Our thinking

Navigating net zero

11 March, 2021

Climate finance champion Mark Carney is usually on the money. But recently he came under fire for claiming that the Canadian asset manager, Brookfield – of which he is the Vice Chair – has achieved net zero status in its portfolio as a result of the renewable investments counterbalancing its fossil fuel investments.

This was widely rejected by experts, who were quick to point out that owning shares in renewable energy suppliers does not mean that you can take the emissions that are avoided through the activities of these companies, set them against the greenhouse gases emitted by the fossil fuel companies you invest in, and call yourself net zero. They’re right, and now, the Institutional Investors Group on Climate Change has released its framework for net zero in the finance sector and suggested that investors should not use even purchased offsets at the portfolio level to achieve emissions reduction targets, a much more stringent approach.

The case of net zero for financial institutions is particularly complex given that their climate impact resides in the equity and other financial instruments they own. But in truth, complexity in the finance sector is repeated in lots of different sectors where progressive businesses are increasingly asking, what does net zero really mean?

It’s a question we have been thinking about and refining for a while, as we help our clients move towards net zero. Despite the growing momentum surrounding net zero, the detail underpinning corporate commitments varies widely in terms of the greenhouse gases and source of emissions included in scope, and the definitions, timeframes, and mitigation strategies used. Some variation may be justified, since there is no one path towards net zero, even within individual sectors, but it’s clear that there is a need for a credible framework to help businesses navigate this space and to harness this momentum in a credible way.

Step forward The Science Based Targets Initiative (SBTi), which has been working towards such a consensus view through their recently released consultation on net zero. As strategic partners to the Net Zero Now initiative, we have been following this with interest. The SBTi is well placed as a credible arbiter of net zero, in terms of both its constituent members and its work at the forefront of translating climate science into meaningful action for businesses via setting science-based targets for emissions reductions.

As with any thorough investigation of this kind, the SBTi starts with a definition of net zero, via two principles:

1. Achieving a scale of value chain emissions reductions consistent with the depth of abatement in pathways that limit warming to 1.5°C with no or low overshoot and;
2. Neutralising the impact of any source of residual emissions that is unfeasible to eliminate by permanently removing an equivalent volume of atmospheric CO₂.

Or, simply put, reducing emissions and removing any residual emissions.

The first component is where the science-based element of net zero becomes evident, through the need to reduce emissions before offsetting. This is consistent with other mitigation hierarchies, the well-known example being ‘reduce, reuse, recycle’, and represents an important development away from some net zero commitments that lean exclusively on offsets.

Helpfully, the SBTi has already created the framework for setting targets to reduce emissions in line with limiting warming to 1.5°C, as per the first objective in the definition. This means that, to reach net zero, a business needs to reduce its emissions by a certain amount – defined either by an annual percentage decrease or by a sector-specific benchmark for what is permissible in a net zero economy – over a period of between 5 and 15 years. It’s interesting to note that there are some subtle differences in the suggested requirements relating to emissions reduction when they are part of a net zero target, in comparison to those required for a standalone science-based target. For example, it is less important to have separate targets for scope 3 emissions when all emissions are neutralised together as part of a net zero commitment, while all businesses need to set targets to reduce scope 3 emissions, regardless of what proportion of total emissions they account for.

Although there are some subtle differences between requirements for emissions reductions as part of net zero compared with standalone emissions reductions, these are largely uncontroversial and the framework defining them is well developed. That is less the case for the second component of reaching net zero: removing the equivalent volume of emissions that remain after the 5-15-year emissions reduction period and beyond.

Part of the challenge stems from the imperfect way that emissions can be offset. There are well-documented issues and complexities surrounding offset permanence, leakage, additionality, scalability and technology maturity. As a result, there is a wide range in quality of offset projects and offset strategies, but it’s something that is important to get right. The SBTi has tackled these problems head-on in its consultation but acknowledges that there are many questions remaining about how to effectively deal with these issues.

Several other things are notable in its approach to emissions removal. Firstly, offsets relying on avoided emissions (such as from energy efficiency and renewable energy projects), as opposed to directly sequestered emissions (such as from afforestation), are implicitly ineligible under its guidance. This contrasts with the recent paper, The Oxford Principles for Net Zero Aligned Carbon Offsetting, which recommends a blended approach but then shifting away from avoided emissions towards sequestered emissions. Secondly, the boundary of emissions that should be removed includes 100% of a business’ supply chain emissions, which is bigger than the boundary of emissions that should be reduced in the first component. Finally, businesses are required to specify which type of removals are used and to differentiate between direct emissions removals and those via contractual instruments such as carbon credits, which must meet social and environmental conformance criteria.

Emissions removal and the criteria for qualifying carbon credits is a complex topic by itself and it seems likely that businesses will see emissions reductions as their priority remit and outsource the challenge of sourcing appropriate credits to offset providers offering net zero compliant products.

This is indicative of the challenging path that SBTi has to tread: ensuring credible and comprehensive criteria that promote ambitious commitments while allowing the framework to be accessible to the widest range of businesses. This is important both in terms of harnessing the momentum around net zero as well as building momentum among those businesses that are currently underrepresented amongst those with net zero targets, such as SMEs.

It’s reassuring to see that the suggested approach proposed by SBTi is consistent with the approach that we at Good Business use for net zero, even if SBTi present it in more complex terms. Condensing the 60+ page document into four principles, net zero involves i) including emissions across the whole value chain, ii) requiring ambitious emissions reductions iii) investing in high-quality offsets, and iv) requiring transparency across all of these stages.

We welcome the developments and look forward to seeing the results of the consultation and its influence on informing more well-developed net zero strategies in the future. Creating the framework for net zero in the corporate sphere is no easy task, but a clear consensus on definition may well be the number one driver of climate action over the next decade.

By Patrick Bapty