Directors have a duty to consider climate change in their decision making, which involves setting GHG reduction targets that support the Paris Agreement to avoid global warming of more than 1.5C this century. A science-based net zero target is the emerging best advice. Yet, many businesses are struggling to set targets, never mind meet them.
7 min read | Last updated 15 July 2021
Directors have a duty to take account of climate change considerations in their decision making (Chapman Tripp, 2019 (pdf)). As a first step, businesses are encouraged to set targets that align with the goals of the Paris Agreement. By July 2021, 801 companies globally had submitted approved targets with the Science Based Targets Initiative, 641 companies had signed the UN Global Compact Business Ambition for 1.5C and 110 companies had joined The Climate Pledge to reach net zero by 2040, ten years earlier than the goal of the 2015 Paris Agreement. This is encouraging, but these are still relatively low numbers of signatories. This tells us that most companies are still struggling to set targets for climate mitigation aligned to Paris goals.
Once they have set effective targets, more importantly, business are expected to meet them. A study of more than 9,000 listed companies’ GHG reduction plans indicates that the time remaining until they deplete the emissions budget for keeping global temperature rise below 1.5C is less than six years (MSCI, 2021 (pdf)). The mitigation pathways of European companies would, if their targets were achieved, lead to global warming of 2.7C by 2100, which is well above the Paris Agreement’s ceiling of no more than 2C (CDP, 2021 (pdf)).
Good GHG targets clarify their emissions scopes, emissions boundaries, strategies and the time horizon.
- Scopes of emissions (refer to the GHG Protocol)
- Direct emissions
- Scope 1 – emissions from sources that are owned or controlled by the reporting entity, eg from the transport fleet
- Scope 2 – emissions from consumption of purchased electricity, heat or steam
- Indirect emissions
- Scope 3 – emissions incurred through the value chain, such as purchased goods (eg office materials) and services (eg business travel); shipping of products; consumer use of products (eg power); disposal of products. On average, scope 3 emissions account for 80% of reported emissions, so climate mitigation requires collaboration through the value chain (CDP, 2021 (pdf)).
- Direct emissions
- Boundary of emissions
- Whole business
- Strategies employed (and their hierarchy)
- Abatement measures
- reduce or eliminate emissions within the value chain (this is the most effective action a business can take and should be the highest priority in climate mitigation)
- Compensating measures
- reduce or eliminate emissions beyond the value chain to compensate for unabated emissions in the value chain (eg purchased carbon credits)
- Neutralising measures
- Abatement measures
- Time horizon
- Base year
- Target year
- Annual or cumulative basis
GHG targets commonly used in business are outlined below, including:
- carbon targets relating to a specific product, such as carpet tiles, milk and flights
- absolute and intensity reduction targets
- net zero and net negative targets
- science-based and science-based net zero targets
|Carbon zero or carbon neutral product / service|
|For each unit sold of a specified product or service, the business aims to compensate for unabated carbon emissions relating to part or all of the product’s lifecycle|
The cost of compensating offsets can be embedded into the product’s price, eg Fonterra’s carbon zero milk, or voluntarily bought by the consumer at point of sale, eg Air New Zealand’s carbon offset programme
|Carbon negative product|
|For a specified product, the business aims to sequester more carbon in the product’s materials than are emitted during its lifecycle|
eg Interface sells a floor tile that has net negative embodied carbon, as measured ‘from cradle to gate’; ie the tile’s materials have a higher carbon content than is emitted as CO2 during operations from raw material to the point of shipment
|Absolute emissions reduction|
|By a stated year and for stated scopes, the business aims to abate emissions by a specified amount, compared to a baseline year|
Eg the business will reduce scope 1 and 2 emissions by 30% by 2030 compared to a 2016 baseline
|Emissions intensity reduction|
|By a stated year and for stated scopes, the business aims to abate emissions by a specified amount relative to another business measure (eg production tonnes, revenue), compared to a baseline year|
A growing business could reach its intensity target but still emit more GHG than in its baseline year, so absolute reduction targets are usually preferable to intensity targets
|Net zero target|
|By a stated year and for stated scopes, the business aims to compensate for or neutralise unabated emissions on an annual or cumulative basis, relating to part or all of the business|
Some businesses offset the emissions of a specific business activity, eg business travel, while others offset the business’s total emissions
A few businesses are aiming for cumulative net zero, eg Microsoft aims to remove its historical carbon emissions across all scopes since it was founded in 1975, by 2050
|Net negative or climate positive|
|By a stated year and for stated scopes, the business aims to more than compensate for or neutralise unabated emissions on an annual basis |
A climate positive business reduces more GHG than its own business emits, through third party offsets, carbon storage technologies and nature-based removals
|By a stated year, the business aims to abate scope 1 and 2 emissions in alignment with global emissions trajectories to provide a 50% chance of global warming of 1.5C or well below 2C above preindustrial levels by 2100, based on one of two approaches:|
1. Sectoral decarbonisation, which allows for intensity or absolute reductions based on pathways modeled by the IEA for that business sector
2. Absolute emissions contraction, which requires an absolute reduction based on RCP2.6, requiring 49% to 72% reductions by 2050 from a 2010 baseline
Preferably verified by SBTi; excludes scope 3 emissions; excludes compensating offsets and neutralising removal measures
|Science-based net zero target (emerging best practice)|
| By a stated year, no later than 2050, and in consideration of all scopes, the business aims to:|
(i) achieve a scale of value-chain emission reductions consistent with the depth of abatement achieved in pathways that limit warming to 1.5C with no or limited overshoot
(ii) neutralise the impact of any source of residual emissions that remains unfeasible to be eliminated by permanently removing an equivalent amount of atmospheric CO2
Emerging best practice is the science-based net zero target. Net zero and science-based targets have both, until recently, been regarded as best practice, but both have loopholes that burden the carbon budget.
- A net zero target with a long term deadline, eg 2050, would allow a business to continue with high emissions in the short to medium term, burdening the carbon budget.
- Targets are ‘science-based’ if they are in line with climate science views on the necessary pathway to meet the goals of the Paris Agreement (SBTi). A science-based target is focused on the abatement of scope 1 and 2 emissions – it does not cover scope 3 emissions, nor does it cover strategies to compensate or neutralise unabated emissions.
The science-based net zero target aims to overcome these problems. Ideally, all material sources of GHG emissions within the value chain are covered; abatement is prioritised over compensation and neutralisation; compensating and neutralising programmes are additional, permanent and avoid double counting; and, in selecting solutions, trade-offs are avoided and stacked bundles of impact are sought, such as through nature-based solutions that bring social and environmental co-benefits.
A company might reach net zero (neutralising emissions with removals) before reaching their science-based targeted level of abatement, in which case they are expected to continue to abate emissions to reach that target.
Definitions for science-based net zero targets are currently being developed by CDP (pdf). Several companies have already developed science-based net zero targets, including Nestlé and Ørsted.
Nestlé, the world’s largest food and beverage company, has a science-based net zero target. It plans to reduce its emissions 20% by 2025 and 50% by 2030 and to reach net zero by 2050, as the company grows. As a signatory to the UN Global Compact Business Ambition for 1.5C, the company has produced a detailed plan to deliver against its targets, covering all of scope 1 and 2 emissions and 80% of scope 3 emissions.
The plan includes the following strategies:
- deforestation free supply chain by 2022
- 100% recyclable or reusable packaging by 2025
- plant 20 million trees per year and 200 million trees by 2030
- switch global fleet to lower emissions options by 2022
- 100% certified sustainable cocoa and coffee by 2025
- carbon neutral water product by 2025
- 100% certified palm oil by 2023
- source 20% of key ingredients through regenerative agriculture by 2025 and 50% by 2030
- 100% renewable electricity in all sites by 2025, and use more renewable thermal energy in manufacturing
- cut virgin plastic by one third by 2025
- balance residual emissions through high quality natural climate solutions
Ørsted, an energy company, has a science-based net zero target. It aims to be carbon neutral by 2025 in operations and energy generation and to have a carbon neutral footprint by 2040. Its carbon reduction target is a science-based target. SBTi has approved this target as more ambitious than a well-below 2C trajectory and has preliminarily concluded that it aligns with a 1.5C trajectory (to be confirmed in 2021). The company is ahead of its decarbonisation goals by two decades.
Ørsted’s plan includes:
- completely phasing out coal by 2023
- installation of 20GW of offshore and onshore wind by 2025
- stopping buying or leasing fossil-fueled cars from 2021 and making its entire car fleet EV by 2025
- reducing value chain 50% by 2032 compared to 2018
- phasing out natural gas trading activities while increasing the green share of power traded
- engaging suppliers to reduce carbon emissions from the manufacture and installation of renewable energy
- offsetting unabated emissions through offset projects that are verified, measurable and additional