovations will likely influence a company’s ability to reduce emissions.
• Availability of carbon removal techniques: These are relatively new and should be part of net-zero strategies, for use when it’s not possible to reduce emissions. To date, such technologies have not been scaled up globally at an affordable cost, especially for addressing scope 3 (value chain) emissions.
• Price of carbon offsets and carbon price: Low prices for carbon/carbon offsets may deter companies from actively reducing their emissions. However, as demand for offsets rises, prices may increase.
• Controversies over technologies: Under pressure to make net-zero commitments, companies may choose approaches that are either unproven or controversial, which could impact their reputation.

Decarbonization involves a major shift and companies should identify how the plan impacts their strategy in terms of business models, investments, and upstream and downstream value chain including products, business lines, R&D and operations. They may need to invest in new skills for employees, board and executives, which could involve upskilling, partnerships with third parties and academia, as well as defining new roles, responsibilities and organizational structure.

The highest emissions-intensive supplies or products will probably have to be discontinued, with low emission ones accelerated using different pricing structures. Companies should also rethink logistics to help reduce transport distances and source locally where possible.

Leveraging the EU taxonomy of environmentally sustainable economic activities, companies should disclose whether they are causing any environmental or social harm through their plan. For example, they should consider the reputational impact of deforestation for installation of solar farms, or installation of wind farms without community engagement.

Decarbonization plans should be dynamic and evolve as uncertainty reduces over time, as companies get closer to targets or intermediate targets. By setting metrics, it’s possible to measure, track and report for an internal and external audience. Investors in particular will likely want to know what’s been achieved versus the plan, and how the organization compares against peers.

Companies can disclose their plan and their progress in their annual report, financial filing and also on their website. As a decarbonization plan is expected to tackle many different aspects such as strategy, business models, investment, Capex availability, R&D, people and supply chain, disclosing the plan in a sustainability context (e.g. sustainability report) is not sufficient. This information is now relevant for investors to understand the financial implications of the plans as well as the risks if plans are not achieved.