Net-Zero emissions targets: what, how and why

Net-Zero emissions targets. You are probably hearing this term a lot. You will have noticed that they are usually set no later than 2050. And that various governmental and private organisations are supporting this initiative. But what is it all about? Where do they come from? And finally, why should you care?

WHAT IS IT?

Some definitions

To begin with, let's clarify the concepts that will be used throughout the article.

• Emissions neutral: State in which a company's activity has a total neutral impact with respect to its carbon footprint, considering the emissions produced, neutralised and offset. In other words, their total emissions are zero.
• Offsetting emissions: A process by which actions are taken that lead to a net emissions reduction, always calculated against a baseline that represents a hypothetical scenario of emissions that would have occurred in the absence of the action. An example of this process would be the purchase of carbon credits, a way of "buying" those "negative" emissions that would offset those produced by the company.
• Paris Agreement: is a legally binding international treaty on climate change to limit global warming to well below 2, preferably to 1.5 degrees Celsius, compared to pre-industrial levels.
• IPPC: The Intergovernmental Panel on Climate Change is an intergovernmental body of the United Nations that provides the world with objective, scientific information relevant to understanding the scientific basis of the risk of human-induced climate change.

So, what are Net-Zero Emissions Targets?

Strictly speaking, setting Net-Zero Emissions targets means setting a time period in which your company must achieve greenhouse gas neutrality. In other words, emissions linked to the company's activity plus offset emissions equal zero.

Is that all there is to it? Certainly not. When talking about Net-Zero Targets, it is understood that setting these targets correctly requires alignment with targets set at the international level.

In 2015, during the COP 21 in Paris, it was established that, in order to avoid the most serious consequences of climate change, the average temperature increase of the planet above 1.5 degrees Celsius must be avoided. The Paris Agreement, already defined, is the commitment that the signatory countries have accepted as a result of this convention. You can find out more here.

In 2018, the IPPC confirmed that in order to reach this target, global CO2 emissions need to be halved by 2030 and reach carbon neutrality by 2050. You can read the summary of the report here.

Therefore, to summarise, in order to be in line with the targets of governments and organisations, you should reach neutrality in an acceptably gradual way and at the latest by 2050.

HOW TO SET THESE TARGETS?

The concept of emission neutrality is not new. Unfortunately, to date, there is no single accepted methodology for setting Net-Zero Emissions Targets, so that they are correctly aligned with global targets. In fact, the main criticism regarding these targets is the huge disparity of methodologies and objectives followed by companies to set their targets, so that they are hardly comparable.

What perimeter do they take into account? do they include Scope 3 emissions? are they considered CO2 or CO2 equivalent? and?is there a maximum of emissions that can be offset?

SBTi (Sciencie Based Target initiative) is currently developing a methodology to standardise the process. The first version is already available and the final version will be available in October 2021, just in time for COP26.

SBTi is a joint initiative between CDP, UN Global Compact, the World Resources Institute, and World Wildlife Fund, so although it is currently not legally recognised, it is a very good starting point for orientation. You can follow their progress on their website.?

WHY ARE THEY RELEVANT TO YOUR BUSINESS?

Now that you know the context, the next question to answer is, why should my company set these targets? Let's review the benefits it can bring you.

Consistency and sense

Your company has been calculating its carbon footprint recently or for a long time (either way, you can read some tips here), and has set emissions reduction targets to reduce its impact on the environment. Clearly, you have identified that climate change is a material issue for you and your stakeholders.

Of course, little is better than nothing, but as long as you are not aligned with international targets, according to the scientific community, you are not doing what is expected of you. What is the point of identifying climate change as a material issue and not setting the necessary targets to prevent it?

Getting ahead of legislation

Today it is voluntary, but tomorrow it will be mandatory. We are currently in the phase of information transparency. There are more and more mandatory reporting requirements on climate change (e.g. in European legislation, you can read about it here).

The Paris Agreement is binding, and most world powers are in it. The goals are not achievable without the direct involvement of private business. When the time comes, signatory countries will either have to give in or set mandatory emission reduction requirements for private business.

Financing

Failure to contribute adequately to the decarbonisation of the economy will represent a direct cost and an opportunity cost. Governments are encouraging the green economy through transparency of information and favourable terms.

• Listed companies: If you represent a listed company, you should be aware of the growing presence of ESG investment funds (read more here). These investment funds are increasingly including evaluation criteria for the decarbonisation strategies of their potential assets. Failure to align with global targets can have a negative impact on your ESG assessment and therefore exclude you from the asset selection process of these funds.
• Emission credit market: This is an increasingly common instrument for governments, and the cost of emission credits is rising year on year. Those countries that already have this system in place are planning to extend the list of activities to which it is mandatory for them. Therefore, being a greenhouse gas generator is going to become more and more expensive.
• Green finance: the European Union is leading the way. Within the framework of the European Green Deal, legislation is being developed to clearly distinguish between "green" and "non-green" assets (the most ambitious example is the European Taxonomy, which will start to be implemented in 2022 and has already aroused interest in other regions). More and more banks are offering green financing options, and green bonds in particular have grown significantly since their inception. It's a growing trend that you don't want to be left out of.

And that's all for this time. Here are some useful links:

• In its mid-year letter to clients, Blackrock explains the steps it is taking to achieve Net-Zero targets on its assets. You can read it by clicking here.
• If you have any questions about how to integrate and manage sustainability in your business, you can book a free consultation session with me by clicking?here.
• And if you would like to receive my upcoming publications directly in your email, you can sign up for my newsletter by clicking?here.