Reaching the 2015 Paris Agreement goals requires bold and coordinated action from governments and businesses globally. The 2018 IPCC Special Report on Global Warming of 1.5°C 1 advised that we need to keep global average temperature rise <1.5 degrees Celsius to prevent catastrophic climate change. This essentially means reducing global anthropogenic greenhouse gas emissions to ‘net zero’ by 2050 thereby reaching state of balance or carbon neutrality .2 Many companies in recent years have stepped forward to set and promote their climate goals: Eighty-one percent of S&P 500 companies had set emissions-reduction or energy-use targets within the last four years .3 As investors that take climate change leadership into consideration, we often ask ourselves, how robust and meaningful are these goals and how do a company’s climate and business goals align: Are these targets science-based? What is the appropriate timeline for how quickly companies can implement meaningful change? What strategies should companies be focusing on? It is not always clear how companies are deciding which path to take or even what various carbon reductions strategies entail. It is often up to us to take a deeper dive into carbon reduction goals and targets in order to evaluate if a company is taking appropriate and timely action.
What does decarbonization look like?
Companies may use different terminology for describing their emissions reduction targets and goals. Carbon reduction approaches, at their simplest, can basically fall in two categories. Carbon neutrality, or “net zero,” means that any CO2 released into the atmosphere from human activity is balanced by an equivalent amount being removed. Becoming carbon negative (also referred to as carbon positive) requires a company, sector or country to remove more CO2 from the atmosphere than it emits.4
Approaches to Carbon Reduction
Carbon neutral or reaching “net zero” emissions means that an activity releases net zero carbon emissions into the atmosphere. While some emissions are still being generated by a building/process these emissions are being offset somewhere else making the overall net emissions zero. This entails cutting emissions to the very limit and compensating for what can’t be eliminated.
Carbon negative (or carbon positive) means that an activity goes beyond achieving net zero carbon emissions to actually create an environmental benefit by removing additional carbon dioxide from the atmosphere. This typically requires the use of net emission technologies (NETs).
Zero carbon (or carbon free) means that no carbon emissions are being emitted in order to generate a product/service. For example, zero-carbon electricity could be provided by a 100% renewable energy supplier. In this case, carbon, given that it was not emitted in the process, does not need to be captured or off-set.
Science-based targets; emissions reduction targets that ensure the transformational action they take is aligned with current climate science. Targets adopted by companies to reduce greenhouse gas (GHG) emissions are considered “science-based” if they are in line with what the latest climate science says is necessary to meet the goals of the Paris Agreement – to limit global warming to well-below 2°C above pre-industrial levels and pursue efforts to limit warming to 1.5°C.1 These targets are typically set within the shorter time horizon of 2030.
Science-based net-zero targets go beyond this. Building on science based GHG emission reduction targets, they ensure that companies also take responsibility for emissions that have yet to be reduced, or that remain unfeasible to be eliminated. These targets are typically set with a longer time horizon extending out to 2050.
Science-based emissions reduction targets ensure the transformational action they take is aligned with current climate science. This includes both quantity and timing. Targets adopted by companies to reduce greenhouse gas (GHG) emissions are considered “science-based” if they are in line with what the latest climate science says is necessary to meet the goals of the Paris Agreement – to limit global warming to well-below 2°C above pre-industrial levels and pursue efforts to limit warming to 1.5°C.5
Do the strategies achieve targets that science says is needed?
Targets adopted by companies to reduce greenhouse gas (GHG) emissions are considered “science-based” if they are in line with what the latest climate science says is necessary to meet the goals of the Paris Agreement – to limit global warming to well-below 2°C above pre-industrial levels and pursue efforts to limit warming to 1.5°C. 6
Around 65% of all company reported targets to CDP are short term with an end date of no more than five years. On average, both short-term and long-term targets are about half of what would be needed for a 1.5°C world; short-term targets aim for minus 15% instead of minus 30%, while longer-term targets look for 50% reductions instead of carbon neutrality.7
In some cases, corporate net-zero targets may be applied inconsistently and without undergoing a robust process to ensure the underlying activities, scope of emissions sources and timelines are consistent with a science-based approach; best practices would entail not only providing an out year target for net-zero but providing a timeline with specific milestones towards the carbon reduction initiatives. Companies can reconcile their efforts by following the independent guidance of the Science-based Targets Initiative (SBTI), an organization that helps companies to set both science-based targets and provides recommendations to further set science-based net-zero carbon setting.
What are some technologies that can enable decarbonization?
By now, we know that many companies have energy efficiency initiatives in place, the starting point for any emissions-reductions strategy. Using more efficient technology that requires less energy to begin with is one of the easiest and cost-effective ways that companies can begin this journey.
Beyond energy efficiency, the technology becomes more challenging and costly to implement. Whether moving to carbon neutral or carbon negative requires a significant undertaking for companies.
Companies that have undertaken the robust process of setting targets and goals highlight the various ways in which they can tackle this challenge. There is no one size fits all approach and will depend on various factors such as the company sector and business. Companies may begin with sourcing renewables to purchasing carbon offsets (thereby offsetting any emissions the company cannot avoid) so that their operations can be considered “carbon free.”
In more aggressive target setting strategies, companies may seek to invest in net emission technologies that can help to remove carbon from the atmosphere enabling the company to reach carbon neutrality, or better yet, carbon negative emissions. For more aggressive targets that may require additional technological advancements, companies should identify what technological investments would be required to accomplish their goals. The costs for many of these technologies have so far been a barrier for mainstream adaptation.
As illustrated in the below graph, net emission technologies (NETs), or carbon removal technologies, are generally categorized as; afforestation and reforestation, land management, bioenergy with carbon capture and storage (BECCS), enhanced weathering, direct air capture and carbon storage (DACCS), ocean fertilization and carbon capture and storage (CCS).8
Source: UNEP 2017
What are some company examples on carbon reduction strategies?
Below we highlight some notable examples.
A consumer goods company has committed to be ‘carbon positive’ by 2030. The approach that the company has taken is to source 100% of its energy across all operations from renewable sources which will enable the company to achieve carbon neutrality. To further becoming carbon positive, the company will also directly support the generation of more renewable energy than needed for its own operations, making the surplus available to the markets and communities in which it operates. In addition, the company has set science-based targets.
A technology company has committed to being carbon negative by 2030 and by 2050, the company will remove from the environment all the carbon the company has emitted either directly or by electrical consumption since it was founded in 1975. This is an ambitious goal that will require not only a shift to renewable energy, but will most notably require investments in negative emission technologies (NET) potentially including; afforestation and reforestation, soil carbon sequestration, bioenergy with carbon capture and storage (BECCs), and direct air capture (DAC).
A business and financial software company has made progress in achieving its own carbon reduction targets. The company has set science-based targets and is on track to achieve 100% renewable electricity, reducing its carbon footprint of its facilities by 80%, and reducing total operational footprint by 50%.
A transmission and distribution company has set a target to become carbon neutral by 2030. The company will continue to implement energy efficiency initiatives for its own operations and customers, continue to make investments in grid modernization, facilitating more renewable energy in the energy mix of the portfolio that will bring cleaner energy to the region.
Companies are recognizing the need to take climate action and engage with the investment community for input into best practices. The onus on us as investors is to make sure that their action plans:
- Are tied to not some arbitrary gold posts but tied to meaningful positive outcomes.
- Are reasonable and achievable in the timeline provided.
- Know the limitations on current technology and what new innovation is needed in order to achieve the goals.
Importantly as investors it is important to keep in mind that the company’s carbon goals are consistent with the business objectives of the business.