Do you have a net zero strategy?
For the 26th United Nations Climate Change Conference – or COP26 – world leaders met for two weeks in Glasgow to check on the progress of nationally determined contributions and reaffirm their commitments to climate transition. Although there are equivocal attitudes to its outcome and some dissatisfied groups, world leaders in the public and private sectors have made leaps and bounds if one remembers how the Kyoto Protocol ultimately unfolded. COP26 will be remembered as the most important step in the climate transition in the years to come.
COP26 resulted in several decisive agreements. First, nearly 200 countries have agreed to end inefficient fossil fuel subsidies. Second, around 110 countries signed the Global Methane Pledge for the first time. Finally, the world’s two biggest emitters – the United States and China – have shaken hands for climate cooperation. There are other important outcomes such as a carbon market settlement, India’s engagement and the active role of the financial sector that will advance scientific approaches. By far, most people agree that this was a major change and a major change.
What net zero really means for businesses
Companies that have diligently followed climate change issues would know that net zero was the subject of heated discussion throughout the event. As countries announced their progress on NDCs, the public and private sectors recognized that even with current targets, the world will still face an increase of more than 2 degrees Celsius. Therefore, efforts to combat global warming by reducing greenhouse gas emissions by 1.5 degrees Celsius through 2050 have been reinstated with a focus on net zero.
At COP26, 74 countries that account for over 80 percent of global GDP and 70 percent of global CO2 emissions made commitments for net zero. More than 3,000 global companies have demonstrated their commitment to the UN Race to Zero campaign. South Korea was mentioned as one of the more ambitious countries with the revised NDC reduction target of 40 percent.
Global business leaders agree that net zero is now the new normal, a new organizing principle for businesses. However, what happens after you make the commitment? What does this really mean when it comes to business decisions? What should CEOs do in 2022? According to McKinsey & Co.’s analysis, companies must now accomplish 200 years of work over a condensed 30-year period. There are industry differences, but the transition to net zero will require the greatest reallocation of capital for most companies. Amid the sourcing challenges of sourcing green materials and using green infrastructure, how can business leaders manage and deliver appropriate ESG performance?
Commit, plan and execute
Net zero is not an easy or short-term task. It requires a strong commitment due to the short term losses. Some headwinds in the aftermath of COP26 were criticisms that the targets were too ambitious and unrealistic. Many climate change experts in South Korea have also expressed doubts when large Korean multinational companies made commitments to net zero by 2050 this year. The concerns mostly come from the production sites due to the huge cost and huge supplier chains who are not willing to add to the costs and risk the technical challenges of the transition. Especially without detailed action plans, net zero promises become just timely marketing blurb that can get companies to face the investor risks of greenwashing.
Therefore, what companies now need to do is incorporate the detailed action plans into the net zero commitments. The commitment should now turn to specific steps for net zero. UK Chancellor of the Exchequer Rishi Sunak reassured at COP26 that the UK Treasury would require UK listed companies to publish net zero plans by 2023. ESG transition standards and climate tend to follow the practices of the best prosecutors. Other countries are likely to follow how governments engage with the private sector in disclosing and communicating ESG practices.
Experts say the basis for competition in today’s times has changed, and having a well-planned net zero roadmap and efficient execution is paramount. Therefore, whether through regulatory pressure or competitive strength to gain a sustainability advantage, global businesses must devote a significant amount of corporate resources to aligning net zero goals with action and business performance.
The Net Zero strategy will reflect the true ESG value of the company
Many have expressed their concerns and doubts about the 2021 COP26 outcome around net zero. There is no easy or quick fix. But companies that develop and execute zero bet strategies will accumulate a long-term sustainability advantage. In the age of ESG, where risks are more difficult to define and predict, companies must integrate strategic perspectives into the existing compliance and risk management system. This means that business leaders must simultaneously anticipate changing ESG and climate risks with the company’s current strategic direction.
Ultimately, the three Ps – engage, plan and execute – will be critical factors that reflect key ESG value for customers, stakeholders and society, as each process will reflect the consistency, robustness and courage of the company, and most importantly, the integrity of the company. Remember, what the company intended to say or do may not always be how it is viewed. Spreading a coherent and clear ESG message in the net zero strategy that integrates compliance and strategy along with other transition risks ahead will be the critical benefit of sustainability beyond 2022 for CEOs. business.
By Lee Yeon-woo
Lee Yeon-woo is an expert advisor at the Korean law firm Bae, Kim & Lee. – Ed.