One of the key discussion areas at COP26 will be net zero targets, especially as this year’s event (held over from 2020) marks the five-year cycle after Paris in 2015 for the renewal of National Determined Contributions – countries’ commitments to reduce carbon emissions.
An important thing that I hope accompanies these commitments and the call for business to do its part is clarification of an important misconception about the path to net zero.
My concern at the corporate level in particular is that some companies are only using strategies that offset or carbon capture their way to net zero. Quite simply, they can’t. To reach net zero, there is no alternative to making tough decisions about decarbonizing their operations, supply chains, and products and services.
Let me explain why this is the case.
For a start, there are practical considerations, such as carbon storage taking up too much of the land that will be needed for other life-preserving activities, including food production. Another reason is the longevity of the storage involved. This is illustrated by what happened to a large swathe of the trees that offered commercial carbon offsets. They went up in smoke in the recent forest fires on the West Coast of the U.S, impacting a number of companies that had invested significant sums of money.
And if further proof is needed, I’d like to see COP26 focus attention on what the Science Based Targets initiative (SBTi) has had to say about the path to net zero. Having previously said that carbon offsets shouldn’t count toward how companies formally account for climate risks, SBTi has been consulting on the relative mix of decarbonization/offsetting/carbon capture activities that will be needed to achieve net zero emissions in different industries. Basically, this says that companies will have to decarbonize their activities by between 90% and 97% before offsetting and carbon capture can help them achieve net zero status.
So tough decisions really are needed. Those decisions will include a need to properly analyze the potential changes to the risk landscape as societies and economies transition to a lower carbon future. Already we see a growing lexicon of descriptions of those risks. For example, the green swan climate events that we can expect with some certainty to materialize and be disruptive, without knowing when they’ll occur, and which cause profound market changes. Or the jellyfish climate risks that you don’t see coming but that could sting you at any time (e.g., the forest fires that affected the offsetting program above).
Nor can we forget the massive elephant in the room of climate risks: The world has to produce and use far fewer fossil fuels – period.
That’s going to be a significant factor in how the rate of transition will vary by industry. And that’s why we can’t just give the big current corporate users of fossils fuels a proverbial kick up the backside. We have to help them make the big decisions; there have to be viable solutions to protect businesses, employment and keep the lights on, in some cases, during this transition.
That’s the thinking behind Climate Transition Pathways, which Willis Towers Watson has incubated to ensure that high-carbon industries transition effectively, by giving them continued access to finance and insurance capacity conditional on their transitioning in line with the science. It is a real finance solution to complement net zero finance initiatives and will ensure that companies can make the tough decisions that a 2050 net zero target demands.
