Making the Net-Zero Transition: Problems & Best Practices

Introduction:

As the world races to meet the goals of the Paris Agreement, and the recently proposed policy changes, including the proposed changes to the EU Sustainable Finance Disclosure Regulation (SFDR) announced earlier this month, businesses and financial institutions clearly face rising pressure to set realistic net-zero targets and transition plan. This article gives an overview of how organisations are committing to decarbonisation and net-zero transition, the challenges businesses and financial institutions face and summarise the best practices that could guide a realistic and ambitious net-zero transition for businesses and financial institutions.

Situation Overview and Problem Statement:

Companies and financial institutions are increasingly realizing the need to take a holistic approach to the transition to a low-carbon economy.

This is evident in the growing number of publicly listed companies that have announced net-zero commitments (Visual Capitalist; MSCI, 2021). This is an encouraging trend, as it demonstrates a growing recognition among organizations of the need to align their sustainability strategies with the latest climate science.

More publicly listed companies are announcing net-zero commitments (Visual Capitalist; MSCI, 2021)

Currently, 96% of the world’s 2000 largest publicly-listed companies have committed to reaching net-zero in or before 2050 (Net Zero Tracker, 2023).

Yet, the extent of commitment varies greatly amongst companies in terms of:

• Scope(s) of emissions covered–Data from Net Zero Tracker (2022) shows that approximately 80% of the world’s largest 2000 publicly listed companies have committed to net zero of all Scope 1 (direct emissions) and Scope 2 (indirect emissions from consumption of purchased electricity);

Data from Net Zero Tracker (2022) regarding companies’ coverage by emissions Scope in their net zero commitment

• Whether interim targets have been set;
• Whether net-zero transition plans have been set; and
• The credibility of such transition plans

Statistics show large corporations rank low on integrity in terms of meeting net zero and emissions reduction pledges (Statista, 2022)

So, what are the challenges that businesses and financial institutions are facing, that hinder them from setting ambitious decarbonisation targets and plans? Some of the key challenges include:

1. Setting interim targets: Companies must set interim targets to ensure that they are making progress towards their net-zero goals. These targets must be ambitious, achievable, and measurable.
2. Scope 3 emissions: Scope 3 emissions, which are emissions generated by a company’s value chain, are often the most challenging to address. Companies must work with their suppliers and customers to reduce these emissions.
3. Financing the transition: The transition to a low-carbon economy requires significant investment, and many companies may not have the necessary resources. Financial institutions can play a critical role in financing the transition.

Best Practices from SBTi Recommendations:

To address these challenges, organizations can draw on the best practices. Some of these best practices recommended by the SBTi include:

1. Setting science-based targets: Companies must set targets that are aligned with the latest climate science. This will help ensure that their targets are ambitious and credible.
2. Conducting a comprehensive emissions inventory: Companies must conduct a comprehensive emissions inventory to identify their key sources of emissions. This will help them develop targeted strategies to reduce emissions.
3. Engaging with stakeholders: Companies must engage with their stakeholders, including customers, suppliers, and investors, to build support for their sustainability strategies. This will help ensure that these strategies are effective and sustainable.
4. Developing a transition plan: Companies must develop a detailed transition plan that outlines the steps they will take to achieve their net-zero goals. This plan must include interim targets and a roadmap for achieving these targets.
5. Investing in innovation: Companies must invest in innovation to develop new technologies and business models that can help them reduce emissions. This will help them stay competitive in a rapidly changing business environment.

Conclusion:

The net-zero transition is a critical aspect of sustainable finance, and companies and financial institutions must take a holistic approach to this transition. While there are several challenges to overcome, organizations can draw on the best practices recommended by the SBTi to develop effective and credible sustainability strategies. By doing so, they can contribute to the fight against climate change while also creating value for their stakeholders.