Ampersand & Net Zero Enthusiasts
Net zero is becoming mainstream. It’s good for the planet, and good for business
Companies around the world are increasingly committing to net zero targets to mitigate global warming. A clear shift in stakeholder, financial and competitive drivers in many industries has made net zero commitments mainstream, and a fundamental part of the license to operate. It is therefore crucial that companies keep pace and, where possible, even capture an early mover’s advantage.
The Net Zero Wave
The Net Zero wave started with Governments - six having already ingrained their targets into law with many more on their way - and is rapidly expanding in the corporate world. Google, M&S and Sky were early movers. Global companies across sectors are following, including the likes of Bayer, Coca-Cola, Shell, BP and Equinor and many smaller, regional players are also setting net zero ambitions, such as Northumbrian Water, UK’s leading water utility on sustainability. The Science-based Targets Initiative (SBTi) recently announced that over 1000 companies are setting science-based climate targets, with the number of such commitments growing at an exponential rate.
“Britain has sought to be a leader in tackling the climate crisis, which gives all of us in business and industry the potential and opportunity to demonstrate leadership.” Heidi Mottram CBE, Chief Executive of Northumbrian Water
That number is expected to increase rapidly. One hundred and thirty seven global investors, including large asset managers AXA Group, Legal & General, Nikko, BMO, Aegon, Allianz SE, HSBC, Lazard, have called on over 1800 companies to set net zero targets in line with the SBTi Business Ambition for 1.5°C* Campaign. Together, these companies’ annual Scope 1 and 2 emissions account for around 25% of global emissions.
The investor push towards SBTi’s is noteworthy for another key reason: Scope 3 emissions. This is a broad reporting category that encompasses all other indirect emissions, including how sold products are used and disposed of. The SBTi requires that companies set Scope 3 targets when their relevant and mandatory scope 3 emissions are 40% or more of total scope 1, 2 and 3 emissions. Why is this important?
Let's take a look at Rio Tinto, one of the companies included in this campaign. Their Scope 3 emissions are more than 18 times the size of Scope 1 & 2 combined. Ambitious net zero targets should tackle Scope 3 and serve as an indicator of a company's seriousness to contribute towards global carbon neutrality. A report from EcoAct highlights that, of the companies in the FTSE 100 setting carbon reduction targets, only 32% include Scope 3.
Where to begin?
Embracing Net Zero effectively means answering some hard questions. To quote Mike Barry, who led the charge at M&S, executives need to be clear on WHY they’re doing it, WHAT they want to do, and HOW they are going to do it. Not so simple questions that we will explore in this series of articles.
The strategic rationale is not straightforward. Does Net Zero provide an edge on competitors, or a hedge on energy? Is it CSR or defending the social licence to operate? Is it meant to make the company more attractive to employees, customers, investors or all key stakeholders? Clarity is important here. The rationale will inform the ambition, justify the investment, and shape the prioritisation of actions.
Companies that were among the first to set targets and source renewable energy were considered heroes - companies acting simply because it was the right thing to do. It has become clear that perhaps those companies also had an advanced understanding of the need to protect their licence to operate.
Net Zero drivers are becoming more powerful and tangible, whether they stem from stakeholders or from the economics of energy and carbon - going green is becoming attractive as the cost of generating renewable electricity falls rapidly.
Stakeholder pressures are increasingly important, with five main channels we summarise as PRICE drivers.
Policy and regulation
Policy and regulation have a decisive role to play when it comes to more energy-intensive industries and regulated utilities, as well as large parts of the public estate. Namely, carbon pricing is proving to be one of the most impactful policies shaping net zero action. Carbon pricing is the umbrella term encompassing carbon taxes, as well as market-based emissions trading systems. The UN PRI’s Inevitable Policy Response projects carbon prices to be around US$40-80/tCO2 by 2030 in their first mover regions, with a global convergence accelerated by border carbon adjustments to ≥$100/tCO2 by 2050.
In the EU ETS specifically, prices are expected to be towards the upper end of that range by 2030 with the removal of excess allowances, a broader scope and a more ambitious abatement target of 55% by 2030.
The Carbon Pricing Leadership Coalition showcases multiple case studies on how carbon pricing has shaped actions by corporations. HYBRIT is one of those success stories.
Due to increasing carbon prices in Europe, three companies came together to form HYBRIT - an initiative to replace coking coal with hydrogen thereby reducing the carbon footprint of steel. This is just one example of how carbon pricing at the corporate level can drive actions towards net zero goals. With such policies tightening, corporates will reap the benefits of anticipating these actions and incorporating them into their decisions early on.
Reputation and brand
Two hundred and ninety five companies, representing over $3.6 trillion in market cap, have signed the SBTi’s Business Ambition for 1.5°C commitment. Companies that do not jump on board risk a falling brand value and reputation as a laggard.
Tesla provides such an example. It is interesting that Tesla, a company based on innovations to accelerate the pace to a sustainable future through its products, is now perceived to have fallen behind for not having set a net zero target. The Transition Pathway Initiative highlights Tesla as a laggard in the auto industry regarding its management of GHG emissions and risks and opportunities related to the low-carbon transition. This showcases why pulling only one lever of action - in this case selling more sustainable products - will not be enough in the public eye.
On the flip side of the coin, Ørsted transformed from being a fossil fuel energy company to a renewable energy provider and is now one of the most profitable energy companies in Europe. Evidently, net zero goals can contribute to making both your brand and your business.
Investor pressure is one of the most recent drivers to emerge, having been practically absent from the sustainability scene until recently. As more investors become aware of the risks climate change poses to their portfolios and the opportunities to create and capture new value, initiatives to transform their investment portfolios become more powerful.
Many companies are increasingly responding to growing customer demands around their environmental impact.
"Sustainability plays an important role in our customer offer, and is now underpinned by an ambitious new strategy to transform our portfolio to net zero carbon by 2030.” Simon Carter, CEO, British Land
RE100 membership is growing yearly across the globe, showing the growing commitment of companies to move towards meeting their energy requirements through renewable energy. RE100 members report that customer expectations are in the top 3 reasons for sourcing renewable electricity, even more so than regulatory requirements and shareholder requests.
While Amazon has recently committed to becoming net zero, they responded only after significant pressure from within their firm to get serious about climate change.
The ‘Amazon Employees for Climate Justice’ group was formed to call attention to Amazon’s unsustainable practices. Employees, including top-tier tech and management, were willing to risk their jobs to ensure their employer put climate change high on their agenda.
McKinsey has reported “interesting opportunities for growth and advancement with impact and meaning” as one of the four elements most valued by top talent. Companies also publicly acknowledge that net zero and sustainability commitments help to attract and retain talent.
“Talent attraction and retention is one of the key reasons we set long-term stretching climate commitments.” Nils Rage, LandSec, at Real Estate Live UK
Energy cost management
At the same time as these drivers are increasing pressure towards net zero ambitions, the falling cost of renewables serves as an enabler for businesses to achieve net zero more affordably. The latest UK Government estimates for 2030 show the projected cost of renewable projects lying well below that of thermal (gas-fired) generation.
Looking towards 2030, the relative cost equation will be influenced by the rising cost of carbon highlighted above, as well as the falling cost of wind and solar projects, and very probably by a recovery in European wholesale natural gas prices from depressed 2020 levels.
This means that the cost to business of making science-based carbon commitments, and backing that up by investment in or procurement of renewable energy, is likely to be much lower than it was for the early movers 5 or 10 years ago. In many cases, there may even be a cost saving vis-a-vis the cost of conventional grid electricity, as well as the opportunity to lock in energy procurement which is far less exposed to the vagaries of energy commodity markets.
The trade off between investment in renewables projects (either on-site or off-site) and arm’s-length procurement from third party projects is something we’ll be exploring in more depth at a later date. For the present, we note that they are not necessarily mutually exclusive strategies and in the meantime a growing number of businesses have been signing Corporate Power Purchase Agreements (CPPAs) for the procurement of project-specific renewable electricity.
As shown in the chart below, the potential supply of CPPA volumes over the next few years substantially exceeds the likely demand from RE100 companies. This may therefore be a favourable time for UK businesses to explore further participation in that market - especially since the proposed new Contracts for Difference route to market for UK onshore wind and solar projects is not expected to be opened up before the back end of 2021.
Businesses which haven’t already done so will need to rapidly commit to Net Zero, both to satisfy their key stakeholders and gain advantage. Only a clear strategic foundation, though, will ensure a business can take advantage of those opportunities while protecting itself from foreseeable risks.
Similarly, companies that have already committed to a target need to confirm they are clear as to why they have made this commitment. If simply keeping up with regulation is the main driver, opting solely for offsets might do the trick but limit your company from meeting its full potential to contribute towards global carbon neutrality. These are the essential steps to ascertain whether your company may still be at risk and is not capturing the opportunities still currently at play, as seen in the Corporate PPA market.
Ampersand Partners and the Net Zero Enthusiasts partner to support industrial, commercial and other asset-heavy industries in understanding those drivers and developing the optimal journey to net zero.
This blog is the first of a series. In our next piece, we'll explore the "what" step in our framework: challenges around defining the Net Zero ambition.
#NetZero #Sustainability #RenewableEnergy #Decarbonisation #CorporatePPAs
Ampersand Partners is a management consultancy, whose Energy Transition and Sustainability practice helps energy companies navigate the energy transition and non-energy clients deliver their net zero ambitions.
Net Zero Enthusiasts (NZE) is a small-group of seasoned independent energy sector professionals who between them have over 100 years of experience in the industry, advisory firms and providers of finance. Based on long-standing connections, complementary backgrounds and a common commitment to decarbonisation, the NZE have come together to support the UK’s low carbon transition.
*See full list of countries and states with net zero targets here, excluding recent declarations by Japan, South Korea, and China.
*The central objective of the 2015 Paris climate agreement is to hold the rise in global average temperature well below 2°C, compared to pre-industrial levels, and to pursue efforts to limit the temperature increase even further to 1.5°C.
*Look out for our upcoming interview with Mike Barry, Former M&S Director of Sustainable Business on Ampersand Partners' LinkedIn and website.