The net-zero path: updates and outlook

With net-zero targets now covering approximately 90% of the global economy, it may be easy for optimists to believe that the bulk of the hard work towards achieving real-world decarbonisation has been completed and that we now simply need to sit back and allow ambitious targets to be self-fulfilled. However, with the increasingly evident advantages associated with building a sustainable corporate brand and the complexity inherent in setting net-zero pathways, it is easy to see that there may be some incentive for organisations to set unrealistic long-term targets in order to benefit in the short-term. Indeed, the growth in potential for “greenwashing” has been recognised by supervisory and regulatory bodies in Europe, with ESAs launching a call for evidence on greenwashing and the European Commission set to present a directive aimed at ensuring that companies are able to substantiate “green claims” later this month.

In the realm of climate claims, specifically net-zero targets, the Science Based Targets initiative represents a reliable and recognised resource both for those setting and for those attempting to evaluate net-zero targets. Aimed at curbing the proliferation of non-standardized pledges SBTi’s Net-Zero Standard, launched in 2021, introduced a robust, comparable and science-based framework outlining what elements a net-zero target must contain. By aligning with the scientific consensus on climate change, companies and institutions can better manage climate risks and contribute to a more sustainable future. Since its launch, net-zero commitments have become increasingly popular among organisations, and this trend is expected to continue rising.

What is net-zero and why is it important?

Net-zero has gained immense traction on the global agenda, with COP26 in 2021 even being dubbed as the “net-zero COP”. The ambition represents the most comprehensive approach to limiting global warming to 1.5°C and overcoming one of the greatest challenges and priorities of the 21st century in order to prevent the triggering of critical climate events, irreversible biodiversity loss and the subsequent economic and social consequences.

To accomplish this, worldwide efforts are necessary, and national governments, corporations, and other organisations have been committing to embarking on the journey to net-zero. Leading the way is the European Union, which aims to become the first climate-neutral continent and achieve net-zero emissions by 2050. This objective is strongly supported by the European Green Deal, which encompasses a wide range of policy initiatives and investments aimed at establishing a sustainable economic model in the EU.  In the Nordic context, countries have been closely following suit but with varying emissions reduction commitment scopes. Sweden is committed to achieve net-zero emissions with an end target of 2045. Others are aiming at carbon neutrality targets with Finland to become carbon neutral by 2035, followed by Iceland “before 2040”, and Denmark and Norway in 2050.

Carbon-neutral vs net-zero

Source: Carbon Trust

With the full spectrum of national and local governments, public and private development frameworks and financial institutions setting net-zero targets, ambition will be passed on throughout value chains and partnerships. Organisations in all arenas will be subject to requirements originating from a net-zero pathway in some form.

Net-zero target setting with SBTi: progress so far

Since the official launch of SBTi's Net-Zero Standard in 2021, over 1,842 organisations have committed to the standard, representing around 40% of the total organisations that have committed to or set short-term SBTs. Among those committed organisations, 89% are companies, 5.5% are financial institutions, and 5.3% are small or medium-sized enterprises. However, while the trend of commitment is increasing, only 9% of organisations have actually followed through with their net-zero commitments and established long-term science-based targets, including net-zero target years.

Source: Science Based Targets Initiative dataset (date: 17/02/2023)

Despite the growing interest in curbing carbon emissions to limit global warming to 1.5 degrees, many organisations are struggling to set long-term net-zero targets and achieve the necessary reductions, particularly in hard-to-abate sectors. This challenge is compounded by the limited use of carbon offsets allowed under the SBTi guidelines, which require a 90-95% reduction in absolute emissions across scope 1, 2 and 3. Without clear strategies to address these hurdles, progress towards a sustainable future may be slow and uncertain.

Total count of net-zero commitments split per target year and region

Source: Science Based Targets initiative dataset (date: 17/02/2023)

Many companies are setting net-zero end target dates in 2050, which may suggest a lack of certainty about how to achieve these reductions. While these targets align with the critical milestone year identified by the IPCC as the year to which global emissions must reach net-zero and hence limit global warming to 1.5 degrees, they may undervalue the importance of early action to reduce short-lived greenhouse gas emissions. Focusing solely on long-term targets could delay urgent emissions reduction initiatives needed to slow down warming in the near term. We encourage organisations to use net-zero target setting as a means of identifying efficient and timely methods of achieving decarbonisation by engaging fully with the process of assessing potential pathways, rather than as a means of deferring action to set future dates.

Investors’ perspective

Investor demand for visibility of pathways to net-zero has played a large role in the drive for corporates to formalise and communicate net-zero ambition through the setting of net-zero SBTs. Investors are required to understand the decarbonisation trajectories of investee companies in order to interrogate their own pathways towards net-zero and to assess their own exposures to climate-related risks and opportunities. Perhaps the biggest drivers for investors set their own decarbonisation commitments are regulatory and client pressure, as well as the mitigation of climate-related risks and increasing exposure to climate-related opportunities.

It has been well-documented that regulatory and stakeholder pressure for investors to act on climate impacts has been rising over the past we years. With attention now turning to the detail and implementation side of sustainability integration, yet more focus will be placed on the specific climate credentials of portfolios and individual investments, including net-zero pathways and decarbonisation trajectories. One way in which investors are seeking to meet their own climate targets, and the ambitions of their clients, is through increasing exposure to sustainable debt. Our review of 2022 data revealed a positive outlook and strong relative support for sustainable debt markets despite a turbulent year more broadly. Although sustainable debt offers formalised and tangible links to sustainable opportunities, and often improved climate performance, corporate commitments alone are no longer sufficient. Corporates must now also be able to demonstrate net-zero transition plans that specify their target ambition, milestones, and actionable reduction levers in the context of the company’s business model as a whole.

The importance of transition plans

The need for comprehensive net-zero transition plans is not limited to investor pressure; it is also driven by regulatory requirements. The UK government, for example, recently announced that all UK-listed businesses and financial organisations will be expected to publish decarbonization plans from 2023. This regulatory push is part of a wider trend, with central banks and other regulatory bodies around the world increasingly calling for climate-related financial disclosure and net-zero transition plans. By requiring organisations to provide a clear roadmap for how they plan to transition to net-zero, regulators hope to ensure that the necessary actions are taken to limit global warming to 1.5 degrees.

The importance of net-zero transition plans cannot be overstated. Without clear plans in place, organisations may struggle to achieve their net-zero targets, particularly in hard-to-abate sectors. Robust transition plans that outline ambitious yet achievable targets, specific milestones, and actionable reduction levers will be critical to organisations' success in meeting the growing demands for climate action.

However, organisations must also be prepared to navigate potential challenges that may arise from market and energy developments, which can impact their net-zero transition. This calls for a proactive and adaptive approach to achieve net-zero targets in the face of unforeseen obstacles. Ultimately, by making and delivering on their net-zero commitments and transition plans, organisations will not only contribute to a more sustainable future but also enhance their own resilience and adaptability to potential market and energy disruptions. This underscores the importance of prioritizing sustainability and responsible business practices, which will be crucial in the years to come.