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Sustainability

Five steps to increase the integrity of corporate net zero pledges

Published 22 April 2022 in Sustainability • 7 min read

Corporate net zero strategies lack teeth, say IMD experts. To translate pledges into action, firms must commit to realistic intermediary targets, rethink their value chains and shift to a long-term mindset.

The majority of corporate climate change pledges lack integrity, despite the lofty commitments set by global leaders at the COP26 Climate Change Conference in Glasgow,  according to a recent Corporate Climate Responsibility Monitor report by non-profit organizations NewClimate Institute and Carbon Market Watch.

Corporate net zero or carbon neutrality pledges by leading brands fail to set targets and strategies with credible ambition levels, according to the report, which assessed the climate strategies of 25 global companies. Business must transform to help limit global warming to 1.5°C above pre-industrial levels.

Household brands such as Amazon, Google, and Volkswagen were cited as having low integrity on their net-zero targets, while Nestlé, BMW and Unilever were rated as having ‘very low integrity’.

Targets require follow through commitments

While firms say they are paying more attention to sustainability performance, their organizational strategies designed to meet targets lack teeth, say IMD experts.  Allocation of resources, changes in organizational architecture, and engagement with key stakeholders need to follow on from target setting, argued Professor Vanina Farber, elea Chair of Social Innovation and EMBA Dean.

“Getting ‘ready’ for net zero is increasingly becoming a lynchpin in corporate strategy,” Farber said. “However, making a net zero commitment should not be made lightly. Credible commitments start with realistic intermediary targets and require boards to understand how corporate policies can help to achieve long-term aspirational goals.”

Only three of the 25 companies studied – Maersk, Vodafone and Deutsche Telekom – clearly commit to deep decarbonization of more than 90% of their full value chain emissions.

For most of the companies, headline pledges are ambiguous and emission reduction commitments are limited. Targets for 2030 do not align with the internationally agreed goals of the Paris Agreement aimed at avoiding the most damaging effects of climate change.

The 13 companies that have backed their net zero pledges with explicit emission reduction commitments commit, on average, to reduce their full value chain emissions from 2019 by only 40%. The other 12 have no specific emissions reduction commitments for their net zero target year. At least five of the companies would effectively only reduce their emissions by less than 15%, often by excluding downstream or upstream emissions in their value chain.

Tying capital to ESG KPIs via sustainability-linked loans can help to accelerate corporate timelines, as well as provide transparency toward net zero commitments, Farber explained. These commitments help accelerate the cultural transformation that is needed to back up the commitments with change in behavior. 

For example, in September 2020, Chanel issued €600 million of bonds with an unusual catch: if the company fails to meet its sustainability goals, it will have to pay penalties to investors. Chanel’s bond sale consisted of two separate deals for €300 million each. The first commits the company to cutting its greenhouse-gas emissions in half by 2030 and reducing emissions in its supply chain by 10%. The second pledges to transition to 100% renewable electricity across the company’s operations by 2025.

More detailed plans for scope 3 emissions needed

Another essential step to cascading targets throughout the organization is rethinking value chains, said Professor Carlos Cordon, an expert on digital value chains, supply and demand chain management, digital lean and process management. These next steps require changes in infrastructure, which have been delayed due to shortages brought on by the pandemic. 

For example, while several companies have taken innovative approaches to source renewable electricity, the overall scale of renewable electricity procurement remains low, the report found.  Firms need to demonstrate a greater sense of urgency to scale up emission reduction measures and share best practices.

An inordinate amount of resources are dedicated by multinationals to measuring sustainability indicators, according to Cordon. Often these efforts are both time-consuming and unclear, particularly with respect to scope 3 emissions, which encompass the emissions found upstream or downstream in a company’s supply chain.

In the financial sector, for example, net zero commitments start with understanding how a company aligns itself with respect to scope 1, 2 (buildings, transportation of employees, electricity, waste management, etc.) and scope 3 (financial products), Farber explained. GHG accounting for investments should be explored further to accompany and speed corporate transformation.

Scope 3 emissions account on average for 87% of total emissions for the 25 companies assessed in this report, but only 8 of the 25 companies disclosed a moderate level of detail on their plans to address these emissions.

Even standard-setting initiatives are giving credibility to low quality and misleading targets, the report found. Companies use A-ratings from non-profit environmental disclosure platform CDP on transparency and 1.5 degree C ratings form the Science Based Targets initiative (SBTi) to signal their commitments, but subtle details and loopholes can undermine the companies’ plans.

“There are a lot of joint efforts to try to coordinate and clarify, but some wonder if it would be better to dedicate those efforts to improve the sustainability impact rather than fulfilling so many reporting requirements,” Cordon said.

Change governance structures to encourage long-term thinking

Following through on climate targets also requires a corporate governance structure that allows firms to think long term, said Karl Schmedders, Professor of Finance.  That requires visionary leaders who can also think beyond their tenure.

Recent estimates for the average tenure of CEOs at the world’s largest companies range from five to seven years. “It is easy for today’s business leaders to proclaim net zero or carbon neutrality pledges for their companies for 2050,” he said. “In that distant future, most of them will no longer be in office (or even alive for that matter). They can reap the positive publicity from making such pledges today without actually having to deliver on them in the future.”

These all-to-often empty promises suffer from the “tragedy of the horizon”, a phrase popularized by Mark Carney, the former governor of the Bank of England.

While climate change is a long-term problem spanning decades, today’s business leaders have planning horizons well below 10 years. Therefore, they have no incentive and thus little interest to implement costly steps towards carbon neutrality.

“Put differently, they are kicking the can down the road to the successors of their successors,” he said.

Incentivize the common good over self-interests

Another obstacle, Schmedders argued, is the “tragedy of the commons”, which US biologist Garrett Hardin popularized in a seminal paper in Science in 1968, which describes the damage that rational individual actions can inflict on a common-pool resource.

The earth’s atmosphere is a common-pool resource: the more greenhouse gases (GHG) are emitted into the atmosphere, the smaller the remaining sustainable capacity for further emissions (often called the “global carbon budget”). In addition, it has proven difficult to exclude unauthorized users from using the atmosphere as a dumping ground for emissions.

“Businesses, consumers, and countries act in self-interest by their individually beneficial economic actions, which, however, have the side-effect of emitting GHGs into the atmosphere,” he said. “If they have no incentive to restrain themselves, then the tragedy of the commons occurs.” (They enjoy the benefits of their actions and distribute the damages on everyone.)

The work of the Nobel prize winner Elinor Ostrom and her collaborators offers solutions to overcome the tragedy of the commons, Schmedders explained. Among several ideas, the leading concept is the collective ownership and management of a common-pool resource based on shared values about individual behavioral change. Unfortunately, the global political and economic order presents significant obstacles to the implementation of this concept.

Break free from conditioned assumptions

The challenges of meeting climate change targets cannot be solved by applying the same approaches that have governed our leadership for the past few centuries, said Professor Susan Goldsworthy OLY, Affiliate Professor of Leadership, Communications and Organizational Change.

“Regulators and standard-setting initiatives must find ways to distinguish and segregate climate leadership from greenwashing, to support ambitious actors to innovate and accelerate decarbonisation,” the Corporate Climate Responsibility Monitor report found.

A clear mindset shift is essential, argued Goldsworthy, citing Einstein’s truism that “we cannot solve our problems with the same thinking we used when we created them.”

“Acting as though we are ‘apart’ from earth (rather than ‘a part,’ totally interconnected) has led to a process of domination, extraction and exploitation of both people and the planet. This approach is completely unsustainable,” she explained. “This requires leaders who have the courage to break free of conditioned assumptions and embrace the uncertainty of a more compassionate approach where we care, dare and share together.

Authors

Natalia Olynec, Head of Sustainability at IMD

Natalia Olynec

Head of Sustainability at IMD

Natalia Olynec is the Head of Sustainability at IMD, where her work focuses on research, program development, strategy, governance, reporting and advisory. She has worked in sustainability management, consulting and education for more than 15 years.

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