What Net-Zero companies are and How to start the journey

Net-zero emissions companies is one of the fastest-growing business trends. According to scientists achieving net-zero before 2050 is critical to keeping us safe from the catastrophic consequences of climate change.

The number of net-zero emissions commitments has doubled this year, as many prioritize climate action in their recovery from Covid-19 ( Data-Driven EnviroLab report).

Still, many organizations struggle to make their first steps to become Net-Zero companies.

In this article, you will learn what net-zero companies are, why embark in such endeavour and how to make your net-zero targets credible.  

What is a Net-Zero company?

Net-zero company refers to an organization who reaches a balance between emissions produced due to its activities and those emissions it removes from the atmosphere.

Achieving a net-zero emissions state is similar to maintaining the water level of a bathtub with the tap fully on and its drain open.

To achieve the water balance, we could turn down the faucet (reduce the emissions released) until there’s no more water coming out. Besides, we could also drain an equal amount down the plughole (removing emissions from the atmosphere).

Therefore, a company achieves a net-zero state by first reducing to the minimum its carbon sources. Then, the organization can balance out the remaining emissions by investing in projects that remove emissions (carbon sinks).

Why should a company be net-zero?

Reason 1 – Is the right thing to do to save the planet

After the signature of the Paris Agreement in 2015, science has become widely accepted. The cause for climate change is due to human activities (read my article about Milankovitch Earth’s Cycles). Therefore, companies have increasingly focused on reducing carbon emissions.

Nevertheless, emissions kept growing. As a consequence, we have reached a global warming of 1 degree Celsius above pre-industrial levels (UN IPCC SR15).

To limit global warming to the safe threshold that science has set at 1.5°C, reducing carbon emissions alone is not sufficient. We need to go further and reach a Net-Zero future where we stop emissions growth.

COVID-19 has reminded us that human and, planetary health are interlinked and, this is one of the reasons that Net-Zero emissions companies has become one of the fastest-growing business trends.

Decreasing GHG emissions also reduce air pollution and, prevent millions of premature deaths. Also, shifting to energy efficiency and renewable energy aligns with efforts to improve energy security and reduce poverty (IPCC, 2018).

Reason 2 – It makes business sense

Besides, companies have understood that achieving net-zero emissions is not only the right thing to do to save the planet. Net-zero also reduces climate risks (read my TCFD article), reduce costs and attracts ESG investors and talent.

Despite these two reasons, some companies don’t understand the benefits of the low carbon economy yet. Ignoring those benefits means ignoring the risk that new regulation, customers or investors could put your business out of the market.

How to start a net-zero roadmap?

According to Race to Zero, a campaign led by the UNFCCC Champions for Climate Action, 25% of global CO₂ emissions are covered by net-zero commitments. Moreover, a recent report by the Energy and Climate Intelligence Unit (ECIU) and Oxford Net Zero affirms that 21% of the world’s 2,000 largest public companies, representing sales of nearly $14 trillion, now have net-zero commitments.

However, there is a great degree of inconsistency in the scope, timeline and actions necessary to reach net-zero. This inconsistency creates confusion and puts off many companies who want to start their net-zero journey.

In a Linkedin poll I recently launched, +50% of the answers were to understand how to start the net-zero journey.

So how should you create a roadmap to make your company net-zero?

It requires you to follow a 4-step process:

1- Understand your carbon footprint

You cannot improve what you don’t measure. Therefore, developing a basic map of your emissions in both your operations and in your supply chain should be the first step.

Here, the GHG protocol is the most widely used international accounting tool for greenhouse gas emissions accounting.

Calculating the emissions from the companies operations such as factories, offices or, fleet is quite a straight forward process. It requires collecting fuel and electricity consumption and applying some international emissions coefficients.

Beyond the company’s operations, there are other emissions produced in the supply chain. Moreover, according to CDP, supply chain emissions are on average 11.4 times greater than those generated from companies operations. Therefore, the potential for reductions is vast in the supply chain.

Businesses must close the ‘Say : Do’ gap; the greenwashing space between their environmental pledges and (lack of) actions to meet them

Paul Polman, former Unilever CEO

Your company should build a first simple supply chain emissions model focusing on company spending. Above all, the purchasing of products and services is the category that usually drives most of the emissions. Then using some tables called EEIO, the company can translate spending into carbon emissions.

Over time, you can improve the model by incorporating data from suppliers and the company’s products life cycle assessments (LCA).

Still, if the company doesn’t have the carbon footprint expertise, it may be wise to use external help to develop the first model. Here my article about supply chain carbon footprinting and here a list of experts in carbon footprinting or LCAs.

2 – Set credible and ambitious net-zero targets

Credibility and ambition are vital aspects when setting a net-zero target.

The level of ambition of a target depends on its scope, timeline aligned with science and the strategy behind:

• Scope: your company should consider including 100% of the emissions produced in your factories, offices, warehouses, fleet and other assets that you own or operate. Besides, since most companies have the majority of their emissions from their supply chain, your targets should also cover those emissions. 52% of the 160 largest GHG emitters committed to net-zero before 2050 and half of them cover the full scope of emissions according to a benchmark from The Climate 100+, a 575 investor initiative with $54 trillion assets under management.

• Timeline: net-zero targets should be no later than 2050. Your stakeholders also will appreciate that you set interim targets 2025, 2030 to review your progress. Of course, companies that can afford to go faster should do, although without compromising the level of abatement in their targets.

• Strategy: validating your target against the Science-Based Target Initiative (SBTi) criteria will provide confidence to your stakeholders that your targets are aligned with the latest climate science. The other option is to disclose transparently the methodology your company has used to calculate its targets.

According to Dexter Galvin, Global Director of CDP Supply Chain, there are six benefits of setting a science-based target. Brand reputation, investor confidence, Resilience against regulation, Increased innovation, Bottom line savings and Competitive edge,

3 – Create programs and internal capabilities

Achieving a net-zero target will require building a carbon emissions program and the capabilities to implement them.

Carbon Emission Programs

As explained in the bathtub analogy, your company will need to reduce emissions and increase carbon removals.

To avoid or reduce emissions, the company can invest in energy efficiency or power the business with renewable energy. Besides, companies can contribute to fighting climate change by developing low-carbon products, services and low-carbon technologies that reduce their customers’ carbon emissions.

The company can also decide to invest in low-carbon projects inside of its value chain, also called insetting or outside of its value chain by using carbon offsets.

To increase carbon removals, the company must promote carbon removals projects, also called carbon sinks, within its operations or in its value chain. Besides, companies can finance carbon sequestration projects outside its value chain. Typical projects are those related to nature-based solutions such as protecting or restoring forests, or soil carbon sequestration.

Besides, projects such as Carbon Capture Sequestration and Utilization (CCSU), Direct Air Carbon Capture and Storage (DACCS) or Bioenergy with Carbon Capture and Storage (BECCS) technology allow to capture and store carbon.

Carbon Emission Capabilities

For both reducing carbon emissions and increase carbon removals, you will need to build internal capabilities.

Your company should create a robust central sustainability team to set the foundations and coordinate the full carbon emission program.

Over time, this central team will train experts embedded in other functions of the company. With this knowledge transfer, functions such as procurement, product design, communications, or investor relations will develop their function sustainability programs aligned with the overarching strategy.

As important as having the right capabilities in the organization is having robust incentives. Incentives for senior leaders who will cascade down emission targets into their organizations.

Also, your company can use instruments such as an internal carbon price to influence investment decisions and internalize externalities. 23% of companies use an internal carbon charge of $27 per metric ton in the EU, while in Asia, it’s $18, according to research done by McKinsey & Company. These prices are still below the $50 to $100 per ton needed by 2030 to achieve the Paris Agreement’s reductions.

4 – Report progress

The last step is Voluntary sharing progress against net-zero targets.

Your company should use existing formal reporting by using an integrated report. The report should be aligned with broader climate-related reporting such as the Taskforce on Climate-Related Financial Disclosures (read TCFD article).

Besides, it could use sustainability reporting platforms such as CDP. These platforms allow your company to gain a competitive advantage by getting ahead of regulatory changes and identifying growing risks. Moreover, it will enable your company to find new opportunities for action that your investors, employees and customers are demanding.

This is the decade of climate action. We have got to get it done. And when we are busy in the office, I remind my colleagues that this is the market that we hoped for

Bill Goldie, director of offsetting at Redshaw Advisors

These four steps are required to be revised continuously and, perfect is the enemy of the good. Start with simple objectives, simplify as much as possible and aim at solving the most material issues first. Aim at improving year after year using feedback from the company’s stakeholders.

Using Carbon Offsets in net-zero targets

Mandatory vs Voluntary Carbon Offset

Companies should reduce their emissions according to the latest science.

The organization should balance out residual emissions that cannot be eliminated with activities that reduce or remove GHG from the atmosphere by using carbon offsets.

There are two types of carbon offsets: compliance offsets and voluntary offsets.

Compliance offsets are those offsets that companies purchase to meet legal obligations such as cap-and-trade schemes (e.g. ETS in Europe)

Voluntary offsets are those offsets that companies purchase at their discretion. They have become a widespread and controversial instrument to fight climate change.

The main concerns are the project’s Additionality, Permanence Double-counting, Leakage and global availability of offsets.

The solution is first to choose offsets that are validated and verified under well-known standards such as Gold Standard or Voluntary Carbon Standard (VCS).

Second, the company should be transparent and publicly communicate the use of offsets.

Finally, choose offsets that invest in programs that empower local communities, improve health and tackle poverty while reducing carbon emissions.

The Voluntary Carbon Offset Market needs to grow by 15 times by 2030 and 100x by 2050 according to Taskforce on Scaling Voluntary Carbon Markets’ (TSVCM) latest report. Besides, prices in 2030 could go from current y $2-10 per ton to $15-90 depending on the scenario. This could create a market of $30-50 billion in 2030.

SBTi and Carbon Offsets

Note that the SBTi currently doesn’t accept the use of offsets as reductions toward the progress of companies’ science-based targets.

Still, they consider offsets as an option for companies wanting to contribute to financing additional emission reductions beyond their science-based target.

The paper Foundations for net-zero target setting in the corporate sector published in September 2020 by SBti, provided the initial conceptual foundations for future guidance clarifying net-zero targets and in particular the role of offsets.

Currently, the SBTi is working on detailed criteria and guidance using a public consultation in early 2021. A final net-zero framework, including target-setting guidance and target validation criteria, will be released on the 28th of October 2021 before COP26. Details of the Net-zero Standard launch event are here.

Conclusions

• Net-Zero emissions companies is one of the fastest-growing business trends.
• The lack of standard approaches puts off organizations who struggle to make their first steps.
• Following a 4-step process, your company can start early the net-zero journey to improve over time.
• Offsetting will play a role in decarbonizing unavoidable emissions.
• The SBTi framework to be published before COP26 will enable companies to set credible net-zero targets and offsets.

We are all responsible for doing what is in our hands to address this climate crisis. I hope this article will bring you some clarity into net-zero companies.

The lack of standards should not stop companies from going from bold ambition to action.

Whether as an individual or as a company, starting a net-zero emissions journey is the best way to help make this world a better place.