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How did net zero become such an essential corporate topic?
The urgent call for a net zero future is not just a rallying cry from environmentalists but a strategic imperative rooted in the Paris Agreement's Article 6 and underscored by the IPCC's call to limit global warming to at least below 2 degrees Celsius, ideally to 1.5 degrees Celsius compared to pre-industrial levels.This global consensus has set the stage for countries worldwide to establish net zero targets, thereby mitigating the clearly visible yet still unpredictable impact of climate change on our planet and corporate environments.It is within this context that companies, both large and small across the EU, are feeling the pressure to set their own net zero targets, reflecting a significant shift in how business success is defined in the age of climate awareness.
What does net zero mean for companies?
According to Zero Tracker, an increasing number of companies from the Forbes 2000 list have set net zero targets—rising from 417 in December 2020 to 929, as of the latest count. This significant uptrend not only highlights the growing recognition of net zero emissions commitments as vital for the health of our planet but also aligns with the Paris Agreement's ambitious goal to limit global warming to below 1.5 degrees Celsius.Moreover, this shift towards sustainability is increasingly viewed as a strategic imperative, a trend now gaining traction among smaller companies across the EU as well. Before we discuss the net zero concept and its associated corporate benefits, let’s first define net zero.
A company is considered to have reached net zero when it has drastically reduced its emissions of carbon dioxide (CO2) and other greenhouse gases (GHGs) to the lowest feasible level. The company then compensates for any remaining unavoidable emissions by removing an equivalent amount of GHGs from the atmosphere, achieving a balance between the amount of GHGs emitted and the amount removed.
Why companies are preparing for net zero
Sustainability and ESG considerations are not new topics in company strategies and conversations. Nowadays, emissions reduction and net zero commitments are also vital topics that sustainability managers are discussing with their C-suites, and for good reason.There are specific pressing forces behind the rapidly increasing number of net zero commitments by EU companies. Your company must understand where these forces come from and how dealing with them can unlock significant competitive advantages.Let us take a look at some of these forces:
1. Government Regulations: The EU committed to net zero emissions across Europe by 2050. Increasing legal obligations, like the European Climate Law, compel companies to adopt sustainable practices or face penalties. The EU is committing to net zero emissions across Europe by 2050.
2. Consumer Preferences: A shift towards eco-friendly products and services, with customers willing to pay more for sustainability. 6 in 10 consumers are willing to change their purchasing habits to reduce the negative environmental impact.
3. Improved Key Stakeholder Relations: An increasing number of C-suite members are starting to see the importance of mitigating the risks of climate change and its effect on their operations and supply chains. According to a worldwide survey involving 300 CEOs and CFOs, 86% consider tackling climate risk a medium to high priority.
4. Investor Expectations: Investors prioritise companies with strong ESG practices, seeking transparency and long-term returns. According to a McKinsey report, a strong ESG proposition correlates with higher equity returns and reduced downside risk, leading to better financial performance.
5. Employee Values: Companies with sustainable policies attract and retain employees who value environmental responsibility. According to a study by IBM, over 70% of workers and those looking for work are drawn to environmentally sustainable employers.
Acting on these forces today will give your company the best chance to mitigate the associated risks and turn obstacles into competitive advantages.
The benefits of embarking on a net zero journey
Embarking on a net zero journey is not merely a way to alleviate these forces or a step toward environmental stewardship; it's a strategic business decision that offers many benefits, positioning companies for resilience, market differentiation, and sustainable growth.Here are some of the tangible benefits your company can reap when embarking on a net zero, or simply an emissions reduction journey:
1. Risk Mitigation and Resilience: Net zero strategies enhance a company's resilience against market shifts, regulatory changes, and climate-related risks by reducing dependency on fossil fuels and anticipating future challenges. Energy prices increased by more than 50% this year. Not only are you safeguarding against further increases, but you are also ensuring long-term sustainability for your company due to the long-term cost savings of emissions reductions.
2. Improved Business Reputation: Companies that commit to net zero enhance their brand value and public image, making them more appealing to consumers, partners, and stakeholders. Your company can, therefore, gain competitive advantages that can differentiate it in the market, attract environmentally conscious customers, and position itself as a leader in sustainability.
3. Economic Growth: Companies investing in net zero can experience economic benefits like energy savings, increased efficiency, and the creation of green jobs, which in turn can stimulate broader economic growth.
- Cost Reduction and Efficiency: Transitioning to net zero leads to operational cost savings by reducing waste and improving energy and resource efficiency. This contributes to increased profits and better financial decision-making.
Advantages of being a purpose-driven company
1. A net zero commitment is one of the strongest ways to show stakeholders that your company is purpose-driven. Purpose-driven companies witness higher market share gains and grow on average three times faster than their competitors while achieving higher employee and customer satisfaction. - Deloitte
2. Investment and Financial Opportunities: Net zero commitments attract green investments and funding opportunities, facilitating financial growth and supporting innovation in sustainable products and services.
3. Environmental Sustainability: Achieving net zero contributes to the mitigation of climate change impacts, reduces carbon emissions, and preserves natural resources, leading to a planet that can sustain the industries that depend on its health.
The Strategic Importance Of Using Carbon Credits For Net Zero, Today.
To date, some companies have utilised carbon credits to offset a portion, and in certain cases, a large percentage of their scope 1-3 emissions. In the latter case, some have received scrutiny for their approach. Today, the approach with low reputational and strategic risk is much clearer.It is recommended that your company utilises carbon credits exclusively to neutralise residual emissions alongside emissions reduction activities. Residual emissions are those emissions that are financially or technically not realistic to reduce. The key to reaching net zero with carbon credits, however, is to understand and forecast:
- Which emissions abatement measures could be implemented in order to understand what percentage of emissions will be left unabated?
- The residual emissions estimates for the next year and the short and longer term.
The graphic below depicts the positive impact of using carbon credits on your net zero journey. Note that carbon removal credits will need to become a larger part of your portfolio of carbon credits as time progresses to ensure science-based offsetting in line with the Oxford Principles.
This approach is crucial to enabling your company to reach net zero efficiently. Waiting until all abatable emissions have been avoided and reduced will leave it too late for the positive effect that carbon credits will have on your net zero journey and the goals to stay under 1.5 degrees warming. Prices of carbon credits are predicted to increase sixfold by 2030, and demand is expected to grow by a factor of 15. By incorporating carbon credits in your emission reduction strategies early on, your company will gain cost savings and secure potentially scarce future supply.It is, therefore, clear that your company will not be able to reach net zero without using carbon credits. This ability of carbon credits, being the “net in net zero,” is the most obvious benefit of using carbon credits in your decarbonisation strategy. Let’s take a look at some other benefits of carbon credits.
Benefits Of Using Carbon Credits For Your Company
59% of VCM buyers reported lower gross emissions year-on-year related to reduced emissions and/or renewable energy consumption, compared to 33% of companies not participating in the carbon markets.- Source. Let’s take a look at some of the other main benefits of incorporating carbon credit in your emission reduction strategy:
- Decarbonise 2 times faster than companies not using carbon credits- Sylvera report
Earlier this year, Sylvera performed an analysis that showed companies that purchase carbon credits decarbonise 2x faster than those that don’t. This debunked the myth that organisations buy credits instead of reducing emissions; to the contrary, they do both.
- 1.8 times more likely to decarbonise year on year - Conservation.org. This is mostly due to carbon credits’ ability to take care of residual emissions, which are not feasible to reduce due to unrealistic financial or technical requirements.
- Marketing benefits of Climate Pioneers
The World Economic Forum emphasises that being environmentally sustainable does not hinder financial performance but rather enhances it significantly. These climate pioneers have seen benefits such as stronger market access, more access to investment and lower capital costs, greater consumer acceptance and loyalty, a competitive edge in attracting talent, and the development of new business models.
- Alignment with ESG goals: Many projects go beyond emissions mitigation and fulfil multiple UN sustainability goals. This alignment can be important to companies that include the UN SDGs as a core part of their ESG strategy and reporting.
- Improved ESG scores are associated with an estimated reduction in the cost of capital by 10% - Source
- Over 20,000 companies are active participants in the UN Global Compact (a 25% increase from June 2022), as of August 2023.
- Staying in line with future regulations: The European Green Deal and Climate Law set legally binding targets for the EU to become climate-neutral by 2050, with a goal of reducing greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels.
How can your company achieve net zero?
Simply put, achieving net zero in a company is done via three actions:
- Establish a baseline year and your company's carbon footprint.
2.1 Reduce or avoid direct emissions from a company's operations and supply chain.
2.2 Compensate for emissions that are not feasible to reduce by purchasing and retiring carbon credits.
3. Report by documenting emission reduction initiatives and detailing the use and impact of carbon credits
Conclusion
In this article, we made it clear that net zero has become not only a top sustainability but also a strategic topic for corporate success. Companies are realising that the forces pressing them to act on their emissions can be turned into competitive advantages and that the use of carbon credits can speed up the process of reaping the rewards of environmental stewardship, amongst other benefits.Waiting until some or most of your emissions have been avoided or reduced will leave it too late to make a science-based climate impact. Incorporating carbon credits into your strategies today leads to early mover advantages like securing fixed prices and supply.
If you want to receive an in-depth view and guide on how to approach emissions reductions practically and make a business case, visit the Senken Academy today to gain a deeper and more practical understanding of how to achieve net zero.