The Role of Net-Zero in Corporate Strategy
by: David Prieto | Director, Climate Finance & Strategy | August 25, 2021
The Paris Agreement signed in 2015 ushered in a new era in corporate strategy. This new era is one where companies and investors play a fundamental role in addressing the key issue of our time – climate change. In our lifetime, the corporate sector has increasingly experienced the impact of climate risk – both physical and transitional. High-profile examples include the bankruptcy of PG&E after the 2018 wildfire season in California and the Volkswagen diesel emissions scandal from 2015. Nonetheless, corporate leaders realize that climate change is also the biggest wealth-creating opportunity in human history. It is, therefore, no surprise that investors are rewarding low-carbon business models with record valuations, such as Tesla and Beyond Meat.
In the absence of broad climate policy and regulation, corporate leaders have to navigate a growing landscape of voluntary initiatives designed to address many environmental, social, and governance (ESG) issues, including climate change. The rapid pace of change in ESG can be daunting to navigate for corporate leaders. Therefore, it is important to understand which voluntary initiatives best align with a company´s strategy and business model, from campaigns and commitments to methodologies, registries, and standards. This blog will discuss the latest development in ESG – Net-Zero – and why it plays a fundamental role in any corporate strategy.
The Science Behind Net-Zero
The goal of the Paris Agreement is to limit the rise in mean global temperature by 1.5°C above pre-industrial levels to avoid the most severe impacts of climate change. To succeed, global emissions of greenhouse gases (GHG) need to halve by 2030 and reach net-zero by 2050, according to a landmark study published in 2018 by the Intergovernmental Panel on Climate Change (IPCC). Achieving net-zero emissions will be a monumental challenge – human activities generate 55 GT of carbon dioxide (CO2) per year, resulting in a total carbon budget of 580 GT of CO2 before exceeding the 1.5°C threshold.
Establishing a Net-Zero Target
Net-zero is a state in time where corporates meet two conditions, according to the Science Based Targets initiative (SBTi). First, GHG emissions from a corporate value chain are abated at a rate consistent with a 1.5°C pathway. Second, residual emissions that cannot be eliminated for technical and economic reasons are compensated by an equivalent amount of carbon dioxide removals. During the transition to net-zero, a science-based target (SBT) informs whether the current rate of emissions abatement is aligned to a 1.5°C pathway. Establishing a net-zero target (NZT) is a commitment to the deep decarbonization of a business model and the resulting future emissions rate.
Deep decarbonization is complex work that requires a diverse set of policy, legal, technology, and market solutions that remain in development as outlined by various net-zero roadmaps, such as the IEA Net-Zero by 2050 and BNEF New Energy Outlook. Optional compensation measures play a key role during the transition to net-zero by neutralizing unabated emissions as the global economy aligns with climate science.
Graphical representation of a net-zero target, an interim science-based target, and optional
compensation alongside the taxonomy of climate mitigation tactics, Science Based Targets Initiative
Different Pathways to Net-Zero
The journey to net-zero is critical to corporate strategy because it entails a fundamental transformation across all sectors of the global economy for business models to operate in balance with the planet. Unfortunately, not all net-zero transformations are created equal, as the emissions profile of value chains vary significantly by sector. In particular, so-called hard-to-abate sectors, such as plastics and aviation, will take longer to decarbonize in the absence of low-carbon alternatives. Nonetheless, the complexity of business model decarbonization has not deterred the private sector that now has approved science-based targets encompassing 20% of total global market capitalization.
Sustainability Solutions for Net-Zero
Since our founding, ClimeCo has been a leading transformation partner to companies, investors, and governments pursuing a low-carbon future. As a vertically integrated sustainability solutions provider, we have enabled our clients to go beyond business as usual. By developing frontier technology-based and nature-based carbon reduction projects, transacting voluntary and compulsory environmental credits, and advising on climate risk and disclosure, our team is dedicated to implementing decarbonization pathways tailored to our clients’ sector, business model, and balance sheet.
Cypress trees planted at a Climate Forward reforestation project in Louisiana, Restore the Earth Foundation
Commencing the Net-Zero Journey
From carbon neutral to net-zero and climate positive, any corporate climate strategy must follow a mitigation hierarchy. A mitigation hierarchy will inform whether a mitigation strategy effectively neutralizes a company’s impact on the climate, mitigating climate risk on the company, and incentivizing low-carbon capital allocation. At ClimeCo, our team aligns to the Blueprint for Corporate Action on Climate and Nature and recommends four priority interventions:
1. Account for and disclose emissions using internationally recognized frameworks, such as the GHG Protocol, CDP, and Task Force on Climate-related Financial Disclosure (TCFD),
2. Reduce value-chain emissions in line with a science-based target pathway, as defined by the Science Based Targets initiative (SBTi),
3. Quantify a financial commitment by pricing remaining emissions through an internal carbon price, and
4. Invest the financial commitment for impact to climate and nature to further emission reductions, unlock climate solutions, and source high-quality carbon credits.
Net-Zero in a COVID World
The IPCC released the first part of the Sixth Assessment Report (AR6) this month and the science is clear – it is in our hands to limit the rise in global temperatures to 1.5°C. Global emissions must fall 7.6% per year between 2020 and 2030, roughly the same drop in emissions from the COVID-19 lockdowns. As a result, extreme weather and the failure of climate action have continued to dominate the long-term risks by likelihood among members of the World Economic Forum. However, COVID-19 has accelerated stakeholder pressure to transition to a low-carbon growth path that could deliver a direct economic gain of US $26 trillion through 2030, compared to business-as-usual. In his annual letter, BlackRock’s Larry Fink, succinctly points this out: “given how central the energy transition will be to every company’s growth prospects, we are asking companies to disclose a plan for how their business model will be compatible with a net-zero economy – that is, […] how this plan is incorporated into your long-term strategy and reviewed by your board of directors.” For leaders integrating net-zero into their corporate strategy, ClimeCo is ready to help.
About the Author
David Prieto serves as Director for Climate Finance & Strategy at ClimeCo, where he advises clients navigating the risks and opportunities associated with an increasingly changing climate. David holds a Master of Science from Columbia University and Bachelor of Arts from the University of London.