Image by Joe.
“Net-zero” is one of the most crucial terms in modern times, and it might ultimately go down as the most pivotal in human history.
In the context of a company, net-zero refers to reducing the greenhouse gas emissions (GHG) emitted via business activities to as close to zero as possible. Any residual emissions that cannot be reduced by the company can be “offset” through a variety of ways. One method includes purchasing carbon credits from projects that remove GHG from the air e.g., biochar or direct air capture (DAC).
For example, SBTi – the current leader of corporate net-zero strategies – requires that a company must first reduce their business activity emissions by over 90%. Then the company can use permanent carbon removal and storage methods to offset the remaining 10%. According to SBTi, once a company accomplishes its science-based reduction target and effectively neutralizes any lingering emissions, it can then claim to be net-zero.
The Importance of Achieving Net-Zero
An excess of GHG in the atmosphere leads to global warming, throwing off the delicate balance of our planetary systems and making Earth significantly less suitable for life.
Scientific evidence explicitly indicates that to mitigate the most severe consequences of climate change and safeguard our precious world, it is imperative to cap the global temperature rise at 1.5°C above pre-industrial levels. Presently, the Earth has already warmed by approximately 1.1°C since the early 19th century with collective global emissions continuing to rise.
To stick to the 1.5°C limit as outlined in the 2015 Paris Agreement, emissions must be slashed by around 45% by 2030 and 60% by 2035 (compared to 2019 levels) to achieve net-zero status by 2050. That means we have 26 years and 2 months to drastically change course and hit net-zero.
Breaking Down Company Emissions
Reducing emissions is crucial for companies because, collectively, they bear responsibility for nearly 70% of global emissions.
To reach net-zero emissions, a company must eradicate emissions throughout its entire value chain. To facilitate a better understanding of a company’s carbon footprint, emissions from its business operations are categorized into three distinct scopes.
- Scope 1 Emissions: direct emissions that originate from sources that are owned or controlled by the company e.g., on-site combustion of fossil fuels (like in company-owned vehicles or heating systems) and process emissions from industrial activities. These emissions are attributed to the company’s operations and are considered the most “owned” emissions.
- Scope 2 Emissions: indirect emissions associated with the generation of purchased or acquired electricity, heat, or steam consumed by the company. While the company doesn’t directly control the sources of these emissions (e.g., power plants), they are responsible for them because they result from the company’s energy consumption.
- Scope 3 Emissions: all other indirect emissions that occur as a consequence of a company’s activities but are not under their direct control or ownership. Scope 3 emissions are often the most extensive and challenging to quantify as they encompass the entire supply chain, including activities like business travel, employee commuting, purchased goods and services, and even the end-use of the products or services the company provides.
Understanding the origins of company’s emissions is mighty helpful; however, it is only part of the effort. The real challenge lies in actively reducing emissions, a process that varies for each company based on its industry and products. While there’s no universal blueprint for success, there are some general approaches companies can consider to decrease their emissions. These include:
- Energy Efficiency: improving energy efficiency within the company by upgrading equipment, improving insulation, and using energy-efficient lighting and appliances to reduce energy consumption
- Renewable Energy: transitioning to renewable energy sources like solar, wind, and hydro power for electricity
- Transportation: encouraging the use of public transportation, carpooling, biking, and electric or fuel-efficient vehicles for employees’ commutes and business travel
- Waste Reduction: reducing, reusing, and recycling materials can minimize waste and its associated emissions
- Telecommuting and Remote Work: encouraging telecommuting and remote work options for employees can reduce the need for office space and the emissions associated with daily commutes
The Current View of Corporate Net-Zero
Net Zero Tracker reviews the 2,000 largest publicly-traded companies in the world by revenue including Walmart, Apple, Amazon, and Exxon Mobil.
Of those 2,000 companies, 986 are engaging with the concept of net-zero. 703 have net-zero in their corporate strategies. 195 have pledged to reach net-zero. 31 have self-declared themselves to have achieved net-zero status. 6 companies – Ares Capital (USA), Goodman Group (Australia), Industrial Bank of Korea (South Korea), ITC (Indonesia), Netflix (USA), and Salesforce (USA) – have achieved net-zero and had those claims externally validated to prove their authenticity.
SBTi expands on this work by opening up their analysis to companies of all sizes. According to their data, a total of 2,518 companies have made commitments to science-based, net-zero targets. Their “Corporate Net-Zero Standard” dictates that companies embracing these emissions reduction goals must achieve them no later than 2050 while aligning with the 1.5°C Paris Agreement trajectory.
In 2022, SBTi had 130 new organizations establish net-zero objectives. Among these, 78 (60%) were classified as large corporations and the remaining 52 (40%) were small or medium-sized enterprises (SMEs). An additional 889 companies pledged to submit future net-zero targets.
Figure 1 below shows the total number of companies with published SBTi validated targets and commitments, including net-zero commitments. The trend is clear – more companies are setting decarbonization targets.
Figure 1 – Annual cumulative number of companies with approved targets and commitments, 2015-2022
Resource: SBTi Monitoring Report 2022
Governmental Regulation Offering Some Help
Committing to net-zero emissions is a matter of voluntary choice. No nation or governing entity has made decarbonization plans obligatory. Even joining the Paris Agreement is not a compulsory requirement. The United States, during the Trump administration, exited the Agreement in 2020 but later re-entered it under President Joe Biden.
However, there is a shift occurring as regulations emerge to assist in validating net-zero assertions.
As we wrote last week, California recently passed a suite of laws that impact companies operating in the state. Senate Bill-253 requires emission disclosure rules by 2025 for companies with annual revenues over $1 billion, affecting around 5,300 firms, such as Apple, Chevron, and Wells Fargo. From 2026, these companies must publicly disclose operational and electricity-related carbon emissions and by 2027, “scope 3” emissions, including those from their supply chains and customers. Senate Bill-261 expands these requirements to businesses with over $500 million in annual revenue, also starting in 2026.
For companies engaging with the voluntary carbon market (VCM) inside the state, Assembly Bill-1305 requires that they must disclose details about carbon credit purchases on their website or face hefty fines for failing to do so.
In September of this year, the European Parliament and Council tentatively agreed on new regulations to ban misleading advertisements and improve product information available to consumers to address issues like greenwashing. Negotiators from the Parliament and Council have decided to outlaw generic environmental claims, such as “environmentally friendly” or “eco,” without substantiated evidence of real environmental benefits. They will also prohibit claims based on emissions offsetting schemes that imply a product has a neutral, reduced, or positive environmental impact unless the claim can be proven. Before this agreement can become law, it must receive final approval from both the Parliament and the Council via a vote anticipated to take place this coming November.
Voluntary Engagement
Currently, neither the Californian nor European initiatives are active. Nonetheless, some companies have been voluntarily self-reporting their environmental impacts.
One system in which this process occurs is through CDP, which operates the world’s largest disclosure system for companies to report on their environmental impacts. In the past year, the count of companies publicly sharing data on the CDP platform has surged by 24%, reaching over 23,000 listed companies worldwide who are openly reporting their environmental performance. CDP’s most recent disclosure summary shows that the amount of companies disclosing has quadrupled since the inception of the Paris Agreement.
In the coming years, as governments inevitably introduce more regulated disclosure requirements, companies with a history of voluntary reporting will be better equipped to navigate new obligations. This readiness facilitates their journey toward achieving net-zero targets.
The Role of Carbon Credits
One area of contention in the pathway to corporate net-zero is the use of carbon credits to reduce or offset residual emissions.
Continuing with SBTi, their corporate net-zero standards are explicit – science-based emissions reduction targets cannot be achieved through the use of offsets in any form. SBTi states that: “companies must reduce emissions by >90% before neutralizing the final <10% of emissions with permanent removals.” So, offsets can be used for that final 10%, as long as they: “permanently remove carbon from the atmosphere.
Removal activities include direct air capture (DAC), bioenergy with carbon capture and storage (BECCS), and a select number of nature-based solutions (NBS). These activities focus on carbon dioxide removal and not avoided emissions. If SBTi continues down this path, it slams the door on the majority of the VCM as the market composition last year consisted of 93% avoidance credits and 7% removal credits.
By analyzing the six companies reported on Net Zero Watch to have “achieved net-zero and had those claims externally validated,” we can learn more about the role of carbon credits.
On their Net Zero Watch profiles, three companies – Goodman Group, Netflix, and Salesforce – stated that they plan to use external offsets credits to achieve their targets. More specific information was not available for Ares Capital, ITC, and Industrial Bank of Korea.
When cross-referencing the claims from Goodman Group, Netflix, and Salesforce with other available data, their carbon credit usage plans are substantiated. In 2021, Netflix said it would be net-zero by 2022 and that their reduction strategy lined up with SBTi criteria. That same year, Netflix purchased more than 1.5 million carbon credits; all nature-based. In June of this year, their 2022 net-zero claim was verified by Ernst & Young to be accurate.
In their 2022 Sustainability Report, Goodman Group stated that they favor nature-based projects and if possible, from projects happening in the regions where they operate. Salesforce announced their intent to utilize carbon dioxide removal (CDR) credits, encompassing both natural and technology-based solutions. This aligns with their financial commitment for CDR projects and the establishment of their proprietary carbon credit market, the Net Zero Marketplace.
The fact is, carbon credits are helping companies reduce their carbon emissions, aiding in the journey towards net-zero. According to a report by Ecosystem Marketplace, companies that purchase voluntary carbon credits are reducing their emissions 1.8 times faster than companies that do not. Not only that but credit buyers tend to have more ambitious climate change targets than non-buyers, as they are 3.4 times more likely to have set an approved, science-based climate target.
For the carbon credit naysayers, that same report found that carbon credits make up a tiny fraction of overall mitigation action, revealing that the credits purchased by companies amount to slightly over 2% of their total emissions, on average.
SBTi, with their less than 10% of emissions threshold, may well be pleased to hear that stat.
Conclusion
The world is extremely far off of the mark of achieving global net-zero. From a company perspective, things aren’t much better as the amount of companies that have achieved net-zero can be counted on two hands. However, as more companies voluntarily commit to decarbonization goals and disclose business emissions, the corporate sector is making progress. In anticipation of forthcoming disclosure regulations, some companies are actively positioning themselves to meet net-zero objectives. Carbon credits, love them or hate them, will inevitably have a role in the mission. The key lies in ensuring that both net-zero plans and carbon credits are rooted in science and maintain high-integrity. Only then can we stride toward global net-zero. With just a few years until 2030 and 26 years until 2050, time is rapidly running out.
