In the last article, we explored the global scientific and political context of climate change. But it is not limited to those sectors, in fact businesses around the world are leading the charge to achieving net zero carbon. So let's look at why and what that looks like in the business context.
This is the second article in a series - The Net Zero Carbon Transformation and your Business. Check out the next ones when you're done:
1. Journey to Net Zero – a COP26 explainer
3. Carbon Reduction Guide for Small Business
Why is this an issue for business?
Climate change impacts business on many fronts. For some businesses, it causes direct financial loss including physical disruption to their supply chain, with drought and floods reducing access to key crops and extreme weather events impacting global transportation and manufacturing.
For some others it is the risk of regulation and economic shifts as the world transitions. While Australian regulation has been limited (for now), climate regulations are increasing globally and Australian businesses operate in a global economy, including multinational businesses and those exporting into global markets.
If some businesses fail to see these financial risks, their financers are raising it. This can include banks considering the risk in their assessment of a loan, insurers in their assessment of coverage and premiums, reduced valuation of their assets and shareholders demanding action at the AGM.
Many businesses are also responding to growing stakeholder expectations that businesses should act responsibly and minimise harm to the environment. These expectations can impact a business in many ways, including being able to attract and keep top talent, attract conscious consumers, win and keep contracts with corporate and government customers, and maintain positive relationships with partners and regulators.
There is also an enormous opportunity for businesses to profit from this global transition. Achieving net zero will require a new industrial revolution in technology. Some businesses will profit by providing new technologies and innovations, and others will become obsolete.
What are Australian businesses doing?
Increasing numbers of Australian businesses are jumping on board with net zero carbon commitments. As of March 2021, more than half of the market capitalisation of the ASX200 was covered by net zero commitments, with the number of companies tripling since the previous year. Eighty companies in the ASX200 are providing climate disclosures, expected to increase to over 100 next year.
They are following in the footsteps of many other global companies doing the same, including 21% of the world's 2,000 largest public companies, representing sales of nearly $14 trillion (also as of March 2021).
These numbers have continued to increase in the lead-up to COP26. A more recent 'stocktake' in October counted 833 businesses in Australia that have made net zero commitments, including small and medium businesses.
What is the difference between net zero and carbon neutral?
Until recently, much of the focus for businesses was on carbon neutrality. Net zero is a higher benchmark because it:
- is focused on actual emissions reductions, while carbon neutrality allows you to offset your emissions
- includes a broader scope of emissions, including those in your value chain (see Scope 3 in the next section) instead of just direct operations
- requires any offsets for unavoidable emissions to actually remove carbon from the atmosphere rather just avoiding emissions.
The two are complimentary, and many businesses use both, that is, go carbon neutral now by offsetting, and set a target for when they will achieve net zero in the future.
What are Scope 1, 2 and 3?
An organisation's emissions sources fall into three buckets, or scopes:
- Scope 1 - direct emissions from owned and controlled sources, including fuel combustion and process and fugitive emissions
- Scope 2 - indirect emissions from the generation of energy consumed, including electricity, steam, heat and cooling
- Scope 3 - all other indirect emissions in the organisation's value chain, including both upstream (purchased goods, capital goods, transportation, travel) and downstream (use of sold products, franchises, investments).
What do science based targets mean?
A science-based target is one that is set in line with reductions required to keep climate change to 1.5°C. As discussed in the previous article, this will globally entail a steep reduction in the next decade, approximately half of global emissions, and achieving net zero emissions by mid century. Organisations are therefore encouraged to set a short term (5-10 year) reduction interim target and a long term one (0 by 2050).
For more information, refer to the Science Based Targets Initiative's (SBTI) new Net Zero Standard.
What does this mean to my small business?
As more and more businesses commit to net zero, the more this will place pressure on their value chain. This will be particularly significant for businesses that supply to corporate and government customers or borrow from banks adopting such commitments.
This means your customers, bank, even insurers will increasingly be asking you questions about how you're reducing your carbon footprint, and possibly excluding you if you're not.
It will also raise expectations of the business community generally as employees and consumers see other businesses taking action.
What should I do about it in my business?
It's not up to you to fix the world, but you can take action on what's under your own control - your energy use. Reduce it, decarbonise it, offset it. See more in the next article in the series!