CAPEX Management that Supports Net Zero Emission Targets

Written by CEO, Richard Frykberg .

Visionary corporate leaders are taking climate action to achieve net zero emission targets and limit global warming to 1.5 degrees Celsius. The identification, definition, selection and execution of projects to deliver on these commitments requires an effective capital expenditure and project portfolio management solution .

The United Nations “Race To Zero” is a global campaign to rally leadership and support from businesses, cities, regions, and investors for a healthy, resilient, zero carbon recovery that prevents future threats, creates decent jobs, and unlocks inclusive, sustainable growth. In this article we refer to the Science Based Targets initiative (SBTi) organization that drives ambitious climate action in the private sector by enabling organizations to set science-based emissions reduction targets. Most companies will require deep decarbonization of 90-95% to reach net zero emission targets under the Standard.

Sustainability and Net Zero Emission

What are Greenhouse Gas Emissions?

A greenhouse gas is a gas that absorbs and emits radiant energy causing the greenhouse effect. The primary greenhouse gases in Earth’s atmosphere are water vapor (H2O), carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), ozone (O3), chlorofluorocarbons (CFCs), Hydrofluorocarbons (HFCs) and Sulfur hexafluoride (SF6).

A company is only considered to have reached net zero emission targets when it has achieved its long-term science-based objective for greenhouse gas emission reduction. Most companies are required to have long-term targets with net zero emission reductions of at least 90-95% by 2050. At that point, a company must use carbon removals to neutralize any limited emissions that cannot yet be eliminated.

What the the Business Benefits of Net Zero Emission?

At current greenhouse gas emission rates, temperatures could increase by 2°C (3.6 °F), which the United Nations’ Intergovernmental Panel on Climate Change (IPCC) says is the upper limit to avoid “dangerous” levels, by 2050.

In addition to saving our planet, companies report that adopting a science-based net zero emission target:

1. Boosts profitability.
2. Improves investor confidence.
3. Drives innovation.
4. Reduces regulatory uncertainty.
5. Strengthens brand reputation.

Companies committed to the Science Based Targets initiative are demonstrating that creating a climate-secure world goes hand-in-hand with successful business operations.

Which Emissions to Reduce?

The Greenhouse Gas Protocol categorizes direct and indirect emissions into three broad scopes:

• Scope 1: Direct greenhouse gas emissions occur from sources that are owned or controlled by the company. For example, emissions from combustion in owned or controlled boilers, furnaces, vehicles, etc.; emissions from chemical production in owned or controlled process equipment.
• Scope 2: Indirect greenhouse gas emissions from consumption of purchased electricity, heat or steam.
• Scope 3: Other indirect emissions, such as the extraction and production of purchased materials and fuels, transport-related activities in vehicles not owned or controlled by the reporting entity, electricity-related activities (e.g. T&D losses) not covered in Scope 2, outsourced activities, waste disposal, etc. Scope 3 emissions relate to both upstream activities (organizational inputs) and downstream activities (including distribution and end-use of outputs).

Who Validates Net Zero Emission Targets?

The SBTi’s Net-Zero Standard provides the guidance and tools companies need to set science-based net zero emission targets. The process outlined is as follows:

• COMMIT – Submit a letter establishing your intent to set a science-based target
• DEVELOP – Work on an emissions reduction target in line with the SBTi’s criteria
• SUBMIT – Present your target to the SBTi for official validation
• COMMUNICATE – Announce your target and inform your stakeholders
• DISCLOSE – Report company-wide emissions and progress against targets on an annual basis

How to Achieve your Net Zero Emission Target

Methods organizations can adopt to achieve targets are:

1. Absolute Contraction Approach – Companies reduce absolute emissions by an amount consistent with a mitigation pathway. The minimum reduction is calculated as an overall amount (e.g., 90% overall for the cross-sector pathway).
2. Physical Intensity Convergence – All companies in a sector converge to a shared emissions intensity in 2050. Recommended for companies in heavy-emitting sectors, or companies with a significant proportion of emissions attributed to heavy-emitting sectors.
3. Renewable Electricity – Using this method, companies set targets to actively procure at least 80% renewable electricity by 2025 and 100% renewable electricity by 2030.
4. Economic Intensity – Companies reduce economic emissions intensity (e.g., tCO2/unit of value added) by an amount consistent with limiting warming to at least 1.5°C. The minimum reduction is calculated as an overall 97% reduction.
5. Physical Intensity Contraction – Companies define their own emissions intensity metric and set targets to reduce emissions intensity by an amount consistent with limiting warming to 1.5°C for long-term targets. The minimum reduction is calculated as an overall 97% reduction.

When to Achieve Reductions

Companies adopting the Net-Zero Standard are required to set both near-term and long-term science-based targets. This means making rapid emissions cuts now, halving emissions by 2030. By 2050, organizations must produce close to zero emissions and will neutralize any residual emissions that are not possible to eliminate.

Learn how your Capital Expenditure Management System can help.

Strategic ESG Capital Projects

An organization should explicitly set-out it’s net zero emission strategic objectives and every related project should be consistently scored and assessed in relation to the degree of strategic alignment, benefits delivered, implementation risks, costs and resource requirements. The objective is to maximize Environment Social and Governance outcomes most effectively and efficiently.

Other Strategic Capital Projects

Where projects have other (innovation, growth or saving) strategic focusses, the impact on the organizational Environment Social and Governance objectives should nevertheless still be assessed and weighted appropriately.

Sustenance Capital Projects

The ongoing replacement of capital items (including buildings, plant and equipment) should always consider the energy efficiency and environmental impact of replacements. For example, a diesel forklift could be replaced with an electric forklift for both cost saving and environmental benefits.

Offsetting Carbon Credits

Investments in carbon offsets need appropriate classification, scoring and ranking to ensure that offsets are high quality and cost effective. In Australia, the Clean Energy regulator is a Government body responsible for accelerating carbon abatement for Australia through the administration of the National Greenhouse and Energy Reporting scheme, Renewable Energy Target and the Emissions Reduction Fund. It is essential that all offset initiatives are reliably measured and assessed by the regulator and that intended outcomes are considered together with costs and risks to optimize the project selection .

Alternate Project Procurement

To comply with indirect supply chain emissions targets, the selection of suppliers, products and services should always consider the emissions impact of alternatives. For example, local supplies should take preference over supplies requiring high transportation overhead. Suppliers with commitment to science-based emissions targets should be preferred over those that don’t.

Achieving CAPEX Net Zero Emission Targets

Achieving Net zero emission targets are critical to a sustainable future. Your capital expenditure and project portfolio management system should support the definition, selection of execution of projects that factor in Environmental Social and Governance outcomes.

IQX CAPEX provides a flexible framework for ranking of capital projects incorporating ESG outcomes as an explicit scoring dimension. By simultaneously factoring in urgency, cost, risk and resource commitments, both the effectiveness and efficiency of investments is ensured.

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