Navigating the Future: The Crucial Significance of Implementing a Net Zero Strategy for Businesses

As countries pledge their net zero targets, businesses must gear up for changes in their day-to-day operations to keep up with competitors

In the ever-evolving realm of business, a barrage of terms such as ESG, net zero, carbon neutral, low carbon transition, and decarbonization has taken center stage. Delving into the intricacies of these concepts and grasping their significance for businesses is not just a necessity but a pathway to unlocking superior performance. Let's embark on a journey to unravel the secrets behind the word “Net Zero” and discover how it can elevate the game for companies. Net zero refers to the reduction of greenhouse gas emissions to near-zero levels, with any remaining emissions offset by absorption through natural processes like oceans and forests. The goal is crucial to limit global temperature increases to 1.5°C above pre-industrial levels, as stipulated in the Paris Agreement. The IPCC concluded the need for net zero CO2 by 2050 to remain consistent with 1.5C. While 'net zero' and 'carbon neutral' are used interchangeably, they differ; 'carbon neutral' often involves offsetting existing emissions, while 'net zero' prioritizes emission reduction, using offsets as a last resort. All industries—not just the energy sector—must achieve net zero to avoid a permanently warmer planet.[1]

As countries have updated their nationally determined contributions (NDCs) that outlines their plans for reducing greenhouse gas emissions and enhancing resilience to climate change impacts, these countries have taken it upon themselves to integrate decarbonisation in their policies and legal frameworks. As a result, businesses operating in these countries must abide by the nation’s rules and regulations pertaining to decarbonization thereby making net zero strategies important to implement.

Global Imperative: Understanding the Evolution and Urgency of Net Zero in the Post-Paris Agreement Era

At the global stage Net Zero came about through the Paris Agreement, a binding international treaty on climate change, which was adopted by 196 Parties at COP21 in Paris in 2015. It aims to limit the global average temperature increase to well below 2°C and strives for 1.5°C above pre-industrial levels. Urgency has grown due to the risks associated with crossing the 1.5°C threshold, as identified by the IPCC. To achieve this goal, greenhouse gas emissions must peak by 2025 and decline 43% by 2030. The agreement is significant as it unites all nations in a binding commitment to combat climate change and adapt to its impacts.[5]

Countries outline their actions in Nationally Determined Contributions (NDCs) to reduce greenhouse gas emissions and enhance resilience, aligning with the Paris Agreement goals. Post-Paris Agreement era has spurred low-carbon solutions, creating markets and fostering carbon neutrality targets globally. A growing coalition, including major emitters, commits to net-zero emissions, with over 140 countries, 9,000 companies, 1,000 cities, 1,000 educational institutions, and 600 financial institutions pledging immediate, rigorous actions to cut global emissions by half by 2030 in the Race to Zero. Countries, including the biggest polluters – China, the United States, India, and the European Union – have set a net-zero target, covering about 88% of global emissions. The UNFCCC reported that by 2030, zero-carbon solutions could be competitive in sectors representing over 70% of global emissions.[5],[1]

Transitioning to a net-zero world is one of the greatest challenges humankind has faced. It calls for nothing less than a complete transformation of how we produce, consume, and move about. The energy sector is the source of around three-quarters of greenhouse gas emissions today and holds the key to averting the worst effects of climate change. Replacing polluting coal, gas and oil-fired power with energy from renewable sources, such as wind or solar, would dramatically reduce carbon emissions.[1]

Achieving net-zero emissions is more feasible if emissions peak earlier and are lower at that point, reducing reliance on carbon removal. While different countries may reach net zero at different times, the chances of limiting global warming to 1.5 degrees C depend on how soon major emitters achieve net zero. Equity considerations suggest earlier dates for wealthier nations. The timeframe varies for CO2 alone versus all greenhouse gases (GHGs), with some short-lived GHGs potentially exceeding the 1.5 degrees C threshold sooner. It's crucial for countries to specify whether their net-zero targets include all GHGs to address urgency comprehensively.[6]

Net-Zero Strategies: A Comprehensive Approach to Combat Climate Change and Drive Business Success

A net-zero strategy involves creating a personalized plan to minimize emissions in alignment with net-zero policies. Implementation varies based on available financial resources and awareness of current emission rates. It is essential for addressing global warming, driven by human activity. Achieving net zero involves navigating ethical, social, political, economic, and technological considerations, emphasizing the need for a well-defined frame of reference for successful implementation.[7]

Implementing a net-zero strategy is crucial for businesses due to its multifaceted benefits. Firstly, it aligns with global environmental goals, contributing to the fight against climate change. Secondly, it enhances a company's environmental reputation, attracting eco-conscious customers and investors. Moreover, a net-zero strategy fosters innovation, operational efficiency, and resilience to regulatory changes, positively impacting long-term profitability and sustainability. Overall, it positions businesses as responsible contributors to a low-carbon future while mitigating climate-related risks and ensuring a competitive edge in evolving markets. Net-zero seemingly provides a goal for climate stability and a measurable progress metric, attracting a growing commitment from diverse players. It ensures climate risk reduction for shareholders and enhances the reputations of climate-conscious entities. However, a closer examination reveals limitations that, if unaddressed, may distort and impede progress toward true environmental sustainability, with observable implications already present in practice.[7]

Achieving net-zero emissions requires rapid transformations in global systems, from energy sources to transportation and food production. Pathways to limit global warming to 1.5 °C necessitate zero-carbon electricity supplying 98%-100% by 2050. Key measures include enhancing energy efficiency, switching fuels in transportation, improving food production efficiency, altering dietary choices, and addressing deforestation. Urgent actions are needed, such as accelerating efforts to phase out coal and doubling the rate of tree cover gain by 2030. [6]

The haste in formulating net-zero strategies has resulted in both uncertainty regarding the most efficient methods and doubt about whether a theoretical net-zero strategy will translate into the promised real-world effects. Therefore a few good practices to consider while creating a net zero strategy are listed below:

1. Establish a clear baseline by accurately mapping the emissions footprint (Scopes 1, 2, and 3) across operations and the value chain. Publicly disclose emissions, including subsidiary data and historical figures. Transparency builds credibility with stakeholders. Net-zero emission targets must account for all GHGs, covering the full scope of activities.

2. Set science-based targets by align net-zero strategies with global warming goals (2-degree or ideally, 1.5-degree) through science-based targets. Prioritize emissions reductions over offsets and transparently communicate plans to replicate success across the value chain.

3. Create a roadmap and accountability by developing a net-zero strategy with clear interim targets, milestones, and a viable action plan. Partner with third-party organizations for verification and accountability.

4. Integrate goals into business strategy through embedding net-zero strategy into core business functions, including strategy, risk management, finance, R&D, and investor relations. Integration ensures resource mobilization and momentum for climate goals.

5. Considerate carbon offsetting by using carbon offsets carefully, mainly where emissions cannot be reduced. Ensure offsets are managed by reputable organizations with verified, long-term solutions, avoiding greenwashing accusations.

6. Invest in innovation internally and externally in industry innovations, such as new technologies or business models, to facilitate a low-carbon future. Collaborate with industry peers, investors, and NGOs for pre-competitive partnerships.

7. Collaborate with Suppliers for addressing Scope 3 emissions by collaborating with Tier 1 suppliers. Support larger suppliers first and facilitate their path to implementing net-zero strategies through patience, empathy, and resources.

8. Continuous Monitoring and Reporting through establishing mechanisms for continuous monitoring of emissions and progress. Regularly report on achievements, challenges, and adjustments made to meet net-zero goals. Adapt strategies based on evolving circumstances, technologies, and stakeholder expectations.

9. Create robust mechanisms of verification through audited inventories of carbon offset resources can support a marketplace for carbon offsets that can be verified and monitored over time.

India's Net-Zero Pledge: An Overview and the Imperative for Business Strategies

India has pledged to reduce the emissions intensity of its GDP by 45% by 2030, a crucial step toward its ultimate goal of achieving net-zero emissions by 2070. The August 2022 updated Nationally Determined Contributions (NDC) also introduces a new framework for transitioning to cleaner energy, focusing on green job creation, manufacturing low-emission products like Electric Vehicles, and advancing technologies such as green hydrogen. Additionally, India commits to stronger adaptation targets, emphasizing investments in climate-vulnerable sectors like agriculture, water resources, health, disaster management, the Himalayas, and coastal regions. The plan also includes building capacities for the rapid adoption of cutting-edge climate technologies. [9]

In light of this, the nation has introduced a standardized ESG reporting for Indian companies in the form of BRSR, a carbon market scheme, transition to cleaner energy is also underway. As the government and various other authoritative bodies plan and develop country wide strategies for reaching the net zero target, it becomes important for Indian businesses to gear up for these changes. Businesses with a clear and robust net zero strategy would be able to sail with the tide as government policies – both national and international, would have a large impact on businesses. As mentioned earlier, initiating a net-zero strategy becomes nearly impractical if a company lacks awareness of its initial emission levels. This is why numerous companies opt to engage third-party firms like Carbon Mandal, for a carbon assessment to identify the sources of excessive emissions. Only with this understanding can a company develop a potentially effective plan for emission reduction.

List of references

1. United Nations. For a Livable Climate: Net-zero commitments must be backed by credible action. https://www.un.org/en/climatechange/net-zero-coalition . Accessed 15th , 16th , 21st November 2023.

2. National Grid. (2023). What is Net Zero? https://www.nationalgrid.com/stories/energy-explained/what-is-net-zero. Accessed 15th November 2023.

3. Net Zero Climate, University of Oxford. What is Net Zero? https://netzeroclimate.org/what-is-net-zero-2/ . Accessed 15th November 2023.

4. McKinsey & Company. What is Net Zero? https://www.mckinsey.com/featured-insights/mckinsey-explainers/what-is-net-zero# / . Accessed 15th November 2023.

5. UNFCC. The Paris Agreement. https://unfccc.int/process-and-meetings/the-paris-agreement. Accessed 15th November 2023

6. World Resources Institute. (2023). What Does "Net-Zero Emissions" Mean? 8 Common Questions, Answered. https://www.wri.org/insights/net-zero-ghg-emissions-questions-answered . Accessed 16th November 2023.

7. Fankhauser, S., Smith, S.M., Allen, M. et al. The meaning of net zero and how to get it right. Nat. Clim. Chang. 12, 15–21 (2022). https://doi.org/10.1038/s41558-021-01245-w . Accessed 17th November 2023.

8. World Economic Forum. (2022). Net-zero: the risks and benefits for companies pledging to save the climate. https://www.weforum.org/agenda/2022/02/net-zero-risks-benefits-climate/ . Accessed 20th November 2023.

9. UNDP. Climate Promise. (2022). India. https://climatepromise.undp.org/what-we-do/where-we-work/india . Accessed 20th November 2023.