Ampersand & Net Zero Enthusiasts
Setting the bar on net zero: time to be bold
As companies take on net zero, setting the target relies more on leadership vision and market standards than on solving the equation - too many unknowns. They will need to form a good initial view of the Net Zero pathway and learn to prioritise as they go.
Once a firm’s leadership has agreed on a strategic rationale for net zero, commitments are made and targets communicated. The most effective Net Zero leaders are action-oriented and not afraid to experiment. They accept uncertainty and embrace an agile approach.
Framing Net Zero: What does good look like?
The universe of guidance around setting net zero is rapidly growing and evolving. Without a single rule stipulating what it means for corporates to be net zero, companies need to reflect back on the strategic drivers to clarify their level of ambition. This typically implies raising the bar.
While early movers navigated the space with relatively less guidance, the majority of companies have tended to follow peers when it comes to setting targets. Based on the exponential growth in commitment to the Science-Based Targets initiative (SBTi), it is likely that newcomers to the net zero wave will look to them for guidance, making SBTi the emerging standard-setter.
What is true across many of the guidances, though, is that what was considered ambitious two years ago can quickly appear as grossly insufficient. A good example is the inclusion of Scope 3 in GHG accounting and net zero targets. Companies that leave Scope 3 out entirely are often singled out for being behind the pack. This is one of the reasons why Repsol received recognition for having one of the more credible net zero ambitions among oil and gas companies.
A growing number of trail blazers are now in a position to go further than net zero and aim to become carbon negative. Who's to say that in the near future this won’t become the new benchmark?
Clarifying the ambition
Before getting too caught up in the jargon, it might be worth clarifying what is meant by carbon neutral, net zero, or carbon negative.
The distinction lies in the interpretation and use of offsets. As shown in Chart 1, purchasing carbon credits for an equal amount to the company’s emissions will not fit the bill in achieving corporate net zero - only permanent carbon removals will count after reducing emissions in the value chain as much as possible. Carbon negative means that companies not only hit net zero but also remove more carbon from the atmosphere than is needed to neutralise residual emissions.
Investors, employees and customers are increasingly literate on climate change and will expect nothing less than net zero targets that satisfy this definition. This does not mean that carbon neutrality should be thrown to one side - on the contrary. Carbon neutrality through offsetting in the transition period is important since offsets support closing climate finance gaps and promote adaptation action, two other important pillars of the Paris Agreement alongside mitigation. Many net zero commitments are likely to require some offsetting for an interim period, until reduction initiatives deliver and further low carbon technologies become commercially viable.
While carbon removals play an important role in eliminating the residual emissions in achieving net zero, some scientists caution against an over-reliance on negative emissions technologies. This is particularly due to uncertainties around technology maturity levels and wide-spread, low cost adoption at the pace required. In short, there are really no options that allow you to bypass reduction and decarbonisation in your own value chain. With the clock ticking, delaying action will only make your net zero journey more challenging and may diminish your value in the eyes of key stakeholders.
"It’s truly exciting that so much of our industry is stepping up to the net zero challenge. But we can’t be complacent. What keeps me up at night is wondering whether we’re all grasping how fundamentally our way of operating in the world must evolve to keep up with the scale and pace of change set by climate science." Nils Rage, Land Securities
There are emerging market norms. ‘Net zero by 2050’ is becoming the minimum bid, aligned to a 2C warming scenario and increasingly to 1.5C. Net Zero by 2050 is a good initial commitment for organisations joining the net zero cohort, though they might well need to revise ambitions upwards subsequently.
The Net Zero Pathway
Each company’s net zero pathway is unique, both in terms of emissions sources and options to tackle them. Forming an initial view of the pathway is key to an informed and credible ambition. It will not be exact nor perfect, but allows Management to mobilise around the end state.
Understanding the baseline
A baseline needs not be perfect and absolutely accurate to enable the journey ahead. A few key points should be noted:
Baselining can no longer only consider Scope 1 and 2 emissions, even if these may be much easier to account for and track. Scope 3 must be fully integrated in the GHG accounting and the net zero target, either immediately or at a later stage.
Baselining focus will obviously differ based on industries and geographies. Comparing Energy Usage across sectors makes those differences obvious and point to a very different effort in baselining effort and measurement challenge, e.g. scope 3.
While there are many in-depth guides and consultants that can support in the development of these GHG accounts and audits (see our full list of recommended resources at the end of the article), some level of uncertainty will need to be accepted by net zero movers across all sectors.
Perfect data is unlikely to be readily available, the trick will be to find a middle ground between analysis paralysis on one end and a completely uninformed declaration of goals on the other - enough data to get started on the net zero journey and improve along the way.
EDF adopted a pragmatic approach when looking at a common Scope 3 category: employee travel.
A ‘good enough’ approach is not a mere compromise here, it is recommended. What the EDF case shows us is that imperfect information is not a justification for inaction. Developing a sharper performance management capability will be part of the net zero journey. It also shows how actions to reduce emissions allow companies to engage with key stakeholders, giving them the opportunity to be a genuine part of the journey.
Uncertainty is not a large business privilege. In a world of wide reaching outsourcing and remote supply chains, startups will need to accept incremental ambitions:
“It's easy to tie yourself in knots trying to build the perfect net zero, sustainable business right from the outset but the truth is, it's sometimes too difficult or impossible to do that right from the beginning, so you can get stuck and perhaps don't even get started. I think it's more important to do as much as you can within your set of constraints at the start, then publicly commit to taking steps to get better and better." Laura Harnett, Founder of The Seep Company
Charting the decarbonisation path
The right-hand side of the waterfall chart follows the logic of ‘doing your bit’ first. Tackle the efficiencies within your own assets and value chain, whereby some of those options are relatively easy to implement and generate savings. Other initiatives will deeply transform how organisations operate and engage their eco-systems, e.g. onboarding suppliers, collaborating with competitors towards market transformation.
The path to decarbonisation is also the first cut of a long to do list. It will inform the time commitment, e.g. can we realistically commit to 2025 or 2030?
Efficiencies: consume less, consume better
End-user behaviour might be the hardest to influence but they offer low cost / high benefit opportunities and can go a long way getting key stakeholders on board. An energy efficiency contest organised between commercial real estate users has resulted in annual average energy savings of 12% over five years.
Net Zero is triggering a new wave of lean continuous improvement applied to energy and carbon Operational efficiency. The focus on running a leaner operation, using less resources and producing less waste, is one of the easier ways to reduce a noteworthy amount of carbon early on.
There is also considerable innovation and progress on Infrastructure efficiency: various levers are available to tackle the elephant in the room, embedded emissions in buildings and other industrial assets. Alternative low-carbon building materials, building light, maximising intensity of spaces, refurbishing rather than demolishing all need to be deployed to maximise carbon reductions.
Supply chain decarbonisation is radically transforming how companies do business and engage with supply chains to tackle various categories of Scope 3 emissions - but will take time , resources, and cooperation. This option will become increasingly necessary, especially as net zero adopters are continuously pushed to squeeze out carbon before resorting to carbon removals. One company alone, especially a small company, attempting to transform the supply chain will likely fall on deaf ears. The entire industry must cooperate to put enough pressure on the system to create accelerated changes. Trying to become net zero in a bubble is not only impossible but undesirable.
Water UK Chief Executive Christine McGourty describes the recent
sector-wide Net Zero 2030 Route map as:
“a crucial step forward in setting out the industry’s vision for tackling climate change as we work towards a green and resilient recovery for society, the economy and the environment. We don’t have all the answers, and we can’t do it alone. But with the support of government, regulators and the supply chain, we believe we can deliver a net zero water supply for customers that also helps build the green skills and solutions needed to protect the environment for generations to come.”
When it comes to energy sourcing, the starting point for many business organisations is to procure certificated renewable energy through either Renewable Energy Certificates/Guarantees of Origin or Corporate Power Purchase Agreements. “Additionality” or renewable sourcing choices that lead to additional investment and bring additional capacity to the grid are a key factor here and help companies make credible claims about their renewable energy sourcing.
Both on-site renewable energy production - where Adnams in Suffolk was an early pioneer of biomethane from brewing waste - and to cite a less mature technology, finding ways to embed captured CO2 in the industrial product itself (cement, steel, concrete, etc.) are relevant Embedded energy solutions. The combination of renewables and carbon capture can create the potential for ‘net negative’ emission impacts, offsetting emissions in areas which are harder or more expensive to abate. We also note that some measures can be complementary, e.g. commercial-scale heat pumps may not be effective unless an office building or other property has first been made more energy efficient.
Planning the path to decarbonisation will require iterative prioritisation based on technological advancements, cost of actions, and level of control. As with baselining, uncertainty will be built into the phasing and influence decisions
While some technologies promise huge carbon potential, they may be 10-20 years away from commercialisation. However, there are already many viable low carbon technologies available to be included in a prioritised Net Zero business plan.
At the same time, technologies that we are considered nascent may very well become commercially viable much quicker than anticipated due to scientific breakthroughs and investments. (The dramatic reduction in wind and solar investment costs over the last 10 years or so is a case in point.) These evolutions will need to be incorporated into your decarbonisation strategy, reiterating the need for an agile approach to the pathway.
“The change in our energy sector over the last decade has been dramatic but the transformation to a net-zero world will be unprecedented. CCUS is essential to ensuring that this transition will benefit every part of the economy, going further into power as well as industry and - through the production of clean hydrogen - the heating and transport sectors. The rollout of CCUS in the UK requires the rapid development of a huge new sector that can provide decarbonisation services to UK businesses.” Judith Shapiro, Carbon Capture and Storage Association
In short, businesses looking to make effective progress on the journey towards Net Zero should look to identify those measures which are material, feasible and viable in their specific context. This will clearly vary between sectors and evolve over time.
Google’s evolving ambition: case in point
The journey of climate action among early movers is a great illustration of evolving climate ambitions in response to changing conditions.
When Google first committed to carbon neutrality, offsets were still considered a relatively novel innovation. Google achieved its goal through this available option but did not stop as new options emerged. With the rise of Corporate Power Purchase Agreements (PPAs) for renewable energy, Google was able to set an even more ambitious target and achieve it within its second decade of operation. Now, through continuous learning about what it takes to meet global climate goals, it has set the most ambitious goal of operating on carbon-free energy 24/7. This will require the deployment of multiple levers, advocating for the decarbonisation of grids, investing in a series of low-carbon technologies, among a host of other actions requiring wide societal support.
While Google has set the bar extremely high, there are lessons that apply more widely:
Learning never stops, neither should you.
Net zero is not a one-man show.
Being a leader is nice, but having a healthy environment is the ultimate goal.
Food for thought (and action)
One resounding message emerges: do not wait for certainty to start on the net zero journey, and enjoy the thrill of unchartered territories. To set the bar, start by having a high level, good enough view of the path forward, and prioritise regularly.
In the next blog, NZE & Ampersand will explore the ins and outs of deploying these options, especially around the central question of “buy vs. make”. Diverse practical, commercial, financial and reputational considerations are relevant here. We will explore the relative merits of direct investment in low carbon energy projects (whether on-site or off--site) vs. arm’s-length procurement of renewable energy from third parties, e.g. Corporate Power Purchase Agreements.
#NetZeroTargets #Decarbonisation #SBTi #Sustainability #Ambition
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Ampersand Partners is a management consultancy, whose Energy Transition and Sustainability practice helps energy companies navigate their fast changing market environment 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.
Energy Usage Data