Sustainability

After the planet saw its hottest days on record in July of this year, it is clear climate change is already impacting our world and climate action is at the forefront of many corporate leaders’ forward-looking strategies. There are many ways to tackle corporate climate strategy and no one approach is alike. How are companies developing approaches to mitigate the impacts of global warming while ensuring that their actions hold up against scrutiny? What does it really mean to pursue commitments like “carbon neutral” or “net-zero?”

The latest definitions of carbon neutral and net zero

As companies work to develop climate strategies, while avoiding greenwashing concerns, it is important to understand the differences between carbon neutral and net-zero claims. The Science-Based Targets initiative defines the terms “carbon neutral” and “net-zero” as:

Carbon neutral: Counterbalancing CO2 emissions with carbon offsets without necessarily having reduced emissions by an amount consistent with reaching net zero at the global or sector level

Net zero: A state of balance between anthropogenic emissions and anthropogenic removals. In most cases, it is important to specify either net-zero CO2 emissions or net-zero GHG emissions, which also includes non-CO2 GHGs. Net-zero GHG emissions must be achieved at the global level to stabilize temperature increase, and targets set using the Net-Zero Standard must cover all UNFCCC/Kyoto GHG emissions

To put it more simply, carbon neutrality usually involves investing in climate-related projects outside of the organization, while net zero involves investing within the organization to directly reduce emissions.

The advent of net zero

The term “carbon neutral” was used interchangeably with “net zero” until the Science-Based Targets initiative released their net-zero standard in October 2021. The Science-Based Targets Initiative, or SBTi, is a partnership between CDP (Carbon Disclosure Project), the United Nations Global Compact, World Resources Institute (WRI), and the World Wide Fund for Nature (WWF) that seeks to drive ambitious climate action in the private sector by enabling organizations to set science-based emissions reduction targets. Their frameworks have emerged as the “gold standard” for organizations looking to set climate targets, and increasingly we see companies setting “science-based” or “science-aligned” targets.

The Corporate Net-Zero Standard offers clear guidance to bring net-zero plans in line with climate science. It calls upon companies to prioritize rapid, deep emissions cuts to direct and indirect value-chain emissions, roughly halving emissions by 2030 then set long-term science-based targets to cut all possible emissions before 2050. Most companies must reduce emissions by more than 90% and neutralize the final <10% of residual emissions by investing in permanent carbon removal and storage.

Pushback on carbon neutral claims

Carbon neutral claims have recently come under fire because they tend to rely so heavily on carbon offsets of mixed quality. For example, a U.S.-based airline is facing a lawsuit over its carbon neutrality claim, which plaintiffs say is “false and misleading” as it relies on poor quality carbon offsets that do little to mitigate global warming. Representatives of the airline said in a statement that they are transitioning away from carbon offsets toward decarbonization of our operations,” by investing in sustainable aviation fuel and more fuel-efficient aircraft.

This is not the only example of a company facing pushback on their carbon neutral claims, and we increasingly see businesses pivoting away from the term. For instance, a Switzerland-based consumer packaged goods company is another company moving away from carbon-neutral claims. They cited a redirection to invest in programs and practices that help reduce GHG emissions in their own supply-chain and operations, where it makes the biggest impact to reach their net zero ambition.

Where do carbon offsets fit in to net zero strategies?

A focus on net zero does not mean companies are or should be ignoring carbon credits. Developers require infusions of capital to fund meaningful carbon avoidance and removal projects, and the market is responding. Carbon credit purchases have doubled over the last two years, even as there is an increasing focus on investment in high quality projects.

We see companies adopting an approach of more thoughtful and transparent investment in the carbon market. Unilever clearly outlined their position on carbon credits in their climate transition action plan. They are focusing on net zero and investment in natural carbon sinks, stating that, “the world must find business cases to support increased investment in the earth’s natural carbon sinks, such as the world’s tropical forests.” Microsoft states that they are “contributing to collective market intelligence by sharing our lessons learned and project insights with the industry.” Their annual report provides updates on carbon removal efforts and the volumes of tons it has contracted to be removed, also commenting on market trends. Other companies are setting up funds to guarantee future demand for carbon removal. Notably, Alphabet, Meta, and other corporate giants will spend USD 1 billion investing in permanent carbon removal.

The SBTi supports investment in the carbon market, as well. While their Corporate Net Zero Standard requires companies to prioritize value chain emission reductions first, the Standard also explicitly states that “companies should go further and invest in mitigation outside their value chains now to contribute towards reaching societal net zero.” The Standard specifically recommends that businesses focus on securing and enhancing carbon sinks to avoid the emissions that arise from their degradation. The SBTi also notes that there is a critical need for companies to invest in nascent greenhouse gas removal technologies (e.g., direct air capture and storage) so that the technology is available to neutralize residual emissions at the long-term science-based target date. The SBTi is currently developing guidance to channel finance towards “Beyond Value Chain Mitigation,” which is expected to be launched in September.

Companies should also watch for the new guidance from SBTi, and generally keep an eye on the rapidly evolving carbon market, seeking opportunities for early investment in projects.

In today’s rapidly changing energy landscape, carbon offsets should not just be thought of as a market mechanism to make claims, but also a responsible way to make environmental restoration and maintenance a commodity. With the right climate strategies in place, organizations can utilize this strategy very effectively to meet their decarbonization objectives.

This article was written by Alyssa Woo, Sustainability Consultant, and Isabel Harrison, Sustainability Consultant, at Schneider Electric.

This article first appeared in the GRESB newsroom. To view, click here.