Heavy going: as investors press for more urgent action on climate, definitions of net zero goals harder to understand
Heavy going: investors pressing for action on climate change want definitions they can better understand © Ian Waldie/Bloomberg

In 2017, mining group BHP said it planned to do something far from normal in its industry: it would bring its greenhouse gas emissions down to net zero in the second half of the century.

Then, as investors pressed for faster action on climate, the Anglo-Australian company brought that target forward to 2050. It also pulled out of the World Coal Association industry body, which did not share all its views on climate change, and announced an exit from coal mining for power plants.

But any hope that investors would wave through BHP’s efforts was dashed in October, when 17 per cent of its London shareholders voted against its plans for reaching net zero, partly due to doubts about their scope — one of the biggest rebellions of its type at a company listed in Europe.

Such is the rapidly changing world of the net zero target, a concept that barely existed six years ago but now poses ever knottier problems for the growing number of businesses rushing to adopt it.

“Expectations are changing really, really fast,” says Fiona Wild, BHP’s vice-president of sustainability and climate change. “No matter what we do, the minute we put it out, it’s out of date.”

At least a fifth of the world’s 2,000 largest public companies have now made a net zero commitment and more are expected to do so at this month’s COP26 summit. But any business that fails to meet investor expectations for robust targets faces more than a reputational problem, says Duncan Burt, chief sustainability officer at National Grid, the UK utility.

“Part of the reason we strive to make our net zero targets robust is that, for those companies that don’t, it’s starting to have a real-world financial impact,” he explains. If a net zero target is deemed too weak, he says, it can cast doubt on a company’s investment plans and lead to downgraded expectations for returns and asset values.

For BHP and National Grid, the pressure to address investor concerns is especially acute. They are among the 167 businesses that Climate Action 100+, a network of investors with a total $55tn assets, has targeted to set credible carbon goals. Those 167 companies account for more than 80 per cent of global industrial emissions. At the start of 2018, when the Climate Action 100+ initiative began, just five of them had a net zero target, according to the Bloomberg New Energy Finance research group. By August this year, the number had jumped to 111.

The list shines a light on those yet to set a target, such as US oil major ExxonMobil, whose chief executive, Darren Woods, said last year he was not interested in a “beauty competition” with other companies over carbon goals.

But investors have also struggled to understand what published net zero goals actually mean. “Quite frankly, I didn’t know how to differentiate credible commitments from bullshit,” says Adam Matthews, chief responsible investment officer at the Church of England Pensions Board. He chairs the Transition Pathway Initiative (TPI), a project launched in 2017 to help asset owners assess companies’ efforts to cut emissions. Its researchers have identified at least five net zero problem spots.

Some companies’ targets cover emissions in only one country, even if they are expanding faster in others, says Nikolaus Hastreiter, a TPI researcher. Others, including many airlines, rely on carbon offsets, which makes their net zero target a “black box” for investors, he says, meaning what a company is doing to cut emissions becomes opaque.

In the energy sector, Hastreiter says some companies, including National Grid, set net zero targets for 2050 even though climate models suggest electricity should be decarbonised by the 2030s in wealthy countries if global emissions are to reach net zero by 2050.

Burt says National Grid agrees with this 2030s target and emissions from the electricity it sells or transmits will reach net zero by about 2035. Its 2050 target relates mostly to gas it pipes or sells, as well as emissions from a gas used to insulate its switching gear, for which there is as yet no green alternative.

Then there are oil and gas companies, such as BP, that do not count what Hastreiter says are “very significant” emissions from their in-house trading arms. BP says that by 2050, it aims to halve the carbon intensity of traded products sold to businesses, governments or consumers. But it excludes sales of products that can be traded many times before reaching such end users, because these will be accounted for multiple times.

A further problem identified by the TPI is the toughest for many big emitters: a net zero target that applies only to the emissions a company produces itself or that arise from the energy it buys; and does not include all the pollution caused by its customers and suppliers.

For fossil-fuel companies, these so-called Scope 3 emissions are often the biggest because they include, for example, CO2 from cars burning petrol. At the end of 2020, only 10 per cent of the companies that Climate Action 100+ tracks had a target that included their most important Scope 3 emissions.

BHP has stopped short of setting a definitive target for the steelmaking sector, to which it sells iron ore, arguing that the industry’s path to net zero by 2050 is unclear. Matthews says that the miner is “genuinely trying to engage with a complicated transition” but there are “legitimate questions” to ask about targets that do not include all Scope 3 emissions.

Meanwhile, as climate concerns deepen, investors may soon be eyeing far more demanding goals.

Hastreiter says that, of the companies the TPI assesses, only one, India’s Dalmia Cement, is aiming to go carbon negative, or take more CO2 out of the atmosphere than it emits.

Climate models suggest many more businesses will have to follow Dalmia’s example if global warming is to be limited to the 1.5C goal in the Paris Agreement. In other words, any company hoping to impress investors by simply setting a net zero target will need to think again.

“That’s only the start,” says Stephanie Pfeifer, chief executive of the Institutional Investors Group on Climate Change, part of Climate Action 100+. “You really have to show how you’re going to meet it. That’s where we are now.”

Climate Capital

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