“Great, we’ve set a net zero target!” [sigh of relief]
“Okay so… now what?”
There has been a huge uptick in net zero target setting over the last three years, yet only a tiny fraction (4%) are aligned with UN minimum criteria and most organizations are struggling to make real progress on these targets. As the performance gap widens and the risk of falling short on climate ambition becomes more acute, management teams need to be honest with themselves about what they are really trying to optimize for.
Corporate climate ambition can be mapped into three focus areas: reaching targets, mitigating risk and demonstrating true climate leadership. These areas look similar at face value but may lead your organization to different outcomes. Which outcome does your board actually want?
Reach for your targets
A defined, measurable target is easy to understand. You know if you’re on track and how far away the finish line is. And it might even save the planet, if we’re lucky (more on that later). But doing the bare minimum to reach a target also creates risk.
Due to evolving climate science, in 2019 the Science-Based Targets initiative (SBTi) changed its guidance to no longer accept 2°C targets, forcing companies to increase their level of ambition to stay relevant. In 2021 this guidance changed again to no longer accept well-below 2°C targets. And in 2022 GHG accounting guidelines changed yet again to no longer permit the use of green gas certificates, forcing many companies to pivot from market-based instruments toward much more ambitious and capital-intensive electrification projects in order to stay on track for their targets.
What could change next? Current guidance encourages location-based Scope 2 accounting rather than market-based: how much of your company’s net zero progress would be wiped out if you could no longer use renewable grid electricity? If your success criteria hinges on rules that may soon change, expect a bumpy ride to net zero.
Another risk is that management teams are not yet considering the full impact of business strategy on reaching their net zero targets. If you are planning to expand into a new region with lower labor cost, what is the carbon intensity of that region’s power grid, now and in 2050? If you are planning to source a new product from outside Europe with lower materials cost, how does that product’s emission factor compare to its alternatives and how much will costs rise due to new CBAM tariffs? Have you quantified how much this will hold back progress toward your targets?
Finally, the intention of science-based targets is that private sectors do their fair share to ensure warming stays within 1.5°C so we avoid the worst impacts of climate change. But what if this fair share isn’t enough? It’s no question the SBTi has been a huge benefit for corporate climate ambition with clear standards for why and how to set credible GHG reduction targets. But there’s an elephant in the science lab that we need to acknowledge. If all companies in all sectors fully comply with SBTi guidance we can expect a median outcome of 1.5°C of warming, which means there is only a 50% chance that warming stays within this threshold. And this assumes the climate models are correct; recent extreme weather events suggest we may have underestimated how rapidly the climate is now changing.
Despite the clear pathway leading to your targets there can be hidden risks along the way, and the uncomfortable truth that even reaching these targets may not prevent the worst impacts of climate change. When prioritizing targets be sure to accurately forecast the different emission scenarios that could result from future business decisions (ESG or otherwise) and map these scenarios against the actions and new innovations needed to stay on target. Sagana would be happy to share our expertise with scenario planning if your team needs support.
Mitigate business risk
If the first focus area guides companies toward best practice but exposes them to hidden risks, the next area is more about directly avoiding those risks. And there are many:
- Operating cost: The recent energy price shocks in Europe have eroded margins and left many businesses struggling to survive. When the next shocks eventually come, those who have aggressively adopted energy efficiency and renewables will be insulated while those who have not will be caught out, again. Make sure to consider this when building the business case for your net zero transition, regardless of what targets have been set.
- Legislation: Emission reporting and risk disclosure is quickly becoming less of a carrot and more of a stick. If your board is not yet familiar with SFDR, CBAM, CRCF and other intimidating acronyms now is the time to brush up and think about which of your operations or investments will be most exposed as annual requirements tighten. And be aware corporate headaches can extend beyond mandatory disclosures: New York State has just sued a major global food processor for misleading claims about its (voluntary) net zero target.
- Market share: If your biggest customers have not yet asked what you are doing to reduce their supply chain emissions they will be doing so very soon. Over a third of global market capitalization is now covered by science-based GHG reduction targets, which include targets on supply chain emissions. This is often the most difficult area for companies to make real progress and there are few options aside from choosing suppliers based on the carbon intensity of products or services procured. You want to be ready for this with a lifecycle analysis (LCA) of your specific product or service-level emissions (and ideally comparing favorably to your competitors) but few organizations are this advanced yet. It’s worth preparing now to avoid losing frustrated customers due to a lack of low-carbon procurement options.
- Employees: Research shows the majority of Gen Z and Millennials think that environmental concerns should be prioritized over economic growth, and have stronger negative emotions about this than older generations. They’re also pretty good at Googling and fact checking. To put it bluntly: if your organization isn’t prioritizing ESG you are losing the ability to attract and retain top talent who cares more about the climate than your board does.
- Shareholders: With over USD 57tn of assets under management (more than half of all global market capitalization) the Net Zero Asset Managers Initiative aims to use net zero commitments to mitigate financial risk and maximize long-term valuation. And analysts want details: the climate transition is now the #1 ESG topic mentioned on quarterly earnings calls, with three to four times more questions than any other topic. Proactive companies are seen by investors as better positioned to adapt to market disruptions, physical/transition risks and policy changes than their peers.
This defensive approach is often favored in uncertain macro environments, but it may not project the strong outward ambition you want to be recognized for. Is there another way to achieve this?
Demonstrate true climate leadership
We’ve seen that a focus on risk mitigation can appear lackluster while a focus on target setting can create its own risks and may not even give the climate outcome we all want. But there is an opportunity to address this head on.
“Truth be told, there were no good options available. So, we created our own.” -Patagonia
True climate leadership is about standing out, not fitting in. The outdoor apparel brand Patagonia has long championed sustainability but wanted to do even more to prove that for-profit businesses can be part of the solution rather than part of the problem. So, in 2022 it restructured its ownership to ensure that 100% of the company’s annual profits (c. USD 100m) are donated to protect the environment.
The company’s founder Yvon Chouinard explains that “instead of extracting value from nature and transforming it into wealth, we are using the wealth Patagonia creates to protect the source. We’re making Earth our only shareholder. I am dead serious about saving this planet.”
Patagonia is not alone. After committing to net zero, the software giant Microsoft announced further plans to remove more carbon from the atmosphere than it emits by 2030 and remove all carbon it has emitted since the company’s founding by 2050. To reach this milestone Microsoft is committing USD 1bn in venture capital funding to early-stage climate technologies that solve some of the hardest decarbonization problems such as sustainable aviation fuel, low-carbon steelmaking and direct air capture of CO2.
Instead of following the rules, this kind of leadership writes its own rules to create a vision that did not previously exist. Patagonia, Microsoft and other ‘world’s first’ organizations have not aligned with established standards to score an ESG goal, instead they have done something bold and unique that got them noticed and moved the goalposts entirely. Not all companies can copy this playbook exactly but that’s the point – every company is different and has an opportunity to define its own ‘world’s first’ niche that goes beyond best practice in a beautifully unique way.
The good news is there are now many exciting innovations that cost-effectively decarbonize industrial heat, leverage efficiencies with AI, eliminate plastics, create circularity in your business model and other breakthroughs that give your organization the cutting edge it needs. Sagana’s team has screened thousands of companies and supply chain solutions around the world for these innovations and is excited to share our insights with you.
By clarifying your true intentions you can better optimize for success, whichever pathway that takes you down. And maybe even move some goalposts while you do so.