CommonWealth Magazine | Net zero emissions: a core business priority
By Nick Molho
From CommonWealth Magazine (vol. 723)
Despite the current prevalence of the COVID-19 crisis, tackling climate change and improving our societies’ resilience to its impacts is fast becoming the defining issue of the 21st century. Since the publication of a Special Report from the United Nations’ Intergovernmental Panel on Climate Change (IPCC) in October 2018, there is growing scientific, political and business consensus that the world should seek to prevent an increase in average temperatures of more than 1.5ºC relative to pre-industrial levels. This is the more ambitious of the two goals that were set out in the Paris Agreement and requires the world economy to reach net zero carbon emissions by mid-century.
With the world already 1ºC warmer compared to pre-industrial times, the investment implications of a rapid transition to net zero emissions are huge.
At a global level, the IPCC estimated that around USD 2.4 trillion or roughly 2.5% of global GDP annually would need to be invested in the energy system between 2016 and 2035. Even at a national level, the amounts of investment are significant. The Committee on Climate Change (CCC) – the UK’s independent climate watchdog – estimated for example in its “sixth carbon budget” advice to Government, that putting the UK on track for its 2050 net zero emissions target would require around £50bn of additional annual investment in low carbon infrastructure from 2030 onwards.
Businesses have a key role to play
The urgency of the challenge facing the world economy and the levels of investment involved are such that businesses and private investors will need to play a very active role in the transition to net zero emissions and provide a large majority of the funding to support the transition.
Here, there is some good news. Since 2018 and the publication of the IPCC’s report calling for limiting warming to 1.5ºC, there has been a significant increase in the number of businesses taking the threat of climate change seriously, an issue that is particularly acute for businesses such as food retailers or manufacturers that rely on complex global supply chains. Board level discussions are also increasingly focusing on the potential innovation, competitive advantage and export opportunities of being an early mover in the transition to a net zero emissions economy.
Climate targets: an increasing imperative for businesses but more standardisation is needed
The demonstration of this shift in business attitude is well exemplified by looking at the increase in the number of businesses having taken on ambitious climate targets over the last three years. What has been particularly interesting is that not only has the number of businesses taking on net zero / carbon neutrality or science-based targets grown, but the diversity of business sectors taking on these targets has grown as well. For example, following the example set by pioneering businesses in sectors such as electricity (Orsted), retail (IKEA) and ICT (BT, Sky), we have seen targets being set by companies in sector such as construction, finance, energy, cement, steel, food and now even big oil with Shell and BP both taking on net zero targets.
Clearly, the quality of targets varies significantly from one company and sector to another and there is a pressing need to streamline definitions of what “net zero emissions” or “climate neutrality” targets actually mean in practice. The more science-based and transparent these targets are, the more credible they are. Whilst a degree of emission offsets (e.g., investment in tree planting) is likely to be needed for some businesses as they transition to new business models, climate science requires that an increasingly significant part of emission reductions must come directly from a change in business operations if they are to genuinely contribute to climate change abatement efforts.
Whether a climate target is credible also depends on the quality of a company’s strategy or delivery plan to get to zero or net zero emissions. Here again, the quality of strategies really differs from one business and one sector to another. Providing clearer definitions of what credible net zero emission delivery plans should look like is an urgent area for progress.
Amongst the best in class, net zero emission targets announced by companies and investors such as WSP, Willmott Dixon, Cemex, Siemens, Scottish Power, Legal and General Investment Management and Lloyds Bank come across as credible because they come with a range of actions broken down over short-term, medium-term and long-term horizons. Importantly, many of them are clear about the actions they will take in the near term but also honest about priority areas for innovation in order to progress areas that are currently uncertain.