Net zero must mean business

COPENHAGEN  —  The world is awash in net-zero emissions targets. A growing number of countries, regions, cities and companies have announced that they will adjust their growth strategies to align with the Paris climate agreement’s goal of keeping global temperatures within 1.5°C of pre-industrial levels. By the end of 2021, roughly 90 per cent of global GDP was covered by some type of net-zero pledge, including those made by more than 680 of the world’s largest corporations.

Yet despite this boom in new commitments, real action from businesses is lagging, because we have long lacked a common, science-based understanding of what a corporate net-zero strategy entails. Far too many corporate net-zero pledges fail to account properly for all the relevant greenhouse gases (GHGs). Many also lack a clear mid-century target date, do not encompass their products’ full value chain, and do not reflect the urgency of cutting emissions significantly by 2030. Worse, many rely far too heavily on offsetting their emissions by purchasing credits generated from carbon-abatement and removal projects elsewhere.

No wonder UN Secretary-General António Guterres thinks there is “a deficit of credibility and a surplus of confusion over emissions reductions and net-zero targets”. Fortunately, with the recent launch of the Science Based Targets initiative’s Corporate Net-Zero Standard, we now have a framework to show companies how to align their climate plans with the science.

The new standard shows that there are no shortcuts. Credible net-zero targets must include all relevant GHGs and cover a company’s full value chain. They also must aim to cut emissions in half by 2030 in order to reach net zero by 2050 or earlier. Most importantly, a company’s plan must reduce emissions by 90-95 per cent before using offsets to “net” itself the rest of the way to zero.

Closing the corporate credibility gap means moving past the era when many companies could simply counterbalance their emissions with offsets to prolong their ability to pollute. The private sector now has an opportunity and an obligation to align itself with science. Recognising this, we at Ørsted piloted a long-term de-carbonisation plan under the SBTi’s new standard last year and became the world’s first energy company with a validated, science-based net-zero target.

We have already learned valuable lessons from this process, including the need to map the full set of emissions across energy generation and operations, purchased electricity, and the upstream supply chain and downstream use of products sold. Only with proper mapping could we identify and address emissions hotspots across our value chain. Listening to our strategic suppliers has also proven critical. Now that we know about their own de-carbonisation pain points, we can work together to alleviate them.

Another important lesson is that companies must develop and draw on the right skills from within their own ranks. Given the wide-ranging impact of the net-zero transition on different business areas, managing it properly requires a diverse range of knowledge and skills. And while we know the direction and destination of our de-carbonisation trajectory, we have learned to accept that we do not yet know every step required to complete it. In piloting a de-carbonisation pathway, we have found the SBTi’s guidance and criteria to be crucial.

These lessons may not be applicable to all companies, but the foundation of credible corporate climate action remains largely the same: Green energy solutions. With over 70 per cent of all GHG emissions stemming from the energy sector, a rapid transition to renewable energy is the key to de-carbonisation globally. As major energy consumers, corporations can make a significant contribution by deploying or purchasing green energy, including through renewable-power purchase agreements. They can also take direct action to reduce emissions within all their own operations and across their supply chains.

This is a big opportunity for companies, which is why Ørsted will have completely phased out coal generation by the end of 2023. By continuing to expand our renewable-energy portfolio and reducing our direct carbon emissions, we are on pace to achieve at least a 98 per cent reduction in carbon intensity by 2025 (from 2006 levels), and to reach carbon neutrality in our own energy generation and operations the same year. To address upstream and downstream emissions in our value chain, we will gradually phase out natural-gas sales and cut emissions from the steel in our wind-turbine foundations and the shipping fuels used in offshore logistics. These comprehensive decarbonisation efforts, together with offsetting less than 10 per cent of residual emissions, will enable us to reach net-zero emissions across our full value chain by 2040.

Nonetheless, government signals are needed to help reinforce credible corporate climate action more broadly. Current national policies leave us on track for 2.7°C of warming by the end of this century. That is unacceptable. Country climate pledges (“nationally determined contributions”) must be strengthened ahead of the United Nations Climate Change Conference (COP27) in Sharm Al Sheikh later this year. At a minimum, stronger national commitments would create a positive feedback loop with the private sector by eliminating some of the policy uncertainties.

But governments also can do many other things to bolster corporate climate efforts. A crucial first step is to set higher renewable-energy targets and establish more transparent market frameworks to accelerate renewables deployment. Governments can mandate more robust emissions disclosures as well, so that investors can properly assess business climate risks and pursue full value-chain de-carbonisation. Genuine progress in combating climate change requires genuine transparency.

Moreover, public procurement, which represents 13-20 per cent of global GDP, can be a powerful tool for accelerating emissions reductions. This is especially true in the energy sector. By integrating climate criteria in public tenders, governments can create strong incentives for companies to put themselves on a meaningful decarbonisation pathway.

COP26 in Glasgow last year gave us a clear mission: to make net-zero targets fit for purpose. As 2022 gets underway, corporations have a fresh opportunity to establish their climate credibility. That is what the science demands, and, ultimately, so does the bottom line.

Mads Nipper is CEO of Ørsted. Copyright: Project Syndicate, 2022. www.project-syndicate.org