The ESG landscape is rich and dense, so over the coming weeks Edelman’s EMEA ESG team will be sharing a series of insights that provide a snapshot of key drivers we expect to shape the maturing ESG ‘market’ in 2022. Today, we’re talking about tightening net zero guidance and the reality check needed on carbon offsetting.

What is real net zero action?

More than ever, we’re witnessing growing pressure to mitigate the impact of global warming and limit a global temperature increase by 1.5C, and at COP26 last year we saw a fresh wave of public and private-sector net zero pledges to help achieve this.

Net zero is often misunderstood. In simple terms, to be considered ‘truly’ net zero a company, or country, needs to balance all the greenhouse gases (GHG) it emits (scopes 1-3) with the amount of emissions it no longer emits into the atmosphere. However, the approaches for how to reach net zero, and by when, are being refined, meaning existing pledges now face new definitions and guidelines, leading to scepticism and confusion.

The Edelman Trust Barometer’s Special Report: Institutional Investors found that 91% of global investors expect companies to establish and communicate a net zero plan in the next 12 months. However, 79% of global investors are concerned that companies are not effectively executing their net zero pledges. The Net Zero Tracker reports that 683 of the 2,000 largest publicly traded companies in the world by revenue have committed to a net zero strategy, but there is evidence that the pressure for companies to make net zero plans is not matched by adequate support to take net zero action.

For corporates, a key determinant in their ability to reach absolute emissions reduction targets lies with policy makers and society’s positive response to carbon reduction measures. Companies often struggle to control their total scope 3 emissions because the infrastructure isn’t in place or communities aren’t engaged. So, to drive their net zero agendas’ organisations have to work with suppliers to put emission processes in place while also providing behaviour change programmes for consumers. As a result, carbon pricing has largely been relied on to mitigate climate change – the value of traded global markets for carbon dioxide permits grew by 164% to a record €760 billion in 2021 – but the system focusses on efficiency of existing systems over long-term transformation of emission reducing processes.

The rise of tougher standards

To drive action institutions are taking charge and imposing clearer, but tougher, standards and regulations. The Science Based Targets initiative (SBTi) has been promoting best practice and targets for carbon emission reductions since 2015 and is working to identify the meaningful net zero players. Last year it launched a new net zero standard, clarifying that an organisation’s short- and long-term net zero targets must cover all scopes. For net zero targets to be validated by SBTi, companies must now achieve decarbonisation of 90-95% before 2050, and carbon offsetting cannot exceed 5-10% of a company’s emissions.

Recently, the UN-Convened Net-Zero Asset Owner Alliance released its second edition of its Target Setting Protocol, where members said they would reduce all scoped emissions linked to their investments by between 49% to 65% by 2030. Demonstrating the inherent need for all parts of the economy to decarbonise. And just last week the Institutional Investors Group on Climate Change extended its Net Zero Investment Framework to include draft guidance for how private equity firms should set decarbonisation targets and measure progress, with relevant guidance for both general and limited partners.

Understanding the environmental outputs of an entire supply chain also requires extensive collaboration, especially so SMEs don’t become overwhelmed with requests from big partners. More than 250 members belong to the Sustainable Apparel Coalition and are working together to develop technology and gather data so their suppliers are not overburdened with the same ESG questions. Likewise, the Natural Environment Research Council is funding a £1.9 million project to analyse the entire of UK Research and Innovation’s digital estate and set out a path for the sector to reach zero carbon emissions by 2040.

What will happen in 2022?

As the pressure on progressing net zero action mounts, companies need to be open and honest about the challenges they face in order to help shape realistic but stretching policies, which is the only way real net zero will be achieved.

Get in touch with the ESG team to find out more about ESG trends and how we can help you, or your clients, with ESG strategies.