Opinion – Why? Economês in good Portuguese: Net zero and carbon neutral: what are they and how to evaluate the commitments of companies?

Given the urgent global climate crisis, there is an increase in private sector engagement with strategies to achieve carbon neutral and net zero in line with the goals of the Paris Agreement.

Why is private sector engagement important? According to the World Economic Forum, 50% of global carbon dioxide emissions are concentrated in 8 supply chains: food, construction, fashion, consumer goods (so-called fast moving, fast selling and relatively low cost, such as beverages and some convenience products), electronics, the automotive industry, professional services (consultancy and audits, which generate a large carbon footprint due to constant travel) and freight transport.

So the first part of the answer about the importance of private sector engagement has to do with its accountability. The private sector is responsible for a significant portion of the problem. At the same time, GlobeScan research shows that companies that are slow to act on the climate crisis are more exposed to socio-environmental, reputational and financial risks. On the other hand, companies can direct efforts to reverse the climate crisis and transform risks into opportunities. In 2018, 225 of the world’s largest companies reported more than $2 trillion in climate-related opportunities for low-carbon goods and services. Last year, European companies alone identified $1.4 trillion in opportunities—six times the cost of realizing them. With the United States pushing the green economy to be the largest in the world, the opportunities there must be even greater.

But what does carbon neutral and net zero mean? Before defining these terms, it is important to remember that the sources of greenhouse gas (GHG) emissions are classified into three different scopes. Scope 1 emissions are generated directly by the company’s own operations. For example, by burning fuel in your boilers. Scope 2 emissions are indirect, generated by energy acquired and consumed for lighting, heating or cooling buildings. Scope 3 emissions are indirect and come from the company’s value chain, that is, emissions linked to the extraction and production of raw materials, logistics, end use of products and waste management, as well as emissions from the displacement of employees and business travel.

In both the carbon neutral and net zero targets, no GHGs are added to the atmosphere by the company. What differentiates them is that neutrality involves emissions related to scopes 1 and 2, while net zero also covers scope 3, which has the most challenging management. In both cases, carbon neutral or net zero, strategies can be oriented towards eliminating emissions, offsetting them, or a mixture of the two.

For many companies, Scope 3 emissions represent more than 70% of their carbon footprint, and can be as high as 90%. Therefore, they cannot be ignored. In addition, the financial market has demanded standards and certifications that include scope 3 reporting. The Science Based Targets Initiative (SBTi), for example, is an entity that helps companies in the process of developing decarbonization goals and plans, with science-based criteria and verification. The initiative requires companies to have scope 3 emissions reduction targets when it represents more than 40% of their combined emissions. On the other hand, these are emissions over which companies do not have direct control and management. For example, how can a company control the type of refrigerator energy the consumer will use to package the food it sells? This demands a complex and costly process of obtaining data.

Given the challenges of implementing strategies especially to achieve net zero, some companies have committed themselves to targets for 2030 and 2050, respectively, but without clearly indicating how they will get there.

Therefore, it is important to understand whether the company’s commitment is based on a complete emissions inventory. The inventory makes it possible to map the emission sources and quantify them, which helps in the definition of reduction projects, as well as in the monitoring of the results. Additionally, it is important to understand if the company uses any reliable standards, such as SBTi.

As the deadlines for achieving carbon neutral or net zero are long, it is crucial that companies have clear short and medium-term timelines, with intermediate targets. Many companies do not make it clear what their goals are for each type of issue and how they are distributed within the organization’s structure, that is, who is responsible for them. In principle, these goals should be the responsibility of the CEO and the board, who have a fiduciary duty to perpetuate the company in the long term.

Another central point is to understand if the company has goals to reduce its emissions or if the strategy is mainly based on the purchase of credits for compensation. Offsets are important to cover residual emissions that are difficult to eliminate. However, they should be a short-term strategy, as the cost of clean technology is still high. Reducing emissions is more sustainable than offsetting. Ideally, companies are committed to getting close to zero by changing their operations and business models. This can be done, for example, by replacing fossil fuel with renewable energy and creating more sustainable products and services, in line with the concept of Nature-Based Solutions.

Transparency, transparency, transparency. Although the commitment to SBTi is good practice, transparency is limited. Therefore, a model for measurement and (public) reporting is being developed and is expected to be launched at COP28. This will ensure more transparency, as well as allowing comparisons over time and across different companies. As the journey is complex, involving multiple stakeholders and challenges, it is important to be conscientious, consistent and coherent. Honest talk about limitations and challenges is better than green make-up and selective disclosure of information. Technology and connectivity allow us to quickly access information to contrast practice with business discourse. Some companies are already paying dearly for a lack of transparency or misleading messages in their sustainability and ESG communication strategies.

Without a doubt, efforts to achieve carbon neutral and net zero are very important. However, the strategies and discourses are mostly environmental and technical. Little is known about how companies are considering reversing climate injustice through strategies that aim to include populations and communities most affected by climate impacts. This lost connection between the technical and the human is fundamental to guaranteeing inclusion and equity, but that is a subject for another article.