Coming out of 2021, the mantra for business practices regarding climate change was: Charge to Net Zero!
Not only were companies pledging their allegiance to this goal, but some began making business choices to match the commitment.
Financial institutions, recognizing their influence for change, began to making investment choices that encouraged a net-zero mindset.
This trend that began in 2021, under the blanket of a pandemic and increasing intensity of an environmental crisis, promises to continue strong for 2022.
In his article, “The State of Net Zero,” published in the 15th Annual GreenBiz State of Green Business report, Rich Mattison president of S&P Global Sustainable1, applauds efforts in making net zero a goal.
“When we think of net zero, in terms of target setting — we are doing pretty well,” he commented in a recent GreenBiz webcast on the subject. About 2000 S&P companies have already signed up to make this a reality.
S&P Global Platts Analytics found that approximately 80% of today’s (worldwide) direct CO2 emissions from energy combustion are covered by some long-term net-zero decarbonization target.
However, the devil is in the details.
Mattison cautions, “when we dug into the details, data from the Carbon Disclosure Project (CDP) and our own data, we found that only a quarter of the companies have actually made plans for hitting that net zero mark.”
In fact, only 30 of the largest companies in the largest global markets have set a viable net-zero plan.
Near-Sight Needed
Normally companies report business trends and goals in a more short-term context. Net-zero goals are different.
Companies are committing for 2050, but there are very few details for accomplishing that goal heading into the 2025 market that can be analyzed.
“This is very unusual,” Mattison says. Normally, companies are more near-sighted. In this instance, there is a big information gap.
“We’ve plotted the end mark, but we have no clear roadmap to get there,” he says.
This will have to change. Companies are going to have to decide what are the near-term commitments that they are willing and able to sign up for, he continues.
Problem Area: Supply Chains
S&P Global Trucost data shows a general trend of declining Scope 1 and 2 emissions. In fact, Scope 1 emissions (the direct emissions from owned or controlled sources) and Scope 2 emissions (indirect emissions from the generation of purchased electricity, steam, heating and cooling) fell 13% among S&P Global 1200 companies between 2016 and 2020.
However, emissions that are not directly controlled by the company, also known as Scope 3 emissions, account for 84% of total CO2 output.
Mattison writes, “The lack of transparency and accountability for emissions created in corporate supply chains is a significant concern when assessing the achievability of net zero commitments and completeness of reporting these targets.”
Don’t Depend on Carbon Markets
Although carbon markets, an emission trading mechanism, are often thrown into the mix as a way for a company to achieve their net-zero goals, these cannot be a primary response.
“These are not a viable approach,” says Mattison in the GreenBiz webcast. “It is expected that companies will do the most they can BEFORE they partner with carbon markets.”
In fact, investors will not look kindly upon businesses that tout carbon markets as their main tool towards reaching zero emissions. Mattison cautions that companies should understand that the trajectory that it is on to reach net zero will be closely scrutinized by investors, customers, and regulators.
Mandatory Disclosure
Although net-zero commitments are voluntary, the reporting of a company’s financial disclosure towards meeting carbon neutrality may soon not be.
The European Union set the stage with the release of its Sustainable Finance Action Plan in 2018. United States regulators are developing a slew of climate-related disclosure rules.
And, according to Mattison: “Starting in April 2022, the Task Force on Climate-related Financial Disclosures (TCFD) will become mandatory for more than 1,300 of the largest UK-registered companies and financial institutions. Switzerland has said it would make TCFD reporting binding, and while the EU has not officially adopted the TCFD for its 27 member states, it is undertaking a reform of its Non-Financial Reporting Directive.”
If the above paragraph is any indication, TCFD reporting has become widely accepted. Almost 3,000 companies backed the TCFD framework in 2021, compared to just 280 in 2017. However, supporting the TCFD is the not the same as making climate-related disclosures.
On this last front, there is still a need for progress.
Although disclosure increased at a much faster pace between 2019 and 2020 than in previous years (9% between 2019 and 2020 compared to 4% growth between 2018 and 2019), only one in three of the companies reviewed disclosed climate-related information aligned with the TCFD recommendations.
Carbon Pricing
Economists see carbon pricing — where governments charge emitters for each ton of carbon emissions emitted — as an important incentive to decarbonization. To date, this has been a largely untapped resource.
That may change and companies should be prepared.
According to S&P Global Trucost data, major companies will face $256 billion in carbon pricing costs by 2025. This represents 10% of earnings.
S&P suggests that companies set internal carbon prices, or assigning a cost to their own greenhouse gas emissions, so that this price can be used to offset future risks from climate change when making business or investment decisions.
Some companies have done this already. Figures from the CDP show that 43% of S&P Global 1200 companies have set an internal carbon price. Another 24% have indicated they intend to do so in the next two years, while almost a third have no plans to do so.
More Progress Needed
In the GreenBiz report, Mattison writes: “S&P Global Trucost data shows only 21 percent of S&P Global 1200 companies are currently in line with the 1.5 degrees Celsius target, while 38 percent are on track for over 5 degrees Celsius of warming. In all, major global companies are 65 percent short of the reductions needed to attain the 1.5 degrees Celsius goal recommended by scientists.”
The circumstances that call for a definitive net-zero action plan cannot be ignored. Not only is humanity clamoring for change, but the economics that affect businesses worldwide is driving the movement.
According to S&P Global Trucost data, climate change could have huge financial costs for corporations that don’t act now. Mattison writes, “Almost 80 percent of the S&P Global 1200, which includes the world’s largest companies, will be exposed to moderate-to-high physical risks from climate change by 2050.”
Joel Makower, chairman and co-founder of GreenBiz, put it this way in his forward of the State of Green Business 2022 report: “the perils and the promise — suggest that business — and, indeed, humankind — is undergoing an epochal transition…Those who view tomorrow’s world as a continuation of today’s are increasingly having those assumptions challenged…Nearly everything, it seems, must be reinvented if we are to prosper into the future, indefinitely and for all.”
Net-Zero is a very present part of that future.
