What is Net Zero?
Net Zero means that the overall balance of emitted and captured greenhouse gases (GHG) such as carbon dioxide (CO₂) or methane amounts to zero. The Net Zero approach relies on two pillars. Step one involves reducing GHG emissions, the second step entails binding emitted GHG molecules from the atmosphere.
In their definition of Net Zero, the Intergovernmental Panel on Climate Change (IPCC) explicitly refers to anthropogenic (human-caused) greenhouse gases. Achieving Net Zero emissions in the next 15 years is also crucial to limit global warming to 1.5°C, as outlined in the Paris Agreement.
What are arguments in favor of the Net Zero calculation?
A central challenge in addressing the climate crisis is the issue of global responsibility. On the one hand, countries in the global North were able to expand their economic advantage without restrictions during industrialization, while developing and least developed countries are just at the beginning of this process associated with high emissions. At the same time, there is still a long way to go before sufficient green energy is generated to cover global societies’ needs.
The Net Zero approach could help address this dilemma by allowing to offset GHGs. In emerging countries, which lack the budget to invest in climate protection action, this can enable continued development – especially considering countries in the global South are most affected by the climate crisis which has been disproportionately caused by the global North.
Critique of Net Zero
On the other hand, Net Zero is currently often associated with greenwashing. The critique: measures to reduce greenhouse gases will appear less urgent when there is the option of subsequently removing them from the atmosphere. Oil and gas companies already receive subsidies for carbon capture, to the detriment of renewable energies. Reevaluating subsidy structures to prioritize renewable energy sources is therefore essential to foster the energy transition.
Moreover, instead of reducing emissions, companies and countries might be tempted to shift their emissions elsewhere. The GHG Protocol is the globally accepted standard for measuring, reporting, and managing greenhouse gas emissions, aiming to address this issue. It requires companies to disclose not just their direct emissions but also indirect emissions across the entire value chain. Furthermore, it encourages the use of consistent measurement methods to prevent inconsistencies in reported data and to assess the real impact of companies’ greenhouse gas emissions. By ensuring the effective utilization of existing standards and redirecting financial incentives, the path to Net Zero can become more robust and aligned with the goals of mitigating climate change.
The climate mitigation disclosure standards
Measuring GHG emissions is a precondition for organizations to develop targeted Net Zero strategies. The CSRD and GRI standards aim to harmonize the measurement and reporting of GHGs to help stakeholders understanding the impact of corporate activities.
CSRD, or the Corporate Sustainability Directive, is a reporting regulation for companies operating in the EU which came into force in 2023. The directive provides a reporting framework covering environmental, social, and governance (ESG) factors. While the CSRD strengthens the disclosure of information, the GRI offers globally recognized guidelines for transparent corporate reporting.
The GRI, or the Global Reporting Initiative, is an independent organization that has developed and provided widely used sustainability reporting standards for businesses. It covers economic, environmental, and social areas. These standards are aligned with various intergovernmental instruments, such as the UN Guiding Principles on Business and Human Rights, the ILO conventions, and the OECD Guidelines for Multinational Enterprises.
The CSRD and the GRI standards are interoperable to facilitate a seamless transition for organizations already adhering to GRI standards, enabling them to report in accordance with ESRS norms within the CSRD framework. Moreover, both CSRD and the GRI standards include measuring the GHG emissions as a part of environmental impact materiality assessment which are based on the GHG Protocol. The GHG Protocol is a comprehensive global standard framework provided by the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBCSD).
However, a commitment to Net Zero goes beyond regulatory compliance. It is a strategic decision that promotes economic stability, innovation, and stakeholder satisfaction. Embracing this challenge positions companies as forward-thinking organizations that incorporate sustainability into their business model.
Transition plans for climate change according to sustainability standards
The sustainability reporting standards require organizations to categorize their climate transition disclosure plans accordingly:
- Assessment of the material and the potential impacts of the undertaking in terms of climate change.
- Description of the climate transition plan demonstrating its alignment with the Paris Agreement (or an updated international agreement on climate change) and limiting global warming to 1.5°C.
- Stating how the transition plan is embedded in their business strategy.
- Measuring and reporting on the impacts in terms of energy consumption and mix, their gross Scope 1, 2, and 3 GHG emissions, and thus their total GHG emissions. This includes reporting on GHG removals and storage from both their own operations and value chain, as well as the amount of GHG reduction or removal through climate change mitigation projects outside their value chain.
How to achieve Net Zero targets?
Measuring GHG emissions along the value chain and analyzing interdependencies forms the cornerstone of comprehensive transition plans for climate change. First, overall (upstream and downstream) GHG emissions need to be measured. Then, a framework should be established to develop strategic climate neutrality pathways. These pathways specify the reduction rates needed to attain Net Zero on a global and sectoral scale. To achieve maximum impact, it is essential to define these strategic pathways based on a consistent and reliable methodology.
Measuring Scope 3
The GHG Protocol divides greenhouse gas emissions into three categories, known as scopes. Scope 1 includes direct emissions from company-owned sources, Scope 2 involves indirect emissions from energy use, and Scope 3 encompasses other indirect emissions along the entire value chain. On average, 75% of GHG emissions occur outside of a company’s own operations in the supply chain, which are referred to as Scope 3. Therefore, measuring supply chain impact is crucial for obtaining a realistic emissions baseline and setting corporate targets that contribute to global Net Zero. In addition, the analysis helps identify ecological hotspots and reduction potentials along the supply chain. Read more about Scope 3 assessment in this article.
Assessing risks
One part of sustainability reporting is the materiality analysis, where businesses identify and evaluate the critical issues that impact their operations and are considered relevant to stakeholders. By identifying and prioritizing risks, companies can take targeted measures to minimize potential damage and strengthen their resilience.
The transition to Net Zero emissions has a dual impact on companies. Transitional risks may include reputational, policy, legal, market, and technological risks, which have the potential to lead to financial risks. In addition, there are climate-related physical risks like increased severity of extreme weather events or sustained high temperatures that pose challenges for companies, affecting not only their own operations but also the global supply chain.
Standardized emissions metrics offer a holistic view on this double materiality to understand and manage multiple risks. This is both relevant for companies and investors. Impact Valuation allows for a targeted focus on areas that can most significantly improve a company’s environmental footprint along the whole value chain. Learn more about how Impact Valuation makes the effects of business activities measurable and understandable in this article.
Standardizing emissions measurement – a collaborative effort
To comply with the sustainability reporting standards, companies need to disclose their progress against validated targets on an annual basis, e.g. in their sustainability report. This includes their Scope 3 emissions, within defined boundaries. Developing an inventory to calculate Scope 3 GHG emissions is challenging as data is difficult to obtain and often fragmented. To address gaps in data, collaboration is valuable. Joint industry and scientific efforts improve the accuracy and comparability of current and target situation, a central aim of Impact Valuation.
Using GHG emission factors, companies can measure, compare, and communicate their impacts. WifOR provides factors representing the quantity of GHG emissions triggered by economic activity in a specific country and sector directly – and across the global supply chain. Learn more about WifOR’s GHG emission factors here.
Building emission reduction scenarios and forecasting
The transition towards carbon neutrality is dynamic. Companies with global value chains are faced with complex strategic decisions. They need to maintain or increase profit levels while at the same time taking responsibility for their climate protection leverage. With WifOR’s Sustainability Impact Tool, organizations can measure emissions and build reduction scenarios to achieve Net Zero.
Investing in carbon offsetting and removal projects?
The CSRD and GRI require organizations to disclose information in adherence to the mitigation hierarchy. The first priority is to avoid GHG emissions by transitioning from fossil fuels to renewable energy sources. Next, organizations should focus on reducing GHG emissions by improving energy efficiency. As the final aspect, GHG removal methods should be deployed to counterbalance residual GHG emissions along the supply chain.
An objective of these standards is preventing the compensation of own and supply chain emissions through removal projects. However, carbon removal strategies are intended after the companies have achieved around 90-95% of their gross GHG reduction through their primary strategies. Carbon credits cannot be used to counterbalance residual emissions to achieve Net Zero targets.
This shows that there is no one-fits-all solution for companies to minimize their GHG emissions. WifOR is an experienced partner in helping organizations to holistically measure their GHG emissions along the supply chain. Our emission forecasts provide the foundation to effectively develop Net Zero plans to address global challenges. However, a holistic sustainability strategy goes beyond considering just greenhouse gas emissions. Impact Valuation allows to focus on areas that can most significantly improve a company’s environmental footprint along the whole value chain. Reach out to our experts here.
