Zero Definition

September 2021 | ACASTA RISK 

Our collective approach to the challenge posed by a warming climate, as individuals, businesses, and public sector organisations, is at the top of the agenda ahead of COP26 due to take place in Glasgow later this year. 

Over the past twelve months, there has been a surge in organisations committing to net zero carbon emissions targets. What lies beneath these claims? Do they hold up under scrutiny, or wither under the light of detailed due diligence? 

There has been much debate about the merits of net zero programmes announced, and whether in some instances net zero initiatives could amount to greenwashing. This highlights the fact that whilst the net zero concept is deceptively simple, as with most issues, things are not always as they seem. 

The road to Zero

Net Zero is defined as reducing all emissions, including those derived from the value chain, in a manner consistent with a global temperature increase of no more than 1.5°C and where emissions cannot practically be reduced any further, those emissions must be permanently removed by an equivalent volume of atmospheric CO2. 

Before embarking on this journey, organisations must create a greenhouse gas inventory of emissions, based on a credible source such as the Greenhouse Gas Protocol Corporate Accounting and Reporting Standard. 

There is no globally accepted standard defining Net Zero. However, this has not stopped companies defining targets, and for those seeking credibility for their endeavour, there are two key initiatives which companies should be aware of.  

Firstly, the ‘race to zero’ is a global campaign supporting Net Zero initiatives covering over three thousand businesses as well as other organisations, and outlines the following requirements:

The second initiative is the ‘Science Based Target Initiative’ (SBTi), which is developing a robust procedure and methodology to set targets aligned with science. 

Since its creation more than sixteen hundred companies have made commitments and some six hundred and sixty have commitments aligned with 1.5°C. It’s important to note that statements made with regards to aiming for ‘well below 2°C’ targets will be no longer acceptable, and instead targets must be consistent with a 1.5°C world. 

Ahead of COP26, the SBTi will publish a Net Zero standard after an extensive consultation period. The Initiative just completed a ‘road-test’ on its near- and long-term criteria to set targets (see figure below)

Near and long-term targets aligned with SBTi, with residual emissions balanced with carbon removals:

 

Source: SBTi, modified by Acasta Risk

*4.2% every year from a baseline year (not earlier than 2015) or alternatively use the Sectoral decarbonisation approach (SDA) for sectors with 1.5°C aligned reductions.

It’s important to note that setting up interim targets are supported by the latest Taskforce for Climate-Related Financial Disclosures (TCFD) guidance on metrics and targets.

Scope for change?  

A common problem is setting Net Zero targets relates to the types of emissions referenced. Many companies focus on Scope 1 (i.e. their own emissions) and Scope 2 (the emissions associated with the purchase of electricity, heat, steam, and cooling) where the degree of influence is greater. Naturally, Scope 3 (value chain emissions) are more difficult to estimate and so are beyond the consideration of most except the most ambitious of targets.

Nonetheless, the ‘race to zero’ initiative requires leadership on the inclusion of material Scope 3 emissions, where the SBTi roadmap requires the following:

For companies that sell, transmit or distribute natural gas or other fossil fuel products an emissions reduction target for their products should be set (as required by category eleven of the Greenhouse Gas Protocol), consistent with 1.5°C.

For organisations who exclude value chain emissions, this is problematic, as it constitutes an important source of emissions for many corporates and financial institutions. It’s evident that companies leading on climate action and setting robust targets will have to include value chain emissions in their target setting.

Adding up to zero; the role of offsets

Whilst companies need to do all they can to reduce emissions, there may be instances where total reductions are not possible, resulting in residual emissions, and in those cases, offsets have to be considered to achieve a net zero position: 

Decarbonise and neutralise residual unabateable emissions to reach a Net Zero target

 

Source: Taskforce on Scaling Voluntary Carbon Markets (TSVCM), modified by Acasta Risk

In this case, organisations will need to develop an offsetting strategy, which specifies what emissions will be offset and the nature of solutions to be deployed. As it can be seen they can reach net zero without neutralizing their emissions along the way. This strategy may include the use of nature-based approaches such as reforestation, afforestation, ecosystem restoration or soil carbon sequestration or engineering-based approaches such as Direct Air Capture (DAC), enhance weathering or biochar. 

As always, these approaches are not risk free. Currently, nature-based solutions are the most prevalent, although their permanence could be considered to be limited in comparison to engineering led approaches. 

For that reason, the Oxford Principles for Net Zero Aligned Carbon Offsetting has developed an example of what an effective offsetting strategy might look like.

A potential net zero aligned offsetting trajectory

 

Source: Oxford Principles for Net Zero Aligned Carbon Offsetting, modified by Acasta Risk

This proposed strategy supports the adoption of long-lived carbon storage as the main source of storage for reaching net zero. This is important when considering to the nature of the gases and their permanence in the atmosphere: 

Nature based solutions can assure emissions remain locked-up for up to a hundred years, while engineering based can assure for longer timeframes. However, as of today, engineering solutions face significant financial, technological, environmental and infrastructure barriers preventing their widespread adoption.

Beyond alignment to Net Zero, organisations can demonstrate leadership by emphasising their commitment to compensate their emissions now, and so become ‘climate neutral’ whilst they work towards a true Net Zero position. 

Decarbonise, neutralise and compensate all emissions on the path to Net Zero target

 

Source: Taskforce on Scaling Voluntary Carbon Markets (TSVCM), modified by Acasta Risk

There are several initiatives underway promoting the uptake of voluntary carbon markets such as the ‘Taskforce on Scaling Voluntary Carbon Markets’ (TSVCM) which is developing Core Carbon Principles (CCPs), as well as the ‘Voluntary Carbon Markets Integrity Initiative’ (VCMI) aiming to develop high integrity guidance for buyers of carbon credits. 

A Net Zero Roadmap

That Net Zero target and roadmap should be approved by the Board and Senior management, and upon which supervision duties are assigned at a senior level in order to plan, execute and measure the effectiveness of the targets set. In addition to governance support, these targets must be embedded into their risk management processes, business strategy and business planning processes. 

Setting a robust and transparent system is fundamental to achieve Net Zero

Source: Acasta Risk

Measurement of progress against targets should be reported annually (at the very least) which for listed companies will likely occur via the Annual Report. This allows stakeholders to understand how those targets are aligned with the organisation’s strategic vision, and to what extent effective governance structures are in place in order to ensure these targets are met.

This is especially important given the long duration of commitments made; businesses are traditionally used to planning for between three to five years ahead, whereas measuring progress against ten-to-thirty-year targets that are inherent in net zero commitments. 

Planning for Net Zero is widely supported by large institutional investment groups. For instance, fifty-three leading investors, coordinated by the Institutional Investors Group on Climate Change (IIGCC), are asking corporates to implement a transition plan to Net Zero, which includes measures such as appropriate capital allocation, and who use their votes in Annual General Meetings, in order to ensure action is taken in line with the climate related objectives. 

Conclusion 

The concept of Net Zero can be deceptively simple, however there is not a simple playbook applicable to all organisations. Organisations should be aware of latest developments in expectations with regards to their own stated Net Zero position in order to align their business to the latest thinking on Net Zero. This will invariably include setting up robust governance, risk management, and strategy processes to ensure a Net Zero plan is embedded into the fabric of the organisation.

With regulators, investors, banks and insurance companies becoming increasingly concerned by the potential of climate related risks, demonstrating commitment and action to address material risks with credible transition plans will be an important component of building trust with key stakeholders. 

At Acasta Risk, we advise organisations on how best to approach their decarbonisation journey, as well as advise on an offsetting strategies that considers the risk of additionality, reversal and veracity of the projects under consideration, as well as other potential negative consequences to the environment and planet. We are actively engaged in projects addressing carbon neutrality and net zero strategies, and as such are well versed in helping companies in their journey to a true Net Zero position and can help you to develop a unique strategy which aligns with your company specific climate risks and opportunities.

For more information please contact:

Mohammed Chunara, Director, Climate Risk, Acasta Risk 

+44 (0)20 3983 9263 or by email: [email protected]

Alba Fuentes Delpon, Manager, Climate Risk, Acasta Risk

+44 (0)20 3983 9263 or by email: [email protected]

© 2021 Acasta Risk


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