Net Zero, Not Zero

In most arenas, whether its corporate prioritization or everyday decision-making, focus yields progress. As motivational speaker Zig Ziglar once famously remarked:

Lack of direction, not lack of time, is the problem. We all have twenty-four hour days.

At a moment in history when the clock is ticking on the urgent need for climate action, it’s worth re-interrogating the question: what are governments and companies really focused on at the moment in terms of sustainability? Is it emissions reduction and net zero targets? Or is it more complex than that?

The answer, as you’ll already likely suspect, is mixed.

The Current State of Net Zero

This week, a new report from Net Zero Tracker, a research coalition connected to Oxford University, published a study looking at net zero trends and progress.

On the positive side, net zero commitments have increased considerably around the world in recent years, particularly among corporates, where net zero targets have more than doubled in the past two years. 90% of the global economy is now aligned to a net zero commitment, including 149 countries, 252 cities, and 46% of the world’s 2,000 largest companies.

As the study authors write, when it comes to market participants aligning around and making net zero commitments:

there is nowhere to hide.

The net zero peer pressure and reputational risk is simply too great to ignore.

Moreover, thanks to smart, adaptive policy-making (coupled with Vladimir Putin’s humanitarian disaster of a foreign policy), net zero is looking more and more like an inevitable reality in the EU. For the first time ever this past month, wind and solar energy generated more electricity in Europe than fossil fuels. That’s a great trend.

And yet, there remain plenty of obstacles along society’s path to net zero.

First, researchers find only limited signs of improvement in the robustness of subnational and corporate net zero strategies. We’re committing to net zero targets, but seeing them through to real economic and operational decarbonization is another task entirely.

Second, despite having net zero pledges, no major oil-producing countries (including the United States) or companies have committed to actually phasing out fossil fuels. From a physics (or math) perspective, its hard to get to zero when you keep adding emissions to your total count.

Third, most organizations still haven’t embraced net zero Scope 3 GHG. Only 37% of corporate net zero targets fully cover Scope 3 emissions.

Fourth, there’s considerable industry-level variance in net zero adherence. While 71% of power generation companies and 60% of hospitality providers have set net zero targets, only 38% percent of infrastructure organizations and 39% of retailers have made similar commitments. In several key emitting sectors like transportation, materials, and manufacturing, net zero targets have only been adopted by around half or the world’s largest companies.

There’s net zero momentum, but still plenty of headwinds to overcome.

Corporate Net Zero Trends in 2023

From a macro perspective, business conditions haven’t been the most favorable toward investment this year. Budgets have contracted, risk appetite is down, and a lot of organizations are understandably more focused on ‘staying the course’ rather than embracing innovation or big changes.

Looking at net zero trends among members of industry coalition ClimateAction100+, we can see that companies’ 2050 net zero ambitions and targets are steadily increasing.

By comparison, when it comes to “medium-term targets” between 2025-2036, we can see most companies fall into the “partial” target category, with a similar distribution in terms of “decarbonisation strategy.” This is consistent with our observations and client work as well: a good percentage of companies have set (or are in the process of setting) science-based targets and net zero goals, but most are still working through their operation implementation and nearer-term targets.

Similarly, TCFD disclosure also continues to gain widespread industry traction and momentum, far greater than the percentage of companies who are actively aligning capital investment with climate risks and opportunities:

Most focus companies have so far failed to follow up on their commitments. Many have not yet disclosed the practical actions on how they intend to achieve their targets, with only roughly half of the focus companies (53% or 84 companies) having a decarbonisation strategy in place to reduce their GHG emissions… and only 10% of companies providing disclosures that commit to fully align their CAPEX plans with their GHG targets or the Paris Agreement

Predictions and Expectations for Corporate Net Zero in 2024

From our vantage point, there are three key levers for corporate net zero strategy, adoption, and execution for the remainder of this year and into 2024:

1. Budgets - What’s the payback on net zero vs. the upfront investment? Is net zero a cost center or profit center? And on what timeline(s)?
2. Regulatory prioritization - Where does net zero fall among a company’s top sustainability, ESG, and overall corporate priorities?
3. Procurement and value chain influence - How important will net zero commitments and SBTi adherence become in sustainable procurement influence and decision-making?

Again, in each of these areas, the dynamics are complex.

The budget conversation is a good example, and comes up often in discussions with CFOs. At the end of the day, energy costs are costs — are there sustainable opportunities to reduce them for a double-bottom-line win? What are the upfront costs for new solar, wind, green hydrogen, or carbon capture projects relative to the benefits and long-term cost savings?

Increasingly, finance leaders are seeing sustainability investments as fundamentally good investments. Nonetheless, in a business environment where budgets are tight, only the most compelling sustainability and energy savings projects may get prioritized.

Prioritization is also an acute theme when it comes to sustainability and ESG-oriented regulatory compliance. Beyond the major EU CSRD directive, countries ranging from Australia and Canada to Chile and India are introducing new ESG and sustainability-linked regulatory and investor disclosure laws.

As a business, it’s usually good practice (or shall we say “governance”) to obey the law. Laws and regulations are a forcing function for corporate decisions and prioritization. If sustainability teams need to invest most of their time and energy in keeping up with ever-evolving compliance and regulatory reporting requirements, how much bandwidth remains for net zero implementation?

Given the global nature of supply chains, a new sustainability law in one country can impact companies all around the world. When LVMH or Nestle needs to report under CSRD, you can be sure their suppliers around the globe are being pulled into that data collection and disclosure process by proxy. We already see it happening.

This raises our third and final point on corporate net zero prioritization. Whereas budget and regulatory trends seem like consistent obstacles to net zero attainment, procurement pressure may to some extent have a counterbalancing effect. We’re already seeing the world’s largest companies engaging their Tier 1 and strategic suppliers around net zero and decarbonization. If net zero looks like a sunk cost, CFOs may not prioritize it, but if a net zero target all of a sudden de-risks or unlocks access to revenue, sustainability all of a sudden looks like a very strategic driver of business value and success. It’s all in the framing and perspective.

Keeping Net Zero in Perspective

Ultimately, one way or another, net zero is an inevitability. Eventually (hopefully sooner rather than later), physics is going to force all of our hands.

In the meantime though, net zero is an important, complex, but undeniably strategic element of government, policymaking, and corporate strategy. It’s important to have clear, empowered leaders in the global net zero conversation, but it’s also equally important to see companies and governments committed to keeping pace. We also need even better resources, knowledge, and toolkits on how to effectively implement net zero in different industries and organizations.

In all of this, one additional point to keep in mind is your business or organization doesn't have to publicly disclose a net zero or science-based target, undergo a formal review, or join a particular industry association in order to set or to work toward decarbonization. While certain standards like SBTi or Net Zero Benchmark lend 3rd party credibility to net zero targets, ultimately what really defines a net zero target is your government or organization’s ability to achieve it.

Relatedly, if your company (or city, etc.) doesn't have high confidence in a net zero target, or is earlier in its sustainability roadmap, it might make more sense to work toward a private, short-term 'informal target' or scenario planning exercise until you have higher confidence in the progress your organization can make year-over-year, in order to go public later on and formally commit to emissions reduction goals.

Overall, net zero remains a major opportunity lever and pathway to transform our economy and society in a just, sustainable way. Here’s hoping the momentum continues, and smart problem-solving, ingenuity, holistic thinking, and narratives help accelerate our progress further.

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