Net Zero Emissions: A Core Business Priority

This article is by Nick Molho, the Executive Director of Aldersgate Group, a business group developing policy positions to tackle major environmental challenges in a way that is environmentally effective and can deliver economic benefits. Originally published by CommonWealth Magazine. Used with permission.

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.

Importantly, a credible climate target and strategy requires a company to look beyond just its operational emissions. It is essential for example that the ‘net zero plans’ of consumer-facing businesses (such as advisory businesses and retailers) factor in not only the steps they will take to cut their own direct emissions (such as those connected to office or store use), but also the steps they will take to reduce their clients’ emissions, which is where the biggest reductions in emissions can be achieved.

For other businesses in sectors such as construction and manufacturing, businesses should carefully consider how they can best drive emission reductions across the complex supply chains which they rely on for their supply of commodities and materials.

The commitments made by the major engineering consultancy WSP in the UK are a good example of a genuinely credible climate target and delivery strategy.

WSP has committed to not only reach net zero operational emissions by 2025 but to also halve the embedded carbon in the infrastructure design advice they provide to their clients by 2030. UK construction company Willmott Dixon recently launched its Now or Never Strategy – probably the most ambitious sustainability strategy in the UK construction sector – which commits for all new buildings and major refurbishments to be delivered with net zero carbon emissions by 2040 and for their whole supply chain to achieve net zero operational carbon emissions by that same date.

In the finance sector, Macquarie Asset Management are committed to drive their investment portfolio down to net zero emissions by 2040, by working closely with individual businesses to help them develop business strategies aligned with the 1.5ºC goal in the Paris Agreement.

Getting to net zero emissions: clear policy direction at a domestic and global level is essential

Whilst businesses clearly have a huge role to play in delivering the goals of the Paris Agreement, they will not be in a position to invest at the pace and scale needed without ambitious political commitments at the global level and clear policy direction at the national level. There are a number of reasons for this.

First, a key takeaway from US President Biden’s recent Leaders’ Summit on Climate is that the 2020s is a ‘make-or-break’ decade for global climate policy. Unless significant and urgent infrastructure investments are made in this decade in areas such as low carbon power, buildings, transport and industry, the world economy will not be on a credible pathway to net zero emissions. Unfortunately, early signs aren’t reassuring, with the International Energy Agency’s 2021 Global Energy Outlook highlighting that economic recovery investments made to date are predominantly based on fossil fuels, with the result that 2021 could see the second biggest rise in emissions in history.

As explained above, the investments at stake are significant. The UK, which is required under its sixth carbon budget to cut emissions by 78% by 2035 compared to 1990 levels, is a case in point. Over the next ten years, the UK needs to quadruple its offshore wind capacity, make corresponding investments in the security and flexibility of its power grid, develop all the necessary charging infrastructure to support sales of exclusively zero emission vehicles by 2030 and deliver deep retrofits to make its 28 million homes more energy efficient. The urgency and scale of this infrastructure challenge demands a comprehensive policy plan in all major economies.

Second, a sustainable transition to a net zero emissions economy can only take place if the private sector does most of the heavy lifting, both in terms of the “doing” and the “financing” of the transition. Businesses and financiers will only be able to play their part if there are clear regulations, fiscal incentives and market mechanisms in place that create a stable investment environment and one where predictable returns can be made.

Third, delivering the rapid rate of emission reductions required by the Paris Agreement will necessitate unprecedented co-ordination between policy measures introduced across different sectors of the economy. Decisions on how to decarbonise power, domestic heat, transport and heavy industry are closely interlinked and will need to be considered as a whole. The same could be said of decisions on negative emissions, land management and agricultural practices.

Fourth, putting countries on track for net zero emissions is also about helping shape future demand and behaviour patterns, another important area for government intervention. For example, the CCC made the point in its recent advice to the UK Government that cutting emissions from transport is not just about replacing petrol and diesel cars with electric vehicles, it is also about reducing the number of individual journeys through better planning, more active and public transport options and a more integrated strategy for transport infrastructure decisions. When it comes to food production, significant emission reductions can be achieved through dietary changes, with the CCC recommending a 20% cut in high carbon and dairy consumption in the UK by 2030.

All in it together: the decade for climate leadership

Climate science demands that the world’s major economies take on a unique investment challenge to cut their emissions at breakneck speed. The 2020s must be the decade where both businesses and the world’s governments show true climate leadership, by not only committing to ambitious climate targets at the COP26 climate summit but by also putting in place tangible plans to turn these aspirations into meaningful investments and new, low-carbon business models.

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(Feature photo by Jason Blackeye on Unsplash)